SEC Says toxic funder John M. Fife is an Unregistered Dealer

John Fife Unregistered Dealer

On September 3, 2020, the Securities and Exchange Commission (“SEC”) filed an enforcement action against John M. Fife and five entities he owns and controls: Chicago Venture Partners, L.P. (“CVP”), Iliad Research and Trading, L.P. (“Iliad”), St. George Investments LLC (“St. George”), Tonaquint, Inc. (“Tonaquint”), and Typenex Co-Investment, LLC (“Typenex”). According to the SEC, Fife and his companies had acted for years as securities dealers, but failed to register with the SEC and with the Financial Industry Regulatory Authority (“FINRA”) as the Securities Exchange Act of 1934 (“Exchange Act”) requires.

Fife has operated as what’s called a “toxic lender” for many years. Microcap companies trading on the over-the-counter market typically have limited access to traditional financing. Desperate for cash, they sign on with financiers like Fife who purchase securities—usually convertible promissory notes or convertible debentures—from them. The financiers charge extremely high interest, but that’s the least of their clients’ problems. Upon conversion, the lenders enjoy a discount to market price that may be as high as 60 percent, and higher in the event of default by the issuer. As he converts portions of his note and sells the resulting stock into the market in a series of tranches, the stock’s price plummets. That is why these kinds of instruments are called “death spiral convertibles.” Eventually, the dilution caused by the conversions may force the issuer to reverse split the company’s stock. Sometimes it drives the company into bankruptcy.

Toxic funders have wreaked havoc with OTC companies for decades, but they’ve proved difficult for the SEC to rein in. In the past, they insisted that they and their clients were bound only by the financing agreements they both signed: the issuers knew, or should have known, what they were getting into. In the past three years or so, however, the SEC has begun to pursue a new theory of these kinds of cases, invoking the funders’ failure to register as dealers. The SEC defines a dealer as “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.” Individuals who buy and sell securities for themselves are usually considered to be “traders,” and are excepted from the dealer definition. What distinguishes a dealer from a trader is that the dealer “buys and sells as part of a regular business,” while a trader does not.

Toxic funders buy convertible notes as part of their principal business. They often advertise that business on websites, and some hire office staff to cold call issuers in an effort to sell them on the supposed advantages of engaging in toxic financing arrangements. A few even offer seminars with lunch. All of these activities are characteristic of dealers, not traders. We’ve recently written about two SEC actions brought against John D. Fierro and Justin W. Keener, respectively, and an older case from 2017, brought against Ibrahim Almagarby.

According to the SEC’s complaint, John Fife, a Chicago resident, was once an investment adviser registered with the SEC. In 2007, he was sued by the SEC in connection with an annuity market timing scheme. He settled the suit by consenting to an injunction, monetary relief, and a bar from associating from investment advisers. In 2012, he failed to respond to requests for information from FINRA, and as a result was barred him from associating with any FINRA member. The activities for which he’s currently under scrutiny began in 2015 and continued to the present.

The issuers with which Fife worked were SEC registrants, and so had periodic filing obligations under the Exchange Act. Fife, his companies, and his client issuers made filings memorializing their financing agreements. Unsurprisingly, nowhere in them did Fife disclose the fact that he was a recidivist securities laws violator, thus depriving any investor or prospective investor reading the filings of valuable information critical to making an informed investment decision. Fife was not, of course, a registered dealer, and his history with FINRA would likely have prevented him from becoming one.

Fife also failed to disclose that:

  • He was required to register as a dealer and had failed to do so;
  • He intended to convert the toxic notes and as soon as Rule 144’s holding period was met and dump the shares into the public markets; and
  • A dramatic drop and often a complete collapse of the issuer’s stock price would follow the public sale of his shares.

Our research also indicates that transfer agents and questionable penny stock lawyers also inhabit the toxic lending space, and actively participate in and facilitate the lenders’ activities. If a transfer agent refuses to accommodate the lender by converting his notes and issuing unrestricted stock to him, he may be sued. Many of the transfer agencies that deal with OTC issuers are small businesses operating on a shoestring. They can’t afford expensive litigation, and so often simply do as they’re told by the toxic lenders.

A handful of penny stock law firms have been involved in facilitating the sale of billions of shares of stock by the unregistered dealers, participating in both the preparation of the convertible notes and related agreements and arranging for other lawyers to provide legal opinions to facilitate the public sale of the shares. It will be interesting to see if the toxic funders eventually bring malpractice actions against the lawyers who guided them through their unlawful activity.

There are a number of red flags raised by the toxic lenders’ habitual activities. Both companies and investors should avoid involvement with:

  • toxic funders who require companies to use “approved transfer agents” to ensure that their unlawful note conversion requests are honored;
  • toxic funders whose financing agreements include clauses requiring the company to pay an inflated fee (as high as 10 times the normal rate) to the transfer agent for the issuance of shares to them upon conversion of notes and legend removals;
  • toxic funders who appear with other toxic funders over and over in the same companies during the same time periods;
  • toxic financing companies that are owned or partially owned by penny stock lawyers who also purport to represent the issuer;
  • hidden transaction fees including but not limited to legal fees, penalties, inflated transfer agent fees;
  • true-up provisions requiring the company to issue additional stock to the lender if the security’s price declines or is diluted.

In our practice we have noted that some transfer agents receiving inflated fees offered in the toxic lender’s agreement self-impose deadlines on the issuer in order to court favor with the toxic lender. In some instances, issuers have been granted only hours to engage counsel to review a lender’s request for conversion.

 Why Is Unregistered Dealer Activity a Big Deal?

A person who seeks to register with the SEC as a dealer must file an application on a form called Form BD. It requires detailed information about the applicant entity and its principals, controlling persons, and employees. The applicant must meet the statutory requirements to engage in a business that involves high professional standards and the toxic funding business would not adhere to this standard.

Registration with the SEC requires the dealer to provide important information about its business, including the names of the direct and indirect owners and executive officers of the business; certain arrangements with other persons or entities; the identities of those who control the business; the states in which the dealer does business; past criminal or regulatory actions against the dealer or any affiliated person that controls the business; and financial information, including bankruptcy history. Further, registration requires the dealer to join one of the self-regulatory organizations—such as FINRA or a national securities exchange—that assist the SEC in regulating the activities of registered dealers. Finally, registered dealers are subject to inspection by the SEC and FINRA to ensure that they comply with the securities laws.

Some toxic lenders don’t register as dealers simply because it would mean more work for them, and would force them to adhere to standards that might affect the amount of money they make on their deals. In addition, quite a few of them have had run-ins with the securities regulators in the past, and so their applications are unlikely to be approved, should they wish to try.

SEC v. John M. Fife et al.

 As noted above, John Fife operates a regular business through which he buys convertible notes from undercapitalized small companies. After holding the notes for the length of time required by Rule 144—usually six months, because he evidently prefers to deal with companies that are registered with the SEC—the notes are converted into newly-issued unrestricted shares of stock at a deep discount from the prevailing market price. After conversion, that stock is sold into the market, locking in a substantial profit. According to the SEC, from 2015 through 2020, Fife sold more than 21 billion newly-issued shares of stock acquired through the conversion of notes he’d purchased from approximately 135 penny stock companies. His profits were at least $61 million, most of which came from the spread between his discounted purchase price and the prevailing market price at which the shares were sold. Fife’s practice was to sell the shares he had acquired in a convertible note deal continuously on a daily or near-daily basis until he’d sold all of them into the market. He usually completed this process in a couple of weeks or less. In addition to profiting from stock sales, Fife charged counterparty microcap companies transaction fees, generally ranging from between $5,000 and $25,000 per deal. He collected at least $2.12 million in those fees.

Fife’s conduct frequently depressed the stock price of counterparty microcap companies. His practice of selling thousands of a counterparty company’s newly-issued shares into the market on multiple consecutive trading days, and his practice of converting additional shares soon after the previously-converted shares were sold, generally led to a significant decrease in stock price.

While the stocks of the companies Fife dealt with often crashed, causing losses to investors, he himself generally reaped large profits. He obtained those profits from the discounted purchase price he negotiated with the counterparty companies, rather than from any appreciation in the stocks’ price.

Moreover, many of Fife agreements with counterparty microcap companies contained true-up provisions that compelled the company to issue additional shares to him if the company’s stock price decreased in the 15 to 20 business days following a conversion. Ironically, his own sales of thousands, or even millions, of newly-issued shares into the market caused a decrease in stock price, and consequently triggered the true-up provision.

The SEC has by now filed a half-dozen suits against toxic lenders alleged to have acted as unregistered dealers. Of them, only the Almagarby suit has been adjudicated. That occurred quite recently, on August 17, 2020, when the judge in the case granted the SEC’s motion for summary judgment against Almagarby and his company Microcap Equity Group, LLC. The decision bodes well for the SEC, and badly for toxic lenders, given that the complaints in these cases are virtually identical. While it’s still relatively early days, it seems likely most or all will be decided in the agency’s favor.

Hamilton and Associates has assisted multiple issuers in disputes arising from convertible note lenders particularly the enforceability of their toxic funding contracts under 15 U.S.C. § 78cc(b) which states:   

  “Every contract made in violation of any provision of this chapter or of any rule or regulation thereunder, and every contract (including any contract for listing a security on an exchange) heretofore or hereafter made, the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter or any rule or regulation thereunder, shall be void (1) as regards the rights of any person who in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any such contract, and (2) as regards the rights of any person who, not being a party to such contract, shall have acquired any right thereunder with actual knowledge of the facts by reason of which the making or performance of such contract was in violation of any such provision, rule, or regulation: Provided, (A) That no contract shall be void by reason of this subsection because of any violation of any rule or regulation prescribed pursuant to paragraph (3) of subsection (c) of section 78o of this title, and (B) that no contract shall be deemed to be void by reason of this subsection in any action maintained in reliance upon this subsection, by any person to or for whom any broker or dealer sells, or from or for whom any broker or dealer purchases, a security in violation of any rule or regulation prescribed pursuant to paragraph (1) or (2) of subsection (c) of section 78o of this title, unless such action is brought within one year after the discovery that such sale or purchase involves such violation and within three years after such violation. The Commission may, in a rule or regulation prescribed pursuant to such paragraph (2) of such section 78o(c) of this title, designate such rule or regulation, or portion thereof, as a rule or regulation, or portion thereof, a contract in violation of which shall not be void by reason of this subsection.”   

Without  proper registration as a dealer, the Securities Act declares the convertible note agreements are void. (15 U.S.C. §78cc). 

For further information, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or  This securities law blogpost is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855