Securities and Exchange Commission v. Manhattan Transfer Registrar Company and John C. Ahearn

We recently wrote about two interesting SEC enforcement actions that examine the question of whether the individuals and entities that purchase convertible promissory notes from public companies are “dealers” according to the definition established in Section 15(a)(1) of the Securities and Exchange Act of 1934 (“Exchange Act”). Informally known as “toxic lenders” or “dilution funders” because the terms of their financing agreements contain provisions that almost always result in harm to investors and issuers alike, they’re considered by many to be the scourge of the penny stock market. Typically, the notes they buy can be converted at any time, often at a discount to market price of 70 percent or more. As the lender converts and sells, stock price drops. To avoid making insider filings to the SEC, the lender's financing agreements specify that he may own no more than 4.99 percent of the company’s stock at any time. But that in no way stops him from converting his note continuously, in a succession of tranches. Since the conversion ratio is pegged to the security’s recent average bid price, every time he converts, he gets more stock than the time before. As he sells tranche after tranche, the company’s stock price enters freefall. Sometimes the only remedy for the issuer is a large reverse split.

On September 20, 2022, the Securities and Exchange Commission (the “SEC”) charged recidivists Manhattan Transfer Registrar Company (“Manhattan Transfer”), a registered transfer agent based in Port Jefferson, New York, and its former principal, John C. Ahearn, a resident of Erie, Colorado, for violations of a Commission order issued against them on May 17, 2018 (“Commission Order”).

The SEC’s complaint against Manhattan Transfer and Ahearn, filed in the U.S. District Court for the Southern District of Florida, alleges Ahearn and Manhattan Transfer violated the Commission Order and the transfer agent associational bar provisions of the Securities Exchange Act of 1934 (“Exchange Act”) when Ahearn acted as inspector of elections on behalf of Manhattan Transfer and participated in the conduct of Manhattan Transfer’s transfer agent business while he was subject to a bar from association with any transfer agent. The complaint further alleges Manhattan Transfer violated the Commission Order by not complying with its undertaking that it would retain an independent consultant and that, for a period of time, the independent consultant would not enter into any professional relationship with Manhattan Transfer other than its independent consultant work. Despite that undertaking, the complaint alleges that Manhattan Transfer retained the independent consultant to, among other things, revise Manhattan Transfer’s written policies and procedures and participate in brokering the sale of Manhattan Transfer.

The complaint charges Ahearn and Manhattan Transfer with violating the Commission Order and the transfer agent associational bar provisions of Section 17A(c)(4)(C) of the Exchange Act. Ahearn consented, without admitting or denying the allegations of the complaint, to the entry of a civil court judgment permanently enjoining him from violating the charged provision and ordering him to pay a civil penalty of $25,000, and to issuance of a court order pursuant to Section 21(e) of the Exchange Act requiring him to comply with the Commission Order. Manhattan Transfer consented, without admitting or denying the allegations of the complaint, to the entry of a civil court judgment permanently enjoining it from violating the charged provision and ordering it to pay disgorgement of $1,075 and prejudgment interest thereon of $200.02, and a civil penalty of $75,000.


To speak with a Securities Attorney about going public or SEC Registration Statements on Form S-1, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post 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 Attorneys
Brenda Hamilton, Securities Attorney
200 E Palmetto Rd, Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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