On February 5, 2019, the SEC obtained a final judgment against a New York-based broker, Robert DePalo who was charged with orchestrating a $6.5 million offering fraud.
In May 2015, the SEC charged Robert DePalo with defrauding over twenty investors by misrepresenting the value of their investments and use of their funds, including by sending the first $2.3 million of investor funds to his personal bank account. The SEC also alleged that Robert DePalo made false statements to SEC examiners in an attempt to conceal the fraud. Read More
The Regulation A + offering integration rules prevent companies from improperly avoiding the SEC’s registration statement requirements by dividing a single securities offering into multiple securities offerings to take advantage of exemptions that would not be available for the combined offerings. Regulation A+ contains integration safe harbor provisions. Under Rule 251(c), a Regulation A+ offerings will not be integrated with prior offers or sales of securities. Subsequent offers and sales of securities in Regulation A+ offerings will not be integrated with other securities offerings that are: Read More
On March 28, 2019, the SEC charged Keith Borge, the former controller of a New York-based not-for-profit college with defrauding municipal securities investors by fraudulently concealing the college’s deteriorating finances.
According to the SEC’s complaint, in recent years, the College of New Rochelle came under considerable financial stress because of declining student enrollment and plummeting revenue from tuition. To hide the college’s deteriorating financial condition from investors, the college’s former controller, Keith Borge, created false financial records, didn’t file payroll tax submissions, and didn’t assess the collectability of pledged donations that were increasingly unlikely to be received as donors became more frustrated with the college’s operations. Keith Borge’s misconduct resulted in the college’s financial statements for its 2015 fiscal year falsely overstating net assets by almost $34 million. Keith Borge also falsely certified the accuracy of the college’s financial statements. The financial statements were published by Keith Borge to an online repository in connection with the College’s continuing disclosure obligations stemming from a 1999 bond issuance, and significantly influenced investors’ decisions to invest in the bonds. Read More
The SE announced on April 1, 2019 that it had halted an ongoing investment fraud by Investment Advisor Motty Mizrahi targeting members of the Jewish community, primarily in the Los Angeles, California region.
The SEC filed an emergency action in federal court against Motty Mizrahi and MBIG Company, his sole proprietorship, alleging that, since June 2012, they defrauded at least 15 advisory clients out of more than $3 million. According to the SEC’s complaint, unsealed on March 29, 2019, Motty Mizrahi falsely claimed that MBIG used sophisticated trading strategies to generate “guaranteed” returns of between 2-3% per month, the investments were risk-free, and clients would not lose their money and could withdraw their funds at any time. Unbeknownst to his clients, however, MBIG had no bank or brokerage account of its own – rather, clients unwittingly sent money to Motty Mizrahi’s personal bank account. Motty Mizrahi used the money to fund his personal brokerage account, in which he engaged in high-risk options trading producing losses of more than $2.2 million, and to pay personal expenses. The SEC alleges that Motty Mizrahi covered up his fraud by issuing MBIG’s clients fabricated account statements, showing positive account balances and profits from trading. When clients demanded proof of MBIG’s securities holdings, Motty Mizrahi showed them brokerage statements reflecting a multi-million dollar balance for a fictitious MBIG brokerage account. Read More
On March 22, 2019, the SEC charged registered investment adviser Direct Lending Investments, LLC with a multi-year fraud that resulted in approximately $11 million in over-charges of management and performance fees to its private funds, as well as the inflation of the private funds’ returns.
According to the SEC’s complaint, Direct Lending advises a combination of private funds that invest in various lending platforms, including QuarterSpot, Inc., an online small business lender. The SEC alleges that for years, Brendan Ross, Direct Lending Investments’s owner and then-chief executive officer, arranged with QuarterSpot to falsify borrower payment information for QuarterSpot’s loans and to falsely report to Direct Lending that borrowers made hundreds of monthly payments when, in fact, they had not. The SEC alleges that many of these loans should have been valued at zero, but instead were improperly valued at their full value, because of the false payments Ross helped engineer. As a result, between 2014 and 2017, Direct Lending cumulatively overstated the valuation of its QuarterSpot position by approximately $53 million and misrepresented the Funds’ performance by approximately two to three percent annually. The SEC alleges that Direct Lending collected approximately $11 million in excess management and performance fees from the Funds that it would not have otherwise collected, had the QuarterSpot position been accurately valued. Read More
On March 26, 2019, the Securities and Exchange Commission (SEC) announced settled actions against Reverse Merger Shell Brokers, James K. McKillop, attorney James M. Cassidy, and Cassidy’s firm Tiber Creek Corp. The agency accused both men of acting as unregistered brokers and of failing to file required beneficial ownership forms with Edgar. While that may sound dull, the case is of interest for several reasons, and in addition illustrates why going public via a reverse merger can turn out to be a poor idea.
We’ve written often about dormant shells and the people who sell them to unwary owners of private companies who want to go public. Usually the shell vendors we’ve discussed obtain their inventory by petitioning for custodianship of the shell companies they wished to control. Once custodianship is granted, the custodian is free to inform the transfer agent that he’s in charge. He can issue himself stock, or a promissory note that converts to stock. If the shell company is a delinquent SEC registrant, he can terminate registration. But his main goal is to sell the shell to someone who wants to take his own company public. Shell vendors always claim their shells are “clean,” but there’s no guarantee of that. Buyers may discover too late that their new shell has a closet full of skeletons, in the form of a bad history, bad share structure with a series of reverse splits, or toxic and potentially dilutive promissory notes. If such issues exist, the only way to resolve them is through litigation, which can be expensive and time-consuming.
On March 26, 2019 the SEC filed settled charges against recidivist James K. McKillop for acting as an unregistered broker and for failing to timely file required beneficial ownership forms in connection with his position at Tiber Creek Corp. The SEC also separately filed related settled administrative charges against Tiber Creek and Tiber Creek’s president, James M. Cassidy.
According to the SEC’s complaint and the SEC’s order, Tiber Creek maintained an inventory of SEC-registered public shell companies, for which James McKillop and James Cassidy served as the officers, directors, and fifty percent shareholders. The SEC alleges that since July 2012, James McKillop and James Cassidy effected securities transactions through Tiber Creek for more than 100 public shell companies without being registered as brokers. The complaint also alleges that on more than 110 occasions, James McKillop and James Cassidy failed to timely file required beneficial ownership reports, including Schedules 13G and Forms 4, in connection with the public shell companies. Read More
On March 8, 2019, Securities and Exchange Commission (SEC) Chairman Jay Clayton and Brett Redfearn, Director of the agency’s Division of Trading and Markets, spoke at Fordham University’s Gabelli School of Business in New York City. They addressed a variety of topics, but a few points of interest stood out including their discussion of reverse mergers in going public transactions. One was the need to do more to combat retail investor fraud. That had been the subject of a lively roundtable discussion that took place at SEC headquarters in Washington on September 26, 2018. Clayton and Redfearn wanted to discuss the conclusions drawn from that and two other roundtables convened in 2018, and to suggest new directions, along with some plans for reform, for 2019.
Clayton stressed, as he had at the roundtable, his fidelity to five principles that serve as his guide. They are: Read More
The SEC filed on March 28, 2019 charges against the former Chief Operating Officer (COO), Richard Diver of a Commission-registered investment adviser for aiding and abetting the advisory firm’s actions to overbill its clients as part of a fraudulent scheme to improperly inflate his own pay.
According to the SEC’s complaint, between 2011 and December 2018, former COO Richard Diver, a resident of Spring Lake, New Jersey, engaged in an illicit scheme to steal approximately $6 million from his employer. Richard Diver, whose duties included managing the advisory firm’s payroll and client billing functions, allegedly inflated his salary by hundreds of thousands of dollars per year. As part of this scheme, Richard Diver defrauded investors by causing the investment adviser to overbill more than 300 investment advisory client accounts by approximately $750,000, for the purpose of generating additional revenue. As alleged in the complaint, Richard Diver used this revenue to finance his inflated salary and when confronted by the investment adviser’s CEO in December 2018, Richard Diver confessed to having carried out the scheme. Read More
The SEC announced fraud charges and an asset freeze on March 18, 2019, against the operators of a $25 million Ponzi scheme falsely promising high annual returns with minimal to no risk to investors in the Vietnamese community of Orange County, California.
The SEC alleges that Kent R.E. Whitney founded The Church for the Healthy Self three months after being released from federal prison for orchestrating a prior investment scheme involving commodities. According to the SEC, the Church for the Healthy Self’s investment program, CHS Trust, promised investors tax-deductible, guaranteed, and insured returns of at least 12%, through reinsurance investments and options trading. Read More