SEC Obtains Judgment Against Todd Zinkwich
On January 12, 2023, the U.S. District Court in Boston entered a final judgment by consent against Florida resident Todd Zinkwich, whom the SEC charged for engaging in a scheme to manipulate the market for numerous microcap stocks. The District Court had previously entered a partial judgment against Zinkwich, imposing multiple injunctions against him.
According to the SEC’s complaint, from at least June 2017 to March 2018, individuals and groups who held large quantities of microcap stocks paid Zinkwich hundreds of thousands of dollars to facilitate a scheme to drive up demand for the stocks of certain issuers. As alleged in the complaint, Zinkwich arranged for his associate Eric Landis to generate an appearance of increased demand for the stocks by placing thousands of trades between numerous accounts under Landis’s control, including accounts that Zinkwich controlled and gave Landis access to. Read More
SEC Charges Andrew DeFrancesco, Marlio Mauricio Diaz Cardona, Carlos Felipe Rezk, Nikola Faukovic, and Catherine DeFrancesco for their roles in a fraudulent scheme to mislead investors about Cool Holdings, Inc
On January 6, 2023, the Securities and Exchange Commission (“SEC”) announced charges against five individuals for their roles in a fraudulent scheme to mislead investors about Cool Holdings, Inc., a publicly-traded company (“Cool”).
The SEC alleges that, from at least March 2018 through June 2019 (the “Relevant Period”), Andrew DeFrancesco, the chairman of Cools’ board, devised and implemented the scheme with Marlio Mauricio Diaz Cardona, Cools’ chief executive officer; Carlos Felipe Rezk, Cools’ chief marketing officer; and Nikola Faukovic, one of DeFrancesco’s employees. According to the complaint, DeFrancesco, Diaz, and Rezk made false statements and omitted material information in Cools’ filings with the Commission, including about a critical business relationship, in order to mask Cools’ perilous financial condition and future prospects. Read More
OTC Markets Group Offers New Guidance for Submitting Attorney Letters
OTC Markets Group has published amendments to the Pink Basic Disclosure Guidelines. The amendments to the Guidelines have been updated to require additional information about ownership and to improve investor access to company disclosure by establishing best practices for publication of the disclosure documents and any accompanying Attorney Letters.
All quarterly and annual reports for the period ended December 31, 2022 or later must be prepared using the amended Guidelines (found here). Read More
SEC Wins $10.2 Million Judgment Against Justin W. Keener d/b/a JMJ Financial For Acting As Unregistered Penny Stock Dealer
On December 20, 2022, Judge Beth Bloom of the United States District Court for the Southern District of Florida entered a final judgment against Justin W. Keener d/b/a JMJ Financial.
The SEC’s complaint alleged that Keener failed to register as a securities dealer with the SEC, or to associate with a registered dealer, when he bought and sold billions of newly issued shares of penny stock from at least January 2015 through January 2018. Keener obtained the shares directly from issuers after converting debt securities known as convertible notes. By failing to register, Keener avoided certain regulatory obligations for dealers that govern their conduct in the marketplace, including regulatory inspections and oversight, financial responsibility requirements, and maintaining books and records. Read More
OTC Markets Group Publishes Guidance on Dilution Risk with Respect to OTCQX and OTCQB Applicants
OTC Markets published guidance with respect to Section 2.13(d) of the OTCQX Rules for U.S. Companies and Section 1.4(5) of the OTCQB Standards regarding the review of applications to the OTCQX and OTCQB markets.
The notice is intended to provide a better understanding of OTC Markets’ application review process and the underlying rationale behind it, to facilitate initial and ongoing compliance with the OTCQX Rules and the OTCQB Standards and support successful participation in these markets.
The notice also highlights a focus by OTC Markets on protecting investors by paying particular attention to dilution risks in the structure of new OTCQX and OTCQB Applicants, including refusing an application based on dilution risks if it determines that admission of the company’s securities would likely be detrimental to the interests of investors or requiring approved applicants involved in convertible financings to provide timely disclosures of the dilution risks. Read More
SEC Charges J.H. Darbie & Co with Anti-Money Laundering Violations
On December 12, 2022, the Securities and Exchange Commission (the “SEC”) charged J.H. Darbie & Co., Inc., a New York City-based brokerage firm, with failing to report suspicious activity related to transactions in tens of billions of shares of low-priced securities – or “penny stocks” – that were traded in over-the-counter markets.
To help detect potential securities law and money-laundering violations, broker-dealers are required to file Suspicious Activity Reports (SARs) describing suspicious transactions taking place through their firms.
According to the SEC’s complaint, from at least January 2018 to January 2020, J.H. Darbie had written anti-money laundering policies and procedures (“AML P&P”) requiring that J.H. Darbie file a SAR consistent with the BSA and its implementing regulations. But despite the policies and procedures, J.H. Darbie failed to investigate and file SARs for numerous suspicious transactions, even when the transactions raised red flags recognized in J.H Darbie’s written anti-money laundering policies and procedures and in regulatory guidance. Read More
Members of New Republican House Majority Seek to Rein in Gary Gensler
A week before the 2022 midterm elections, the ranking members of four important committees of the House of Representatives composed and jointly signed a letter to Gary Gensler, Chair of the Securities and Exchange Commission, demanding answers to a number of important questions. The ranking members—the most senior members of each committee from the minority party—were Jim Jordan (R-OH)) of the Committee on the Judiciary, Patrick McHenry (R-NC) of the Committee on Financial Services, James Comer (R-KY) of the Committee on Oversight and Reform, and Tom Emmer (R-MN) of the Subcommittee on Oversight and Investigations of the Committee on Financial Services.
Since the Republicans won the House in the midterms–though by only a few seats, not in the Red Wave they’d hoped for—those four congressmen will become chairmen of their committees in January 2023. They’ll wield more power and influence than they have in the past four years and perhaps find themselves in a position to achieve some of their goals. They’re likely to increase past efforts to prevent what they see as excessive regulation of our financial markets. As we shall see, they object to Gensler’s interest in regulation and rulemaking and would, for the most part, like to see him thwarted.
Charges Filed Against Eight Social Media Influencers in $100 Million Stock Manipulation Scheme Promoted on Discord and Twitter
On December 13, 2022, eight social media influencers were arrested and charged in the United States District Court for the Southern District of Texas Houston Division for a stock manipulation scheme that earned the group at least $114 million.
Charges in the Indictment are as follows:
FTX Founder Samuel Bankman-Fried Charged by the SEC and Criminally Indicted
Today, December 13, 2022, the Securities and Exchange Commission (the “SEC”) charged Samuel Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (“FTX”), the crypto trading platform of which he was the CEO and co-founder. The SEC alleges that Bankman-Fried fraudulently raised billions of dollars from investors in FTX and misused funds belonging to FTX’s trading customers.
According to the SEC’s complaint, since at least May 2019, FTX, based in The Bahamas, raised more than $1.8 billion from equity investors, including approximately $1.1 billion from approximately 90 U.S.-based investors. In his representations to investors, Bankman-Fried promoted FTX as a safe, responsible crypto asset trading platform, specifically touting FTX’s sophisticated, automated risk measures to protect customer assets. Read More
Justin Bieber, Kevin Hart, Snoop Dogg, Madonna, Serena Williams, Jimmy Fallon, and More Are Being Sued for Promoting Bored Ape Yacht Club NFTs
A Class Action Complaint filed in the United States District Court Central District of California Western Division on December 8, 2022 names several A-list musicians, athletes and celebrities as defendants for promoting Bored Ape Yacht Club NFTs (“BAYC NTFs”), accusing them of generating billions of dollars in sales and re-sales by using misleading statements to artificially increase the interest in and price of the BAYC NFTs, causing loses to the investors that purchased the BAYC NFTs at the drastically inflated prices.
The Complaint further alleges that the Executives of Yuga Labs, the parent company of Bored Ape Yacht Club, failed to register the investments as securities with the Securities and Exchange Commission (the “SEC”) and the A-list celebrities failed to disclose their compensation for promoting the BAYC NFTs.
The celebrity promoters named in the complaint include Madonna Louise Ciccone, Justin Bieber, James “Jimmy” Fallon, Paris Hilton, Gwyneth Paltrow, Serena Williams, Austin Richard “Post Malone” Post, Thomas “Diplo” Pentz, Calvin “Snoop Dogg” Broadus, Jr., Kevin Hart, Alexander Pall, Andrew Taggart, Wardell Stephen Curry II, Nayvadius “Future” Wiburn Cash, Abel “The Weeknd” Tesfaye, Khaled Mohammed Khaled “DJ Khaled”, and Mike “Beeple” Winkelmann. Read More
Audits With Deficiencies Increased in 2021, According to New PCAOB Staff Report
December 8, 2022
A new Public Company Accounting Oversight Board (“PCAOB”) staff report published this month, found on the Staff Publications page on the PCAOB website, shows a year-over-year increase in the number of audits with deficiencies at audit firms inspected by the PCAOB in 2021.
The report titled “Staff Update and Preview of 2021 Inspection Observations” presents aggregate observations from the PCAOB’s inspections of 141 annually and triennially inspected audit firms in 2021.
According to the report, PCAOB staff expects approximately 33% of the audits reviewed will have one or more deficiencies that will be discussed in Part I.A of the individual audit firm’s inspection reports, up from 29% in 2020. Read More
Foreign Issuer Going Public Registration Statements and SEC Filings
The Securities and Exchange Commission (“SEC”) requires various forms of SEC registration statements covering the offer and sale of securities for both public and private companies. The eligibility and requirements of each SEC registration statement vary depending on the characteristics of the issuer and the securities offering. The requirements vary for US issuers and non-US companies.
Non-US companies may seek to file a US registration statement to go public and access the US public capital markets to raise capital in the US, use its securities as a currency for mergers and acquisitions or to list on a national securities exchange like NASDAQ or the NYSE.
Foreign issuers going public in the U.S. who qualify as Foreign Private Issuers can avail themselves of certain benefits, including less detailed disclosure and reporting requirements. When going public, a Foreign Issuer can offer and sell the same types of securities that a U.S. Issuer can offer and sell. Read More
David Stephens, Donald Danks, Jonathan Destler, and Robert Lazerus Indicted for Conducting an International Pump-and-Dump / Money Laundering Scheme Using Loop Industries Inc
On November 22, 2022, Canadian resident David Stephens and California residents Donald Danks, Jonathan Destler, and Robert Lazerus were charged in a federal grand jury indictment with securities fraud in connection with a pump-and-dump scheme, and Danks was additionally charged with money laundering, arising from their alleged manipulation of the market for shares of Quebec-based Loop Industries, Inc. (NASDAQ: LOOP). Read More
SEC Charges Unregistered Brokers, Jeffrey K. Galvani and Stuart A. Jeffery, for Facilitating $1.2 Billion in Penny Stock Trades
On November 17, 2022, the Securities and Exchange Commission (the “SEC”) charged Jeffrey K. Galvani, Stuart A. Jeffery, and two New York-based entities they controlled with operating as unregistered broker-dealers that facilitated more than $1.2 billion of securities trading, primarily in penny stocks.
The SEC’s complaint alleges that Galvani and Jeffery – both registered brokers at a registered broker-dealer unconnected with this case (Crito Capital LLC, according to FINRA Broker Search) – created GEL Direct Trust, which they managed through its trustee, GEL Direct, LLC.
The GEL entities were not registered with the SEC as broker-dealers. Nonetheless, from 2019 through at least May 2022, Galvani and Jeffery, acting through the GEL entities, executed more than 19,000 trades of more than 300 billion shares of stock of more than 400 issuers (primarily penny stocks) on behalf of approximately 60 customers.
Trades facilitated by GEL generated more than $1.2 billion of trading proceeds for its customers, from which the defendants allegedly received at least $12 million in transaction-based and other compensation. Read More
Class Action Lawsuit filed against Tom Brady, Stephen Curry and other Athletes and Celebrities that Promoted FTX
By now, most people have heard about the epic collapse of FTX. The crypto exchange founded by Sam Bankman-Fried (“SBF”) was once the 3rd largest crypto exchange, with an estimated valuation of $32 billion, and is now in Bankruptcy, facing a flurry of allegations of illegal activities and misappropriation of customer funds.
It all began on November 2nd when Coindesk reported that a leaked balance sheet showed that Alameda Research (SBF’s trading firm for FTX) was full of FTX – specifically, the FTT token issued by the exchange, meaning SBF’s trading giant Alameda rested on a foundation primarily made up of a coin that its sister company invented, not an independent asset like a fiat currency or another crypto. Further, it showed that Alameda held far more of the tokens than traded on the market, suggesting its stake would be hard to liquidate at current prices.
Then, on November 6th, Binance CEO Changpeng “CZ” Zhao said his company, the largest crypto exchange, planned to sell its FTT holdings, which dated back to an early investment by Binance in FTX. Read More
Joseph Padilla Arrested and Charged in $7 Million Securities Fraud
On August 25, 2022, Joseph Padilla was arrested at the San Diego International Airport in connection with his alleged involvement in a sophisticated securities fraud scheme that generated over $7 million in illicit proceeds.
Padilla, 53, of Carlsbad, Calif., was charged in the United States District Court District of Massachusetts (Boston) with one count of securities fraud. The charge provides for a sentence of up to 20 years in prison, three years of supervised release, and a fine of $5 million.
According to the Complaint, between February and April 2021, Padilla participated in a lucrative pump-and-dump fraud scheme involving the shares of Charlestowne Premium Beverages Inc., a thinly-traded microcap company that traded under the stock ticker symbol FPWM.
The Complaint alleges that Padilla (i) concealed control by one or more persons of a large portion of Charlestowne stock (including nearly 97% of the float), (ii) orchestrated the fraudulent manipulation of Charlestowne stock in order to inflate its price through his association with five traders and cooperating witness #2 (CW-2) and, (iii) orchestrated the dump of Charlestowne stock through Valor Capital, a broker-dealer in the Cayman Islands netting at least $7 million in illicit proceeds. Read More
SEC Charges Incarcerated Felon (Syed Arham Arbab) and Five Friends in $2 Million Fraud Scheme
On October 31, 2022, the Securities and Exchange Commission charged six individuals, including a federal inmate, for conducting a freeriding scheme that defrauded multiple broker-dealers.
The SEC’s complaint alleges that from May 2019 to early January 2021, Syed Arham Arbab, 25, and five others – Tomas Javier Jimenez, 24, of Dunwoody, Georgia; Blake Douglas McKinney, 26, of Plymouth, Michigan; Mushfiqur Rahman, 21, of Jamaica, New York; John Ryan Shows, 25, of Atlanta, Georgia; and William Carl Spagnoli, 24, of Alpharetta, Georgia – made more than $2 million in bogus deposits from empty or underfunded bank accounts into various brokerage accounts to deceive broker-dealers into providing instant deposit credit for online securities trading. Read More
What are the SEC Periodic Reporting Requirements? Form 10-K, Form 10-Q and Form 8-K Reports
Once the staff of the Securities and Exchange Commission (“SEC”) declares a company’s registration statement on Form S-1 effective under the Securities Act of 1933, as amended (the “1933 Act”), the company may offer and sell the registered securities covered by the Form S-1.
Once the registration statement is effective, the company becomes subject to the SEC’s periodic reporting requirements. Companies can also become subject to the SEC’s periodic reporting requirements by filing a Form 10 Registration Statement. The SEC reporting requirements mandate that the company file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K on an ongoing basis. The company’s management must certify financial and certain other information contained in these periodic filings and reports. Read More
Nasdaq puts the brakes on IPOs of at least 4 small Chinese companies while it probes suspicious market activity
According to various internet reports, Nasdaq Inc has halted the initial public offerings (IPOs) of at least four small Chinese companies while it investigates short-lived stock rallies of other recent Chinese IPOs after going public.
Several small Chinese companies that raised small amounts, typically $50 million or less, in their IPOs, saw their stock prices rise 2,000% – 32,000% in their debuts, only to crash in the days that followed, harming investors who chased the stocks at its higher prices.
This penny stock-style pump-and-dump action allegedly has NASDAQ officials concerned about manipulative trading, and until the causes of the price action can be determined, similar Chinese IPOs are on hold. Read More
Five Russians and Two Oil Traders Charged in Global Sanctions Evasion and Money Laundering Scheme
A 12-count indictment was unsealed on October 19, 2022, in federal court in Brooklyn, New York, charging five Russian nationals, Yury Orekhov, Artem Uss, Svetlana Kuzurgasheva, also known as “Lana Neumann,” Timofey Telegin and Sergey Tulyakov with various charges related to a global procurement, smuggling and money laundering network.
Also charged were Juan Fernando Serrano Ponce, also known as “Juanfe Serrano” and Juan Carlos Soto, who brokered illicit oil deals for Petroleos de Venezuela S.A. (PDVSA), the Venezuelan state-owned oil company, as part of the scheme.
On October 17, 2022, Orekhov was arrested in Germany and Uss was arrested in Italy, both at the request of the United States, and will undergo extradition proceedings.
According to the Indictment, the Defendants obtained military technology from U.S. Companies, smuggled millions of barrels of oil and laundered tens of millions of dollars for Russian Oligarchs, Sanctioned Entities and the world’s largest energy conglomerate based in Beijing, People’s Republic of China. Read More
SEC Defendant and FBI Fugitive Justin Costello Arrested
On October 4, 2022, SEC Defendant and FBI fugitive Justin Costello was arrested by an FBI SWAT team. Costello had been on the run from authorities as a fugitive since September 29th after failing to surrender to authorities after being charged with 22 counts of wire fraud and 3 counts of securities fraud as part of $35 million financial fraud.
According to the criminal Indictment, Costello, a 42-year-old resident of La Jolla, California, (i) diverted at least $3.6 million to himself from his company Pacific Banking Corp, which provided banking services to three marijuana companies, (ii) cost more than 7,500 investors about $25 million through pump-and-dump schemes fueled by false statements, (iii) scammed $6 million from 29 investors who invested directly with Costello based on false statements made to those investors about his background and experience, and (iv) misappropriated $42,000 to pay for his wedding with Katrina Rosseini, which included a Jame Bond-themed cake and ice sculptures. Read More
OTC Markets Group Reflects on Amended Rule 15c2-11
The last week of September marked the one-year anniversary of the compliance date for the Securities and Exchange Commission (“SEC”) amendments to Securities and Exchange Act Rule 15c2-11, which regulates the quotation of over-the-counter securities. As we shall see, OTC Markets Group, whose issuer-clients are directly affected by the amended rule, decided to commemorate the occasion with a webinar called “One Year On: The Impact & Outcomes of SEC Rule 15c2-11.”
An overhaul was long overdue; the rule had last been altered in 1991, more than 30 years ago. Since then, the ways in which most people manage their investments have changed enormously. Now they can do research on the internet, and buy and sell through online brokers, many of whom will charge them charge them no SECs or fees. They can communicate with their fellow investors on a large number of social media forums. All of that made the need for amended Rule 15c2-11 urgent.
Amended SEC Rule 15c2-11 took quite a while to make it to prime time. First, a concept release titled “Publication or Submission of Quotations Without Specified Information” was published by the SEC on September 25, 2019. Concept releases are relatively rare—none has appeared since the one under discussion here—and their purpose is to “solicit the public’s views on securities issues so that we can better evaluate the need for future rulemaking.” The SEC got what it wanted: though the deadline for comment was December 30, 2019, members of the public, market participants, and even politicians continued to send letters until July 26, 2022. Read More
Justice Department Awards Nearly $100 Million to Help Reduce Recidivism and Support Successful Reentry to Communities
On Wednesday, October 5th, the Department of Justice announced awards totaling almost $100 million to reduce recidivism and support adults and youths in successfully returning to their communities after a period of confinement. Read More
IPO v Direct Listing Go Public Direct
IPO v Direct Listing Go Public Direct FAQ
Q: How is going public with a direct listing to the NASDAQ Capital Market different than the traditional IPO listing to NASDAQ Capital Market?
A: Both direct listings and Initial Public Offerings or IPOs result in a privately held company becoming publicly traded on a stock exchange. Read More
Rule 506(b) and Rule 506(c) Private Placements under Regulation D
The SEC’s Office of Investor Education and Advocacy recently issued an Investor Bulletin to educate investors about investing in unregistered securities offerings, sometimes called private placements, under Regulation D of the Securities Act. Rule 506(b) and Rule 506(c) are the most commonly used exemptions from SEC registration. Read More
SEC Charges Neil B. Swartz and Timothy S. Hart
On September 9, 2022, the Securities and Exchange Commission (the “SEC”) announced charges against TBG Holdings Corporation (“TBG”), its principals Neil B. Swartz and Timothy S. Hart, and sales agents Ted L. Romeo, Vincent J. Caputo, and Frank S. Dickerson alleging registration violations for unlawfully selling shares of health management company MediXall Group, Inc. (“MediXall”) to investors.
The SEC’s complaints, filed in U.S. District Court for the Southern District of Florida, allege that, from 2018 through March 2020, TBG and its principals, Swartz and Hart, hired and directed a group of unregistered sales agents to solicit investors to purchase shares of MediXall, a microcap company. According to the complaints, TBG and sales agents Romeo, Caputo, and Dickerson advised investors on the merits of the investments, described the offer to purchase the shares as time-sensitive, provided investors with promotional materials, and raised approximately $3 million by selling MediXall stock to more than 200 investors. As alleged, TBG, Hart and Swartz tracked the sales agents’ investor solicitations, and paid over $500,000 in commissions to the sales agents for their sales of MediXall stock, even though they were not registered as broker-dealers or associated with registered broker-dealers. Read More
Securities and Exchange Commission v. Manhattan Transfer Registrar Company and John C. Ahearn
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”). Read More
SEC Charges Kim Kardashian with Violating Section 17(b)
On October 3, 2022, the SEC Division of Enforcement entered into a settlement of charges with Kimberly Kardashian (“Kardashian” or “Respondent”).
The SEC Offer of Settlement (the “Offer”) includes findings that:
- On June 13, 2021, Kim Kardashian—a well-known media personality and businesswoman—touted a crypto asset security on social media that was being offered and sold. Kardashian did not disclose that she was being compensated for giving such security publicity by the entity offering and selling the security.
- Kardashian’s failure to disclose this compensation violated Section 17(b) of the Securities Act, which makes it unlawful for any person to promote a security without fully disclosing the receipt and amount of such consideration from an issuer.
Stock Manipulation, Bed Bath & Beyond as a Meme Stock, and Ryan Cohen
On Friday, September 2, the man who lived on the 18th floor of 56 Leonard Street in New York’s Tribeca district didn’t go to work or, perhaps, he came home very early. We know only that at about 12:30 in the afternoon, he fell from one of the balconies of his luxury apartment, landing on the roof of an adjacent building. Someone called 911. A crying woman appeared and accompanied the paramedics and the body to the hospital. Though some video was shot by journalists at the scene, the story didn’t get much publicity. It was carried by the New York Post, which said the man was pronounced dead at the scene, adding that the police had not offered further details.
It wasn’t until Sunday afternoon that the victim was identified as Gustavo Arnal, chief financial officer and executive vice president of troubled home décor retailer Bed Bath & Beyond (BBBY). Arnal, 52, lived in the “Jenga Building”—so-called because its asymmetrical balconies are reminiscent of the popular game—with his wife and two adult daughters. According to the Post, he “didn’t say a word to his wife before apparently leaping to his death.” Neither did he leave a note.
The medical examiner ruled the death a suicide. Bed Bath & Beyond’s interim chairwoman, Harriet Edelman, conveyed her condolences to the family in a company press release. Colleagues and social media friends said they were shocked; that what he’d done seemed to them out of character. Read More
SEC Registration Statements And Direct Public Offerings Q & A
SEC Registration Statements And Direct Public Offerings Q & A
Filing a Form S-1 registration statement is the most efficient and reliable method for a private company to obtain public company status. Using a Form S-1 registration statement, companies provide transparency to investors and avoid the risks of reverse merger transactions. Any issuer can use Form S-1. This blog post addresses some of the most common questions we are asked about Form S-1 and SEC registration statements during the going public process.
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