SEC Sues Carebourn Capital, L.P. and Its Managing Partner Chip Rice for Acting as an Unregistered Securities Dealer
On September 24, 2021, the Securities and Exchange Commission (“SEC”) charged Carebourn Capital, L.P. and its managing partner Chip Rice of Maple Grove, Minnesota, with acting as unregistered securities dealers in connection with their buying and selling of billions of newly-issued shares of microcap securities, or “penny stocks,” which generated millions of dollars for Carebourn Capital and Rice. Also named as a relief defendant is another Rice-controlled entity, Carebourn Partners, LLC.
The SEC’s complaint alleges that Rice and Carebourn Capital’s business model was to buy convertible promissory notes – a type of security – from penny stock issuers, convert the notes into newly issued shares of stock, and quickly sell those shares into the public market at a profit. The SEC further alleges that, since January 2017, Rice and Carebourn Capital purchased more than 100 such notes from approximately 40 different penny stock issuers. According to the SEC complaint alleges that Rice and Carebourn Capital negotiated and received highly favorable terms for these notes, including terms that gave them deep discounts from the prevailing market price for the shares of counterparty penny stock issuers.
Proceedings under Section 12(j) of the Securities Exchange Act of 1934, (the “Exchange Act”) are frequently initiated when an SEC reporting company has failed to comply with its SEC reporting requirements. Section 12(j) authorizes the SEC to revoke an issuer’s Exchange Act registration for failure to comply with any provision of the Exchange Act or any of the regulations promulgated thereunder. Section 12(j) also prohibits broker-dealers from effecting transactions in the securities of any issuer whose registration has been so revoked. The entry of a Section 12(j) order is, therefore, effectively stops the public trading of an issuer’s securities.
Section 13(a) of the Exchange Act and the rules promulgated thereunder require companies with a class of securities registered pursuant to Exchange Act Section 12 to file current and accurate information in periodic reports, even if the registration is voluntary under Section 12(g). Rule 13a-1 requires issuers to file annual reports, and Rule 13a-13 requires domestic issuers to file quarterly reports. Reporting companies that do not to comply with their SEC reporting requirements face that risk that their securities will be suspended for up to twelve months, or their Exchange Act registration will be revoked. Read More
We’ve written several times about the Securities and Exchange Commission’s (“SEC”) amendments to Rule 15c2-11, first proposed in September 2019 and adopted in September 2020. The amended rule will finally become effective on September 28, 2021. That is important because no stock that trades over-the-counter can trade at all unless it’s compliant with the relevant provisions of the rule.
The Financial Industry Regulatory Authority (“FINRA”) has always played a significant role in the practical application of Rule 15c2-11. It once administered and operated the OTC Bulletin Board (“OTCBB”) and dealt with the issuers that traded on it. Just before the turn of the new century, the SEC decided that all OTCBB companies had to register stock with the Commission or be dumped to the lowly Pink Sheets. The Pinks had recently been purchased by a group of investors who believed they could make a go of them, and they went on to do just that, eventually changing the name to OTC Markets Group. The OTCBB died a slow death, largely due to FINRA’s lack of interest and failure to innovate; on September 17, FINRA announced it would “retire” the OTC Bulletin Board entirely at a date not yet fixed, but probably in the fourth quarter of this year. (That announcement has been made several times in the past five years; the OTCBB seems always to be on its way out but not quite gone.)
FINRA continues to process corporate action requests by OTC issuers and to process Forms 211. When an issuer wants to initiate or resume quotation until now, it’s needed to find a sponsoring market maker willing to file a Form 211. In order to do so, he needed to obtain information from the company, including financial statements that needed to be accurate but not audited, and send the completed form to FINRA. If anything in the documentation is incorrect, the sponsoring market maker could be found liable. He was not permitted to charge for preparing and submitting a Form 211.
We last wrote about the Securities and Exchange Commission’s new Rule 15c2-11 in early August. The amended rule was proposed in September 2019; the final rule appeared in September 2020. Now the compliance deadline, September 28, 2021, is only a week away. Penny players holding “no information” stocks hope against hope management will show up and make just enough disclosure to OTC Markets Group to qualify for the bare minimum required by the SEC. That means a single annual report dated within the past 16 months, enough to send the stock in question to OTC Markets’ Pink Limited Information tier.
No one was expecting new developments so late in the day, when Brian Chappatta, a Bloomberg opinion columnist and bond expert, found a joint letter sent to the SEC on August 6 by the Securities Industry and Financial Markets Association (“SIFMA”) and the Bond Dealers of America (“BDA”). The letter points out that “[t]he rule on its face does not distinguish between types of securities, other than municipal securities, which Rule 15c2-11expressly excepts.”
That is: Rule 15c2-11 applies to over-the-counter bonds as well as to over-the-counter stocks. Most fixed income securities—according to the BDA, “virtually all”—trade OTC, and the fixed income securities market is enormous. Michael Decker, the BDA’s senior vice president of federal policy and research, told Chappatta, “Until April of this year, I’ve never paid attention to this rule because this was not a fixed-income rule. The SEC has now taken the position that the rule already applies to fixed income and has always applied.”
On September 15, 2021, the Securities and Exchange Commission (the “SEC”) awarded approximately $110 million to a whistleblower whose information and assistance led to successful SEC and related actions.
With the award, the SEC’s whistleblower program has now paid more than $1 billion in awards to 209 whistleblowers, including over $500 million in fiscal year 2021 alone.
The $110 million award stands as the second-highest award in the program’s history, following the over $114 million whistleblower award the SEC issued in October 2020.
On September 1, 2021, the Securities and Exchange Commission announced that it filed an action against Alexander Kon, a penny stock promoter and resident of Overland Park, Kansas, seeking an order directing him to comply with investigative subpoenas for documents and testimony.
According to the SEC’s filing in U.S. District Court for the Southern District of Florida, the SEC is investigating whether Kon violated the federal securities laws by participating in an offering of penny stock in contravention of an SEC order.
Kon was previously named in an SEC Order on November 14, 2016, for his involvement in a 2014 stock promotion for Cannabusiness Group Inc (CBGI).
In 2020, the Securities and Exchange Commission (SEC) stepped up its efforts to reel in “toxic lenders”: individuals who profit enormously by buying convertible securities in penny stock companies and selling the shares they obtain upon conversion of their promissory notes, warrants or preferred stock. Since those conversions usually take place at a considerable discount to market price, as tranche after tranche is sold, the stock price plummets and shares outstanding soar. Investors flee the staggering dilution, scrambling to get out before a big reverse split becomes inevitable. The companies themselves are doomed unless management can find a way to break the vicious cycle caused by the toxic lenders.
The SEC once had difficulty dealing with toxic lenders. The lenders insisted they were engaged in lawful business. They had contractual relationships with the issuers from whom they purchased notes, and the parties involved were merely acting in accordance with the terms of those contracts, they claimed. For a while, the regulator had some success alleging that in order to sell the stock they obtained through conversion, certain lenders illegally relied on a provision of Regulation D, Rule 504 that granted an exemption from registration under the blue sky laws in force in some states. They sued Edward Bronson and his firm E-Lionheart (d/b/a Fairhills Capital) on those grounds in 2012; in the following year, Curt Kramer and his Mazuma companies agreed to settle a similar action. But Bronson, Kramer, and others like them altered their methods and were soon back in business.
The SEC needed a new approach, and in 2017, it found one. It charged Ibrahim Almagarby and his Microcap Equity Group (MEG) with acting as unregistered dealers. The Securities Exchange Act of 1934 (Exchange Act) defines a dealer as “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.” That naturally sounds like a description of a normal retail investor, so there’s an exception for “traders,” who buy and sell for their own accounts, “but not as part of a regular business.” Anyone who fits the definition of a “dealer” must register with the SEC and FINRA. Failure to do so constitutes a violation of the securities laws. In 2008, the SEC produced a Guide to Broker-Dealer Registration that clearly explains who may need to register.
On August 2, 2021, Gary Gensler, the new chair of the Securities and Exchange Commission (SEC), announced that because he wasn’t entirely pleased with the amendments to the rules governing the agency’s whistleblower program that became final in September 2020, he had:
… directed the staff to prepare for the Commission’s consideration later this year potential revisions to these two rules that would address the concerns that these recent amendments would discourage whistleblowers from coming forward. In particular, the staff is considering whether our rules should be revised to permit the Commission to make awards for related actions that might otherwise be covered by an alternative whistleblower program that is not comparable to the SEC’s own program and to clarify that the Commission will not lower an award based on its dollar amount.
Gensler’s feelings about the recent amendments to the whistleblower rules were already known; only a few days before, he’d delivered brief remarks at the National Whistleblower Center’s National Whistleblower Day 2021 celebration in which he alluded to his plans.
He also pointed out that the program was of particular interest to him because when the Dodd-Frank Act provided for its creation in 2010, he’d been chair of the Commodity Futures Trading Commission (CFTC) and had worked on setting up the whistleblower program there.
On Friday, August 13th, the Securities and Exchange Commission (the “SEC”) filed charges against GPL Ventures LLC, GPL Management LLC, Alexander J. Dillon, Cosmin I. Panait (the “GPL Defendants”), HempAmericana, Inc, Salvador E. Rosillo, Seaside Advisors, LLC, and Lawrence B. Adams (aka Larry Adams).
Dillon, a 32-year-old resident of New Jersey, and Panait, a 35-year-old New York resident and Romanian citizen, co-own and control GPL Ventures LLC and GPL Management LLC. The duo also co-own and controls Blackbridge Capital LLC, a toxic lending company mirroring GPL Ventures.
Lawrence Adams, a 66-year-old New Jersey resident, owns Seaside Advisors LLC, a New Jersey entity that touts itself as a consulting firm that helps public companies find favorable funding.
The SEC Complaint alleges that since 2017, the GPL Defendants have been operating as unregistered dealers by privately acquiring large blocks of stock in approximately 140 microcap issuers and publicly selling those blocks into the market for their own account, generating gross proceeds of at least $81 million.
Going public offers many benefits to companies seeking to grow their business, including:
- Enhanced ability to raise capital,
- Liquidity for founders and shareholders,
- Increased visibility
- Improved financial position,
- Enhanced credibility,
- Enhanced ability to attract and retain employees and
- The ability to offer valuable incentives to employees and consultants.
An Emerging Growth Company is defined as an issuer with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year. Status as an Emerging Growth Company offers many benefits to issuers going public. Most companies quoted on the OTC Markets OTC Link qualify as Emerging Growth Companies.
On July 29, 2021, the United States District Court for the District of New Jersey entered a default judgment against Oleksandr Ieremenko and Andrey Sarafanov, who were charged in connection with a scheme to trade on nonpublic earnings information hacked from the SEC’s EDGAR system.
The SEC’s complaint alleged that Ieremenko, a Ukrainian hacker, gained access to EDGAR in 2016 and extracted EDGAR filings containing nonpublic earnings results.
The information in the filings was allegedly passed to individuals, including Sarafanov, who used it to trade in the narrow window between when the files were extracted from SEC systems and when the companies released the information to the public.
In total, eight traders allegedly traded before at least 157 earnings releases from May to October 2016 and generated at least $4.1 million in illegal profits. According to the complaint, Sarafanov’s trading on hacked information resulted in profits of $1,094,435.
As the summer of 2021 enters its final months, investors in the U.S. over-the-counter market and OTC issuers themselves await the rollout of the amended Securities and Exchange Commission (“SEC”) Rule 15c2-11 on September 28. The rule is vital to the penny stock market: no OTC security can begin trading until a market maker sponsors it by filing a Form 211 with the Financial Industry Regulatory Authority (“FINRA”). Once the form is processed, the sponsoring market maker can request a trading symbol and begin to quote the stock. For 30 days, he has exclusive rights to market making in that issue; subsequently, additional market makers may join in without filing their own Forms 211. That is known as the Piggyback Exception.
Why Is a New Rule Needed?
Rule 15c2-11 was introduced in 1971 and was last substantially modified in 1991. Since then, the OTC Market has changed dramatically, largely thanks to the rise of the internet. By 1995, inexpensive online trading was readily available; the high commissions that had once discouraged frequent trading disappeared. The Pink Sheets and the OTCBB, once-sleepy backwaters, turned into gold rush towns crowded with gamblers willing to take a chance on the latest can’t-miss play. Microcap fraud increased by leaps and bounds. Read More
2020 and 2021 have been historic years for Securities and Exchange Commission (“SEC”) enforcement action against toxic lenders as unregistered dealers. We recently wrote about the interesting SEC enforcement actions that examine toxic financings and 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 July 22, 2021, the Securities and Exchange Commission (the “SEC”) filed an emergency action charging California resident Charlie Abujudeh with running microcap fraud schemes targeting retail investors.
According to the SEC’s complaint, filed in the U.S. District Court for the Eastern District of New York, Abujudeh worked with others from August 2019 to at least September 2020 to fraudulently sell several microcap companies’ stock to investors by making misleading statements during high-pressure sales calls and/or email promotions.
On July 15th, the Securities and Exchange Commission (the “SEC”) announced charges against Marlon Muller for engaging in a pattern of coordinated trading intended to artificially raise and sustain the price of microcap issuer EMS Find, Inc. (EMSF) and to generate liquidity.
The SEC’s complaint, filed in the United States District Court for the Southern District of New York, alleges that using an internet chat application Muller repeatedly instructed an associate when and how to submit buy and sell orders for EMSF shares, using several brokerage accounts the associate controlled at multiple broker-dealers, in order to reach the price and liquidity levels Muller wanted.
This manipulative trading activity allegedly distorted the true value of EMSF shares as well as the actual market interest in EMSF and operated as a fraud on the investing public.
According to the complaint, from June until September 2015, Muller received compensation from the associate as well as payments from another entity trading EMSF shares, totaling over $300,000.
TD Ameritrade puts out list of liquidation only stocks ahead of September 28, 2021 Rule 15c-211 amendments
On September 28, 2021, new amendments to Rule 15c-211 under the Securities Exchange Act of 1934 go into effect to enhance investor protection and improve issuer transparency. These amendments will restrict the ability of market makers to publish quotations for those companies that have not made required current financial and company information available to regulators and investors.
Ahead of the enforcement date, TD Ameritrade published its list of stocks that will become “liquidation only”. This list, which is extensive and includes around 5,000 securities, is subject to change.
Starting in mid-August, TD Ameritrade will only accept orders to liquidate positions – (i.e., no new buy orders) in the 5,000 or so listed securities.
All penny stock investors should take notice, as this will undoubtedly negatively affect the stock prices of all listed securities, especially considering that TD Ameritrade is the second-largest broker with over 11 million users.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email [email protected] or visit www.securitieslawyer101.com. 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.
Today, July 15, 2021, the Securities and Exchange Commission (the “SEC”) charged the former CEO and CFO of FTE Networks, Inc. (“FTE”), a network infrastructure company formerly based in Naples, Florida, with conducting a multi-year accounting fraud.
The alleged scheme involved inflating the company’s revenues for certain periods by as much as 108 percent, the misappropriation of millions of dollars of company funds for personal use, and concealing the then NYSE-listed publicly-traded company’s issuance of almost $23 million in convertible notes.
Today, the Securities and Exchange Commission (the “SEC”) suspended trading in 55 publicly traded penny stock companies because of public interest concerns.
According to the Order, all 55 issuers have stopped making public disclosures putting their operating status into question.
Many of the stocks were formally involved in pump & dump schemes and other types of securities fraud. Some even had insiders charged by the SEC and criminally Indicted. Still, the one thing they all had in common is that none of the companies have made any public disclosures through OTC Markets for a considerable time.
After an effort to contact each of the companies, the SEC determined that they were no longer operating and posed a public concern because of the potential for market manipulation via social media and online trading groups.
On July 9th, the Securities and Exchange Commission (the “SEC”) charged three individuals with insider trading in advance of an announcement by Long Blockchain Company (formerly known as Long Island Iced Tea Co.) that it was going to “pivot” from its existing beverage business to blockchain technology, which caused the company’s stock price to soar.
According to the SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, Eric Watson, an undisclosed control person of Long Blockchain who helped drive this business change within the company and signed a confidentiality agreement not to disclose the company’s business plans, tipped his friend and broker, Oliver Barret-Lindsay, of such plans, including by sharing with him a draft of the company’s press release.
Barret-Lindsay, in turn, allegedly passed the material nonpublic information on to his friend, Gannon Giguiere.
Within hours of receiving this confidential information, Giguiere purchased 35,000 shares of Long Blockchain stock. According to the complaint, the company’s stock price skyrocketed after the press release was issued, spiking more than 380% intraday. Within two hours of the announcement, Giguiere sold his shares for $162,500 in illicit profits.
On July 1st, the Securities and Exchange Commission (the “SEC”) filed charges against banned attorney Shawn F Hackman for violating a September 10, 2002 Commission Order that suspended him from appearing or practicing before the Commission as an attorney after the Supreme Court of Nevada disbarred him.
According to the Application filed in federal district court, pursuant to Section 21(e)(1) of the Securities Exchange Act of 1934, Hackman violated the order by (1) drafting and providing legal advice on SEC filings made by scores of companies, and (2) directly communicating with SEC staff on substantive legal issues concerning SEC filings.
The SEC’s Application further alleges that Hackman earned more than $800,000 for work that violated his suspension order.
The SEC seeks a federal court order requiring him to comply with the suspension order and to disgorge all profits earned in violation of that order.
On June 30, the Securities and Exchange Commission (the “SEC”) announced settled charges against Reuben Robert Goldman and his online stock promotion firm, Two Triangle Consulting Group LLC, which does business under the name Goldman Small Cap Research, for failing to disclose that they had been paid to create and distribute tweets promoting the securities of ten issuers.
Goldman, age 52, the founder, owner, and sole employee and “chief analyst” of Goldman Small Cap Research, is a resident of Pikesville, Maryland. Between 1989 and 2003, Goldman was associated with several broker-dealers and held Series 7, 62, 63, and 65 licenses.
Goldman Small Cap Research’s business primarily consists of producing promotional materials about microcap issuers and distributing these materials online to potential investors in exchange for cash payments from the issuers or third parties. Goldman Small Cap Research distributes stock market research and promotional material through its website (GoldmanResearch.com), subscription-based e-mail lists, and its accounts on Twitter and Facebook.
OTC Markets Pink companies will need to update their disclosure to ensure they comply with the new requirements.
- Alternative Reporting Companies: OTC Markets has updated the Disclosure Guidelines for Alternative Reporting Companies to include all the information required under amended Rule 15c2-11. Companies must follow the Guidelines to be designated “Current Information” or “Limited Information” and remain publicly quoted.
- Bank Reporting Companies: OTC Markets has created new Disclosure Guidelines for Bank Reporting Companiesto include all the information required under amended Rule 15c2-11. Banks and bank holding companies must follow these Guidelines to be designated “Current Information” or “Limited Information” and remain publicly quoted.
- International Reporting Companies: Companies that are current in their periodic disclosure and are listed on a Qualified Foreign Exchangethat requires disclosure in English will remain in compliance and may continue to be publicly quoted. Other international companies seeking to ensure their ongoing compliance may publish their disclosure directly to OTC Markets for review.
OTC Markets has indicated Impacted OTC Pink companies should provide the required disclosure to OTC Markets by June 30th. This will ensure that the OTC Markets Issuer Compliance Team has sufficient time to review and update market status for companies prior to the rule’s compliance date on September 28th. Securities that do not meet the Rule’s disclosure standard will have their public quotes removed from the OTC Markets Pink as of the September deadline.
In September of last year, the Securities and Exchange Commission (the “SEC”) adopted amendments to Securities Exchange Act Rule 15c2-11. In early 2020, we wrote about amendments to Rule 15c2-11 that were proposed by the SEC in September 2019. The object of the proposed changes was, according to the regulator, to ensure that over-the-counter issuers—better known as penny stocks—would make “current information” available to prospective investors. Issuers are reminded that the deadline for compliance is just around the corner.
SEC Rule 15c2-11, last revised in 1991, provided that before quotations could be initiated for an OTC issuer, the issuer would need to find a sponsoring market maker who would, relying on “current information” provided by the company, compile and submit a Form 211 to the Financial Industry Regulatory Authority (“FINRA”). FINRA would process the form, and the stock could then begin to trade. For one month, it would only be quoted by the sponsoring market maker; subsequently, other market makers could rely on the “piggyback exception” and publish their own quotes.
Over the past 30 years, the OTC Markets has changed enormously. Once it was an obscure corner of the larger equity marketplace. But with the dawn of the Internet age and the rise of online discount brokerages, information about penny stocks that in the past could only be obtained by telephoning a broker or by subscribing to the daily “Pink Sheets”—so called because they were printed on pink paper—became available to anyone who owned a computer hooked up to the Worldwide Web. At the same time, the heady bull market driven by skyrocketing dot.com companies brought millions of new investors to the markets generally. Vastly lower commissions charged by the discount brokers made frequent trading practical for people who fancied themselves “players,” and opened the penny market to the general public. Read More
On Friday, June 18th, the Securities and Exchange Commission (the “SEC”) filed a Complaint in the United States District Court for the District of Minnesota against Minnesota resident, Mark Allen Miller, for engaging in a fraudulent scheme to target at least seven inactive penny-stock companies (the “Issuers”) with the intention of profiting through pump & dump activity.
The seven Issuers include Bebida Beverage Company (“BBDA”), Bell Buckle Holdings Inc (“BLLB”), Digitili Inc (“DIGI”), Encompass Holdings Inc (“ECMH”), Simulated Environment Concepts Inc (“SMEV”), Strategic Asset Leasing Inc (“LEAS”), and Utilicraft Aeropace Industries Inc (“UITA”).
According to the SEC complaint, between September 2017 and August 2018, Miller hijacked five of the companies, BLLB, DIGI, ECMH, SMEV, and UITA, using forged resignation letters and other falsified documents. Then, after illegally gaining control, Miller ran pump & dump schemes on the Issuers using false and misleading press releases and tweets. Read More
Brenda Hamilton was recently quoted in an article published on the EB5 Investors blog. EB5 Investors is one of the world’s largest publications in the immigration law industry. The article, published on June 16th details a recent court order by a California federal court mandating that defendants Charles Liu and his wife Xin Wang repay $20.8 million in disgorgement to the U.S. Securities and Exchange Commission.
“This case demonstrates the vulnerabilities of foreign investors seeking to enter the U.S. using the EB-5 Visa program and the SEC’s interest in pursuing securities violators like Liu and Wang who take advantage of these vulnerabilities.”
The full article can be read at https://www.eb5investors.com/blog/eb5-visa-liu-fraud-case.
With the EB-5 Investor Visa Integrity Reform Bill EB-5 Regional Center Program set to expire on June 30th, absent bipartisan integrity reforms, Senator Patrick Leahy (D-Vt.), a senior member and former chairman of the Judiciary Committee, and Senator Chuck Grassley (R-Iowa), Ranking Member of the Senate Judiciary Committee, introduced the EB-5 Reform and Integrity Act of 2021 to address fraud and national security vulnerabilities in the EB-5 investor visa Regional Center Program, which has been exploited and abused for years.