SEC Charges Unregistered Brokers for Making Unregistered Offerings

The SEC charged five unregistered broker-dealers and four unregistered investment companies with deceptive pre-initial public offerings (pre "IPO").

According to the Complaint, filed in the U.S. District Court for the Eastern District of New York, the defendants (i) orchestrated a scheme involving unregistered sales agents conducting unregistered securities offerings and (ii) misled investors about the nature of their investments. The SEC stated that the defendants raised approximately $528 million from over 4,000 investors globally.

The SEC alleged that the investors were induced with promises of no upfront fees and commissions, amid representations that the defendants would profit only from investors' gains. The SEC alleged that investors were actually subjected to exorbitant upfront markups, some as high as 150 percent, which allowed defendants to collect millions before any investor gains materialized. These deceptive practices, the SEC argued, were concealed by the written materials and a wide network of sales agents. As a result, the SEC charged that the defendants earned substantial undisclosed markups, totaling around $88.6 million. In addition, the SEC said that the defendants failed to disclose the identity of the head of the sales force, who had been previously found liable for insider trading.

The SEC charged the brokers with violation of Securities Act Sections 5(a) ("Sale or delivery after sale of unregistered securities"), 5(c) ("Necessity of filing registration statement") and 17(a) ("Use of interstate commerce for purpose of fraud or deceit"); Exchange Act Section 10(b) ("Regulation of the Use of manipulative and deceptive devices") and Rule 10b-5 ("Employment of manipulative and deceptive devices"). The SEC also charged the defendants for "aiding and abetting" violations under Exchange Act Section 20(a) ("Liability of controlling persons and persons who aid and abet violations").

In the Complaint, the SEC is seeking the following: (i) defendants will cease and desist from future violations: (ii) imposition of a permanent injunction, (iii) disgorgement of ill-gotten gains with prejudgment interest, (iv) imposition of civil monetary penalties and (v) imposition of a permanent prohibition of certain individuals from serving as officers or directors.