What happened to that New Year’s resolution?

Did you kick off 2020 with a New Year’s resolution? Go to the gym more? Eat fewer carbs? Get a dog?

One suspects that this year, Longfin Corp. CEO Venkata S. Meenavalli wishes he’d made a 2019 resolution not to try to defraud the Securities and Exchange Commission (SEC). The SEC kicked off its own new year’s resolution to punish more bad actors by announcing the first week of January that Meenavalli will pay $400,000 in disgorgement and penalties to resolve the Commission’s fraud action against him.  The settlement, which remains subject to court approval, concludes the regulator’s actions against Longfin, its CEO, and three other individuals in which the SEC has secured over $26 million of ill-gotten gains. Not a bad haul for the regulator and a potential windfall for the “harmed investors.” But a big hit for the SEC targets. The SEC intends to establish a Fair Fund to distribute money received from the defendants to harmed investors.

False representation for an A+ offering

According to the SEC’s complaint, Longfin and Meenavalli obtained qualification for a Regulation A+ offering by falsely representing in public filings that the company was managed and operated in the U.S.  The company and its CEO then distributed over 400,000 Longfin shares to Meenavalli’s affiliates, and misrepresented the offering to NASDAQ to meet its listing requirements.  The complaint also alleged that more than 90 percent of Longfin’s reported revenue for 2017 was fictitiously derived from sham commodities transactions.

“As alleged in our complaint, said Anita B. Bandy, Associate Director of the SEC’s Division of Enforcement, “Meenavalli abused the Reg. A+ process to conduct a fraudulent offering, list Longfin on Nasdaq, and entice investors with falsified revenue. (Exposing) the full scope of Meenavalli’s fraud…resulted in additional monetary and prophylactic relief to prevent him from defrauding U.S. investors in the future.”

Qualifying for less burdensome procedures

To execute the NASDAQ listing scheme, the defendants secured a qualification to conduct an offering under SEC Regulation A, a set of rules that permitted issuers to publicly sell securities under less burdensome procedures than those that apply to sales registered under Section 5 of the Securities Act of 1933.

Part of that qualification mandates that the company be based in the United States or Canada, which Longfin was not, despite its claim to be located in New Jersey and New York. Rather, Meenavalli located most of Longfin’s management, employees, assets, cash, and records outside the United States.

Still missing the NASDAQ mark

The misrepresentation made it possible for Longfin to qualify to sell its securities at $5 per share. However, unable to sell enough shares to meet NASDAQ’s listing requirements, the company then distributed shares to insiders and affiliates to create the false appearance of having a sufficient public float of bona fide investors to proceed with a listing. None of the insiders or affiliates paid for the shares. Undiscovered, Longfin’s Class A shares were able to publicly trading on the NASDAQ. Two days later, Longfin announced it had acquired a purported cryptocurrency business named “Ziddu.com” from Meridian Enterprises Pte. Ltd., an entity at least 92%-owned by Meenavalli. Following the company’s announcement of the acquisition, Longfin’s stock price rose dramatically – as high as $142.82/share even though Ziddu.com itself was worthless.

The sell-off…and more fraud

The insiders and affiliates began to sell their shares for millions of dollars in profits. Additionally, Longfin and Meenavalli perpetrated a massive accounting fraud by reporting more than $66 million in fictitious revenue from commodity transactions that represented more than 89% of Longfin’s total revenue for the year ended December 31, 2017. Meenavalli signed all of the firm’s materially false year-end reports each of these reports.

Payback is a…

If approved, the settlement the SEC has reached with Longfin’s CEO would require Meenavalli to disgorge $159,000 (his full salary received while acting as the company’s CEO) plus prejudgment interest of $9,000 and to pay a $232,000 civil penalty.  It would also require Meenavalli to surrender all of his Longfin stock, permanently bar him from acting as an officer or director of a public company, and enjoin him from participating in the offer or sale of penny stocks. 

This is in addition to a previous default judgment the SEC obtained against Longfin that ordered the company to pay nearly $6.8 million in monetary relief.  A parallel criminal action against Meenavalli, filed by the U.S. Attorney’s Office for the District of New Jersey, remains ongoing.

Where was compliance?

Let’s be serious. There was never any intent of compliance. But Meenavalli was a uniquely committed bad actor. And look what happened to him. But that’s not you, right? And that’s where Patrina comes in. For more than 25 years, Patrina has been helping uniquely committed compliance professionals like you to stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, our comprehensive 8-module compliance solution, and compliant data capture & file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.Let’s talk.