SEC Charges Nine Individuals and Companies for Roles in Microcap Scheme
SEC Charges Nine Individuals and Companies for Roles in Microcap Scheme
On March 11, 2019, the Securities and Exchange Commission announced charges against nine individuals and companies in a multi-million dollar stock distribution and market manipulation scheme involving two microcap companies, NanoTech Entertainment, Inc. and NanoTech Gaming, Inc.
The SEC’s complaint alleges that David R. Foley, the founder of the NanoTech companies, orchestrated a scheme to manipulate trading in their stock and perpetrated some aspects of the scheme while serving out a prison sentence in two unrelated cases. As part of the scheme, Foley allegedly hired Bennie L. Blankenship, who promoted the NanoTech companies on Twitter, YouTube, and to an investor group he cultivated on social media, and engaged in manipulative trading with Foley. Foley also allegedly prepared false quarterly financial statements for the NanoTech companies.
According to the SEC’s complaint, from February 2014 through October 2016, Foley acquired more than a billion shares of the NanoTech companies’ stock through the conversion of notes issued to himself, and then sold the stock to River North Equity LLC, a securities trading company, in a series of unregistered transactions. River North and its president, Edward M. Liceaga, then allegedly sold these shares to the public. Michael A. Chavez, a River North employee, acted as an unregistered broker for these sales. David Foley’s wife, Lisa, completed over half of the sales of stock to River North, with the assistance of Jeffrey Foley, David’s brother, and Chavez. David and Lisa Foley funneled some of their profits from these stock sales back to the NanoTech companies.
The SEC’s complaint, filed in federal district court in Chicago, charges River North, Liceaga, David Foley, Lisa Foley, Jeff Foley, Blankenship, NTEK and NTGL with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. The complaint also charges River North, Liceaga, and Chavez with violating the broker-dealer registration provisions of Section 15(a) of the Securities Exchange Act of 1934 and David Foley and Blankenship with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of Exchange Act and Rule 10b-5 thereunder. The complaint seeks equitable and monetary relief.
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https://www.law360.com/privateequity/articles/1158939/pe-firm-says-sec-can-t-call-it-a-dealer-over-stock-scheme-
PE Firm Says SEC Can’t Call It A ‘Dealer’ Over Stock Scheme
By Dean Seal
Law360 (May 13, 2019, 5:27 PM EDT) — Private equity firm River North Equity LLC and its sole manager want out of a U.S. Securities and Exchange Commission enforcement action, saying the agency has not shown that the firm was a “dealer” in connection to an alleged stock manipulation scheme.
Edward M. Liceaga, president of River North, told an Illinois federal judge Friday that the SEC has not found that he engaged in any fraud related to the market manipulation scheme conducted through penny stock companies NanoTech Entertainment Inc. and NanoTech Gaming Inc.
The SEC has not claimed that Liceaga knew of the illegal scheme when River North bought and sold shares of the microcap entertainment companies, he argued. Instead, the agency is trying to cast the firm as an unregistered dealer of those shares when it was no more than a “self-interested market participant,” he said.
“After engaging in a lengthy investigation into River North’s and Mr. Liceaga’s activities and finding no fraudulent conduct, the commission is now attempting to use this court to reverse its longstanding public policy against taking enforcement actions against ‘traders,’ who simply buy and sell securities for their own benefit and self-interest but who are not in the business of providing services to third-parties,” according to River North and Liceaga’s dismissal bid.
The SEC asserted securities claims against River North and its president in March — along with the NanoTech companies and their founder David R. Foley — claiming that Foley sold NanoTech stock to River North, had co-defendant and stock promoter Bennie L. Blankenship boost the price of and market for NanoTech stock, and then misled the investing public with falsified documents about the companies.
Without admitting or denying the accusations, Blankenship consented to a penny stock bar and disgorgement earlier this month and has been dropped from the case.
After Foley pled guilty to fraud in two unrelated cases in 2015, he had his wife create three companies that were used to continue the scheme in which NanoTech stock was sold to River North, which in turn sold the stock to the public, reaping profits for both NanoTech and River North, the agency claims.
Foley, his wife and the NanoTech companies asked the court on Friday for more time to respond to the SEC’s complaint.
But the SEC’s claims fail to delineate how River North was acting as anything more than a trader of securities, especially without any evidence that the firm knew of the illegal stock promotion scheme, Liceaga said Friday.
The enforcement action does not say that River North held itself out as a continuous buyer and seller of NanoTech securities, otherwise made a market for those securities, held money for third parties in any security, lent money, or even gave advice, the firm said in its dismissal bid. It is only accused of trading for its own account, it said.
Without performing any of the duties of a dealer as stipulated in securities law, the SEC’s attempt to hold River North and Liceaga liable for registration violations in buying and selling NanoTech stock would improperly expand requirements for registration, according to the dismissal bid.
“If the commission’s attempt in this matter is successful, then every day trader, hedge fund, or other market participant who purchased and sold securities for a profit would be acting as an unregistered dealer and subject to sanctions,” River North said. “Such an outcome is unjust on its face because Congress, and not the federal courts, is the proper forum for the commission to engage in rulemaking.”
The SEC and counsel for River North, Liceaga and the NanoTech defendants did not immediately respond to requests for comment Monday.
The SEC is represented in-house by Daniel J. Hayes, Robert M. Moye, Richard G. Stoltz and Christine B. Jeon.
River North and Liceaga are represented by Mark David Hunter of Hunter Taubman Fischer & Li LLC.
The NanoTech defendants are represented by Robert A. Shipley of Shipley Law Group Ltd.
The case is SEC v. River North Equity LLC et al., case number 1:19-cv-01711, in the U.S. District Court for the Northern District of Illinois.
–Editing by Adam LoBelia.