Longfin, the controversial US fintech company is in trouble after the SEC obtained court orders last week to freeze $27 million in “illicit” trading profit. Its stock has since plunged more than 90 per cent since its peak in December after news of its tribulations with the regulator.
This after it experienced a surge of up to 47 per cent after news that it was buying a cryptocurrency start up. The high volatility prompted Nasdaq to halt trading of its shares.
At the centre of the matter are unregistered shares issued at the direction of CEO Venkat Meenavalli to three people with the intention of having them sold. The shares were indeed sold by the three nominees and forms the basis for the current tribulations facing the company.
While unregistered shares can indeed be held legally, they cannot be sold in certain circumstances.
The $27 million are “trading proceeds from allegedly illegal distributions and sales of restricted shares of Longfin Corp. stock involving the company, its CEO, and three other affiliated individuals,” the SEC said in a press statement announcing the development.
Longfin’s stock price rose dramatically after it started trading on Nasdaq on April 6 with its market capitalisation exceeding $3 billion after the company announced the acquisition of a “purported” cryptocurrency business, the SEC statement alleges. The complaint was unsealed in a Manhattan court shortly after trading started. Trading was halted at 10.01 am ET.
SEC’s Enforcement Division, Cyber Unit chief Robert Cohen says “we acted quickly to prevent more than $27 million in alleged illicit trading profits from being transferred out of the country,”.
“Preventing defendants from transferring this money offshore will ensure that these funds remain available as the case continues,” he added.
The restricted shares were allegedly illegally sold to the public during the period when prices were highly elevated. Amro Izzelden “Andy” Altahawi, Dorababu Penumarthi, and Suresh Tammineedi, the three nominees made a profit of $27 million in the short period.
The SEC complaint alleges that a total of 2 million unregistered and restricted shares were issued to Altahawi, the corporate secretary and director. Tens of thousands other shares were issued to the two other individuals Dorababu and Penumarthi.
“The subsequent sales of those restricted shares violated federal securities laws that restrict trading in unregistered shares distributed to company affiliates,” the SEC says.
The SEC now seeks injunctive relief, disgorgement of ill-gotten gains, and penalties against the three.
Longfin recently disclosed it was under investigation by the SEC regarding the trading of its shares and that the agency has requested documents related to its IPO and the acquisition of Ziddu.com.
How it Works
Selling unregistered shares is a clever way of sidestepping the rigours of a registered securities offering which requires audited financial statements contained in a prospectus to potential buyers. Scammers usually issue the shares indirectly through an affiliate acting as if there is no link to the company.
The scheme increases the chances of cashing out before being caught. Fake pronouncements about a company are usually made and designed to fool the public that the value of the company is about to go up.
The acquisition of Ziddu.com served this purpose very well. According to the SEC, Ziddu.com has not “ascertainable value” and generated no revenue. No physical facilities, employees, distribution systems or production techniques were acquired, the SEC says.
The whole affair bears all the hallmarks of a scam. For now, the SEC is not even concentrating on this. It just needs to prove that the company sold unregistered shares and some insider trading was involved.
While many of the SEC’s rules are seen by some as cumbersome and even anti-innovation, this is one chance it can prove useful in protecting investors.