SEC targets Bitcoin -Denominated Ponzi Scheme

The Securities and Exchange Commission announced late last week that it has filed an action involving what it claims is a Bitcoin investment scam. The case involves the alleged fraudulent offers and sales of securities in a Bitcoin-denominated alleged Ponzi scheme founded and operated by a 30-year old Trendon T. Shavers from Texas.

The complaint alleges Shavers was the founder and operator of BTCST (formerly known as First Pirate Savings & Trust) an unincorporated entity with physical “brick and mortar” operating presence or location.  On or about November 3, 2011, Shavers, under the Internet name pirateat40, posted a general solicitation for BTCST, entitled “Looking for Lenders,” on the Bitcoin Forum[1] an online forum dedicated to BTC where, among other things, numerous BTC-denominated investment opportunities were posted. Shavers continued to post what the SEC alleges was martially false or misleading statements as to the purported investment opportunity.

A Lender’s Duty To Produce Sufficient Documentation In Forcelosure Mediation Proceedings: Nevada Foreclosure Mediation Rules (FMR)

The Deed of Trust

A deed of trust is an instrument that "secure[s] the performance of an obligation or the payment of any debt." NRS 107.020. The Nevada Supreme Court has previously held that a deed of trust "constitutes a conveyance of land as defined by NRS 111.010."[1]  Ray v. Hawkins, 76 Nev. 164, 166, 350 P.2d 998, 999 (1960). The statute of frauds governs when a conveyance creates or assigns an interest in land: No estate or interest in lands, . . . nor any trust or power over or concerning lands, or in any manner relating thereto, shall be created, granted, assigned, surrendered or declared . . . , unless ... by deed or conveyance, in writing, subscribed by the party creating, granting, assigning, surrendering or declaring the same, or by the party's lawful agent thereunto authorized in writing. NRS 111.205(1) (emphases added). Thus, to prove that WAMU properly assigned its interest in land via the deed of trust to Wells Fargo, Wells Fargo needs to provide a duly signed writing from WAMU demonstrating that transfer of interest (and each subsequent transfer). If no such assignment(s), duly executed, is/are provided at the mediation, Wells Fargo lacks would lack standing to pursue foreclosure proceedings against ________.

SEC Lifts Rule 506 Solicitation and Advertising Ban pursuant to JOBS Act

The Securities and Exchange Commission (SEC) adopted a new rules today implementing Title II of the JOBS Act.  In essence, these new rules lift the ban on general solicitation or general advertising for certain private securities offerings for business startups, while also adopting rules to discourage fraudsters from touting the investments and to add new protections for investors.

The new rules become effective 60 days after publication in the Federal Register. During this 60 day period the rules will be subject to public comment.

Ordinarily, the offer and sale of securities require registration with the SEC.  A number of exemptions from registration exist but most of these exemptions prohibited general solicitation advertising.  Rule 506 of Regulation D for example allowed a company (issuer) to raise an unlimited amount of capital from an unlimited number of “accredited investors” and up to 35 non-accredited investors. [1]

SEC Obtains Final Judgment Against Miami Attorney for preparing and presenting False Attorney Letters on behalf of issuer.

SEC Litigation Release No. 22746

July 9, 2013

SEC v. Merkin

On July 1, 2013, a District Judge for the Southern District of Florida, signed a final judgment against defendant Stewart A. Merkin (“Merkin”) in a civil action originally filed by the SEC on October 3, 2011.  The Defendant is an attorney in Miami, Florida.  

The alleged violations include Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder.  The Defendant wrote four attorney representation letters for posting on the website of Pink Sheets LLC and its successor, Pink OTC Markets, Inc.  Therein, he disclaimed knowledge of any investigation into possible violations of the securities laws by StratoComm or any of its officers or directors. However, the SEC’s complaint also alleges that the Defendant was representing StratoComm and several individuals in connection with the SEC’s investigation at the time. Nevertheless, in order that StratoComm’s shares would continue to be quoted, the SEC’s complaint alleges that Defendant falsely stated that to his knowledge StratoComm was not under investigation.

On October 3, 2012, the Court granted the Commission’s motion for summary judgment with respect to liability, finding that the Defendant made false statements of material fact, with scienter, in connection with the purchase or sale of securities.  Defendant subsequently consented to the entry of a final judgment that: (i) orders him liable to pay a total of $125,000 in disgorgement, prejudgment interest and a civil penalty; (ii) imposes a permanent injunction against future violations of Section 10(b) and Rule 10b-5 of the Exchange Act by making false or misleading statements; and (iii) permanently bars Merkin from participating in an offering of penny stock.  In consenting to these remedies, Merkin retained his right to appeal from the Court’s ruling on summary judgment with respect to liability. 

Fed. R. Civ. P. 12(b)(6); Fed. R. Civ. P. 8(a)(2); and Judicial Notice—A Motion to Dismiss

   The Federal Rules of Civil Procedure permit a responding party to seek dismissal of a claim, or any part thereof, for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) requires the Court to decide whether the facts alleged in the complaint entitle the plaintiff to relief. Id. The court need not accept as true conclusory allegations of law made in the complaint, nor must it accept unreasonable inferences or unwarranted deductions of fact. Hon. William W. Schwarzer, et al., Federal Civil Procedure Before Trial § 9:221 (2000) (citing In re Delorean Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993)). In addition, the court need not accept as true conclusory allegations or legal characterizations of counsel. See, W Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981).

The United States Supreme Court heightened the federal pleading standards governing Rule 12(b)(6) motions. In Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), the Supreme Court held that notice pleading requires more than a mere legal conclusion to defeat a motion to dismiss. The Supreme Court specifically stated that a plaintiff is obligated "to provide the 'grounds' of his entitle[ment] to relief" beyond mere "labels and conclusions." Id. at 555. The Supreme Court also stated that "a formulaic recitation of the elements of a cause of action will not do." Id. As a result, a plaintiff must provide "[f]actual allegations . . . enough to raise a right to relief above the speculative level ... on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Id. More recently, in Ashcroft v. Iqbal, 556 U.S. 129 S. Ct. 1937 (2009), the Supreme Court further reaffirmed Twombly and clarified that its holding applies in all civil actions in the United States district courts. Id. at 1951.

SEC To Hold Open Meeting to Consider the Elimination of the Prohibition Against General Solicitation and Advertising For Rule 506 and Rule 144A Offerings

The Securities and Exchange Commission will hold an Open Meeting on Wednesday, July 10, 2013 at 10:00 a.m., in the Auditorium, Room L-002. (SEC’s main offices, 100 F Street, NE, Washington, DC.)

The Commission will consider whether to adopt amendments to eliminate the prohibition against general solicitation and general advertising in certain securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act, as mandated by Section 201(a) of the Jumpstart Our Business Startups Act.

The Commission will also consider whether to propose amendments to Regulation D, Form D and Rule 156 under the Securities Act. The proposed amendments are intended to enhance the Commission’s ability to evaluate changes in the market and to address the development of practices in Rule 506 offerings.

Finally, the Commission will consider whether to adopt amendments to disqualify securities offerings involving certain “felons and other ‘bad actors’” from reliance on the exemption from Securities Act registration pursuant to Rule 506 as mandated by Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

SEC Litigation Release No. 22742

SEC Litigation Release No. 22742 

July 3, 2013

Securities and Exchange Commission v. Magdalena Tavella, et al.

Civil Action No. 13 CIV 4609 (S.D.N.Y.) 

The Securities and Exchange Commission filed a complaint against 8 Argentine citizens who are alleged to have unlawfully sold millions of shares of Biozoom, Inc. in unregistered transactions. The SEC also secured a TRO, freezing assets held in U.S. securities firms in accounts of the eight defendants and two other Argentine citizens who had Biozoom shares but had not yet sold them. Last week the SEC suspended trading in Biozoom due to concerns that some shareholders may be unlawfully distributing its securities.

The SEC alleges that from March to June 2013, the defendants received more than 20 million shares of Biozoom (formerly Entertainment Art, Inc.) or one-third of the company's total outstanding shares. In a one-month period beginning in May, 8 of the Defendants  sold more than 14 million shares yielding almost $34 million.  $17 million out of the sales proceeds was wired to overseas bank accounts.

According to the SEC's complaint, the Defendants claimed to have acquired the bulk of the shares in March 2013 from Biozoom’s former shareholders who purchased them in private placements that began in 2007. Each of the defendants provided stock purchase agreements between them and the former shareholders purportedly signed by the defendants and those shareholders. 

11 USC § 727 – and Denial of Discharge

§ 727. Discharge

(a) The court shall grant the debtor a discharge, unless—

(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—

(A) property of the debtor, within one year before the date of the filing of the petition; or

(B) property of the estate, after the date of the filing of the petition;

(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case;

(4) the debtor knowingly and fraudulently, in or in connection with the case—

(A) made a false oath or account;

(5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities[.]

§ 727(a)(2), (3), (4)(A), and (5).[1]

Section 727(a)(4)(A) denies a discharge to a debtor who “knowingly and fraudulently” makes a false oath or account in the course of the bankruptcy case. § 727(a)(4)(A). A false statement or an omission in the debtor’s bankruptcy schedules or statement of financial affairs can constitute a false oath.[2] “The fundamental purpose of § 727(a)(4)(A) is to insure that the trustee and creditors have accurate information without having to conduct costly investigations.” Fogal Legware of Switz., Inc. v. Wills (In re Wills), 243 B.R. 58, 63 (9th Cir. BAP 1999) (citing Aubrey v. Thomas (In re Aubrey), 111 B.R. 268, 274 (9th Cir. BAP 1990)). That said, a false statement or omission that has no impact on a bankruptcy case is not material and does not provide grounds for denial of a discharge under § 727(a)(4)(A). Id.

               Plaintiffs must show by a preponderance of the evidence that: (1) Debtor made such a false statement or omission, (2) regarding a material fact, and (3) did so knowingly and fraudulently. See Searles, 317 B.R. at 377; Roberts, 331 B.R. at 882 (same test, broken down into four elements).