Boiler Room Defrauds Investors of $35 Million, SEC Intervenes

The Securities and Exchange Commission (SEC Securities and Exchange Commission (SEC) The Securities and Exchange Commission (SEC) is one of the most widely known independent authorities in the United States. The SEC has a wide range of responsibilities, helping police markets and curbing against abuse. This includes enforcing federal securities laws, proposing securities rules, and regulating the US’ stock and options exchanges.As one of the paramount regulatory authorities in the US, the SEC is responsible for the oversight of public companies in the aforementioned segments.Wha The Securities and Exchange Commission (SEC) is one of the most widely known independent authorities in the United States. The SEC has a wide range of responsibilities, helping police markets and curbing against abuse. This includes enforcing federal securities laws, proposing securities rules, and regulating the US’ stock and options exchanges.As one of the paramount regulatory authorities in the US, the SEC is responsible for the oversight of public companies in the aforementioned segments.Wha Read this Term) yesterday (Tuesday) confirmed it had acquired a preliminary injunction and asset freeze against Legend Venture Partners LLC. The unregistered broker-dealer, based in New York City, is implicated in a fraudulent scheme surrounding the sale of interests in private companies poised for a public offering (IPO).

The case is similar to a scheme previously orchestrated by StraightPath Venture Partners LLC, which the SEC shut down last year. Notably, many of Legend's principals and sales agents had previously been employed by StraightPath.

Boiler Room Operations under Scrutiny of SEC

According to the SEC's complaint, Legend operated boiler room activities from February to October 2022 and sold securities issued by the Legend Funds. The Legend Funds invested in shares or interests in specific pre-IPO companies. The boiler room, manned by a substantial network of unregistered sales agents, performed cold calls and raised at least $35 million from over 300 investors.

Legend allegedly made a series of false statements to investors. These included claims that its sales agents did not receive upfront fees or commission and that the firm would only profit if the investor made a profit on an IPO.

Contrary to these assertions, the SEC stated that Legend applied extreme, undisclosed markups to the prices it had paid for the pre-IPO shares. These markups averaged at almost 60%, reaching up to 105% per share. The firm also paid its sales agents and principals more than $12.8 million in upfront compensation.

“We allege that, just as the SEC was in the process of shutting down StraightPath, the defendant simply rebranded that scheme and used StraightPath’s documents and sales agents to solicit and deceive investors about Legend’s compensation,” Sheldon L. Pollock, the Associate Director of the New York Regional Office of the SEC, commented. “We filed this emergency action to protect victims of the alleged copy-cat scheme.”

Legal Implications and Further Actions

The SEC is accusing Legend of violating antifraud and certain registration provisions of the federal securities laws. The commission is seeking permanent injunctive relief, civil penalty and the return of allegedly ill-gotten gains.

The US District Court Judge for the Southern District of New York has issued an order imposing a temporary restraining order, asset freeze, and other restrictions. A preliminary injunction was granted on 27 June, enjoining Legend from violating the charged provisions of the federal securities laws. The decision on the SEC's request to appoint a receiver over Legend and the Legend Funds is currently pending.

Boiler Rooms Are a Serious Problem for the SEC

Boiler room scams are among the oldest tactics in investment fraud, as the perpetrators engage in cold calls to potential victims and persuade them to buy junk stocks. The operation of such a scheme was portrayed in the 2013 movie ‘The Wolf of Wall Street’.

The SEC has repeatedly warned about boiler rooms, financial pyramids, and Ponzi schemes in the past. These often victimize retail investors. An example is the FX Ponzi scheme, which the SEC reported earlier this week. The company owned by Sanjay Singh is accused of defrauding a total of 1,500 investors for an amount of $112 million.

In the past, creators of boiler rooms, even smaller than the one described above, were sentenced to long prison terms. One of them is Michael Nascimento, who was sentenced to 13 years imprisonment in 2018. Over ten years ago, he and his fellow scammers were cold-calling strangers to persuade them to buy shares in a company that supposedly owned land in Madeira.