SEC Obtains Court Order Freezing More Than $27 Million in Trading Proceeds from Allegedly Illegal Distributions and Sales of Restricted Longfin Stock
On April 6, 2018, the Securities and Exchange Commission announced that it obtained a court order freezing more than $27 million in 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.
According to an unsealed complaint, shortly after Longfin Corp. began trading on NASDAQ and announced the acquisition of a purported cryptocurrency business, its stock price rose dramatically and its market capitalization exceeded $3 billion. The SEC alleges that Amro Izzelden “Andy” Altahawi (“Altahawi”), Dorababu Penumarthi (“Penumarthi”), and Suresh Tammineedi (“Tammineedi”) then illegally sold large blocks of their restricted Longfin shares to the public while the stock price was highly elevated. Collectively, through their sales, Altahawi, Penumarthi, and Tammineedi procured more than $27 million in profits.
According to the SEC’s complaint, Longfin’s founding CEO and controlling shareholder, Venkata Meenavalli (“Meenavalli”), caused Longfin to issue more than two million unregistered, restricted shares to Altahawi, who was the corporate secretary and a director of Longfin, and tens of thousands of restricted shares to two other affiliated individuals, Penumarthi and Tammineedi, who, allegedly, were acting as nominees for Meenavalli. The subsequent sales of those restricted shares violated federal securities laws that restrict trading in unregistered shares distributed to company affiliates.
The SEC’s complaint charges Longfin, Meenavalli, Altahawi, Penumarthi, and Tammineedi with violating Section 5 of the Securities Act of 1933. The complaint seeks injunctive relief, disgorgement of ill-gotten gains, and penalties, among other relief.
Securities and Exchange Commission v. Longfin Corp., et al
According to the SEC’s complaint, filed in United States District Court, Southern District of New York:
[The] action concerns over $27 million in unregistered distributions of Defendant Longfin securities in a public distribution by Longfin affiliates between December 2017 and February 2018. Defendants Altahawi, Tammineedi, and Penumarthi conducted these sales in violation of Section 5 of the Securities Act of 1933 (“Securities Act”) [15 U.S. C. § 77e], which prohibits such unregistered sales unless a specific exemption applies under the federal securities laws. No exemption applied to these illegal transactions. Longfin and Defendant Meenavalli,
Longfin’ s Chairman and Chief Executive Officer, participated in and are liable for the Section 5 violations of Defendants Altahawi, Tammineedi, and Penumarthi.
From June 16, 2017 through December 11, 2017, Longfin sold 1,140,989 shares pursuant to SEC Regulation A [Regulation A -Conditional Small Issues Exemption, 17 C.F.R. §§ 230.251 -263], a set of rules that allows issuers to publicly sell securities under procedures that are less burdensome than those that otherwise would apply if the sales were registered as required by Section 5 of the Securities Act of 1933. Pursuant to the Regulation A exemption from registration, Longfin was qualified to sell up to 10 million shares of its Class A common stock.
On September 15, 2017, Longfin and Meenavalli issued Defendant Altahawi 2,025,000 Class A common shares in consideration of purported legal and business consulting services performed by Altahawi. Altahawi’s shares . . . were restricted securities that could not be resold, except under limited circumstances.
On December 13, 2017, Longfin’s Class A shares began trading on The Nasdaq Stock Market, LLC (the “Nasdaq”). In connection with its voluntary Nasdaq listing, Longfin was required to register its shares pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78l(b)]. Longfin’s Section 12(b) registration required the company to comply with the periodic reporting requirements of the Exchange Act, including the requirement to file quarterly reports on Form 10-Q under Exchange Act Rule 13a-13 [J 7 C.F.R. § 240.13a-13].
On or about December 15, 2017, Longfin announced its acquisition of a purported cryptocurrency business named “Ziddu.com” from Meridian Enterprises Pte. Ltd., an entity at least 92%-owned by Meenavalli.
Although, as alleged below, Ziddu.com had no ascertainable value, Longfin’s stock price rose dramatically after Longfin publicly announced the acquisition. On December 15, 2017, Longfin’s stock price opened at $9.76 per share and closed at $22.01 per share, up four-fold from the previous day’s closing price of$5.39. On December 18, 2017, the next trading day, Longfin’s stock price rose during trading to a high of $142.82 per share, which was an increase of over 548% from the prior day’s closing price and approximately 2,662% above Longfin’s closing price on its first day of trading just three days earlier.
Having registered its securities under Section 12(b) of the Exchange Act, Longfin was required to file a quarterly report on or before January 8, 2018. It failed to do so. Therefore, beginning on January 9, 2018, Longfin was out of compliance with its Exchange Act periodic reporting obligations. Longfin thereafter failed to file any quarterly or annual report until April 2, 20 l 8, when it filed its annual report on Form 10-K for 2017.
Between February 8, 2018 and March 23, 2018, Altahawi sold 475,751 shares of Longfin in the public market, consisting of both the 2,025,000 shares that he received on September 15, 2017 as purported compensation and 121,000 additional restricted shares that he received from ten individuals, one or more of whom were affiliated with Longfin. No registration statement was filed or in effect for these sales, and no Securities Act exemption applied to them. Altahawi reaped profits of over $25 million from these sales.
Between December 2017 and March 2018, Defendants Tammineedi and Penumarthi realized illegal profits of over $2.8 million by selling shares of Longfin that they acquired in December 2017. Longfin and Meenavalli authorized 30,000 shares to Tammineedi and 40,000 shares to Penumarthi on December 6, 2017, even though Tammineedi and Penumarthi had not transferred funds to Longfin’s escrow agent in accordance with their subscription agreements. In addition, Tammineedi, through a nominee entity named Source Media Limited, purchased 67,000 shares on the Nasdaq on December 13 and 14, 2017, right before the Ziddu.com announcement. Tammineedi and Penumarthi later sold their shares for total profits of over $2.7 million and over $168,000, respectively. No registration statement for these sales had been filed or was effective, and no exemption from registration applied to Tammineedi and Penumarthi’s transactions.