SEC Obtains Emergency Relief to Halt Pre-IPO Stock Fraud Scheme by Unregistered Broker-Dealer

The Securities and Exchange Commission today announced that it obtained a preliminary injunction, asset freeze, and other emergency relief against Legend Venture Partners LLC, a New York City-based unregistered broker-dealer, in connection with a fraudulent scheme involving the sale of interests in private companies that had the potential for a public offering. Last year, the SEC shut down a similar scheme by StraightPath Venture Partners LLC, for which Legend’s principals and many of its sales agents had previously worked.

The SEC’s complaint, filed on June 22, 2023, alleges that, from February through October 2022, Legend ran boiler room operations that sold securities issued by the Legend Funds, which invested in shares or interests in shares of specific pre-IPO companies. The boiler rooms were staffed by a vast network of unregistered sales agents who made cold calls and raised at least $35 million from more than 300 investors. Among a number of alleged misstatements, Legend told investors that its sales agents did not receive upfront fees or commissions and that the firm only made money if the investor made a profit on an IPO. In reality, however, Legend charged exorbitant, undisclosed markups to the prices it paid for the Pre-IPO shares, which averaged almost 60 percent, and reached as high as 105 percent per share, and 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,” said Sheldon L. Pollock, Associate Director of the New York Regional Office.  “We filed this emergency action to protect victims of the alleged copy-cat scheme.”

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, charges Legend with violating the antifraud and certain registration provisions of the federal securities laws and seeks permanent injunctive relief, the return of allegedly ill-gotten gains, and a civil penalty. The Hon. Lewis A Kaplan, U.S. District Court Judge for the Southern District of New York, entered an order on June 23, 2023, imposing a temporary restraining order, asset freeze, and other relief. At a hearing held on June 27, 2023, Judge Kaplan granted a preliminary injunction enjoining Legend from violating the charged provisions of the federal securities laws, reserving decision on the SEC’s request to appoint a receiver over Legend and the Legend Funds. 

The SEC’s ongoing investigation is being conducted by Joshua D. Tannen and Lee A. Greenwood of the Asset Management Unit and Suzanne M. Bettis, Megan Genet, Tiantong Wen, Douglas Smith, Kerri L. Palen, Patricia Schrage, Daniel Loss, Alistaire Bambach, and Steven G. Rawlings of the New York Regional Office. It is being supervised by Mr. Pollock. The litigation will be led by Mr. Loss, Mr. Tannen, and Ms. Bettis.

Investors can learn more about the risks involved with investing in unregistered offerings by reading such SEC investor bulletins as 10 Red Flags That An Unregistered Offering May Be A Scam.


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