SEC Obtains Emergency Relief to Halt Pre-IPO Stock Fraud Scheme by Unregistered Broker-Dealer
Defendants, including persons barred from the brokerage industry, allegedly sold shares they didn’t own, and pocketed more than $75 million
The Securities and Exchange Commission today announced that it obtained asset freezes and other emergency relief against StraightPath Venture Partners LLC, StraightPath Management LLC, Brian K. Martinsen, Michael A. Castillero, Francine A. Lanaia, and Eric D. Lachow (collectively, the defendants) to halt ongoing securities violations, including allegedly selling pre-initial public offering (IPO) shares they did not own, pocketing undisclosed fees, and commingling investor funds, resulting in Ponzi scheme-like payments. The relief arose from fraud and registration charges filed by the SEC.
The SEC alleges that the defendants, running an unregistered broker-dealer with a vast network of sales agents, raised at least $410 million from more than 2,200 investors from November 2017 through February 2022. The SEC also alleges that the defendants repeatedly told investors that each investment would be kept separate and that they were charging no upfront fees, but the defendants freely commingled investor funds, paid themselves more than $75 million, and paid their sales agents nearly $48 million from illegal, undisclosed markups on the pre-IPO shares that were, in some cases, as high as 100 percent. The SEC alleges that a share deficit exists of at least $14 million across the funds. The defendants also allegedly concealed from investors that two of the three founders, Castillero and Lanaia, ran the funds despite being barred from the brokerage industry. When SEC staff sought copies of the emails sent by the defendants’ sales agents during its investigation, rather than producing them, Castillero and Martinsen allegedly deleted them from their servers and texted that “an a***hole regulator would have a field day” with a particular e-mail.
“We allege that the defendants deceived investors about the pre-IPO shares they held, how much they were charging in fees, and who was controlling the business—all while paying themselves more than $75 million,” said Lara S. Mehraban, Acting Director of the New York Regional Office. “We filed this emergency action to stop the ongoing fraud and to preserve assets for investors.”
The SEC’s complaint, filed in federal district court in Manhattan, charges the defendants with violating antifraud and other provisions of the federal securities laws. The complaint seeks permanent injunctive relief, return of allegedly ill-gotten gains, and civil penalties. The SEC obtained a court order to freeze the assets of Martinsen, Castillero, Lanaia, StraightPath Venture Partners, and StraightPath Management. The order further temporarily enjoins the defendants from violating these provisions of the federal securities laws and orders them not to destroy any additional relevant documents. A hearing on the SEC’s application, which also seeks the appointment of a receiver, will be held on May 26, 2022.
The SEC’s ongoing investigation is being conducted by Megan R. Genet, Tian Wen, Douglas Smith, Debbie Chan, Lee A. Greenwood, Patricia Schrage, Alistaire Bambach, and Steven G. Rawlings of the New York Regional Office, with assistance from Suman Beros. It is being supervised by Sheldon L. Pollock. The litigation will be led by Mr. Greenwood and Philip A. Fortino. The SEC appreciates the assistance of Ronald Krietzman, Michael McAuliffe, and Stephen DeBella of the NYRO Broker-Dealer and Exchange Program (BDX), the Financial Industry Regulatory Authority (FINRA), the Office of the Montana State Auditor, Commissioner of Securities and Insurance, and the New Jersey Bureau of Securities.
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.