Longfin, a controversial U.S. fintech company, is facing serious regulatory action after the SEC obtained court orders last week to freeze $27 million in trading proceeds it says were gained illicitly. The company’s stock has plunged more than 90 percent from its December peak amid revelations of its regulatory troubles.
The decline followed an extreme price swing that included a surge of up to 47 percent after Longfin announced it was acquiring a cryptocurrency startup. That volatility prompted Nasdaq to halt trading in the company’s shares.
Unregistered Shares
At the center of the dispute are unregistered shares that were issued at the direction of CEO Venkat Meenavalli to three nominees with the apparent intent that they be sold. Those nominees sold the shares, and the resulting transactions form the basis of the SEC’s action.
Although unregistered shares can lawfully be held under certain conditions, they cannot be openly sold to the public unless the transfer complies with federal securities laws.
The SEC described the frozen funds as “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,” in a press statement announcing the development.
Longfin’s stock price rose dramatically after the company began trading on Nasdaq on April 6, with market capitalization briefly exceeding $3 billion following the announcement of the acquisition of a purported cryptocurrency business, the SEC said. A related complaint was unsealed in Manhattan federal court shortly after trading began; trading was halted at 10:01 a.m. ET.
Robert Cohen, chief of the SEC’s Enforcement Division Cyber Unit, said the agency “acted quickly to prevent more than $27 million in alleged illicit trading profits from being transferred out of the country.” He added that preventing the defendants from moving the funds offshore “will ensure that these funds remain available as the case continues.”
Elevated Prices
The SEC alleges that the restricted shares were illegally sold to the public during a brief period of highly elevated prices. The three nominees — Amro Izzelden “Andy” Altahawi, Dorababu Penumarthi, and Suresh Tammineedi — are accused of realizing approximately $27 million in profits from those sales.
The SEC complaint alleges that about 2 million unregistered, restricted shares were issued to Altahawi, who served as corporate secretary and director, while tens of thousands of additional shares were issued to Dorababu and Penumarthi. According to the SEC, the subsequent sales violated federal securities laws that restrict trading in unregistered shares distributed to company affiliates.
The SEC is seeking injunctive relief, disgorgement of ill-gotten gains, and civil penalties against the three individuals named in the complaint.
Longfin has disclosed that it is under SEC investigation related to trading in its shares and that the agency has requested documents concerning its IPO and the acquisition of Ziddu.com.
How It Worked
Selling unregistered shares can be a way to avoid the requirements of a registered securities offering, which would normally require audited financial statements and a prospectus. In alleged schemes, shares are sometimes issued indirectly through affiliates or nominees to obscure the connection to the issuing company.
Such schemes increase the chances that insiders can cash out quickly before regulators or the market catch on. They often rely on exaggerated or misleading public statements designed to convince investors that a company’s value is about to rise.
According to the SEC, Longfin’s purchase of Ziddu.com served that purpose: the agency alleges Ziddu.com had no ascertainable value and generated no revenue, and that no physical facilities, employees, distribution systems, or production techniques were actually acquired.
The SEC’s current focus is narrow: to demonstrate that restricted shares were distributed and sold in violation of securities laws and that insiders benefited from those transactions. If proven, the agency will seek to hold the individuals and potentially the company accountable.
Although some view SEC regulations as burdensome or anti-innovation, enforcement in cases like this is aimed at protecting investors from manipulative schemes and ensuring market integrity.