The Securities and Exchange Commission (SEC) has added new fraud charges against Longfin Corp. and its CEO for falsifying the company’s revenue. Longfin’s former consultant Andy Altahawi was also included in the action for “fraudulently securing the company’s listing on Nasdaq.”
In April of 2018, the SEC filed an injunction freezing more than $27 million in Longfin assets alleging illegal trading proceeds from unregistered distributions of Longfin stock.
Longfin completed a Reg A+ offering in 2017 at $5 a share. The company went on to trade shares on the NASDAQ and quickly purchased blockchain firm Ziddu, a company that would ostensibly provide microfinance lending against collateralized warehouse receipts in the form of ERC20 “Ziddu Coins.” Shares in Longfin rocketed to over $140/share.
Longfin CEO Venkat Meenavalli soon found himself on CNBC defending his company and the rapid rise in valuation.
The SEC’s complaint alleges that Longfin and Meenavalli obtained qualification for a Reg A+ offering by falsely representing in SEC filings that the company was principally managed and operated in the U.S. when, in fact, the company’s operations, assets and management remained offshore. Meenavilli resides in India.
The SEC alleges that Longfin and Meenavalli engaged in a “fraudulent scheme by distributing over 400,000 shares of Longfin to insiders and affiliates to meet certain Nasdaq listing criteria, without obtaining payment for any of these shares.” In brief, the SEC is alleging there was nothing there.
The SEC is charging that Altahawi misrepresented to Nasdaq the number of qualifying shareholders and shares sold in the offering. The SEC’s complaint alleges an accounting fraud, recording more than $66 million in sham revenue, representing nearly 90% of Longfin’s total 2017 reported revenue.
Unsurprisingly, Longfin voluntarily delisted from Nasdaq in May 2018. The SEC states that the company shut down later that year.
Simultaneously, the U.S. Attorney’s Office for the District of New Jersey has announced related criminal charges against Meenavalli.
“In our complaint against Longfin and Meenavalli and our amended complaint against Altahawi, we allege a multi-pronged fraud involving fake revenue, misrepresentations to the SEC, and false statements to Nasdaq,” stated Anita B. Bandy, Associate Director of the Division of Enforcement. “Today’s filings reflect the work of a dedicated SEC staff who, after moving swiftly on behalf of investors to freeze assets last year, continued investigating to uncover the alleged fraud.”
Calculating the Incalculable?
The SEC’s prior action alleged that Longfin, Meenavalli, Altahawi, and two affiliated individuals, Dorababu Penumarthi and Suresh Tammineedi, illegally distributed and sold more than $33 million of Longfin stock in unregistered transactions.
The SEC reports that Altahawi, Penumarthi, and Tammineedi have agreed to settlements, subject to court approval, that would fully resolve the SEC’s charges and have agreed to surrender the previously frozen funds towards paying monetary relief.
Without admitting or denying the charges, Altahawi has agreed to settle the fraud charges and the prior charges of trading in unregistered securities.
The potential settlement would require Altahawi to return $21 million of allegedly ill-gotten gains, pay a $2.9 million penalty, and surrender all his Longfin shares.
Altahawi also agreed to be barred from serving as a public company officer or director for five years, and to an industry bar to be issued in an administrative proceeding.
Penumarthi and Tammineedi, without admitting or denying the charges, agreed to settle all pending charges for trading in unregistered securities.
The proposed settlements require Penumarthi to pay more than $1.7 million and Tammineedi to pay more than $241,000, in addition to injunctive relief.
[pdf-embedder url=”https://staging-crowdfundinsider.kinsta.cloud/wp-content/uploads/2019/06/SEC-v.-Longfin-6.5.19-comp-pr2019-90-2.pdf” title=”SEC v. Longfin 6.5.19 comp-pr2019-90-2″]