The Securities and Exchange Commission today announced charges against six individuals and two companies for their involvement in a fraudulent scheme to promote the securities of issuers that were conducting (or purporting to conduct) offerings pursuant to Regulation A, which, if certain conditions are met, provides an exemption to the Securities Act’s registration provisions. All but two of the parties have agreed to settle the SEC charges.
The SEC’s complaint alleges that Jonathan William Mikula, a recidivist securities law violator who resides in Georgia, promoted the securities of four issuers—Elegance Brands Inc. (now Sway Energy Corp.), Emerald Health Pharmaceuticals Inc., Hightimes Holding Corp., and Cloudastructure Inc.—without disclosing his receipt of compensation for the promotions. As alleged, Mikula promoted the securities through Palm Beach Venture, a newsletter for which he served as an author and chief analyst, and presented the recommendations as unbiased and not paid for, while he was secretly compensated in the form of cash and lavish expenses. The complaint also alleges that investors purchased approximately $80 million in the securities offered by these issuers following Mikula’s promotion.
The SEC’s complaint further charges Christian Fernandez and Raj Beri, associates of Mikula’s, who allegedly acted as middlemen for the promotional scheme. According to the complaint, Fernandez and Beri, CEO of Elegance Brands, arranged to receive a percentage of investor funds raised by the issuers, in exchange for arranging Mikula’s promotion, under the guise of consulting agreements with the issuers. The complaint also alleges that Fernandez and Beri tried to disguise their receipt of payments from the issuers by submitting invoices for fake consulting services, and by funneling payments through offshore accounts for Mikula’s benefit.
The complaint states that two of the issuers promoted by Mikula, Elegance Brands and Emerald Health, as well as their respective CEOs, Beri and James DeMesa, participated in the scheme and made material misrepresentations and omissions in their respective filings with the SEC and other investor materials concerning the promotion and related payments. According to the complaint, Emerald Health’s co-founder, Avtar Dhillon, played a key role in the scheme to promote Emerald Health. A separate administrative proceeding against Emerald Health’s CFO, Lisa Sanford, finds that she negligently participated in the scheme. The complaint also charges Elegance and Beri with engaging in an offering that was unregistered and not covered by a valid registration exemption.
"Payments for the promotion of securities—including securities offered pursuant to the Reg A exemption—must be fully and accurately disclosed," said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. "Such disclosures are necessary to permit investors to consider the personal motivations of the author so they can make informed investment decisions."
The SEC’s complaint, filed in the U.S. District Court in Los Angeles, seeks the following remedies against the two litigating defendants, Mikula and Fernandez: permanent injunctions from violations of the charged anti-fraud and anti-touting provisions, conduct-based injunctions, disgorgement, prejudgment interest, and civil monetary penalties.
Elegance, Beri, Emerald Health, DeMesa, and Dhillon have agreed to settle to permanent injunctions from violations of the anti-fraud and other charged provisions, and will pay a combined total of $2.5 million to settle fraud charges against them. In addition, Dhillon agreed to a permanent bar from serving as an officer and director, DeMesa agreed to a five-year bar from serving as an officer and director, and Beri agreed to a ten-year bar from serving as an officer and director and a conduct-based injunction prohibiting him from engaging in certain promotional activities.
Finally, as noted above, the SEC instituted a separate settled administrative proceeding against Sanford, who agreed to pay a penalty of $25,000 and to be suspended from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after three years.
The SEC reminds investors to beware of investment research websites or articles that seem to provide unbiased commentary on stocks, as they may be a part of an undisclosed paid stock promotion. The Commission also warns investors about the risks of investing in Reg A securities offerings.
The SEC’s investigation was conducted by Sarah Nilson and Yolanda Ochoa, with assistance from Christopher Conte. The case was supervised by Finola Manvelian. The SEC’s litigation will be led by Charles Canter and supervised by Gary Leung.
The SEC appreciates the assistance of the U.S. Attorney’s Offices for the Central District of California and the District of Massachusetts, the Ontario Securities Commission, the Comision Nacional Bancaria y de Valores, and the Australian Securities and Investments Commission.
