Types Of SEC Whistleblower Cases:  Unregistered Securities Offerings

SEC Charges Chinese Traders With Unregistered Securities Offerings

The U.S. Securities and Exchange Commission (“SEC”) brought fraud charges in court against two Chinese citizens for making unregistered securities offerings in the United States.

The Commission also alleged that the securities in question were falsely or misleadingly promoted by three stock promotion websites, in violation of U.S. securities laws.

unregistered securities offerings

The SEC’s court Complaint

Fraudulent Sale of Stock Through Unregistered Securities Offerings

In its court Complaint, the SEC accused Wensheng Lin and Sheng Li Chen of violating U.S. securities laws regulating the offering and sale of unregistered securities.

Per the complaint, Lin and Chen were Chinese traders who purchased shares of Immage Biotherapeutics Corp. (“IMMG”), a purported cancer research biotechnology company.  They supposedly purchased unregistered shares for $0.0037/share and then sold the shares for up to $1.47/share, netting a profit of approximately $1.8 million.

The SEC stated that no registration statement was in effect covering the sale of the securities by Lin or Chen, no one had filed for registration, and no exemption existed or was available for the sale of the securities without registration.  The stock sales therefore constituted unregistered securities offerings.

False Statements And Disclosures

The SEC also asserted that it had evidence proving that Lin and Chen lied about the sources and circumstances pertaining to their acquisition of the shares of stock that they subsequently offered and sold.

Lin and Chen claimed to have acquired the securities from individual shareholders situated in South Africa.  The SEC alleged that the defendants did not, and could not, have purchased their IMMG shares from the South Africans, because the South Africans never owned those shares.

Rather, according to the SEC, Lin and Chen actually purchased restricted shares directly from the issuer (IMMG).  They then illegally offered and sold these unregistered shares through the over-the counter inter-dealer market in the United States.

Internet Pump-and-Dump

The SEC further alleged that the majority of Lin and Chen’s stock sales occurred during a period when three stock promotion companies were conducting a promotional e-mail campaign touting IMMG.  According to the Complaint, Lin and Chen achieved the majority of their profits as a result of false and misleading statements made through the three penny stock promotional websites.  [For more information regarding Public Statement Fraud (false statements or material omissions in advertising materials) click here.]

For example, the Complaint claims that following a press release by IMMG pertaining to a supposedly positive test on laboratory mice, the three stock promotion websites sent at least 16 e-mails to their subscribers touting IMMG.  Two of those promotional e-mails claimed that IMMG “may be on the cusp of getting FDA approval for its cancer therapies”.

Another promotional e-mail allegedly claimed that “IMMG seems to be on the verge on [sic] curing cancer according to its latest press release.”

The Complaint states that IMMG had not filed any FDA applications and was purportedly targeting 2018 for its initial stage 1 application.

According to the SEC, the false promotional statements drove up demand for IMMG shares, and allowed Chen and Lin to sell their shares for substantial profits.

unregistered securities offerings

The SEC’s press release

Trading and Asset Freeze

“[B]ecause of concerns regarding the accuracy and adequacy of information in the market place and potentially manipulative transactions in IMMG’s common stock”, the SEC temporarily suspended trading in IMMG’s stock.

However, the defendants were allegedly able to transfer hundreds of thousands of dollars of their illicit profits out of the U.S. to a bank in Hong Kong.

In its Complaint, the SEC sought injunctions preventing the defendants from selling unregistered stock, participating in any offering of penny stock, disgorgement of profits including prejudgment interest, and civil penalties.

Apparently, at the same time, the SEC also sought an emergency order from the court freezing the defendants’ remaining brokerage account assets in the U.S., including millions of shares of IMMG stock and approximately $1.2 million in cash, to prevent the defendants from transferring more of their allegedly illegal profits out of the country.

Whistleblowers Can Report Unregistered Securities Offerings To The SEC

This case illustrates some types of misconduct that could give rise to SEC whistleblower cases if reported to the Commission through the SEC whistleblower program.

However, SEC has not made any public statement as to whether this case was itself an actual SEC whistleblower case.  The SEC Office of the Whistleblower posts Notices of Covered Action (“NoCA”) for Commission actions where a final judgment or order results in monetary sanctions exceeding $1 million.  The NoCA list does not disclose if a particular Enforcement action was brought as the result of an SEC whistleblower case, tip, complaint, or referral being filed with the Commission.

Additional Information

For more information about unregistered securities offerings, click on the links below:

  • The SEC’s Press Release announcing the case.  (External link to the SEC’s website.)
  • The SEC’s Complaint in SEC v. Lin and Chen.  (External link to the SEC’s website.)