316 F. Supp. 3d 743
S.D. Ill.2018Background
- Longfin obtained Regulation A+ Tier 2 qualification (up to $50M) on June 16, 2017 and registered a class of securities on Form 8‑A on November 22, 2017 (effective Nov. 24), making it an Exchange Act reporting company.
- Between Sept–Dec 2017 Longfin issued shares in small tranches; on Dec 6, 2017 Longfin’s control log shows issuance of 409,360 shares to 24 individuals (marked as "restricted") with no payment records for many recipients.
- Longfin listed on NASDAQ on Dec 13, 2017; the Dec 15, 2017 Ziddu.com acquisition announcement caused Longfin’s stock to spike, then later collapse and trading halts in March–April 2018.
- Defendants Altahawi, Tammineedi, and Penumarthi sold Longfin shares between Dec 2017–Mar 2018 and realized substantial proceeds; the SEC froze those proceeds by TRO on Apr 4, 2018 and sought a preliminary injunction to continue the freeze.
- The SEC alleges these were unregistered sales in violation of Section 5 of the Securities Act; defendants invoke Rule 144, Section 4(a)(1), and Regulation A+ defenses (claiming some shares derived from the Regulation A+ offering).
- The court found the SEC likely to succeed at trial that the defendants sold unregistered securities and granted the SEC’s motion to continue the asset freeze as to Altahawi, Tammineedi, and Penumarthi.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether defendants violated Section 5 by selling Longfin shares without registration | SEC: sales of four tranches (Altahawi’s Consulting and Private Transaction Shares; defendants’ Dec. 6 and Source Media shares) were unregistered and used interstate commerce | Defendants: sales qualified for exemptions (Rule 144 safe harbor, Section 4(a)(1), or were Regulation A+ shares) | Court: Likely Section 5 violations; SEC met burden to justify continued asset freeze |
| Whether Altahawi’s Consulting Shares were lawful under Rule 144 or Section 4(a)(1) | SEC: Altahawi was an affiliate; Longfin was noncompliant with reporting so Rule 144 did not protect sales; facts show acquisition with view to distribution | Altahawi: not an affiliate; had one‑year holding or met six‑month safe harbor; relied on counsel opinion | Court: Altahawi likely an affiliate; Longfin delinquent on Exchange Act filings; Rule 144 and 4(a)(1) defenses fail; proceeds remain frozen |
| Whether Private Transaction and Dec. 6 Shares derived from a bona fide Regulation A+ offering (i.e., were non‑restricted) | SEC: control log marks shares restricted; no payment records; circumstantial evidence shows shares issued outside bona fide offering to satisfy listing requirements | Defendants: they paid for shares / acquired on market or via intermediaries and thus not restricted | Court: Likely shares were issued outside Reg A+ offering or remained restricted/control; Rule 144 conditions unmet; sales likely unlawful |
| Whether asset freeze should remain pending trial | SEC: freeze preserves assets tied to alleged Section 5 violations and potential disgorgement | Defendants: freeze unduly burdensome because defenses available (Rule 144, Reg A+) | Court: Freeze appropriate; SEC demonstrated likelihood of success on merits, so TRO extended until further order |
Key Cases Cited
- S.E.C. v. Cavanagh, 155 F.3d 129 (2d Cir.) (standards for SEC preliminary relief and Section 5 elements)
- S.E.C. v. Cavanagh, 445 F.3d 105 (2d Cir.) (burden-shifting on exemptions from Section 5)
- S.E.C. v. Unifund SAL, 910 F.2d 1028 (2d Cir.) (asset freeze as preservation of status quo)
- S.E.C. v. First Jersey Sec., 101 F.3d 1450 (3d Cir.) (disgorgement reaches profits of Section 5 violations)
- Kern v. S.E.C., 425 F.3d 143 (2d Cir.) (definition of affiliate/control in Rule 144 context)
- In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167 (2d Cir.) (remedial purpose of securities laws)
- Rojas-Reyes v. I.N.S., 235 F.3d 115 (2d Cir.) (agency statements and waiver principles)
- Yoder v. Orthomolecular Nutrition Inst., 751 F.2d 555 (2d Cir.) (compensation-for-services-as-purchase for securities rules)
- Mills v. Polar Molecular Corp., 12 F.3d 1170 (2d Cir.) (employment contracts promising shares treated as securities transactions)
- Ackerberg v. Johnson, 892 F.2d 1328 (8th Cir.) (acquisition with a view to distribution; holding‑period analyses)