SEC wins legal battle with alleged Microcap Securities Fraudsters

The U.S. District Court of the Southern District of New York made a major ruling on May 4, 2023. The court granted the Securities and Exchange Commission summary judgment in its non-fraud claim against three individuals and businesses associated with them. What does it mean for the defendants?

The Alleged Scheme

According to SEC’s complaint a complex deceitful web was spun between December 2012 and June 2013. Magna Group founded and owned Joshua Sason, the alleged spider in this web. The scheme is? The plan is to acquire fake convertible promissory bills supposedly issued penny stock company Lustros Inc. then convert them into Lustros stock. Imagine buying what you believed to be an authentic Picasso only to learn that it was a fake. This is how investors must have felt who purchased these shares.

The SEC claims that Marc Manuel was Magna’s former director of research and due-diligence, and he was the one behind the scenes negotiating and executing the transactions. The SEC alleges that the shares were sold without a registration or an exemption to registration requirements to unaware investors. The result? Investors are left scrambling after the value of Lustros’ publicly traded shares plunged.

Additional Transactions

But the accusations don’t end there. Magna Equities II (also owned by Sason) is alleged to have bought a note in November 2013 from Pallas Holdings. This note was issued by NewLead Holdings and did not meet the criteria for an exemption from securities registration. It was allegedly settled by Magna Equities II’s designated company, MG Partners. Again, this occurred without a registration or exemption.

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The SEC asserts that Kautilya Salviola and Perian Salaviola, acting for Pallas Holdings participated in these NewLead deals. Pallas Holdings and Sharma and Salviola are also accused of selling more than $20,000,000 in NewLead shares they received as payment for mining assets. This was done without filing a registration or exemption.

The Court’s ruling

The SEC sought summary judgment in all claims it brought against defendants that were not fraud-related, while defendants requested summary judgment for all claims they brought against the Commission. The court denied the motion of all defendants. The court found Manuel and Magna Entities had violated Section 5 of Securities Act of 1934 by selling unregistered Lustros securities and NewLead. Pallas Holdings as well as Sharma and Salviola were found to be in violation of Section 5 by their sales as well as MGP’s sales of NewLead.

The court rejected the SEC’s claim that Sason had violated Section 5 Securities Act by selling Lustros and NewLead stocks through Magna Entities. This means that the SEC will have to resolve this claim at trial along with its fraud claim against Manuel, the Magna Group and other Magna Entities. The court dismissed earlier fraud claims related to the NewLead transaction and fraud claims against Sason.

Sheldon L. Pollock supervises the ongoing litigation, which is led by Lee A. Greenwood & Daniel Loss. This case’s outcome could have important implications for microcap securities, and for the fight against securities scams. As we follow this legal drama, the question is: Will justice be done?