SEC Obtains Emergency Relief to Halt Pre-IPO Stock Fraud Scheme by Unregistered Broker-Dealer

SEC Obtains Preliminary Injunction and Asset Freeze Against Legend Venture Partners


In a significant development, the Securities and Exchange Commission (SEC) has taken decisive action against Legend Venture Partners LLC, an unregistered broker-dealer based in New York City. The SEC’s move comes in response to the discovery of a fraudulent scheme involving the sale of interests in private companies with potential for public offerings. This article will delve into the details of the case, shedding light on the allegations and the actions taken by the SEC.

Allegations and Background

On June 22, 2023, the SEC filed a complaint against Legend Venture Partners LLC, outlining a series of damning allegations. According to the complaint, from February through October 2022, Legend orchestrated a fraudulent operation in the form of boiler rooms. These boiler rooms engaged a network of unregistered sales agents who cold-called potential investors. Through these operations, Legend managed to raise over $35 million from more than 300 investors.

Legend enticed investors with securities issued by the Legend Funds, which invested in shares or interests in shares of specific pre-IPO companies. However, the SEC’s investigation revealed a string of misstatements made by Legend. One such misrepresentation involved the upfront fees and commissions received by the sales agents. Legend assured investors that its sales agents did not receive any such compensation, leading investors to believe that the firm’s profit depended solely on the success of an initial public offering (IPO).

However, the truth was far from what Legend portrayed. The SEC discovered that Legend had been charging exorbitant, undisclosed markups on the prices it paid for the pre-IPO shares. These markups averaged nearly 60 percent, with some instances reaching a staggering 105 percent per share. Furthermore, the firm provided its sales agents and principals with more than $12.8 million in upfront compensation.

Legal Actions Taken

In response to these allegations, the SEC moved to protect the victims of this scheme. On June 23, 2023, the Honorable Lewis A. Kaplan, U.S. District Court Judge for the Southern District of New York, issued an order imposing a temporary restraining order, asset freeze, and other necessary relief. Subsequently, a hearing took place on June 27, 2023, during which Judge Kaplan granted a preliminary injunction, effectively barring Legend from violating the charged provisions of the federal securities laws.

The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, accuses Legend of violating antifraud and registration provisions of the federal securities laws. As a result, the SEC seeks permanent injunctive relief, the return of allegedly ill-gotten gains, and the imposition of a civil penalty. In addition, the SEC has requested the appointment of a receiver over Legend and the Legend Funds, a decision that Judge Kaplan has reserved for further consideration.

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