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

The Securities and Exchange Commission (SEC) made an important announcement today regarding its actions against Legend Venture Partners LLC, an unregistered broker-dealer based in New York City. The SEC has obtained a preliminary injunction, asset freeze, and other emergency measures against the company due to its involvement in a fraudulent scheme related to the sale of interests in private companies with potential for public offerings. Interestingly, Legend’s principals and several sales agents had previously worked for StraightPath Venture Partners LLC, a similar scheme that the SEC shut down last year.

According to the complaint filed by the SEC on June 22, 2023, Legend operated boiler room operations from February to October 2022. These operations involved the sale of securities issued by the Legend Funds, which invested in shares or interests of specific pre-IPO companies. Legend employed an extensive network of unregistered sales agents who engaged in cold calling and managed to raise over $35 million from more than 300 investors. The complaint alleges that Legend made various misrepresentations to investors, including claims that its sales agents did not receive upfront fees or commissions and that the firm would only profit if investors made a profit from an initial public offering (IPO). However, in reality, Legend charged excessive and undisclosed markups on the prices of the pre-IPO shares, averaging nearly 60 percent and reaching as high as 105 percent per share. Additionally, Legend paid more than $12.8 million in upfront compensation to its sales agents and principals.

Sheldon L. Pollock, Associate Director of the New York Regional Office, stated, “We believe that the defendant simply rebranded the previous scheme operated by StraightPath, using their documents and sales agents to deceive investors about Legend’s compensation. As a result, we took swift action to protect the victims of this alleged copy-cat scheme.”

The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, accuses Legend of violating antifraud and certain registration provisions of federal securities laws. The SEC seeks permanent injunctive relief, the return of alleged ill-gotten gains, and a civil penalty. On June 23, 2023, U.S. District Court Judge Lewis A. Kaplan issued an order imposing a temporary restraining order, asset freeze, and other necessary measures. During a hearing on June 27, 2023, Judge Kaplan granted a preliminary injunction, preventing Legend from violating the charged provisions of federal securities laws. The decision on the SEC’s request to appoint a receiver over Legend and the Legend Funds is still pending.

The SEC’s investigation is ongoing and is being conducted by Joshua D. Tannen and Lee A. Greenwood of the Asset Management Unit, along with Suzanne M. Bettis, Megan Genet, Tiantong Wen, Douglas Smith, Kerri L. Palen, Patricia Schrage, Daniel Loss, Alistaire Bambach, and Steven G. Rawlings of the New York Regional Office. The investigation is under the supervision of Mr. Pollock, and the litigation will be led by Mr. Loss, Mr. Tannen, and Ms. Bettis.