SEC Charges Seven in Microcap Fraud Scheme
Litigation Release No. 24791 / April 8, 2020
Securities and Exchange Commission v. Douglas Leighton et al., No. 1:20-cv-10686 (D. Mass. filed April 7, 2020)
The Securities and Exchange Commission charged Massachusetts resident Douglas Leighton for a scheme in which he allegedly acquired discounted shares in a microcap company, knowingly failed to disclose his holdings and sales, and manipulated the public market for those shares. Leighton, two entities he controlled, and six investors he directed agreed to settlements ordering them to pay nearly $1.5 million in civil penalties, disgorgement, and prejudgment interest.
The SEC's complaint, filed in federal court in Boston, alleges that Leighton orchestrated the fraud after acquiring millions of shares in MassRoots, Inc., a cannabis-social-media company now based in Los Angeles, California. As alleged, when MassRoots began selling its shares to the public in April 2015, Leighton directed Michael Sullivan, David Hall, Zachary Harvey, Paul Dutra, Jason Harman, and Jessica Geran to manipulate the public market for MassRoots stock, including by making open-market purchases at specific volumes and prices to create an appearance of active trading in and increase the price of MassRoots stock. According to the complaint, Sullivan also used accounts at two separate broker dealers to further create an appearance of volume in and affect the price of MassRoots stock. The complaint further alleges that Leighton acquired and sold shares through Dutchess Opportunity Fund II LP, Azure Capital Corp., and Bass Point Capital LLC, which along with Leighton and the other defendants never disclosed to the investing public, through required SEC filings, their sales and significant ownership of MassRoots stock.
Leighton, Azure Capital, Bass Point, Sullivan, Hall, Harvey, Dutra, Harman, and Geran have agreed to settle the matter by consenting, without admitting or denying the SEC's allegations, to the entry of final judgments, which are subject to court approval. The judgments would permanently enjoin all of the defendants from violating the beneficial ownership reporting provisions of Sections 13(d) and 16(a) of the Securities Exchange Act of 1934 and Rules 13d-3 and 16a-1 thereunder; Leighton, Bass Point, Azure, and Sullivan from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933; Leighton, Bass Point, and Azure from violating the antifraud provisions Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and Leighton and Sullivan from violating the market manipulation provisions of Section 9(a)(2) of the Exchange Act. In addition, the judgment would bar Leighton from serving as an officer or director of a public company and order him to pay a civil penalty of $160,000, and would bar Leighton, Azure Capital, and Bass Point from trading in penny stocks, impose a conduct-based junction restricting their future trading in any stock, and order them jointly and severally to pay disgorgement plus prejudgment interest of nearly $1 million. Leighton has also agreed to settle a follow-on administrative proceeding that bars him from the securities industry. Sullivan has agreed to be barred from trading in penny stocks for five years and to pay a civil penalty of $40,000 and disgorgement plus prejudgment interest of $63,228. The final judgments would order Hall, Harvey, Dutra, Harman, and Geran to pay civil penalties of $15,000 each, and would order payments of disgorgement plus prejudgment interest of $67,080 by Hall, $32,720 by Harvey, and $28,906 by Dutra.
The SEC's investigation was conducted by Jonathan Allen, Sofia Hussain, Alexander Pevzner, Rachel Hershfang, and Amy Gwiazda of the Boston Regional Office, with assistance from Robert Nesbitt in the SEC's Office of Market Intelligence. The investigation originated from an examination conducted out the Boston Regional Office by Marie Hagelstein, Kenneth Leung, and Mayeti Gametchu of the SEC's Office of Compliance Inspections and Examinations.