SEC Sues Minnesota-Based Firm and Its Managing Partner for Acting as an Unregistered Securities Dealer
Litigation Release No. 25223 / September 27, 2021
Securities and Exchange Commission v. Carebourn Capital, L.P., et al., Civil Action No. 21-cv-02114 (D. Minnesota filed September 24, 2021)
On September 24, 2021, the Securities and Exchange Commission ("SEC") charged Carebourn Capital, L.P. and its managing partner Chip Rice of Maple Grove, Minnesota with acting as an unregistered securities dealer in connection with their buying and selling of billions of newly-issued shares of microcap securities, or "penny stocks," which generated millions of dollars for Carebourn Capital and Rice. Also named as a relief defendant is another Rice-controlled entity, Carebourn Partners, LLC.
The SEC's complaint alleges that Rice and Carebourn Capital's business model was to buy convertible promissory notes - a type of security - from penny stock issuers, convert the notes into newly-issued shares of stock, and quickly sell those shares into the public market at a profit.
The complaint further alleges that, since January 2017, Rice and Carebourn Capital purchased more than 100 such notes from approximately 40 different penny stock issuers. The complaint alleges that Rice and Carebourn Capital negotiated and received highly favorable terms for these notes, including terms that gave them deep discounts from the prevailing market price for the shares of counterparty penny stock issuers. According to the complaint, by engaging in a regular business of buying convertible notes and then selling the resulting newly-issued shares of penny stock companies' stock into the public market, Rice and Carebourn Capital operated as unregistered securities dealers and collectively generated more than $25 million in gross stock sale proceeds and over $13 million in net profits, with many deals still outstanding.
The SEC's complaint, filed in the U.S. District Court for the District of Minnesota, alleges that Rice and Carebourn Capital violated the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act of 1934. The complaint also alleges that Carebourn Partners, LLC received illicit proceeds from Rice and Carebourn Capital's violations. The SEC's complaint seeks injunctive relief, disgorgement and prejudgment interest, civil penalties, and a penny stock bar against Rice and Carebourn Capital.
The investigation of this matter was conducted by Craig McShane, Timothy Stockwell, and Chris White and was supervised by C.J. Kerstetter of the SEC's Chicago Regional Office.