SEC Charges Eight in Scheme to Fraudulently Promote Securities Offerings
Litigation Release No. 25541 / September 30, 2022
Securities and Exchange Commission v. Jonathan William Mikula, et al., No. 2:22-cv-07096 (C.D. Cal. filed September 30, 2022)
The Securities and Exchange Commission today announced charges against six individuals and two companies for their involvement in a fraudulent scheme to promote the securities of issuers that were conducting (or purporting to conduct) offerings pursuant to Regulation A, which, if certain conditions are met, provides an exemption to the Securities Act's registration provisions. All but two of the parties have agreed to settle the SEC charges.
The SEC's complaint alleges that Jonathan William Mikula, a recidivist securities law violator who resides in Georgia, promoted the securities of four issuers-Elegance Brands Inc. (now Sway Energy Corp.), Emerald Health Pharmaceuticals Inc., Hightimes Holding Corp., and Cloudastructure Inc.-without disclosing his receipt of compensation for the promotions. As alleged, Mikula promoted the securities through Palm Beach Venture, a newsletter for which he served as an author and chief analyst, and presented the recommendations as unbiased and not paid for, while he was secretly compensated in the form of cash and lavish expenses. The complaint also alleges that investors purchased approximately $80 million in the securities offered by these issuers following Mikula's promotion.
The SEC's complaint further charges Christian Fernandez and Raj Beri, associates of Mikula's, who allegedly acted as middlemen for the promotional scheme. According to the complaint, Fernandez and Beri, CEO of Elegance Brands, arranged to receive a percentage of investor funds raised by the issuers, in exchange for arranging Mikula's promotion, under the guise of consulting agreements with the issuers. The complaint also alleges that Fernandez and Beri tried to disguise their receipt of payments from the issuers by submitting invoices for fake consulting services, and by funneling payments through offshore accounts for Mikula's benefit.
The complaint states that two of the issuers promoted by Mikula, Elegance Brands and Emerald Health, as well as their respective CEOs, Beri and James DeMesa, participated in the scheme and made material misrepresentations and omissions in their respective filings with the SEC and other investor materials concerning the promotion and related payments. According to the complaint, Emerald Health's co-founder, Avtar Dhillon, played a key role in the scheme to promote Emerald Health. A separate administrative proceeding against Emerald Health's CFO, Lisa Sanford, finds that she negligently participated in the scheme. The complaint also charges Elegance and Beri with engaging in an offering that was unregistered and not covered by a valid registration exemption.
The SEC's complaint, filed in the U.S. District Court in Los Angeles, seeks the following remedies against the two litigating defendants, Mikula and Fernandez: permanent injunctions from violations of the charged anti-fraud and anti-touting provisions, conduct-based injunctions, disgorgement, prejudgment interest, and civil monetary penalties.
Elegance, Beri, Emerald Health, DeMesa, and Dhillon have agreed to settle to permanent injunctions from violations of the anti-fraud and other charged provisions. Elegance has agreed to pay a penalty of $776,932; Beri has agreed to pay disgorgement of $960,314.96, prejudgment interest of $38,979.24, a penalty of $207,183, has consented to the entry of a 10-year bar and a conduct-based injunction prohibiting him from engaging in certain promotional activities; Emerald Health has agreed to pay a penalty of $517,955; DeMesa has agreed to pay a penalty of $103,591 and agreed to a five-year bar from serving as an officer and director; and Dhillon has agreed to a permanent bar from acting as an officer and director.
The SEC also instituted a separate settled administrative proceeding against Sanford, who agreed to pay a penalty of $25,000 and to be suspended from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after three years.
The SEC's investigation was conducted by Sarah Nilson and Yolanda Ochoa, with assistance from Christopher Conte. The case was supervised by Finola Manvelian. The SEC's litigation will be led by Charles Canter and supervised by Gary Leung.
The SEC appreciates the assistance of the U.S. Attorney's Offices for the Central District of California and the District of Massachusetts, the Ontario Securities Commission, the Comision Nacional Bancaria y de Valores, and the Australian Securities and Investments Commission.