Litigation Release No. 25772 /July 11, 2023

Securities and Exchange Commission v. Legend Venture Partners LLC, No. 1:23-cv-05326 (S.D.N.Y. filed June 22, 2023)

SEC Obtains Appointment of a Receiver in Pre-IPO Stock Fraud Scheme by Unregistered Broker-Dealer

The Securities and Exchange Commission has obtained an order appointing a receiver over Legend Venture Partners LLC (“Legend”) and the five private Legend Funds that Legend managed and advised.  On July 7, 2023, the Hon. Lewis A. Kaplan of the U.S. District Court for the Southern District of New York Court appointed retired bankruptcy court judge Melanie L. Cyganowski as receiver over Legend and the Legend Funds.  Last year, Judge Kaplan appointed Ms. Cyganowski as the receiver in a similar alleged scheme shut down by the SEC run by StraightPath Venture Partners LLC.

The SEC charged Legend on June 22, 2023.  According to the complaint, Legend, a New York City-based unregistered broker-dealer, ran boiler room operations that sold securities issued by the Legend Funds, which invested in shares or interests in shares of specific private companies that had the potential for a public offering (“pre-IPO”).  The complaint alleges that the boiler rooms were staffed by a vast network of unregistered sales agents who made cold calls and raised at least $35 million from more than 300 investors.  Among a number of alleged misstatements, Legend told investors that its sales agents did not receive upfront fees or commissions and that the firm only made money if the investor made a profit on an IPO.  In reality, however, Legend allegedly charged exorbitant, undisclosed markups to the prices it paid for the pre-IPO shares, which averaged almost 60 percent, and reached as high as 105 percent per share, and paid its sales agents and principals more than $12.8 million in upfront compensation.

On June 27, 2023, Judge Kaplan imposed a preliminary injunction enjoining Legend from violating the charged provisions of the federal securities laws—Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2), 206(3), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and imposing other emergency relief.  The court’s preliminary injunction will remain in effect until the litigation of this matter is concluded or until further order of the court.