LG Capital's Victory Parade May Be Short Lived - Dilution Funder Facing Serious RICO Claims by Public Companies

LG Capital Funding’s Claim of Victory in SEC Case: A Policy Concession Amid Ongoing RICO and Legal Challenges

In a press release dated July 14, 2025, LG Capital Funding, LLC (“LG”) and its managing member, Joseph I. Lerman (“Lerman”), celebrated what they described as a “total victory” against the Securities and Exchange Commission (“SEC”) in a case accusing them of operating as unregistered securities dealers.  The United States District Court for the Eastern District of New York dismissed the SEC’s claims with prejudice on May 22, 2025, barring the agency from refiling the same allegations.  LG hailed this as a vindication of their business practices, asserting compliance with securities laws.  However, nothing in the court’s order indicates the dismissal was merits-based;  rather, it appears to reflect a policy decision by the SEC, potentially abdicating its oversight responsibilities in protecting shareholders.  The recent appellate ruling in SEC v. Almagarby, 92 F.4th 1306 (11th Cir. 2024) and the Fifth Circuit's decision in Eastside Church of Christ v. National Plan, Inc., 391 F.2d 357 (5th Cir. 1968), alongside various civil lawsuits, including an action with ongoing RICO (defined below) claims that defeated LG’s motion to dismiss in VNUE, Inc. v. LG Capital Funding, LLC, 2024 U.S. Dist. LEXIS 7054, at *1 (E.D.N.Y. Jan. 12, 2024), suggests that LG and Lerman may still face significant legal risks despite their proclaimed triumph.

LG Capital’s Claimed Victory: A Policy Decision

The SEC’s case against LG Capital and Lerman, filed in June 2022, alleged that between January 2016 and December 2021, LG Capital engaged in unregistered dealer activity by purchasing over 300 convertible notes from more than 100 penny stock issuers, converting these notes into shares at a steep discount, and selling approximately 23 billion newly issued shares for roughly $30 million in proceeds and $20 million in net profits.  The SEC argued that this business model constituted engaging in securities transactions as a securities dealer without registration, violating Section 15(a)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”).  Lerman, as a controlling person, was also charged under Section 20(a) of the Exchange Act.

LG Capital’s press release claims that after extensive discovery, including examination of notes, trading records, and witness testimony, the SEC stipulated to a dismissal with prejudice.  The dismissal means the SEC cannot pursue the same claims again, and LG Capital was not required to alter its business practices or pay fines.  The company framed this outcome as a rejection of the SEC’s attempt to expand the definition of a securities dealer, citing a related ruling in Nat'l Ass'n of Private Fund Managers v. SEC, 2024 U.S. Dist. LEXIS 211895, at *1 (N.D. Tex. Nov. 21, 2024), which vacated an SEC rule broadening the dealer definition. 

However, the court’s order, and the stipulation between the parties filed with that order, provides no indication that the dismissal was based on the "merits" of the SEC’s claims.  Instead, it clearly states, “WHEREAS, in the exercise of its discretion and as a policy matter, the Commission believes the dismissal of this case with prejudice is appropriate.” This is clearly a a policy decision by the SEC that now triggers concerns by public company issuers and their shareholders, that the agency may be abdicating its responsibility to protect shareholders from the risks posed by toxic lending dilution funding practices, potentially leaving investors vulnerable to market manipulation and financial harm.

A Conflicting Ruling From the Decisions in Almagarby and Eastside

Despite LG Capital’s claimed victory, a recent appellate court decision involving a similar business model indicates that unregistered securities dealing carries significant consequences, casting doubt on the broader implications of LG’s dismissal.  In Almagarby, the 11th Circuit Court upheld a lower court’s ruling that Ibrahim Almagarby (“Almagarby”) and his company, Microcap Equity Group, LLC, operated as unregistered dealers.  Almagarby purchased convertible debt from penny stock companies, converted it into discounted shares, and sold them rapidly, earning over $885,000 in profits over three and a half years.  The court found that his high-volume transactions, use of cold callers to identify issuers, and intent to profit from share sales constituted dealer activity under the Exchange Act, as the definition does not require acting on behalf of customers.  The court ordered disgorgement of profits and interest totaling $1,067,276.99 but lifted a permanent ban on penny stock participation, citing Almagarby’s assurances of future compliance.

Similarly, in Eastside, the Fifth Circuit addressed allegations that the churches sold bonds through a third party agent to purchasers, who did not compensate the churches. The court found that the purchasers’ failure to register as a dealer under the Exchange Act rendered the transaction unlawful, leading the Fifth Circuit to void the transaction. The court emphasized that the National Plan, Inc. (“National”), one of the purchasers, had previously and regular engaged in the purchase of bonds, which evidences National as "a broker and a dealer within the meaning of the Act." See Eastside Church of Christ, 391 F.2d at 362. This ruling aligned with the Eleventh Circuit’s reasoning in Almagarby, reinforcing the SEC’s position that unregistered securities dealing—whether involving convertible notes or bonds—violates federal securities law and can result in severe consequences, such as transaction voidance.

These appellate rulings highlight a critical tension:  LG’s business model, involving the purchase and conversion of convertible notes, resembles activities that a court may deem unregistered dealer conduct.  The SEC’s policy-driven dismissal in LG’s case does not negate the legal precedent set by these ruling, which affirm the agency’s authority to regulate such practices and impose remedies like voiding transactions.

RICO Claims and Other Litigations

LG and Lerman still face significant legal challenges through private litigation alleging violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”).  In VNUE, the plaintiff alleged that LG and Lerman engaged in a pattern of racketeering activity through predatory convertible note agreements that manipulated stock prices and harmed issuers and investors.  The court denied LG Capital’s motion to dismiss the RICO claims, allowing the case to proceed and signaling that the allegations of a coordinated scheme to extract profits through toxic lending were sufficiently pleaded to warrant further scrutiny.  This ruling heightens LG and Lerman’s exposure to potential treble damages and reputational harm.

Recently, the SEC targeted another toxic lender, Crown Bridge Partners, LLC (“Crown Bridge”) for unregistered dealer activity, alleging that Crown Bridge purchased convertible notes, converted them into discounted shares, and sold them for substantial profits without registering as a dealer.  Private litigation related to Crown Bridge has also raised RICO claims, asserting that Crown Bridge’s lending practices formed part of a broader racketeering scheme.  For example, in DarkPulse, Inc. v. Crown Bridge Partners,  (S.D.N.Y. 2024), the plaintiffs alleged that Crown Bridge engaged in a pattern of predatory lending that violated federal RICO by systematically targeting vulnerable issuers.  These cases signal a growing trend of private litigants using RICO to challenge toxic lending practices, further increasing LG and Lerman’s exposure to civil lawsuits.

Beyond the federal RICO actions in VNUE and DarkPulse, LG has faced scrutiny in other litigations.  Specifically, in LG Capital Funding, LLC v. Exeled Holdings Inc. (S.D.N.Y. 2024), LG faced counterclaims alleging usurious lending practices.  The court cited the New York Court of Appeals’ decision in Adar Bays, LLC v. GeneSYS ID, Inc., 179 N.E.3d 612 (N.Y. 2021), which held that floating-price conversion options in convertible notes constitute interest for usury analysis, potentially rendering such loans illegal under New York law.  This precedent poses a direct threat to LG’s business model, as the discounts in convertible note conversions could be deemed usurious if the effective interest rate exceeds New York’s legal limits (25% A.P.R.).

Analysis:  A Pyrrhic Victory?

LG’s press release portrays a complete exoneration, but the broader legal context suggests otherwise.  The SEC’s policy-driven dismissal, rather than a merits-based ruling, does not affirm the legality of LG’s practices and may reflect a troubling abdication of the agency’s responsibility to protect shareholders.  The Almagarby decision demonstrates that courts are willing to classify unregistered securities dealing in convertible notes as dealer activity, with consequences like disgorgement or transaction voidance.  The Nat'l Ass'n of Private Fund Managers ruling, cited by LG, vacated an SEC rule but did not negate the statutory definition of a dealer under the Exchange Act, which appellate courts have applied rigorously.

Moreover, the court’s denial of LG’s motion to dismiss in VNUE highlights significant ongoing risks to LG and Lerman.  The Adar Bays precedent amplifies the threat of usury violations, as it establishes that discounts in convertible note conversions—central to LG’s operations—may be treated as interest.  RICO claims, bolstered by the VNUE ruling, increase the possibility of treble damages and reputational harm, particularly if plaintiffs can establish a pattern of racketeering and a cohesive enterprise.

Conclusion

While LG and Lerman celebrate their SEC case dismissal as a “total victory,” the lack of a merits-based ruling and the SEC’s apparent policy decision raise concerns about the agency’s commitment to protecting shareholders.  Nevertheless, the Eleventh Circuit’s recent ruling in Almagarby, and the Fifth Circuit's ruling in Eastside, affirms that unregistered dealer conduct carries severe consequences, including voided transactions.  Far from a clean bill of health, LG Capital’s practices remain under intense scrutiny, and LG and its managing members could face significant financial and operational consequences in pending and future litigation.  Investors and market participants should view LG’s claims of exoneration with caution, recognizing that LG’s legal battles are far from resolved.

If you or your company have been affected by a toxic lending arrangement and want to explore possible remedies, contact Mark R. Basile, Esq. at The Basile Law Firm P.C., (516)-455-1500 x110 or email Mark at Mark@thebasilelawfirm.com