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OTC Market Issuers May Recoup Hundreds of Millions from SEC Actions against Toxic Lenders.

Updated: Sep 9


Many CEO’s and investors in small public companies trading on the OTC Markets are closely following the SEC lawsuits instituted against Edward Liceaga, John D. Fierro, Justin Keener and John Fife and their companies. This article addresses how those small public companies, on behalf of their shareholders, can recoup part of the expected hundreds of millions of dollars in disgorgement that the courts may order based on the alleged unlawful actions of River North Equity LLC, JDF Capital, Inc., JMJ Financial, Chicago Venture Partners, L.P., Iliad Research and Trading, L.P., St. George Investments, LLC, Tonaquint, Inc., Typenex Co-Investment, LLC.

First, an update on those actions. Recently, the United States District Court for the Southern District of Florida denied Mr. Keener’s request to dismiss that case based on the hail-Mary defense that Mr. Keener was operating as a trader, among other defenses. The court found that Mr. Keener engaged in the business of buying and selling securities as a business, for his own account, without first registering as a dealer in accord with 15 USC §78(o). This decision is consistent with the decisions by the United States District Court for the Northern District of Illinois in SEC v River North Equity, 415 F. Supp. 3d 855 (2019) and the United States District Court for the Southern District of Florida in SEC v. Ibriham Almagarby, Case no. 0:17-cv-62255 (2020) wherein those courts granted the SEC’s motions for summary judgment, definitively finding that buying convertible notes then selling the resulting shares, as part of a regular business, is the conduct of a dealer that required those defendants to register under the Securities Act as dealers. For those attorneys that do not practice securities law, 15 USC §78cc specifically voids transactions that violate the Securities and Exchange Act. A failure to register as a dealer is a violation of the Securities Act under those circumstances.

Recently, a few partners at a large and prestigious law firm in D.C. penned an article criticizing the SEC efforts to clean up the markets opining that such activity would dampen funding to small companies. One can only question whether that firm represents convertible note lenders, or, they just don’t understand how floor-less fixed discount rate convertible notes work. The current SEC cases against toxic lenders all have the fixed discount rate convertible note in common. That article attempts to provide cover for the lenders illegal activity by claiming the impact on the markets for funding is somehow worse than the tens of millions of dollars of shareholders losses attributable to the forced conversion discounts while the lenders reap tremendous returns. Not a good position to take politically or otherwise.

In most cases, the funding document known as the floor-less fixed discount rate “convertible note” has not only wreaked havoc on OTC Market issuers valuations, but the very nature of the mechanics of those notes force a depressed stock price over a short period of time where shareholder’s interests are severely diluted and their holdings lose tremendous value. Many small public companies rarely survive the sharp declines in their stock prices while these “funders” line their pockets on the backs of those issuer’s shareholders. While some state courts, at their highest appeals levels, are only now reviewing whether those transactions violate state criminal usury laws and are possibly void under state law, the SEC is charging forward in an attempt to corral these operators, expose their business practices and punish them for the alleged unlawful acts under federal securities laws. Registration under the Act allows the SEC and FINRA oversight over brokers and dealers conduct. Until now, this unregulated market activity was flying below the SEC and FINRA's radar and for those reading this, to understand a floor-less fixed discount rate convertible note - it is never an investment where the lender actually takes any risk in the success of a company - these instruments guarantee full repayment of the amount loaned through forced stock conversions at a steep discount to the stocks trading price. These documents all build in provisions, such as the 4.99% blocker, so the lender never has to report its activity.

In the cases instituted against these toxic convertible note lenders, the SEC is seeking disgorgement of all money and profits derived from these unlawful activities. The aggregate estimated disgorgement amount against the companies listed above is expected to be in excess of $150M. Recently, the United States Supreme Court in Liu v SEC 140 S.Ct. 1936 (2020) held that the disgorgement proceeds are intended to be paid to those that were harmed by the unlawful activities. In the SEC toxic lender cases cited above, small public company issuers and their estimated 10’s of thousands of shareholders that were victimized by these toxic lenders, may be able recoup some of the value they lost due directly to these unlawful activities.

We can help your shareholders participate in the distribution of disgorged proceeds from these lawsuits. While any recovery by the SEC at this stage is speculative, it is prudent for those companies, on behalf of its shareholders, to take action now in order to secure their share of any future distribution.

We are expecting several other SEC actions against several other toxic convertible note lenders in the near future that may raise the disgorgement proceeds in excess of $250,000,000 dollars.


If you are the CEO of a small public company, or a shareholder in a company that is trading on the OTC Markets that may have suffered losses due to convertible note lenders, now is the time to act to make sure the company you invested in secures your position to participate in any future distribution of court ordered disgorgements.

If your company issued convertible notes to River North Equity, LLC, JDF Capital, Inc., JMJ Financial, Chicago Venture Partners, L.P., Iliad Research and Trading, L.P., St. George Investments, LLC, Tonaquint, Inc. and/or Typenex Co-Investment, LLC in the last 3 years, you should contact us to discuss how you can participate in future court ordered disgorgements.

Small OTC MARKET issuers may also have other direct legal remedies against, or in defense of, other toxic convertible note lenders that have yet to be sued by the SEC under both federal and state law.

For more information on how your company can participate in disgorgement orders, or how your company can take other action against or in defense of aggressive attempts to enforce those and other funding agreements, please feel free to contact me at mark@thebasilelawfirm.com, or Brenda L. Hamilton, Esq. of Hamilton & Associates Law Group, P.A. at bhamilton@securitieslawyer101.com.



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