stack of gold coinsInvestors in a cannabis cryptocurrency startup obtained a default judgment for more than $12 million against rapper The Game and other defendants. The Game did not submit an opposition to the renewed motion for default judgment against him filed by the plaintiffs in Astley Davy, et al. v. Paragon Coin, Inc. et al., No. 18-cv-00671-JSW (N.D. Cal. Jun. 23, 2021). The order granting the default explained, “[t]he general rule of law is that upon default the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true.” Id. at 2 (quoting Geddes v. United Fin. Grp., 559 F.2d 557, 560 (9th Cir. 1977)). 

The “PRG Tokens” at issue in the lawsuit were a security offered or sold by means “which include[d] an untrue statement of a material fact or omit[s] … a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.”  Id.

The plaintiffs had previously not met their burden to show that The Game was a statutory seller for purposes of claims under Section 12(a)(1) and 12(a)(2) of the Securities Act of 1933, 15 U.S.C. Sections 77(a)(1)-(2) and 77o(a). The court in Davy cited to Pinter v. Dahl, 486 U.S. 622, 643-647, 650 n.26 (1988) (internal quotation marks omitted) to explain “that a person who successfully solicits the purchase of a security and who is motivated at least in part by a desire to serve his own financial interests or those of the security owner, i.e. a statutory seller can be held liable under Section 12(a)(1) while an individual who is merely a collateral participant cannot be liable.” Further, “individuals who solicit securities transactions but who may not actually transfer title in the security can be held liable.” Pinter, 486 U.S. at 646-47. In granting the default judgment, the Davy court concluded that the plaintiffs’ allegations were sufficient to show that The Game “acted for his own gain or for Paragon’s gain and, thus, could be considered a statutory seller.”

cow with yellow tag in earThe Commodity Futures Trading Commission (“CFTC”) accused a Washington rancher, Cody Easterday and Easterday Ranches, Inc., of defrauding beef and pork producers by billing for cattle that never existed. Easterday had a contract with the producers to raise and fatten over 100,000 cattle per year. The lawsuit (Commodity Futures Trading Commission v. Cody Easterday, Easterday Ranches, Inc., Case No. 4:21-cv-5050, 2021 WL 1217660 (Mar. 31, 2021, E.D.Wash.)), filed in federal court in Washington, also alleges that Easterday submitted fake cattle inventory information to the Chicago Mercantile Exchange (“CME”) in hedge exemption applications. The hedge exemption applications sought permission to exceed speculative position limits at the CME.

The CFTC alleges that the defendants came up with the scheme to meet margin calls after incurring more than $200 million in losses trading cattle futures. The scheme involved preparing fake invoices charged to the beef and pork producers for the purchase and grow costs of more than 200,000 cattle that did not exist. The CFTC referred to these nonexistent cattle as “ghost cattle.” The fraud allegedly caused the producers to overpay Easterday by $233 million. Easterday allegedly confessed to the CME and United States Department of Justice. The CFTC is an independent federal regulator responsible for administering and enforcing the Commodity Exchange Act and related regulations. The lawsuit alleges that  the defendants violated the Commodity Exchange Act, 7 U.S.C. §§ 126 (2018) and 17 C.F.R 1-190 (2020).

Salem Oregon Capitol BuildingThe Oregon Department of Consumer and Business Services (DCBS) and its Division of Financial Regulation (DFR) announced that TK Keen, who has been serving as the acting administrator of DFR, has been officially appointed administrator of the division. According to DCBS and DFR, Mr. Keen has been a deputy administrator with DFR since 2015.

DFR is responsible for licensing and regulating certain investments professionals and investments in Oregon. DFR also licenses and regulates other industries in the state, including check cashing businesses and pawnbrokers.

DFR has resources for investors and retirees to learn about investing and to report investment and consumer fraud. DFR also provides easy access to check whether an investment advisor, stockbrocker, or other investment professional is licensed.

check mark image with workersIn an October 29, 2020, regulatory notice, FINRA announced the adoption of a new rule that creates new requirements before any person associated with a firm regulated by FINRA obtains power of attorney or is named a beneficiary, executor, or trustee for or on behalf of a customer. Rule 3241 now requires firms regulated by FINRA to review and approve or disapprove any such status or role by a registered person associated with the firm.

The rule is intended to limit conflicts of interest that arise when a broker or registered representative is a customer’s beneficiary, executor, trustee, or has power of attorney. These conflicts are problematic and dangerous for any investor, but especially for elderly and unsophisticated investors. In explaining the new rule, FINRA said many member firms already address this potential conflict by prohibiting or imposing limitations on an associated person from being named as a beneficiary or to a position of trust when there is not a family relationship with the customer. FINRA added, “Nonetheless, FINRA observed situations where registered representatives tried to circumvent firm policies, such as resigning as a customer’s registered representative, transferring the customer to another registered representative, or having the customer name the registered representative’s spouse or child as the customer’s beneficiary.”

By requiring the registered person to provide written notice of such proposed status to the member firm and receive written approval from the firm, the new rule may provide limited additional protection for investors.