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Longfin, Rule 144 and Affiliate Status

by   |   May 3, 2018

The United States District Court for the Southern District of New York recently issued an opinion granting a preliminary injunction with respect to alleged Section 5 violations by certain persons associated with ill-fated Regulation A+ issuer Longfin. More specifically, the preliminary injunction extends until the conclusion of the case an emergency order previously entered by the Court freezing more than $27 million in trading proceeds from allegedly illegal distributions and sales of restricted shares of Longfin.

The opinion reads like a law school exam question related to the application of the Rule 144 exemption, and as an alternative the Section 4(1) exemption, for the sales of restricted securities and control securities. One of the more interesting aspects of the opinion is whether at trial the defendants were likely to be found affiliates of Longfin.

Andy Altahawi.  Altahawi’s association with Longfin began when he signed a consulting agreement to assist Longfin to initiate a Regulation A+ Tier II Direct Public Offering, or DPO.  The determination of whether Altahawi could rely on Rule 144 for certain sales hinged on whether he was an affiliate.  The Court said this is a question of fact which depends on the totality of the circumstances including an appraisal of influence upon management and policies of a corporation.  The Court discussed Altahawi acting as secretary of Longfin, managing an unusual distribution of Longfin shares and his acquisition of a portion of those shares a short time later, his communications with the SEC, arranging to remove the restrictive legend on his shares, his domination of the public market for Longfin shares and other matters.  In the end the Court found that Altahawi was likely to be found an affiliate at trial solely because of his personal management of the entire DPO process and his control of the public float in Longfin shares.

Suresh Tammineedi.  The Court stated the record provided strong support Tammineedi would be found to be an affiliate of Longfin.  Tammineedi was a director of Stampede Capital Limited which owned well over 10% of Longfin’s shares and was Longfin’s largest shareholder.  Venkata Meenavalli founded both Longfin and Stampede Capital.  Meenavalli held 17.11% of Stampede Capital and Meenavalli and Tammineedi were “frequent business colleagues and close associates.”

Dorababu Penumarthi.  The Court stated the record provided strong support Penumarthi would also be found to be an affiliate of Longfin.  Penumarthi worked as a consultant for Longfin.  Penumarthi had publicly stated he was director of Longfin’s UK operations, although in opposition to the motion before the Court, Penumarthi claimed this statement was in error.  The Court noted Penumarthi grew up with Meenavalli and appears to have been a previous business partner of his.

It should be noted that the opinion was not a final decision on the merits and no court has found the defendants violated the law.