On September 26, 2019, the U.S. District Court for the Southern District of New York entered a default judgment against Longfin Corp. (“Longfin”), a defunct fintech company that promoted cryptocurrency, holding it liable for more than $6.8 million after missing a deadline to respond to SEC allegations that the company and its CEO, Venkata Meenavalli, engaged in offering fraud and falsified Longfin’s revenue in SEC filings. The SEC’s action against Meenavalli and a parallel criminal action filed by the U.S. Attorney’s Office for the District of New Jersey are ongoing. Longfin drew regulatory scrutiny in early 2018, which led to the company’s decision to voluntarily delist from NASDAQ in May 2018 and ultimately cease operations last November.

• Falsification of Revenue – The SEC alleged that Longfin engaged in a largescale accounting fraud in which it reported over $66 million in sham revenue, representing nearly 90% of the company’s total reported revenue for 2017. According to the SEC’s complaint, the scheme involved fictitious purchases and sales of bills of lading for the shipment of physical commodities, such as coal, copper, zinc, and nickel, for which Longfin never held title or ownership interests. Longfin made the revenue from these transactions appear legitimate by forging contracts and recording round-trip transactions that it entered into with entities controlled by Meenavalli, who signed several false contracts and invoices that were used in the transactions. Given this brazen fraud with completely sham revenue, it is no surprise that the criminal authorities determined this was an appropriate criminal action.
• Fraudulent NASDAQ Listing – According to the SEC’s complaint, Longfin obtained qualification for a Regulation A+ offering in November 2017 after falsely representing in SEC filings that it was principally managed and operated in the United States and was therefore entitled to sell shares pursuant to Regulation A+. Although Longfin was incorporated in Delaware, the firm was managed entirely from Singapore. After qualifying under Regulation A+, the company realized that it could not sell enough shares to meet NASDAQ listing requirements, so it distributed shares to company insiders and affiliates to create the false appearance that it had a sufficient public float to proceed with a NASDAQ listing. The insiders and affiliates never paid for the stock and therefore could not be properly included in the public float.
• Prior Proceedings – In a separate prior action, the SEC charged Longfin, Meenavalli, and other Longfin insiders and affiliates in connection with the subsequent sale of more than $33 million of unregistered Longfin stock that the company had distributed to meet NASDAQ listing requirements. Those charges resulted in a preliminary injunction freezing more than $27 million in allegedly illegal trading proceeds. Three individuals affiliated with Longfin have agreed to pay roughly $26 million to settle the SEC’s prior charges. Presumably the current charges resulted from the continuing investigation following those earlier charges.

The SEC’s complaint against Longfin and Meenavalli can be found here.

The SEC’s prior complaint against Longfin, Meenavalli, and other insiders and affiliates can be found here.

View the full Accounting & Financial Reporting Enforcement Round-Up.