SEC proposes plan for distribution of over $26m to compensate Longfin investors

The United States Securities and Exchange Commission (SEC) is pressing ahead with its efforts to compensate investors in Longfin Corp.

On May 22, 2020, the regulator submitted a proposed distribution plan at the New York Southern District Court. The plan is accompanied by a Motion for an Order to Show Cause why the Court should not approve the SEC’s proposed plan, which provides for the distribution of more than $26 million to compensate investors in Longfin Corp. common stock.

Let’s recall that, on April 4, 2018, the SEC commenced an action against Longfin Corp., Venkata S. Meenavalli, Amro Izzelden Altahwi, Suresh Tammineedi, and Dorababu Penumarthi. The Commission alleged that the defendants raised over $27 million through the unregistered distribution of Longfin securities in violation of Section 5 of the Securities Act of 1933, which prohibits such unregistered sales unless a specific exemption applies under the federal securities laws.

According to the complaint, Longfin’s CEO and controlling shareholder, Meenavalli, caused the company to issue more than two million unregistered, restricted shares to Altahawi, who was the corporate secretary and a director of Longfin, and tens of thousands of restricted shares to two other affiliated individuals, Penumarthi and Tammineedi. Shortly after Longfin began trading on NASDAQ and announced the acquisition of a purported cryptocurrency business, Altahawi, Penumarthi, and Tammineedi illegally sold large blocks of restricted Longfin shares to the public while the stock price was highly elevated, for profits in excess of $27 million.

The Court has since entered final judgments against all of the defendants, ordering them, in the aggregate, to pay disgorgement of $22,862,377.23 and civil penalties of $3,582,941.97, for a total monetary liability of $26,445,319.20. Of this amount, the defendants have paid, approximately, $26.1 million, which is deposited in an interest-bearing account at the U.S. Treasury’s Bureau of Fiscal Service. Each of the final judgments provides that the SEC may propose a plan to distribute the collected funds.

By Order dated April 15, 2020, the Court established a Fair Fund.

The distribution plan proposed by the SEC was developed jointly by the Distribution Agent and the SEC in accordance with practices and procedures customary in Fair Fund administrations. The Plan governs the administration and distribution of the Fair Fund, and sets forth the method and procedures for distributing the assets of the Fair Fund to investors harmed by the conduct alleged in the SEC’s Complaint.

In terms of terminology, let’s note that “Recovery Period” means June 16, 2017 through April 6, 2018, inclusive, and “Security” means Longfin Class A common stock, traded on the NASDAQ under the trading symbol LFIN.

For shares of the Security that were purchased during the Recovery Period, and:

• (a) Sold on or before April 6, 2018, the Recognized Loss (or Gain) per Share is the purchase price less the sale price.
• (b) Retained as of close of business on April 6, 2018, the Recognized Loss (or Gain) per Share is equal to the purchase price less $4.55 (the closing price on May 25, 2018).

A potential claimant’s eligible loss amount will be determined by aggregating the Recognized Loss (or Gain) per Share for all transactions which occurred during the Recovery Period. An investor will be eligible to receive a distribution not to exceed the overall net loss, after all profits from transactions in the Security during the Recovery Period are subtracted from losses.

Regarding methodology and timing, let’s note that within 45 days of Court approval of the distribution plan, the Distribution Agent will:

• create a mailing and claim database of all potential claimants based upon information identified by the Distribution Agent;
• design and submit a claims packet to the SEC staff for review and approval;
• mail a claims packet to each potential claimant identified by the Distribution Agent and to the Distribution Agent’s list of banks, brokers, and other nominees;
• establish and maintain a website dedicated to the Fair Fund. The Fair Fund’s website, located at www.longfinfairfund.com, will make available in downloadable form the approved Plan, components of the claims packet, and related materials, and such other information that the Distribution Agent believes will be beneficial to potential claimants;
• establish and maintain a traditional mailing address and an email mailing address which will be listed on all correspondence from the Distribution Agent to potential claimants as well as on the Fair Fund’s website; and
• establish and maintain a toll-free telephone number for potential claimants to call and speak to a live representative of the Distribution Agent during its regular business hours or, outside of such hours, to hear pre-recorded information about the Fair Fund.

The plans stipulates that, within 75 days following the date of the Final Determination Notices, the Distribution Agent shall compile and send to the SEC staff the payee information, including the names, addresses, and Distribution Payments of all Eligible Claimants (“Payee List”).

Upon receipt and review of the validated Payee List and Reasonable Assurances Letter, the SEC staff will petition the Court for authority to disburse the entire balance of the Net Available Fair Fund from the SEC to the Distribution Agent for distribution to Eligible Claimants pursuant to the Plan.

Following the Court’s approval of the SEC’s motion for the authority to distribute the Net Available Fair Fund to Eligible Claimants as provided for in this Plan, the Distribution Agent is set to commence mailing Distribution Payment checks or effect wire transfers within 15 business days of the transfer of the funds into the Escrow Account.