Page 1
Roberto A. Tercero (Cal. Bar No. 143760)
Email: terceror@sec.gov
Attorney for Plaintiff
Securities and Exchange Commission
Michele Wein Layne, Regional Director
John W. Berry, Associate Regional Director
Amy J. Longo, Regional Trial Counsel
444 S. Flower Street, Suite Los Angeles, California Telephone: (323) 965-Facsimile: (213) 443-
UNITED STATES DISTRICT COURT
DISTRICT OF ARIZONA
Securities and Exchange Commission,
Plaintiff,
vs.
David M. Loflin,
No.
COMPLAINT
Defendant.
Plaintiff Securities and Exchange Commission (“SEC”) alleges:
SUMMARY
1.
This case concerns a fraudulent “pump-and-dump” scheme by
Defendant David M. Loflin (“Loflin”). As part of this scheme, Loflin obtained shares
of stock of a small public company, Greenway Design Group, Inc. (“Greenway”),
disseminated positive hype about the company to “pump” up its stock price and
stimulate trading, and then sold the stock, or “dumped” it, at a profit. The stock
price, as is typical in schemes like this, then fell, and those unsuspecting investors
who continued to hold the stock lost money.
COMPLAINT Page 2
2.
Loflin worked with a now-deceased co-fraudster (“Individual A”) to
obtain shares of Greenway stock using convertible promissory notes issued by the
company. They converted portions of the convertible notes into Greenway stock
between October 2014 and December 2016. For Loflin to be able to immediately sell
the Greenway shares after converting the notes, he needed to obtain stock certificates
without restrictive legends on them. Restrictive legends notify prospective
purchasers that a registration statement for the sale of the stock must be filed with the
SEC or, alternatively, that a regulatory exemption to that registration requirement
exists. To obtain certificates without these restrictive legends, and to deposit the
shares into his brokerage account for subsequent resale, Loflin misled his broker and
Greenway’s transfer agent, who issued the certificates, into believing that the stock
sales were exempt from the SEC’s registration requirements.
3.
Loflin and Individual A then organized a “pump” of Greenway stock.
They hired a promoter who organized a promotional campaign through stock touters.
The touters in turn sent out blast emails to hype Greenway stock concurrent with
Greenway press releases written by Loflin and Individual A. This pump coincided
with a substantial increase in Greenway’s share price and trading volume. Loflin and
Individual A sold their Greenway stock between January 2015 and May 2017, and
Loflin made about $152,800 from those sales.
4.
In deceiving the transfer agent and the brokerage firm, Loflin also
deceived Greenway investors. Transfer agents and brokerage firms are gatekeepers
who must take steps to ensure that they do not participate in illegal offerings. They
seek assurances that their customers can rely on a valid exemption before selling
securities into the public market. Here, because Loflin deceived the brokerage firm
into allowing him to make unregistered sales of Greenway shares, the purchasers of
those shares were deprived of the information that they otherwise would have been
entitled to receive in a registration statement filed with the SEC, including
information regarding the fact that Greenway affiliates were dumping their stock.
COMPLAINT Page 3
5.
By this conduct, Loflin violated Sections 5(a), 5(c), 17(a) of the
Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§ 77e(a), 77e(c), and 77q(a);
Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C.
6.
With this complaint, the SEC seeks an order permanently enjoining
Loflin from future violations of the registration provisions of the Securities Act and
the antifraud provisions of the Securities Act and the Exchange Act, requiring him to
pay disgorgement plus prejudgment interest and a civil penalty, barring him from
acting as an officer or director of a public company, and barring him from offering or
selling penny stock.
JURISDICTION AND VENUE
7.
The Court has jurisdiction over this action pursuant to Sections 20(b),
20(d)(1), and 22(a) of the Securities Act, 15 U.S.C. §§ 77t(b), 77t(d)(1), and 77v(a),
and Sections 21(d)(1), 21(d)(3)(A), 21(e), and 27 of the Exchange Act, 15 U.S.C.
§§ 78u(d)(1), 78u(d)(3)(A), 78u(e), and 78aa.
8.
Defendant has, directly or indirectly, made use of the means or
instrumentalities of interstate commerce, of the mails, or of the facilities of a national
securities exchange in connection with the transactions, acts, practices and courses of
business alleged in this complaint.
9.
Venue is proper in this district pursuant Section 22(a) of the Securities
Act, 15 U.S.C. § 77v(a), and Section 27 of the Exchange Act 15 U.S.C. § 78aa.
because certain of the transactions, acts, practices and courses of conduct constituting
violations of the federal securities laws occurred within this district.
THE DEFENDANT
10.
David M. Loflin resides in Baton Rouge, Louisiana. He has been a
CEO of public and private companies for eighteen years. He worked with
Individual A with respect to a number of public companies, including Greenway.
Individual A is now deceased.
COMPLAINT Page 4
THE ISSUER
11.
Greenway Design Group, Inc. is a Delaware corporation with
headquarters until December 2017 in Phoenix, Arizona, at which time it moved to
Upland, California. From 2010 to February 2018, Greenway’s stock was quoted
under the ticker symbol “GDGI” on OTC Link, operated by OTC Markets Group,
Inc. (“OTC Markets”). It is a non-reporting company and makes submissions to OTC
Markets. From 2010 to February 2018, Greenway purportedly produced and
distributed consumer air conditioning cooling systems; it also entered the cannabis
market in 2016. It was originally incorporated as Prescription Corporation of
America in 1986 and changed its name to Voice Networkx, Inc. in 2009 and
Greenway Design Group, Inc. in 2010. In December 2017, the company entered into
a reverse merger and was renamed Redwood Scientific Technologies, Inc. in
February 2018. Its stock is now quoted on OTC Link under the ticker symbol
“RSCI.”
THE ALLEGATIONS
A.
Loflin’s and Individual A’s General Scheme
12.
In general, Loflin and Individual A conducted their pump-and-dump
schemes using microcap companies, such as Greenway. Microcap companies are
companies whose stock is traded publicly in the over-the-counter market, such as
OTC Link, at less than $5 per share and often for less than a penny per share.
13.
Individual A usually searched for a microcap company that was
available for merger or appeared to be in need of funding. He would then acquire a
controlling interest in the company by purchasing a large block of its stock through a
nominee and operate the company through a CEO whom he controlled. Individual A
then brought in Loflin to work with him in running the company, although
Individual A directed all of Loflin’s activities regarding the acquired microcap
company.
14.
COMPLAINT
Loflin and Individual A would then acquire convertible promissory notes Page 5
of the company; convert them into shares; convince the transfer agent issue stock
certificates for the shares without restrictive legends; and deposit them with their
brokerage firm. Loflin and Individual A then organized a promotional campaign to
boost, or “pump,” the share price of the company’s stock. They then sold, or
“dumped,” their shares onto the public through the over-the-counter market.
B.
SEC Registration Requirements and Rule
15.
In order to sell the shares, Loflin and Individual A had to comply with
Section 5 of the Securities Act. The Securities Act protects investors by ensuring that
companies issuing securities fully disclose information relevant to a public offering.
One of the most important aspects of the Securities Act is its registration requirement
under Section 5, which, unless some exemption exists, requires offers and sales of
securities to be registered with the SEC. That requirement is central to protecting
public investors, because it is designed to assure that material facts bearing on the
value of publicly-traded securities are made available and disclosed to the investing
public.
16.
Specific exemptions under the Securities Act allow some offers or sales
of securities to be made without registering them with the SEC. One of those
exemptions is found in Section 4(a)(1) of the Act. While Section 5 generally requires
registration for the flow of securities from an issuer to investors, the premise of the
Section 4(a)(1) exemption is that registration is no longer necessary for further sales
once the shares come to rest with public investors.
17.
Section 4(a)(1) exempts “transactions by any person other than an issuer,
underwriter, or dealer.” 15 U.S.C. § 77d(a)(1). An underwriter is defined to include
anyone who purchased a security from “an issuer with a view to” later “distribut[e]”
the security to others, or anyone who “offers or sells” securities “for an issuer” in
connection with the distribution of those securities. For this definition of an
underwriter, an “issuer” is additionally defined to include “any person directly or
indirectly controlling or controlled by the issuer, or any person under direct or
COMPLAINT Page 6
indirect common control with the issuer.”
18.
Rule 144 of the Securities Act creates a “safe harbor” from the
underwriter definition for persons seeking to resell stock they acquired directly from
an issuer or an affiliate of an issuer – often called “restricted securities.” 17 C.F.R.
§ 230.144. Under Rule 144, an affiliate of an issuer “is a person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by, or is
under common control with” the issuer. 17 C.F.R. § 230.144. A person satisfying
the applicable conditions of the Rule 144 safe harbor is deemed not to be an
underwriter for purposes of the Section 4(a)(1) registration exemption, and therefore
can sell the restricted securities without having to register the sale with the SEC.
19.
One of the requirements for Rule 144’s safe harbor is that the restricted
securities had to be held for more than a year before they could be resold again.
Rule 144 provides that the one-year holding period does not begin until the full
purchase price is paid by the person acquiring the securities from the issuer or from
an affiliate of the issuer. Under certain conditions, a seller can include, or “tack,” the
holding period of the previous owner of the stock. Tacking is not permitted,
however, if the previous owner of the stock is an affiliate of the issuer.
20.
Here, Greenway and Individual A, because Individual A controlled
Greenway, were both the issuers of the stock.
21.
Also, Individual A used a nominee entity to acquire some of the
Greenway stock (“Stock Trading Company”). That entity was both an affiliate of the
issuers and an issuer itself, since it and Greenway were under the common control of
Individual A.
22.
Likewise, Loflin was an affiliate of the issuers because he too was under
common control of Individual A, who directed all of Loflin’s activities with respect
to Greenway.
23.
Moreover, Loflin was an underwriter when he sold the Greenway shares
he had acquired. That is because he had acquired all of his Greenway shares of stock
COMPLAINT Page 7
from an issuer – either from Greenway itself or from Individual A’s Stock Trading
Company. Also, Loflin had acquired the Greenway shares with a view to later
distribute the stock to others in the public market as part of the pump-and-dump
scheme.
24.
Because Loflin was an underwriter for any sales of Greenway stock out
of his brokerage account, he was required to register those sales with the SEC, unless
he came within the Rule 144 safe harbor. But Loflin had not held the Greenway
stock for a year, and so the safe harbor could not apply.
25.
Moreover, Loflin could not “tack” on the time the stock was held by the
previous owners of the stock in order to meet the one-year holding period if the
previous owner was an affiliate of the issuer (such as the Stock Trading Company).
So, as alleged in more detail below, he misled the transfer agent and his broker about
his affiliate status and the amount of time that he had held his Greenway shares.
C.
The Greenway Pump-and-Dump
1.
26.
The acquisition of Greenway
In 2013, Individual A approached Greenway’s CEO about acquiring the
company. The CEO was interested in selling Greenway because he was broke and
the company had no assets. During the negotiations, the CEO informed Individual A
that Greenway owed money on a loan made in 2011, which was documented in a
promissory note. Individual A expressed interest in buying the note if it could be
recast as a convertible promissory note, and the CEO secured the lender’s willingness
to do so. Individual A then offered to buy a controlling interest in Greenway by
paying the CEO $40,000 for his control block of Greenway stock. Individual A said
that the CEO could remain in that position, but only if he ran the company as
Individual A instructed. The CEO agreed.
27.
Individual A also offered to buy some or all of the 2011 promissory
note, once it was made convertible, from the lender. Individual A would then sell
portions of the note to Loflin so that they could each convert their respective portions
COMPLAINT Page 8
of the note into shares and sell them.
28.
Neither Loflin or Individual A, however, wanted to disclose
Individual A’s ownership of or control over Greenway or the convertible promissory
note – because that would reveal that Individual A and his Stock Trading Company
were affiliates of the company. If it was known that Individual A and the Stock
Trading Company were affiliates, then “tacking” of the one-year holding period
under Rule 144 would not be allowed for Loflin’s note purchases from the Stock
Trading Company. As such, Loflin would not be deemed to have held the Greenway
stock for one year and, therefore, would not be able to immediately sell his Greenway
shares of stock under Rule 144.
29.
For that reason, Individual A decided to acquire controlling ownership of
Greenway using a private company to conceal his ownership and control of the
company. At Loflin’s suggestion, Individual A convinced Loflin’s colleague
(“Individual B”) to create the private holding company and to use money supplied by
Individual A to purchase the controlling block of shares held by the puppet CEO.
Individual B completed the purchase using the private holding company in 2013.
2.
30.
Loflin’s acquisition of convertible promissory notes
In 2013, Individual A put Greenway’s CEO in touch with Loflin, who
prepared a backdated convertible promissory note to replace the 2011 note. Loflin
also prepared an agreement for the sale of the note from the lender and original
holder of the note to the Stock Trading Company.
31.
From September 2014 through 2016, Loflin and Individual A acquired
portions of the backdated convertible promissory note. Individual A also had the
Stock Trading Company make loans to Greenway in return for additional convertible
promissory notes. Additionally, Loflin received another convertible promissory note
as compensation for services allegedly to be rendered under a consulting agreement
that he entered into with Greenway.
32.
COMPLAINT
For each note purchase, Loflin prepared a sales agreement. It was Page 9
signed by the seller (the lender under the backdated note, Loflin, or Individual A for
the Stock Trading Company), purchaser (Loflin or Individual A for the Stock Trading
Company), and Greenway by its CEO, as an interested third party consenting to the
transaction. Loflin also prepared the consulting agreement between himself and
Greenway. And Loflin also prepared each of the convertible promissory notes.
33.
Loflin’s whole and partial convertible promissory note acquisitions were
as follows:
a.
On December 19, 2014, Loflin paid $2,500 for a portion of the
note backdated to 2011.
b.
On July 12, 2015, Loflin agreed to provide consulting services to
Greenway until January 12, 2016, in return for a convertible
were for a term ending January 12, 2016, which would have been
the date that the one-year holding period would have begun.
Therefore, Loflin only held the shares for eight months.
c.
On September 30, 2015, Loflin converted $200 of the portion of
the convertible promissory note he purchased from the Stock
Trading Company that same day. Therefore, he had held it, and
the shares that could be converted from it, for just one day rather
than one year. Because the Stock Trading Company was an
affiliate (Individual A controlled it and Greenway), Loflin could
not tack on the Stock Trading Company’s holding period.
36.
For the conversion of the backdated 2011 note, Loflin and Greenway
entered into an agreement under which Loflin agreed to cancel the amount of the debt
being converted in return for Greenway shares of stock. In the agreement, Loflin
stated that he was not an affiliate of Greenway. This statement was false and
misleading because Individual A controlled Loflin and Greenway.
4.
37.
Loflin obtains false attorney opinion letters
Loflin and the Stock Trading Company then retained counsel to prepare
opinion letters for each conversion opining that their future sales of their respective
Greenway stock complied with the safe harbor of Rule 144. Without such an opinion
letter, transfer agents will not issue a stock certificate without a restrictive legend, and
brokerage firms will not accept a stock certificate for deposit into a customer account,
much less allow the subsequent sale of those shares from that account.
38.
Loflin prepared a package (“note conversion package”) for the attorney
of each note conversion. The packages consisted of documents prepared by Loflin:
COMPLAINT Page 11
the sales agreement for acquisition of the portion of the note, except for one which
contained Loflin’s consulting agreement; a representation letter by Loflin that he was
not an affiliate of Greenway; a Greenway board resolution authorizing the issuance of
shares pursuant to the conversion; and a letter to the transfer agent instructing it to
issue the requested shares.
39.
Loflin’s representation letters, however, were false and misleading.
Because he was planning on immediately reselling the stock he purchased from the
issuers (or an affiliate of an issuer), and thus was an underwriter, Loflin needed to be
able to convince the transfer agent and the broker that he could “tack” on the holding
periods of the prior stock owners to satisfy Rule 144’s one-year holding requirement.
To do that, he had to claim that he had not acquired the stock from any affiliates.
40.
Each representation letter Loflin included in the note conversion
packages falsely stated that he was not a Greenway affiliate, even though he, and
Greenway, were controlled by Individual A.
41.
The attorney opinion letters stated that the transfer agent could issue,
without restrictive legend, the share certificates requested by Loflin because he had
complied with the Rule 144 safe harbor. The opinion letters, however, were based
upon the false statements that Loflin was not an affiliate and that Loflin had met the
one-year holding period.
42.
For the shares from the backdated 2011 note that Loflin purchased, the
attorney opinion letter concluded that the one-year holding period had been met, but
the note never had a convertible feature and was backdated to give that false
impression. Consequently, the shares never existed under the note and the holding-
period never began.
43.
For the shares from the note that Loflin purchased from the Stock
Trading Company, the attorney opinion letter concluded that Loflin could tack the
time that the Stock Trading Company’s holding period. Loflin, however, could not
tack that time because the Stock Trading Company was an affiliate. For the shares
COMPLAINT Page 12
under the consulting agreement, the letter incorrectly claimed that the holding period
began on the day that the Greenway issued the note.
5.
44.
Loflin obtains stock certificates without restrictive legends
After Loflin received each attorney opinion letter for his shares, he
combined it with the associated note conversion package and sent it to Greenway’s
transfer agent with instructions to issue a stock certificate without a restrictive legend
for the number of shares converted. The transfer agent then issued the stock
certificate as requested and sent it to Loflin.
45.
On January 7, 2015, October 7, 2015, and August 24, 2016, Loflin
submitted a deposit security request (“DSR”) for each stock certificate to his broker
so that the shares could be deposited into his brokerage account. Each DSR consisted
of a deposit application on the brokerage firm’s form, the stock certificate, the note
conversion package, and the attorney opinion letter. Loflin signed each deposit
application under penalty of perjury, but each one contained false and misleading
statements besides the ones contained in the note conversion packages.
46.
First, Loflin falsely swore that he was not an affiliate of Greenway, even
though he was because he and the company were under Individual A’s control. The
brokerage firm would not have accepted Loflin’s DSR had it known his true affiliate
status.
47.
Second and for the DSR related to the backdated 2011 note, Loflin
swore falsely that the note was convertible, even though it was not. The brokerage
firm would not have accepted the Loflin’s DSR had it known that its customer was
trying to deposit shares that were not bona fide and had been procured by deceit.
48.
Third, Loflin falsely swore in each DSR that he was not acting in concert
with anyone regarding Greenway stock, even though he was executing a plan with
Individual A to acquire shares of the company’s stock, organize a promotional
campaign, and sell the shares into the artificially inflated market that Loflin and
Individual A created. The brokerage firm would not have accepted Loflin’s DSRs
COMPLAINT Page 13
had it been given the true facts.
49.
Based upon the DSR, Loflin’s broker accepted each of his Greenway
stock certificates and placed the stock into his brokerage account. Consequently,
Loflin could sell the shares of stock through the public market. Individual A
followed the same process for the Stock Trading Company’s shares thereby also
making its shares available for public sale.
6.
50.
Loflin and Individual A “pump” Greenway stock
In order to increase Greenway’s stock price, Loflin and Individual A
orchestrated a promotional campaign. They hired Individual B, who had at least
years’ experience promoting companies and their securities. Individual B used
approximately 11 stock touters to send mass emails hyping Greenway as an
investment. Individual A also prepared press releases for Greenway, which Loflin
reviewed and edited. Greenway issued the press releases during the same period that
the stock touters sent their email blasts.
51.
The promotional campaign began on January 29, 2015, and was
concentrated into four periods. The email blasts spoke of a Greenway investment in
glowing terms. For instance, one email characterized Greenway stock as “a sub
penny play with tons of upside potential.” Another stated “We are putting Greenway
on steroid alert for Friday’s [sic] Trading.”
52.
The promotional campaign coincided with increases in Greenway’s
stock price and trading volume and Loflin’s and the Stock Trading Company’s stock
sales as follows:
a.
First, between January 29 and 30, 2015, four email blasts and one
Greenway press release were issued talking positively about the
company. During that time, the stock price increased 57% and
trading volume increased 5,700%. Then, between January 30 and
February 11, 2015, Loflin then sold 50 million shares he had
acquired for $21,900.
COMPLAINT Page 14
b.
Second, between May 13 and 15, 2015, four email blasts and one
Greenway press release were issued talking positively about the
company. During that time, the stock price increased 125% and
trading volume increased 1,134%. Then, between May 14 and
June 29, 2015, Loflin sold 34.85 million shares he had acquired
for $21,600.
c.
Third, between September 16 and 17, 2015, two email blasts were
issued talking positively about the company. During that time, the
stock price increased 16.7% and trading volume increased more
than 19,300%. Then, between September 17 and 18, 2015, Loflin
sold 68 million shares for $12,400.
d.
Fourth, between October 26 and 28, 2015, 13 email blasts were
issued talking positively about the company. During that time, the
stock price increased 233% and trading volume increased more
than 23,000%. Then, between November 2 and 17, 2015, Loflin
sold 20 million shares he had acquired for $3,900.
53.
Loflin continued to trade his shares from December 30, 2015 to May 2,
2017 for proceeds of about $93,000. Overall, Loflin received about $152,800 in
trading proceeds.
FIRST CLAIM FOR RELIEF
Fraud in Connection with the Purchase or Sale of Securities
Violations of Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c)
54.
53 above.
55.
The SEC realleges and incorporates by reference paragraphs 1 through
As alleged above, Loflin engaged in a fraudulent pump-and-dump
scheme that allowed him to quickly profit from the sale of Greenway shares without
registering the sale of those shares as required by the federal securities laws. In
particular, and as alleged in more detail above, Loflin concealed Individual A’s
COMPLAINT Page 15
control of and affiliation with Greenway, prepared false and misleading documents,
to give the appearance that Loflin was not an Greenway affiliate, obtained a false and
misleading attorney opinion letters, lied to and misled his broker and the Greenway
transfer agent to facilitate the conversion of the notes to tradeable shares, organized a
promotional campaign to drive the stock price up, and then sold his shares for profit
into the public market.
56.
By engaging in the conduct described above, Loflin, directly or
indirectly, in connection with the purchase or sale of a security, by the use of means
or instrumentalities of interstate commerce, of the mails, or of the facilities of a
national securities exchange: (a) employed devices, schemes, or artifices to defraud;
and (b) engaged in acts, practices, or courses of business which operated or would
operate as a fraud or deceit upon other persons.
57.
Loflin knew, or was reckless in not knowing, that he employed devices,
schemes or artifices to defraud and engaged in acts, practices, or courses of business
that operated as a fraud upon other persons by the conduct described in detail above.
58.
By engaging in the conduct described above, Loflin, violated, and unless
restrained and enjoined will continue to violate, Section 10(b) of the Exchange Act,
15 U.S.C. § 78j(b), and Rules10b-5(a) and 10b-5(c) thereunder, 17 C.F.R.
§§ 240.10b-5(a) and 240.10b-5(c).
SECOND CLAIM FOR RELIEF
Violations of Sections 17(a)(1) and (3) of the Securities Act
59.
53 above.
60.
The SEC realleges and incorporates by reference paragraphs 1 through
As alleged above, Loflin engaged in a fraudulent pump-and-dump
scheme that allowed him to quickly profit from the sale of Greenway shares without
registering the sale of those shares as required by the federal securities laws. In
particular, and as alleged in more detail above, Loflin concealed Individual A’s
control of and affiliation with Greenway, prepared false and misleading documents to
COMPLAINT Page 16
give the appearance that Loflin was not an Greenway affiliate, obtained a false and
misleading attorney opinion letters, lied to and misled his broker and the Greenway
transfer agent to facilitate the conversion of the notes to tradeable shares, organized a
promotional campaign to drive the stock price up, and then sold his shares for profit
into the public market.
61.
By engaging in the conduct described above, Loflin, directly or
indirectly, in the offer or sale of securities, and by the use of means or instruments of
transportation or communication in interstate commerce or by use of the mails,
employed devices, schemes, or artifices to defraud; and engaged in transactions,
practices, or courses of business which operated or would operate as a fraud or deceit
upon the purchaser.
62.
Loflin knew, or was reckless or negligent in not knowing, that he
employed devices, schemes or artifices to defraud and engaged in acts, practices, or
courses of business that operated as a fraud upon other persons by the conduct
described in detail above.
63.
By engaging in the conduct described above, Loflin violated, and unless
restrained and enjoined will continue to violate, Sections 17(a)(1) and 17(a)(3) of the
Securities Act, 15 U.S.C. §§ 77q(a)(1), and 77q(a)(3).
THIRD CLAIM FOR RELIEF
Fraud in the Connection with the Purchase or Sale of Securities
Violations of Section 10(b) of the Exchange Act and Rule 10b-5(b)
64.
53 above.
65.
The SEC realleges and incorporates by reference paragraphs 1 through
As alleged above, Loflin made materially false and misleading
statements that: (a) he was not an affiliate of Greenway, even though Individual A
controlled his Greenway-related activities and Greenway itself; (b) the backdated
2011 note was convertible, even though it was not and consequently could not be the
basis of obtaining or depositing stock certificates; and (c) he was not acting in concert
COMPLAINT Page 17
with anyone regarding Greenway stock, even though he worked with Individual A to
acquire shares of the company’s stock, organize a promotional campaign, and sell
shares into the artificially inflated market that Loflin and Individual A created.
66.
By engaging in the conduct described above, Loflin, directly or
indirectly, in connection with the purchase or sale of a security, and by the use of
means or instrumentalities of interstate commerce, of the mails, or of the facilities of
a national securities exchange, made untrue statements of material fact or omitted to
state a material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
67.
Loflin knew, or was reckless in not knowing, that he made untrue
statements of material fact or omitted to state a material fact necessary in order to
make the statements made, in light of the circumstances under which they were made,
not misleading.
68.
By engaging in the conduct described above, Loflin violated, and unless
restrained and enjoined will continue to violate, Section 10(b) of the Exchange Act,
Violations of Section 17(a)(2) of the Securities Act
69.
53 above.
70.
The SEC realleges and incorporates by reference paragraphs 1 through
As alleged above, Loflin obtained money by means of materially false
and misleading statements that: (a) he was not an affiliate of Greenway, even though
Individual A controlled his Greenway-related activities and Greenway itself; (b) the
backdated 2011 note was convertible, even though it was not and consequently could
not be the basis of obtaining or depositing stock certificates; and (c) he was not acting
in concert with anyone regarding Greenway stock, even though he worked with
Individual A to acquire shares of the company’s stock, organize a promotional
COMPLAINT Page 18
campaign, and sell shares into the artificially inflated market that Loflin and
Individual A created. By means of these statements, Loflin was able to deposit the
Greenway shares into his brokerage account, sell them in the open market, and obtain
money in the form of trading proceeds.
71.
By engaging in the conduct described above, Loflin, directly or
indirectly, in the offer or sale of securities, and by the use of means or instruments of
transportation or communication in interstate commerce or by use of the mails,
obtained money or property by means of untrue statements of a material fact or by
omitting to state a material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading.
72.
Loflin knew, or was reckless or negligent in not knowing, that he
obtained money or property by means of untrue statements of a material fact or by
omitting to state a material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading.
73.
By engaging in the conduct described above, Loflin violated, and unless
restrained and enjoined will continue to violate, Section 17(a)(2) of the Securities
Act, 15 U.S.C. § 77q(a)(2).
FIFTH CLAIM FOR RELIEF
Unregistered Offer and Sale of Securities
Violations of Sections 5(a) and 5(c) of the Securities Act
74.
53 above.
75.
The SEC realleges and incorporates by reference paragraphs 1 through
As alleged above, Loflin’s sale of Greenway shares was not registered
with the SEC, and no exemption to the registration requirements was available.
Loflin was an underwriter, so his sales were not exempt under Section 4(a)(1) of the
Securities Act. Additionally, Loflin was not able to rely on the Rule 144 safe harbor
for his sales because he was an affiliate of Greenway who had not held his shares for
one year before selling them.
COMPLAINT Page 19
76.
By engaging in the conduct described above, Loflin, directly or
indirectly, singly and in concert with others, has made use of the means or
instruments of transportation or communication in interstate commerce, or of the
mails, to offer to sell or to sell securities, or carried or caused to be carried through
the mails or in interstate commerce, by means of instruments of transportation,
securities for the purpose of sale or for delivery after sale, when no registration
statement had been filed or was in effect as to such securities, and when no
exemption from registration was applicable.
77.
By engaging in the conduct described above, Loflin violated, and unless
restrained and enjoined will continue to violate, Sections 5(a) and 5(c) of the
Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c).
PRAYER FOR RELIEF
WHEREFORE, the SEC respectfully requests that the Court:
I.
Issue findings of fact and conclusions of law that Defendant committed the
alleged violations.
II.
Issue a judgment, in a form consistent with Rule 65(d) of the Federal Rules of
Civil Procedure, permanently enjoining Loflin and his officers, agents, servants,
employees and attorneys, and those persons in active concert or participation with
any of them, who receive actual notice of the judgment by personal service or
otherwise, and each of them, from violating Sections 5(a), 5(c), and 17(a) of the
Securities Act, 15 U.S.C. §§ 77e(a), 77e(c), and 77q(a), and Section 10(b) of the
Order Defendant to disgorge all funds received from their illegal conduct,
together with prejudgment interest thereon.
COMPLAINT Page 20
IV.
Order Defendant to pay a civil penalty under Section 20(d) of the Securities
Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C.
§ 78u(d)(3).
V.
Enter an order against Defendant pursuant to Section 20(e) of the Securities
Act and Section 21(d)(2) of the Exchange Act, 15 U.S.C. § 77t(e) and 15 U.S.C.
§ 78u(d)(2), prohibiting him from acting as an officer or director of any issuer that
has a class of securities registered pursuant to Section 12 of the Exchange Act,
U.S.C. § 78l, or that is required to file reports pursuant to Section 15(d) of the
Exchange Act, 78 U.S.C. § 78o(d).
VI.
Enter an order against Defendant prohibiting him from participating in any
offering of penny stock pursuant to Section 20(g) of the Securities Act, 15 U.S.C. §
77t(g), and Section 21(d)(6) of the Exchange Act, 15 U.S.C. § 78u(d)(6).
VII.
Retain jurisdiction of this action in accordance with the principles of equity and
the Federal Rules of Civil Procedure in order to implement and carry out the terms of
all orders and decrees that may be entered, or to entertain any suitable application or
motion for additional relief within the jurisdiction of this Court.
VIII.
Grant such other and further relief as this Court may determine to be just and
necessary.
24 Dated: April 19, /s/ Roberto A. Tercero
Roberto A. Tercero
Attorney for Plaintiff
Securities and Exchange Commission
COMPLAINT
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Roberto A. Tercero (Cal. Bar No. 143760)
Email: terceror@sec.gov
Attorney for Plaintiff
Securities and Exchange Commission
Michele Wein Layne, Regional Director
John W. Berry, Associate Regional Director
Amy J. Longo, Regional Trial Counsel
444 S. Flower Street, Suite 900
Los Angeles, California 90071
Telephone: (323) 965-3998
Facsimile: (213) 443-1904
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9
UNITED STATES DISTRICT COURT
10
DISTRICT OF ARIZONA
11
12
13
Securities and Exchange Commission,
Plaintiff,
14
15
vs.
16
David M. Loflin,
17
No.
COMPLAINT
Defendant.
18
19
20
Plaintiff Securities and Exchange Commission (“SEC”) alleges:
21
22
SUMMARY
1.
This case concerns a fraudulent “pump-and-dump” scheme by
23
Defendant David M. Loflin (“Loflin”). As part of this scheme, Loflin obtained shares
24
of stock of a small public company, Greenway Design Group, Inc. (“Greenway”),
25
disseminated positive hype about the company to “pump” up its stock price and
26
stimulate trading, and then sold the stock, or “dumped” it, at a profit. The stock
27
price, as is typical in schemes like this, then fell, and those unsuspecting investors
28
who continued to hold the stock lost money.
COMPLAINT
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2.
Loflin worked with a now-deceased co-fraudster (“Individual A”) to
2
obtain shares of Greenway stock using convertible promissory notes issued by the
3
company. They converted portions of the convertible notes into Greenway stock
4
between October 2014 and December 2016. For Loflin to be able to immediately sell
5
the Greenway shares after converting the notes, he needed to obtain stock certificates
6
without restrictive legends on them. Restrictive legends notify prospective
7
purchasers that a registration statement for the sale of the stock must be filed with the
8
SEC or, alternatively, that a regulatory exemption to that registration requirement
9
exists. To obtain certificates without these restrictive legends, and to deposit the
10
shares into his brokerage account for subsequent resale, Loflin misled his broker and
11
Greenway’s transfer agent, who issued the certificates, into believing that the stock
12
sales were exempt from the SEC’s registration requirements.
13
3.
Loflin and Individual A then organized a “pump” of Greenway stock.
14
They hired a promoter who organized a promotional campaign through stock touters.
15
The touters in turn sent out blast emails to hype Greenway stock concurrent with
16
Greenway press releases written by Loflin and Individual A. This pump coincided
17
with a substantial increase in Greenway’s share price and trading volume. Loflin and
18
Individual A sold their Greenway stock between January 2015 and May 2017, and
19
Loflin made about $152,800 from those sales.
20
4.
In deceiving the transfer agent and the brokerage firm, Loflin also
21
deceived Greenway investors. Transfer agents and brokerage firms are gatekeepers
22
who must take steps to ensure that they do not participate in illegal offerings. They
23
seek assurances that their customers can rely on a valid exemption before selling
24
securities into the public market. Here, because Loflin deceived the brokerage firm
25
into allowing him to make unregistered sales of Greenway shares, the purchasers of
26
those shares were deprived of the information that they otherwise would have been
27
entitled to receive in a registration statement filed with the SEC, including
28
information regarding the fact that Greenway affiliates were dumping their stock.
COMPLAINT
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5.
By this conduct, Loflin violated Sections 5(a), 5(c), 17(a) of the
2
Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§ 77e(a), 77e(c), and 77q(a);
3
Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C.
4
§ 78j(b); and Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5.
5
6.
With this complaint, the SEC seeks an order permanently enjoining
6
Loflin from future violations of the registration provisions of the Securities Act and
7
the antifraud provisions of the Securities Act and the Exchange Act, requiring him to
8
pay disgorgement plus prejudgment interest and a civil penalty, barring him from
9
acting as an officer or director of a public company, and barring him from offering or
10
selling penny stock.
11
12
JURISDICTION AND VENUE
7.
The Court has jurisdiction over this action pursuant to Sections 20(b),
13
20(d)(1), and 22(a) of the Securities Act, 15 U.S.C. §§ 77t(b), 77t(d)(1), and 77v(a),
14
and Sections 21(d)(1), 21(d)(3)(A), 21(e), and 27 of the Exchange Act, 15 U.S.C.
15
§§ 78u(d)(1), 78u(d)(3)(A), 78u(e), and 78aa.
16
8.
Defendant has, directly or indirectly, made use of the means or
17
instrumentalities of interstate commerce, of the mails, or of the facilities of a national
18
securities exchange in connection with the transactions, acts, practices and courses of
19
business alleged in this complaint.
20
9.
Venue is proper in this district pursuant Section 22(a) of the Securities
21
Act, 15 U.S.C. § 77v(a), and Section 27 of the Exchange Act 15 U.S.C. § 78aa.
22
because certain of the transactions, acts, practices and courses of conduct constituting
23
violations of the federal securities laws occurred within this district.
24
25
THE DEFENDANT
10.
David M. Loflin resides in Baton Rouge, Louisiana. He has been a
26
CEO of public and private companies for eighteen years. He worked with
27
Individual A with respect to a number of public companies, including Greenway.
28
Individual A is now deceased.
COMPLAINT
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2
THE ISSUER
11.
Greenway Design Group, Inc. is a Delaware corporation with
3
headquarters until December 2017 in Phoenix, Arizona, at which time it moved to
4
Upland, California. From 2010 to February 2018, Greenway’s stock was quoted
5
under the ticker symbol “GDGI” on OTC Link, operated by OTC Markets Group,
6
Inc. (“OTC Markets”). It is a non-reporting company and makes submissions to OTC
7
Markets. From 2010 to February 2018, Greenway purportedly produced and
8
distributed consumer air conditioning cooling systems; it also entered the cannabis
9
market in 2016. It was originally incorporated as Prescription Corporation of
10
America in 1986 and changed its name to Voice Networkx, Inc. in 2009 and
11
Greenway Design Group, Inc. in 2010. In December 2017, the company entered into
12
a reverse merger and was renamed Redwood Scientific Technologies, Inc. in
13
February 2018. Its stock is now quoted on OTC Link under the ticker symbol
14
“RSCI.”
15
THE ALLEGATIONS
16
A.
Loflin’s and Individual A’s General Scheme
17
12.
In general, Loflin and Individual A conducted their pump-and-dump
18
schemes using microcap companies, such as Greenway. Microcap companies are
19
companies whose stock is traded publicly in the over-the-counter market, such as
20
OTC Link, at less than $5 per share and often for less than a penny per share.
21
13.
Individual A usually searched for a microcap company that was
22
available for merger or appeared to be in need of funding. He would then acquire a
23
controlling interest in the company by purchasing a large block of its stock through a
24
nominee and operate the company through a CEO whom he controlled. Individual A
25
then brought in Loflin to work with him in running the company, although
26
Individual A directed all of Loflin’s activities regarding the acquired microcap
27
company.
28
14.
COMPLAINT
Loflin and Individual A would then acquire convertible promissory notes
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of the company; convert them into shares; convince the transfer agent issue stock
2
certificates for the shares without restrictive legends; and deposit them with their
3
brokerage firm. Loflin and Individual A then organized a promotional campaign to
4
boost, or “pump,” the share price of the company’s stock. They then sold, or
5
“dumped,” their shares onto the public through the over-the-counter market.
6
B.
SEC Registration Requirements and Rule 144
7
15.
In order to sell the shares, Loflin and Individual A had to comply with
8
Section 5 of the Securities Act. The Securities Act protects investors by ensuring that
9
companies issuing securities fully disclose information relevant to a public offering.
10
One of the most important aspects of the Securities Act is its registration requirement
11
under Section 5, which, unless some exemption exists, requires offers and sales of
12
securities to be registered with the SEC. That requirement is central to protecting
13
public investors, because it is designed to assure that material facts bearing on the
14
value of publicly-traded securities are made available and disclosed to the investing
15
public.
16
16.
Specific exemptions under the Securities Act allow some offers or sales
17
of securities to be made without registering them with the SEC. One of those
18
exemptions is found in Section 4(a)(1) of the Act. While Section 5 generally requires
19
registration for the flow of securities from an issuer to investors, the premise of the
20
Section 4(a)(1) exemption is that registration is no longer necessary for further sales
21
once the shares come to rest with public investors.
22
17.
Section 4(a)(1) exempts “transactions by any person other than an issuer,
23
underwriter, or dealer.” 15 U.S.C. § 77d(a)(1). An underwriter is defined to include
24
anyone who purchased a security from “an issuer with a view to” later “distribut[e]”
25
the security to others, or anyone who “offers or sells” securities “for an issuer” in
26
connection with the distribution of those securities. For this definition of an
27
underwriter, an “issuer” is additionally defined to include “any person directly or
28
indirectly controlling or controlled by the issuer, or any person under direct or
COMPLAINT
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2
indirect common control with the issuer.”
18.
Rule 144 of the Securities Act creates a “safe harbor” from the
3
underwriter definition for persons seeking to resell stock they acquired directly from
4
an issuer or an affiliate of an issuer – often called “restricted securities.” 17 C.F.R.
5
§ 230.144. Under Rule 144, an affiliate of an issuer “is a person that directly, or
6
indirectly through one or more intermediaries, controls, or is controlled by, or is
7
under common control with” the issuer. 17 C.F.R. § 230.144. A person satisfying
8
the applicable conditions of the Rule 144 safe harbor is deemed not to be an
9
underwriter for purposes of the Section 4(a)(1) registration exemption, and therefore
10
11
can sell the restricted securities without having to register the sale with the SEC.
19.
One of the requirements for Rule 144’s safe harbor is that the restricted
12
securities had to be held for more than a year before they could be resold again.
13
Rule 144 provides that the one-year holding period does not begin until the full
14
purchase price is paid by the person acquiring the securities from the issuer or from
15
an affiliate of the issuer. Under certain conditions, a seller can include, or “tack,” the
16
holding period of the previous owner of the stock. Tacking is not permitted,
17
however, if the previous owner of the stock is an affiliate of the issuer.
18
19
20
20.
Here, Greenway and Individual A, because Individual A controlled
Greenway, were both the issuers of the stock.
21.
Also, Individual A used a nominee entity to acquire some of the
21
Greenway stock (“Stock Trading Company”). That entity was both an affiliate of the
22
issuers and an issuer itself, since it and Greenway were under the common control of
23
Individual A.
24
22.
Likewise, Loflin was an affiliate of the issuers because he too was under
25
common control of Individual A, who directed all of Loflin’s activities with respect
26
to Greenway.
27
28
23.
Moreover, Loflin was an underwriter when he sold the Greenway shares
he had acquired. That is because he had acquired all of his Greenway shares of stock
COMPLAINT
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from an issuer – either from Greenway itself or from Individual A’s Stock Trading
2
Company. Also, Loflin had acquired the Greenway shares with a view to later
3
distribute the stock to others in the public market as part of the pump-and-dump
4
scheme.
5
24.
Because Loflin was an underwriter for any sales of Greenway stock out
6
of his brokerage account, he was required to register those sales with the SEC, unless
7
he came within the Rule 144 safe harbor. But Loflin had not held the Greenway
8
stock for a year, and so the safe harbor could not apply.
9
25.
Moreover, Loflin could not “tack” on the time the stock was held by the
10
previous owners of the stock in order to meet the one-year holding period if the
11
previous owner was an affiliate of the issuer (such as the Stock Trading Company).
12
So, as alleged in more detail below, he misled the transfer agent and his broker about
13
his affiliate status and the amount of time that he had held his Greenway shares.
14
C.
15
16
The Greenway Pump-and-Dump
1.
26.
The acquisition of Greenway
In 2013, Individual A approached Greenway’s CEO about acquiring the
17
company. The CEO was interested in selling Greenway because he was broke and
18
the company had no assets. During the negotiations, the CEO informed Individual A
19
that Greenway owed money on a loan made in 2011, which was documented in a
20
promissory note. Individual A expressed interest in buying the note if it could be
21
recast as a convertible promissory note, and the CEO secured the lender’s willingness
22
to do so. Individual A then offered to buy a controlling interest in Greenway by
23
paying the CEO $40,000 for his control block of Greenway stock. Individual A said
24
that the CEO could remain in that position, but only if he ran the company as
25
Individual A instructed. The CEO agreed.
26
27.
Individual A also offered to buy some or all of the 2011 promissory
27
note, once it was made convertible, from the lender. Individual A would then sell
28
portions of the note to Loflin so that they could each convert their respective portions
COMPLAINT
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2
of the note into shares and sell them.
28.
Neither Loflin or Individual A, however, wanted to disclose
3
Individual A’s ownership of or control over Greenway or the convertible promissory
4
note – because that would reveal that Individual A and his Stock Trading Company
5
were affiliates of the company. If it was known that Individual A and the Stock
6
Trading Company were affiliates, then “tacking” of the one-year holding period
7
under Rule 144 would not be allowed for Loflin’s note purchases from the Stock
8
Trading Company. As such, Loflin would not be deemed to have held the Greenway
9
stock for one year and, therefore, would not be able to immediately sell his Greenway
10
11
shares of stock under Rule 144.
29.
For that reason, Individual A decided to acquire controlling ownership of
12
Greenway using a private company to conceal his ownership and control of the
13
company. At Loflin’s suggestion, Individual A convinced Loflin’s colleague
14
(“Individual B”) to create the private holding company and to use money supplied by
15
Individual A to purchase the controlling block of shares held by the puppet CEO.
16
Individual B completed the purchase using the private holding company in 2013.
17
18
2.
30.
Loflin’s acquisition of convertible promissory notes
In 2013, Individual A put Greenway’s CEO in touch with Loflin, who
19
prepared a backdated convertible promissory note to replace the 2011 note. Loflin
20
also prepared an agreement for the sale of the note from the lender and original
21
holder of the note to the Stock Trading Company.
22
31.
From September 2014 through 2016, Loflin and Individual A acquired
23
portions of the backdated convertible promissory note. Individual A also had the
24
Stock Trading Company make loans to Greenway in return for additional convertible
25
promissory notes. Additionally, Loflin received another convertible promissory note
26
as compensation for services allegedly to be rendered under a consulting agreement
27
that he entered into with Greenway.
28
32.
COMPLAINT
For each note purchase, Loflin prepared a sales agreement. It was
8
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signed by the seller (the lender under the backdated note, Loflin, or Individual A for
2
the Stock Trading Company), purchaser (Loflin or Individual A for the Stock Trading
3
Company), and Greenway by its CEO, as an interested third party consenting to the
4
transaction. Loflin also prepared the consulting agreement between himself and
5
Greenway. And Loflin also prepared each of the convertible promissory notes.
6
7
33.
Loflin’s whole and partial convertible promissory note acquisitions were
as follows:
a.
8
On December 19, 2014, Loflin paid $2,500 for a portion of the
note backdated to 2011.
9
b.
10
On July 12, 2015, Loflin agreed to provide consulting services to
11
Greenway until January 12, 2016, in return for a convertible
12
promissory note in the amount of $15,000.
c.
13
Stock Trading Company’s convertible promissory notes.
14
15
On September 30, 2015, Loflin purchased a portion of one of the
34.
In the sales agreement for Loflin’s September 30, 2015 convertible
16
promissory note purchase, the Stock Trading Company, which sold the note, stated
17
that it was not an affiliate of Greenway. This statement was false and misleading.
18
The Stock Trading Company was an affiliate because it and Greenway were under
19
Individual A’s control. Loflin, therefore, could not tack the seller’s holding period to
20
his own.
3.
21
22
35.
Loflin’s conversion of portions of his convertible notes
From October 2014 to December 2016, Loflin and Individual A
23
converted their interests in the notes into Greenway shares of stock. Loflin’s
24
conversions were as follows:
a.
25
On the same day that he acquired it, December 19, 2014, Loflin
26
converted the entire portion of the convertible promissory note
27
backdated to 2011. Because he converted it the same day he
28
purchased it, he held the shares for much less than the required
COMPLAINT
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Rule 144 one-year holding period.
b.
2
On August 10, 2016, Loflin converted $1,200 of the $15,000
3
convertible promissory note he had acquired in July 2015 for his
4
alleged consulting services. Loflin’s alleged consulting services
5
were for a term ending January 12, 2016, which would have been
6
the date that the one-year holding period would have begun.
7
Therefore, Loflin only held the shares for eight months.
c.
8
On September 30, 2015, Loflin converted $200 of the portion of
the convertible promissory note he purchased from the Stock
9
10
Trading Company that same day. Therefore, he had held it, and
11
the shares that could be converted from it, for just one day rather
12
than one year. Because the Stock Trading Company was an
13
affiliate (Individual A controlled it and Greenway), Loflin could
14
not tack on the Stock Trading Company’s holding period.
15
36.
For the conversion of the backdated 2011 note, Loflin and Greenway
16
entered into an agreement under which Loflin agreed to cancel the amount of the debt
17
being converted in return for Greenway shares of stock. In the agreement, Loflin
18
stated that he was not an affiliate of Greenway. This statement was false and
19
misleading because Individual A controlled Loflin and Greenway.
4.
20
21
37.
Loflin obtains false attorney opinion letters
Loflin and the Stock Trading Company then retained counsel to prepare
22
opinion letters for each conversion opining that their future sales of their respective
23
Greenway stock complied with the safe harbor of Rule 144. Without such an opinion
24
letter, transfer agents will not issue a stock certificate without a restrictive legend, and
25
brokerage firms will not accept a stock certificate for deposit into a customer account,
26
much less allow the subsequent sale of those shares from that account.
27
28
38.
Loflin prepared a package (“note conversion package”) for the attorney
of each note conversion. The packages consisted of documents prepared by Loflin:
COMPLAINT
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the sales agreement for acquisition of the portion of the note, except for one which
2
contained Loflin’s consulting agreement; a representation letter by Loflin that he was
3
not an affiliate of Greenway; a Greenway board resolution authorizing the issuance of
4
shares pursuant to the conversion; and a letter to the transfer agent instructing it to
5
issue the requested shares.
6
39.
Loflin’s representation letters, however, were false and misleading.
7
Because he was planning on immediately reselling the stock he purchased from the
8
issuers (or an affiliate of an issuer), and thus was an underwriter, Loflin needed to be
9
able to convince the transfer agent and the broker that he could “tack” on the holding
10
periods of the prior stock owners to satisfy Rule 144’s one-year holding requirement.
11
To do that, he had to claim that he had not acquired the stock from any affiliates.
12
40.
Each representation letter Loflin included in the note conversion
13
packages falsely stated that he was not a Greenway affiliate, even though he, and
14
Greenway, were controlled by Individual A.
15
41.
The attorney opinion letters stated that the transfer agent could issue,
16
without restrictive legend, the share certificates requested by Loflin because he had
17
complied with the Rule 144 safe harbor. The opinion letters, however, were based
18
upon the false statements that Loflin was not an affiliate and that Loflin had met the
19
one-year holding period.
20
42.
For the shares from the backdated 2011 note that Loflin purchased, the
21
attorney opinion letter concluded that the one-year holding period had been met, but
22
the note never had a convertible feature and was backdated to give that false
23
impression. Consequently, the shares never existed under the note and the holding-
24
period never began.
25
43.
For the shares from the note that Loflin purchased from the Stock
26
Trading Company, the attorney opinion letter concluded that Loflin could tack the
27
time that the Stock Trading Company’s holding period. Loflin, however, could not
28
tack that time because the Stock Trading Company was an affiliate. For the shares
COMPLAINT
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under the consulting agreement, the letter incorrectly claimed that the holding period
2
began on the day that the Greenway issued the note.
3
5.
44.
4
Loflin obtains stock certificates without restrictive legends
After Loflin received each attorney opinion letter for his shares, he
5
combined it with the associated note conversion package and sent it to Greenway’s
6
transfer agent with instructions to issue a stock certificate without a restrictive legend
7
for the number of shares converted. The transfer agent then issued the stock
8
certificate as requested and sent it to Loflin.
45.
9
On January 7, 2015, October 7, 2015, and August 24, 2016, Loflin
10
submitted a deposit security request (“DSR”) for each stock certificate to his broker
11
so that the shares could be deposited into his brokerage account. Each DSR consisted
12
of a deposit application on the brokerage firm’s form, the stock certificate, the note
13
conversion package, and the attorney opinion letter. Loflin signed each deposit
14
application under penalty of perjury, but each one contained false and misleading
15
statements besides the ones contained in the note conversion packages.
46.
16
First, Loflin falsely swore that he was not an affiliate of Greenway, even
17
though he was because he and the company were under Individual A’s control. The
18
brokerage firm would not have accepted Loflin’s DSR had it known his true affiliate
19
status.
20
47.
Second and for the DSR related to the backdated 2011 note, Loflin
21
swore falsely that the note was convertible, even though it was not. The brokerage
22
firm would not have accepted the Loflin’s DSR had it known that its customer was
23
trying to deposit shares that were not bona fide and had been procured by deceit.
24
48.
Third, Loflin falsely swore in each DSR that he was not acting in concert
25
with anyone regarding Greenway stock, even though he was executing a plan with
26
Individual A to acquire shares of the company’s stock, organize a promotional
27
campaign, and sell the shares into the artificially inflated market that Loflin and
28
Individual A created. The brokerage firm would not have accepted Loflin’s DSRs
COMPLAINT
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2
had it been given the true facts.
49.
Based upon the DSR, Loflin’s broker accepted each of his Greenway
3
stock certificates and placed the stock into his brokerage account. Consequently,
4
Loflin could sell the shares of stock through the public market. Individual A
5
followed the same process for the Stock Trading Company’s shares thereby also
6
making its shares available for public sale.
7
8
9
6.
50.
Loflin and Individual A “pump” Greenway stock
In order to increase Greenway’s stock price, Loflin and Individual A
orchestrated a promotional campaign. They hired Individual B, who had at least 15
10
years’ experience promoting companies and their securities. Individual B used
11
approximately 11 stock touters to send mass emails hyping Greenway as an
12
investment. Individual A also prepared press releases for Greenway, which Loflin
13
reviewed and edited. Greenway issued the press releases during the same period that
14
the stock touters sent their email blasts.
15
51.
The promotional campaign began on January 29, 2015, and was
16
concentrated into four periods. The email blasts spoke of a Greenway investment in
17
glowing terms. For instance, one email characterized Greenway stock as “a sub
18
penny play with tons of upside potential.” Another stated “We are putting Greenway
19
on steroid alert for Friday’s [sic] Trading.”
20
52.
The promotional campaign coincided with increases in Greenway’s
21
stock price and trading volume and Loflin’s and the Stock Trading Company’s stock
22
sales as follows:
a.
23
First, between January 29 and 30, 2015, four email blasts and one
24
Greenway press release were issued talking positively about the
25
company. During that time, the stock price increased 57% and
26
trading volume increased 5,700%. Then, between January 30 and
27
February 11, 2015, Loflin then sold 50 million shares he had
28
acquired for $21,900.
COMPLAINT
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1
b.
Second, between May 13 and 15, 2015, four email blasts and one
2
Greenway press release were issued talking positively about the
3
company. During that time, the stock price increased 125% and
4
trading volume increased 1,134%. Then, between May 14 and
5
June 29, 2015, Loflin sold 34.85 million shares he had acquired
6
for $21,600.
c.
7
Third, between September 16 and 17, 2015, two email blasts were
8
issued talking positively about the company. During that time, the
9
stock price increased 16.7% and trading volume increased more
10
than 19,300%. Then, between September 17 and 18, 2015, Loflin
11
sold 68 million shares for $12,400.
d.
12
Fourth, between October 26 and 28, 2015, 13 email blasts were
13
issued talking positively about the company. During that time, the
14
stock price increased 233% and trading volume increased more
15
than 23,000%. Then, between November 2 and 17, 2015, Loflin
16
sold 20 million shares he had acquired for $3,900.
17
53.
Loflin continued to trade his shares from December 30, 2015 to May 2,
18
2017 for proceeds of about $93,000. Overall, Loflin received about $152,800 in
19
trading proceeds.
20
FIRST CLAIM FOR RELIEF
21
Fraud in Connection with the Purchase or Sale of Securities
22
Violations of Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c)
23
54.
24
53 above.
25
55.
The SEC realleges and incorporates by reference paragraphs 1 through
As alleged above, Loflin engaged in a fraudulent pump-and-dump
26
scheme that allowed him to quickly profit from the sale of Greenway shares without
27
registering the sale of those shares as required by the federal securities laws. In
28
particular, and as alleged in more detail above, Loflin concealed Individual A’s
COMPLAINT
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1
control of and affiliation with Greenway, prepared false and misleading documents,
2
to give the appearance that Loflin was not an Greenway affiliate, obtained a false and
3
misleading attorney opinion letters, lied to and misled his broker and the Greenway
4
transfer agent to facilitate the conversion of the notes to tradeable shares, organized a
5
promotional campaign to drive the stock price up, and then sold his shares for profit
6
into the public market.
7
56.
By engaging in the conduct described above, Loflin, directly or
8
indirectly, in connection with the purchase or sale of a security, by the use of means
9
or instrumentalities of interstate commerce, of the mails, or of the facilities of a
10
national securities exchange: (a) employed devices, schemes, or artifices to defraud;
11
and (b) engaged in acts, practices, or courses of business which operated or would
12
operate as a fraud or deceit upon other persons.
13
57.
Loflin knew, or was reckless in not knowing, that he employed devices,
14
schemes or artifices to defraud and engaged in acts, practices, or courses of business
15
that operated as a fraud upon other persons by the conduct described in detail above.
16
58.
By engaging in the conduct described above, Loflin, violated, and unless
17
restrained and enjoined will continue to violate, Section 10(b) of the Exchange Act,
18
15 U.S.C. § 78j(b), and Rules10b-5(a) and 10b-5(c) thereunder, 17 C.F.R.
19
§§ 240.10b-5(a) and 240.10b-5(c).
20
SECOND CLAIM FOR RELIEF
21
Violations of Sections 17(a)(1) and (3) of the Securities Act
22
59.
23
53 above.
24
60.
The SEC realleges and incorporates by reference paragraphs 1 through
As alleged above, Loflin engaged in a fraudulent pump-and-dump
25
scheme that allowed him to quickly profit from the sale of Greenway shares without
26
registering the sale of those shares as required by the federal securities laws. In
27
particular, and as alleged in more detail above, Loflin concealed Individual A’s
28
control of and affiliation with Greenway, prepared false and misleading documents to
COMPLAINT
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1
give the appearance that Loflin was not an Greenway affiliate, obtained a false and
2
misleading attorney opinion letters, lied to and misled his broker and the Greenway
3
transfer agent to facilitate the conversion of the notes to tradeable shares, organized a
4
promotional campaign to drive the stock price up, and then sold his shares for profit
5
into the public market.
6
61.
By engaging in the conduct described above, Loflin, directly or
7
indirectly, in the offer or sale of securities, and by the use of means or instruments of
8
transportation or communication in interstate commerce or by use of the mails,
9
employed devices, schemes, or artifices to defraud; and engaged in transactions,
10
practices, or courses of business which operated or would operate as a fraud or deceit
11
upon the purchaser.
12
62.
Loflin knew, or was reckless or negligent in not knowing, that he
13
employed devices, schemes or artifices to defraud and engaged in acts, practices, or
14
courses of business that operated as a fraud upon other persons by the conduct
15
described in detail above.
16
63.
By engaging in the conduct described above, Loflin violated, and unless
17
restrained and enjoined will continue to violate, Sections 17(a)(1) and 17(a)(3) of the
18
Securities Act, 15 U.S.C. §§ 77q(a)(1), and 77q(a)(3).
19
THIRD CLAIM FOR RELIEF
20
Fraud in the Connection with the Purchase or Sale of Securities
21
Violations of Section 10(b) of the Exchange Act and Rule 10b-5(b)
22
64.
23
53 above.
24
65.
The SEC realleges and incorporates by reference paragraphs 1 through
As alleged above, Loflin made materially false and misleading
25
statements that: (a) he was not an affiliate of Greenway, even though Individual A
26
controlled his Greenway-related activities and Greenway itself; (b) the backdated
27
2011 note was convertible, even though it was not and consequently could not be the
28
basis of obtaining or depositing stock certificates; and (c) he was not acting in concert
COMPLAINT
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1
with anyone regarding Greenway stock, even though he worked with Individual A to
2
acquire shares of the company’s stock, organize a promotional campaign, and sell
3
shares into the artificially inflated market that Loflin and Individual A created.
4
66.
By engaging in the conduct described above, Loflin, directly or
5
indirectly, in connection with the purchase or sale of a security, and by the use of
6
means or instrumentalities of interstate commerce, of the mails, or of the facilities of
7
a national securities exchange, made untrue statements of material fact or omitted to
8
state a material fact necessary in order to make the statements made, in light of the
9
circumstances under which they were made, not misleading.
10
67.
Loflin knew, or was reckless in not knowing, that he made untrue
11
statements of material fact or omitted to state a material fact necessary in order to
12
make the statements made, in light of the circumstances under which they were made,
13
not misleading.
14
68.
By engaging in the conduct described above, Loflin violated, and unless
15
restrained and enjoined will continue to violate, Section 10(b) of the Exchange Act,
16
15 U.S.C. § 78j(b), and Rule 10b-5(b) thereunder, 17 C.F.R. § 240.10b-5(b).
17
FOURTH CLAIM FOR RELIEF
18
Fraud in the Offer or Sale of Securities
19
Violations of Section 17(a)(2) of the Securities Act
20
69.
21
53 above.
22
70.
The SEC realleges and incorporates by reference paragraphs 1 through
As alleged above, Loflin obtained money by means of materially false
23
and misleading statements that: (a) he was not an affiliate of Greenway, even though
24
Individual A controlled his Greenway-related activities and Greenway itself; (b) the
25
backdated 2011 note was convertible, even though it was not and consequently could
26
not be the basis of obtaining or depositing stock certificates; and (c) he was not acting
27
in concert with anyone regarding Greenway stock, even though he worked with
28
Individual A to acquire shares of the company’s stock, organize a promotional
COMPLAINT
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1
campaign, and sell shares into the artificially inflated market that Loflin and
2
Individual A created. By means of these statements, Loflin was able to deposit the
3
Greenway shares into his brokerage account, sell them in the open market, and obtain
4
money in the form of trading proceeds.
5
71.
By engaging in the conduct described above, Loflin, directly or
6
indirectly, in the offer or sale of securities, and by the use of means or instruments of
7
transportation or communication in interstate commerce or by use of the mails,
8
obtained money or property by means of untrue statements of a material fact or by
9
omitting to state a material fact necessary in order to make the statements made, in
10
11
light of the circumstances under which they were made, not misleading.
72.
Loflin knew, or was reckless or negligent in not knowing, that he
12
obtained money or property by means of untrue statements of a material fact or by
13
omitting to state a material fact necessary in order to make the statements made, in
14
light of the circumstances under which they were made, not misleading.
15
73.
By engaging in the conduct described above, Loflin violated, and unless
16
restrained and enjoined will continue to violate, Section 17(a)(2) of the Securities
17
Act, 15 U.S.C. § 77q(a)(2).
18
FIFTH CLAIM FOR RELIEF
19
Unregistered Offer and Sale of Securities
20
Violations of Sections 5(a) and 5(c) of the Securities Act
21
74.
22
53 above.
23
75.
The SEC realleges and incorporates by reference paragraphs 1 through
As alleged above, Loflin’s sale of Greenway shares was not registered
24
with the SEC, and no exemption to the registration requirements was available.
25
Loflin was an underwriter, so his sales were not exempt under Section 4(a)(1) of the
26
Securities Act. Additionally, Loflin was not able to rely on the Rule 144 safe harbor
27
for his sales because he was an affiliate of Greenway who had not held his shares for
28
one year before selling them.
COMPLAINT
18
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1
76.
By engaging in the conduct described above, Loflin, directly or
2
indirectly, singly and in concert with others, has made use of the means or
3
instruments of transportation or communication in interstate commerce, or of the
4
mails, to offer to sell or to sell securities, or carried or caused to be carried through
5
the mails or in interstate commerce, by means of instruments of transportation,
6
securities for the purpose of sale or for delivery after sale, when no registration
7
statement had been filed or was in effect as to such securities, and when no
8
exemption from registration was applicable.
9
77.
By engaging in the conduct described above, Loflin violated, and unless
10
restrained and enjoined will continue to violate, Sections 5(a) and 5(c) of the
11
Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c).
12
13
PRAYER FOR RELIEF
WHEREFORE, the SEC respectfully requests that the Court:
14
15
16
I.
Issue findings of fact and conclusions of law that Defendant committed the
alleged violations.
17
18
II.
Issue a judgment, in a form consistent with Rule 65(d) of the Federal Rules of
19
Civil Procedure, permanently enjoining Loflin and his officers, agents, servants,
20
employees and attorneys, and those persons in active concert or participation with
21
any of them, who receive actual notice of the judgment by personal service or
22
otherwise, and each of them, from violating Sections 5(a), 5(c), and 17(a) of the
23
Securities Act, 15 U.S.C. §§ 77e(a), 77e(c), and 77q(a), and Section 10(b) of the
24
Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5.
25
III.
26
Order Defendant to disgorge all funds received from their illegal conduct,
27
together with prejudgment interest thereon.
28
COMPLAINT
19
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1
2
IV.
Order Defendant to pay a civil penalty under Section 20(d) of the Securities
3
Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C.
4
§ 78u(d)(3).
5
6
V.
Enter an order against Defendant pursuant to Section 20(e) of the Securities
7
Act and Section 21(d)(2) of the Exchange Act, 15 U.S.C. § 77t(e) and 15 U.S.C.
8
§ 78u(d)(2), prohibiting him from acting as an officer or director of any issuer that
9
has a class of securities registered pursuant to Section 12 of the Exchange Act, 15
10
U.S.C. § 78l, or that is required to file reports pursuant to Section 15(d) of the
11
Exchange Act, 78 U.S.C. § 78o(d).
12
13
VI.
Enter an order against Defendant prohibiting him from participating in any
14
offering of penny stock pursuant to Section 20(g) of the Securities Act, 15 U.S.C. §
15
77t(g), and Section 21(d)(6) of the Exchange Act, 15 U.S.C. § 78u(d)(6).
16
17
VII.
Retain jurisdiction of this action in accordance with the principles of equity and
18
the Federal Rules of Civil Procedure in order to implement and carry out the terms of
19
all orders and decrees that may be entered, or to entertain any suitable application or
20
motion for additional relief within the jurisdiction of this Court.
21
22
23
VIII.
Grant such other and further relief as this Court may determine to be just and
necessary.
24 Dated: April 19, 2019
/s/ Roberto A. Tercero
Roberto A. Tercero
Attorney for Plaintiff
Securities and Exchange Commission
25
26
27
28
COMPLAINT
20