SEC Ties Legend Venture Partners to StraightPath and Seeks Receiver
The SEC asked a judge to put Legend Venture Partners under the same receiver controlling StraightPath Venture Partners. Photo: Stephen Voss for The Wall Street Journal By Ted Bunker June 28, 2023 4:44 pm ET | WSJ Pro A federal judge will soon decide whether to put Legend Venture Partners, which faces civil securities fraud allegations related to pitching pre-IPO shares to individuals, under a receiver to protect what is left of investor assets. The Securities and Exchange Commission sought the action after telling Judge Lewis Kaplan in the U.S. District Court for the Southern District of New York on Tuesday that Legend arose from StraightPath Venture Partners, which also faces securities fraud allegations from the agency. The judge put S
The SEC asked a judge to put Legend Venture Partners under the same receiver controlling StraightPath Venture Partners.
Photo: Stephen Voss for The Wall Street Journal
By
A federal judge will soon decide whether to put Legend Venture Partners, which faces civil securities fraud allegations related to pitching pre-IPO shares to individuals, under a receiver to protect what is left of investor assets.
The Securities and Exchange Commission sought the action after telling Judge Lewis Kaplan in the U.S. District Court for the Southern District of New York on Tuesday that Legend arose from StraightPath Venture Partners, which also faces securities fraud allegations from the agency. The judge put StraightPath under a receiver last year.
On Tuesday, Judge Kaplan issued an injunction to prevent the firm from violating securities laws following a hearing in which Legend lawyers opposed a receivership. The firm’s lawyers have also said the SEC’s securities fraud allegations won’t stand up under court scrutiny.
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Subscribe NowThe SEC has alleged that Legend’s principals managed boiler rooms of sales agents for StraightPath before starting the firm in September 2021 and followed StraightPath’s script in pitching privately held shares to investors. The agency effectively shut down StraightPath, which has denied the fraud charges, in February 2022, about the same time as Legend began soliciting investors, according to court filings.
Lawyers for Legend haven’t filed a formal response to the SEC’s fraud allegation, but they protested the agency’s call for a receiver, saying in court Tuesday that it is unnecessary since the $22.3 million in remaining investor cash has been committed to purchasing shares in seven companies ahead of their expected initial public offerings.
“This is not StraightPath,” Legend lawyer Patrick Smith told the judge. “There are no Ponzi allegations.”
The agency’s complaint against StraightPath said that the Jupiter, Fla.-based firm had collected at least $410 million from around 2,200 individuals since 2017 and used commingled investor cash to make Ponzi-like payments to earlier investors in its funds.
The regulator wants New York-based Legend placed under the same receiver as StraightPath, noting that most Legend investors had also invested in StraightPath funds to acquire shares in pre-IPO companies. But Legend lawyers have argued that the two cases differ markedly.
On Tuesday, SEC lawyers told Judge Kaplan that a receiver is needed to protect what is left for more than 320 investors who ponied up over $35 million for access to seven pre-IPO securities. The agency has said that more than $9 million of that money went into the pockets of Legend principals and over $3.25 million went to sales agents.
In its fraud complaint filed last week, the agency said the firm concealed markups on share prices that averaged from 46% to 105%, even as sales agents and investor communications suggested that the firm wouldn’t charge upfront fees or commissions. The SEC subpoenaed Legend last October, leading the firm to cease soliciting new investments, according to its lawyers.
About a year ago, Judge Kaplan named Melanie Cyganowski, a former bankruptcy court judge now with the Otterbourg law firm in New York, as StraightPath’s receiver. She later reported that the firm had sent more than $30 million to Legend or people associated with it to pay sales commissions.
Smith, the Legend lawyer, has said that there is virtually no cash available to the firm, so nothing for a receiver to protect. In papers filed ahead of Tuesday’s court hearing, he said that Legend “does not concede that the SEC has a fraud claim based upon undisclosed markups” of share prices imposed on investors.
Legend disclosed several times to each investor that there would be markups and that the price they paid “was higher than Legend’s cost, thus advising investors that Legend was not passing through these investments at cost,” Smith said in court filings. “Investors were advised that Legend would earn profit from the price difference.”
According to the SEC, Legend used two former StraightPath boiler rooms—offices in lower Manhattan where some 45 sales agents made hundreds of cold calls daily to solicit investments—and employed unregistered agents. The agency said the firm made little or no effort to determine whether its investors met regulatory requirements to purchase unregistered securities.
Agents pitching Legend funds falsely told investors that it would only collect fees once pre-IPO shares could be converted to publicly traded securities following an IPO, the SEC said, adding that agents told prospective investors that they would double or triple their investments.
Judge Kaplan asked the lawyers for the SEC and Legend to develop an alternative to a receiver and present arguments for and against adopting that alternative by next week.
Write to Ted Bunker at [email protected]
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