Toxic Funders

[Kool Aid Man]

SEC-v-LG CAPITAL FUNDING, LLC, and JOSEPH I. LERMAN,
Defendants, and DANIEL GELLMAN, BORUCH GREENBERG, and
ELI SAFDIEH.
https://www.sec.gov/litigation/complaints/2022/comp25410.pdf

1. From at least January 1, 2016 through at least December 31, 2021 (the “Relevant Period”), LG Capital Funding, LLC (“LG Capital”) and its managing member and 50% owner Joseph I. Lerman (“Lerman”), acted as securities dealers, engaged in the business of buying and selling large volumes of penny stocks for their own account, without being registered as a dealer with the SEC and without Lerman associating with an SEC-registered dealer.

2. LG Capital’s business model – which was carried out under Lerman’s direction and control – involved purchasing convertible promissory notes from penny stock issuers for the exclusive benefit of Lerman and its two other principals, later converting those notes into
unrestricted, newly issued shares of penny stocks at a substantial discount to the then-prevailing market price (typically 35% to 50%), and a quick re-sale of the post-conversion shares into the public markets to capture the benefit of the discount.

3. During the Relevant Period, LG Capital purchased or funded approximately 330 convertible notes of more than 100 different penny stock issuers, the majority repeat customers. It converted at least 150 of the 330 convertible notes into more than 23 billion unrestricted,
newly issued shares of common stock – shares that had never traded publicly until LG Capital introduced them into the public markets.

4. LG Capital’s convertible notes business was lucrative. It generated at least $30 million in gross stock sale proceeds and at least $20 million in profits from its post-conversion sale of shares. Upon information and belief, LG Capital continues to hold unconverted notes and shares derived from converted notes, and is still engaged in the convertible note business today.

5. In practice, LG Capital began to sell post-conversion shares soon after each conversion and derived profits principally from the discounted acquisition price, as opposed to appreciation in the market price of the issuer’s common stock.

6. Lerman at all times controlled and had final authority over LG Capital’s business decisions. His actions committed LG Capital to the initial investments and to the later acquisition and sale of discounted shares. He signed all of the agreements pursuant to which LG Capital
acquired the convertible notes. He signed a majority of the notices that LG Capital used to convert the notes into newly issued, free-trading shares. He controlled LG Capital’s bank accounts and authorized a majority of the funding wires. He controlled LG Capital’s brokerage
accounts and, in connection with a majority of conversions, executed the paperwork needed to deposit the converted shares into LG Capital’s brokerage accounts. He instructed LG Capital’s contract accountant on how to record the transactions in LG Capital’s books and records.

7. By failing to register as securities dealers, and by Lerman’s failure to associate with a registered securities dealer, LG Capital and Lerman avoided the regulatory obligations that govern dealer conduct. Those obligations include submitting to regulatory inspections and oversight, following financial responsibility rules, and maintaining books and records in accordance with applicable regulatory requirements.

8. Relief Defendants Daniel Gellman (“Gellman”), Boruch S. Greenberg
(“Greenberg”), and Eli Safdieh (“Safdieh”) each received a portion of the proceeds of Defendants’ violations, to which they have no legitimate claim.

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