SEC Secures Final Judgement Against Fernandez In Jonathan William Mikula Case

On September 30, 2022, the SEC filed a complaint against Defendants Jonathan William Mikula (“William Mikula”), Christian Fernandez (“Fernandez”), Raj Beri (“Beri”), Elegance Brands, Inc. (“Elegance”), Avtar Singh Dhillon (“Dhillon”), Emerald Health Pharmaceuticals Inc. (“Emerald Health”), and James M. DeMesa (“DeMesa”) for engaging in a fraudulent scheme to promote the securities of issuers that were conducting (or purporting to conduct) offerings under Regulation A between 2019 and 2021.

But on February 20, 2024, the Securities and Exchange Commission (SEC) announced that it had secured a final judgment against one of the key Defendants Christian Fernandez.

Regulation A is a provision under the Securities Act exempting certain offerings from registration requirements, provided specific conditions are met. However, Fernandez and others were accused of exploiting this exemption for fraudulent purposes.

The final judgment obtained by the SEC likely includes penalties and sanctions against Fernandez for his involvement in the fraudulent scheme. These could include financial penalties, disgorgement of ill-gotten gains, and potential bans or restrictions on future involvement in securities trading or offerings.

Such enforcement actions by the SEC are essential for maintaining the integrity of the securities markets and protecting investors from fraudulent schemes.

Facts Of The Case

The scheme described involves Defendant Mikula, who is characterized as a repeat offender in violating federal securities laws. Mikula, along with various intermediaries, including Defendants Fernandez and Beri, engaged in promoting securities offerings to subscribers of the Palm Beach Venture newsletter. Mikula held a prominent role in this newsletter as an author and chief analyst.

Despite purported claims of independence in Mikula's analysis and assertions that no one associated with Palm Beach Venture received compensation for promoting the securities, the reality was quite different. Mikula was clandestinely receiving compensation from the issuers of the promoted securities.

The scheme orchestrated by Mikula targeted the securities offerings of four issuers: Elegance Brands, Emerald Health, Cloudastructure, Inc., and Hightimes Holding Corporation. These offerings were purportedly conducted under Regulation A (Reg A), which provides an exemption from certain registration provisions of the Securities Act for qualified public securities offerings.

The revelation that Mikula and his associates, including Fernandez and Beri, received millions of dollars in compensation for promoting the Reg A offerings despite claiming otherwise underscores the deceptive nature of their actions. To conceal the fact that these promotions were paid for, they engaged in a series of elaborate schemes.

Some of the tactics employed to deceive investors and hide the true nature of the promotions included:

a. Arranging Sham Consulting Agreements

Mikula, Fernandez, and Beri orchestrated agreements that falsely portrayed the payments as legitimate compensation for consulting services rendered to the issuers. These agreements were likely designed to create a semblance of legitimacy while serving as a mechanism for funneling illicit payments.

b. Submitting False Invoices

Mikula, Fernandez, and Beri fabricated invoices to provide false documentation for the payments received. These invoices were likely used to create an illusion of business transactions to justify the flow of funds.

C. Funneling Payments Through Multiple Parties And Foreign Accounts

To obfuscate the trail of money and obscure their involvement, Mikula, Fernandez, and Beri utilized a complex network of intermediaries and foreign accounts to receive and transfer the payments. By involving multiple parties and foreign jurisdictions, they likely sought to complicate any attempts at tracing the funds back to their true origins.

Further, the fact that investors purchased more than $80 million in securities from the companies Elegance Brands, Emerald Health, Cloudastructure, and Hightimes during the period of deceptive promotion by Mikula highlights the significant impact of the fraudulent scheme. Despite the fraudulent nature of the promotions and the undisclosed financial interests of Mikula and his associates, investors were led to believe in the legitimacy and value of these securities offerings.

Fernandez’s Role

Fernandez's central role in the promotional scheme highlights his significant involvement in facilitating the fraudulent activities orchestrated by Mikula. As a close associate of Mikula, Fernandez was entrusted with crucial tasks related to managing the illicit funds associated with the promotions.

For instance, Fernandez was responsible for negotiating the portion of the illicit proceeds that Mikula would receive from the issuers or middlemen involved in the scheme. This indicates Fernandez's active participation in ensuring that Mikula benefited financially from the fraudulent promotions. He played a role in generating false invoices to create a facade of legitimacy for the payments made to Mikula. These invoices likely served to deceive regulators, investors, and other stakeholders by providing a false justification for the flow of funds.

Further, Fernandez utilized a network of entities and accounts, many of which were located abroad, to channel the illicit proceeds from the fraudulent promotions. This strategy was likely employed to obscure the trail of funds and minimize the risk of detection or tracing by authorities.

Beri’s Role

Beri's involvement in the fraudulent scheme demonstrates his multifaceted role in facilitating deceptive promotions and illicit financial transactions. As CEO of Elegance Brands, Beri held a position of authority that enabled him to authorize payments for promotional activities. Additionally, he acted as a middleman for Mikula's promotions of Emerald Health and Hightimes.

For instance, in his capacity as CEO of Elegance Brands, Beri had the authority to approve payments for promotional activities. By authorizing these payments, Beri contributed to the financing of Mikula's deceptive promotions, thereby perpetuating the fraudulent scheme.

Furthermore, Beri entered into a sham consulting contract with Emerald Health, ostensibly to provide consulting services in exchange for payments. However, the true purpose of this contract was to disguise the payments as legitimate compensation while funding Mikula's promotion of Emerald Health securities.

Also, Beri facilitated the flow of illicit funds by passing approximately half of the payments collected from Emerald Health to Fernandez, to benefit Mikula. This suggests Beri's active involvement in coordinating the distribution of funds within the fraudulent scheme.

Role Of Elegance, Emerald Health, And Other Affiliated Individuals

The involvement of Elegance and Emerald Health, along with certain affiliated individuals, in the fraudulent scheme suggests a deeper level of complicity in perpetrating securities fraud. Defendants Beri, Dhillon (Emerald Health’s co-founder), and DeMesa (Emerald Health’s CEO) are implicated in knowingly participating in the scheme or demonstrating recklessness in not knowing about it.

For instance, the issuers and affiliated individuals, including Beri, Dhillon, and DeMesa, are alleged to have known or demonstrated recklessness in not knowing that investor funds were being used to finance the Palm Beach Venture promotions of their Reg A offerings. This suggests that they were aware or should have been aware of the fraudulent activities taking place.

Furthermore, by knowingly allowing investor funds to be used for deceptive promotions and failing to take appropriate action to stop it, the issuers and affiliated individuals are implicated in participating in the fraudulent scheme orchestrated by Mikula and others.

Then the issuers, acting through Beri and DeMesa, are accused of making material misrepresentations and omissions to investors and in their filings with the SEC. This indicates a deliberate effort to deceive investors and regulators by providing false or incomplete information about the nature of the promotions and the use of investor funds.

The additional allegations against Elegance and Beri reveal further instances of securities law violations and deceptive practices.

For instance, Elegance and Beri are accused of offering and selling approximately $20 million in Elegance securities to investors at a time when the offering was not registered and did not qualify for a valid registration exemption. This constitutes a violation of securities laws that require offerings to be registered or exempt from registration to protect investors.

Furthermore, Elegance and Beri allegedly provided false information to Mikula to use in connection with the promotion of Elegance securities. This indicates their active involvement in facilitating deceptive promotional activities to mislead investors.

Also, Elegance and Beri are accused of making false and misleading disclosures in filings with the SEC and communications to investors. This includes falsely representing that the offering was conducted under a valid Regulation A exemption and misrepresenting payments made to a third party for marketing and consulting services, which were provided in exchange for Mikula's promotion.

Charges Against Fernandez

Fernandez is permanently enjoined from violating the antifraud provisions of Sections 17(a)(1), 17(a)(3), and 17(b) of the Securities Act of 1933, as well as Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder. This injunction prohibits Fernandez from engaging in fraudulent activities related to the sale or promotion of securities.
Fernandez is prohibited from assisting with, facilitating, or receiving compensation for any Promotional Campaign related to any security. This restriction prevents Fernandez from participating in any future promotional activities involving securities.
He is ordered to pay disgorgement of $458,160, representing net profits gained as a result of the conduct alleged in the complaint. Additionally, he is required to pay prejudgment interest on this amount, totaling $41,557.44. Disgorgement aims to deprive Fernandez of ill-gotten gains obtained through his fraudulent conduct.
Due to Fernandez's cooperation in a Commission investigation and related enforcement action, he was not ordered to pay a civil penalty. This exemption from further financial penalties may be a result of Fernandez's cooperation with the SEC during the investigation process.

Key Takeaways For The Investors

Investors should be wary of such fraudulent promotional activities that mislead them into investing in securities the issuers offer. They must thoroughly go through the financial statements of the issuing company and undertake proper due diligence before investing. Additionally, simply going by the word of online investment advisors and their investment recommendations must not be the only basis for investing in particular securities.

Gayatri GuptaApril 10, 2024

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

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