SEC Secures Final Judgement Against Dills In Joseph A. Padilla Case

SEC Secures Final Judgement Against Dills In Joseph A. Padilla Case

The U.S. District Court for the District of Massachusetts passed final judgments against California resident Kevin C. Dills and two entities that Dills controlled. The judgment was related to the SEC complaint filed on June 14, 2023, against Dills and other Defendants and entities for engagement in a fraudulent scheme of illegally selling stocks of several small companies to the public between February 2020 and August 2022.

On June 13, 2023, the Securities and Exchange Commission (SEC) put allegations against defendants Joseph A. Padilla ("Padilla") and Kevin C. Dills ("Dills"), collectively referred to as "Defendants," as well as relief defendants Bright Star International, Inc. ("Bright Star"), Life Sciences Journeys, Inc. ("Life Sciences"), Carlos Hernandez ("Hernandez"), Jamie Quick ("Quick"), Ashley Robinson ("Robinson"), and Arlene Sandoval ("Sandoval"), collectively referred to as "Relief Defendants".

Facts Of The Case

Summary

Between February 2020 and August 2022, Padilla allegedly orchestrated a fraudulent scheme aimed at selling stock to the public. It's claimed that Padilla knowingly facilitated illegal stock sales by individuals or groups ("Control Persons") who held significant amounts of stock in various small publicly traded companies, enabling them to dominate the market for their stock.

Padilla reportedly referred to these Control Persons as his "clients" and provided them with a disguise to conceal their identities, all to defraud investors by accumulating and selling large volumes of stock without adhering to the registration and disclosure requirements mandated by federal securities laws.

These requirements, which Padilla and his clients allegedly sought to evade, serve as crucial safeguards meant to inform investors about the nature of the stock they're considering buying and the parties from whom they're purchasing it.

In furtherance of his scheme, Padilla allegedly undertook several actions to sell his clients' shares to investors in the public securities market and covertly funnel the proceeds back to his clients. He obscured his clients' identities by executing stock sales for them through offshore brokerage accounts under various pseudonyms that he controlled. These sales occurred during periods of heightened investor demand, often driven by promotional activities such as online articles, email newsletters, or other marketing efforts aimed at attracting investor interest.

Padilla purportedly bolstered his clients' stock sales by manipulating stock prices through trading activities conducted in his own U.S. brokerage account, as well as those belonging to his friends and family. Additionally, it's claimed that Padilla involved a professional stock trader at a U.S. brokerage firm in his scheme, enlisting them to clandestinely facilitate large stock sales on behalf of his clients.

Dills allegedly colluded with Padilla in a scheme to sell stock of a company secretly controlled by Dills, all while evading legal requirements for the sale of stock by a control person to the public. Dills purportedly supplied stock for Padilla to sell to the public by transferring shares to individuals acting as fronts or "nominees" for Padilla. Padilla then allegedly funneled the proceeds back to Dills through a convoluted path involving foreign bank accounts held in the names of these front individuals. Dills is said to have received approximately $20 million from the scheme, deposited into accounts under the names of two front companies he controlled: Bright Star and Life Sciences, both relief defendants in this case.

Background

The stock involved in the alleged scheme was classified as "penny stock," a term typically used for companies with low market capitalizations and stocks trading at less than $5 per share. This stock comprised "restricted stock" originally issued by a company (referred to as the stock's "issuer") in a private transaction that wasn't registered with the Securities and Exchange Commission (SEC).

Under federal securities laws and regulations, restricted stock cannot legally be offered or sold to the public unless a securities registration statement has been filed with the SEC for an offer, or is in effect for a sale, unless exempted. Such registration statements, often submitted on Form S-1, are crucial as they provide essential information about an issuer's business operations, financial condition, results of operation, risk factors, and management. Additionally, they disclose any individual or group holding more than 5% of the company's securities, providing transparency to potential investors.

In the context described, an "affiliate" of an issuer, such as Dills, is defined as a person or entity that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the issuer. This encompasses individuals or entities with the power to direct the management and policies of the company in question. Affiliates may include officers, directors, controlling shareholders, as well as any person under common control with, or having common control of, the issuer.

In this scenario, the term "Control Persons" refers to individuals or groups who collectively act as affiliates of an issuer, implying they have the power to direct the management and policies of the company.

The term "Unrestricted stock" refers to stock that can legally be offered and sold in the public securities marketplace, either because it has previously been subject to a registration statement or because it is otherwise exempt from registration requirements. It's important to note that registration statements are specific to each transaction and apply to individual offers and sales as outlined in the registration statement. Therefore, registration does not automatically extend to the security itself, and registration for one transaction or party does not necessarily cover subsequent offers and sales by the same or different parties.

When a control person purchases publicly traded or unrestricted shares in a company they control, those shares become subject to legal restrictions on sales by an affiliate. These restrictions strictly limit the quantity of shares that may be sold to the public at any given time in the absence of registration. For affiliates holding stock quoted on the over-the-counter market, regulations typically restrict sales to no more than one percent of the issuer's outstanding stock within three months.

In this case, it's alleged that Dills sold shares of Oncology Pharma through Padilla in quantities that exceeded this limitation on sales by an affiliate, thus violating the legal restrictions imposed on such transactions.

A "transfer agent" is a company tasked with various responsibilities, including the issuance and cancellation of certificates representing a company's stock to reflect changes in ownership. Numerous companies with publicly traded securities employ transfer agents to maintain records of the individuals and entities that own their stock. Transfer agents play a vital role in monitoring whether shares are restricted from resale, ensuring compliance with legal and regulatory requirements regarding the transfer and trading of securities. They facilitate the smooth transfer of ownership and help maintain accurate records of shareholders for the issuing company.

The Over-the-Counter (OTC) Market is a stock quotation service that enables the public trading of shares in small companies that are not listed on national securities exchanges such as NASDAQ or the New York Stock Exchange (NYSE). Stocks traded on the OTC Market are typically from smaller companies and may not have met the stringent listing requirements of major exchanges.

OTC stocks are often characterized by lower trading volumes compared to those listed on major exchanges, meaning they may have fewer shares changing hands daily. This lower volume can make OTC stocks more susceptible to price manipulation by undisclosed Control Persons, such as Padilla's clients, who clandestinely accumulate large quantities of stock. Their actions can potentially influence the price of the stock due to the thinner trading activity in the market.

"Public float" refers to the number of shares of an issuer's stock that are available for trading in the marketplace, including on the OTC Market. These shares are typically on deposit with broker-dealers and are freely tradable by investors. The public float is distinct from the total outstanding shares of the issuer, which includes all shares issued by the company, both those available for public trading (public float) and those that are restricted from public trading (restricted stock).

Restricted stock is typically issued by the company in private transactions and is subject to legal restrictions on resale. Therefore, when calculating the public float, only the shares available for trading in the marketplace are considered, excluding restricted stock.

The trading of penny stocks on the OTC Market relies heavily on brokerage firms that act as market makers, facilitating the buying and selling of these stocks. Market makers, such as the firm where Trader A worked, play a crucial role in executing investors' orders, especially during periods of high demand.

Market makers can engage in short selling, which involves selling shares that the market maker does not currently own. If the market maker sells short at one price and later purchases shares at a lower price, they can profit from the price difference.

In this scenario, Padilla allegedly had a covert arrangement with Trader A, allowing Padilla to utilize a trading account at Trader A's brokerage firm to engage in market-making activities for stocks being sold in large quantities by Padilla Nominee accounts. This arrangement suggests potential collusion between Padilla and Trader A to manipulate the market for their benefit.

Unlike larger public companies whose stocks are traded on major exchanges and subject to stringent public reporting requirements and professional analysis by stock analysts, penny stock companies often lack reliable information available to investors. This lack of transparency and scrutiny makes penny stock companies more vulnerable to fraud schemes.

In the case of penny stocks, fraudulent actors may exploit this lack of information by disseminating misleading online news articles or engaging in other promotional activities aimed at generating investor interest in the stock. These schemes are designed to artificially inflate the stock price, allowing control persons, such as Padilla's "clients," to sell their shares at higher prices before the true nature of the company's financial health is revealed.

The combination of limited public reporting, minimal analyst coverage, and the potential for manipulative promotional tactics creates an environment where investors may be more susceptible to fraudulent schemes in the penny stock market.

Overview Of The Scheme

Padilla's scheme can be broken down into three main components:

(i) Providing nominee account holders, referred to as the "Padilla Nominees," with offshore brokerage accounts to deposit and sell stock on behalf of his clients, while concealing their identities. This allowed Padilla's clients to sell their stock without revealing their true ownership, thereby avoiding detection.

(ii) Engaging in trading activities in Padilla's own U.S. brokerage account, as well as in the accounts of friends and family, including certain individuals referred to as "the Padilla Group," such as the Russian Individuals and Relief Defendants Hernandez, Quick, Robinson, and Sandoval. These trades aimed to profit alongside the scheme and manipulate stock prices in support of it.

(iii) Recruiting Trader A to participate in the scheme by acting as a ready buyer of large quantities of stock sold by Padilla for his clients. This collaboration created an illusion of typical over-the-counter trading activity, thereby concealing the fraudulent nature of the scheme.

Padilla executed this scheme for his own gain, as well as for the benefit of his clients or partners who compensated him with commissions or fees for his illicit services.

Padilla Nominees

Padilla facilitated his clients' fraudulent stock sales by providing a service aimed at concealing their involvement. He utilized front companies or individuals acting as nominees to hold and sell stock on behalf of his clients, effectively shielding their connection to illicit transactions.

To further this scheme, Padilla controlled brokerage accounts in the names of these nominees, which included the Russian Individuals and Individual B. Padilla leveraged his relationship with these nominees to advance the scheme's objectives, such as having Individual B open a bank account or having a Russian Individual sign stock transfer documents.

In a February 2022 encrypted message, Padilla reminded one of the Russian Individuals to communicate via the Silent Circle messaging application, stating that it would prevent their messages from being used against them. Silent Circle is an encrypted messaging application that provides features such as the ability to destroy sensitive messages and allows the sender to delete messages on the recipient's end, adding layer of security to their communications. This suggests an intent to maintain secrecy and evade detection in carrying out the fraudulent scheme.

Padilla orchestrated the Padilla Nominee accounts to receive deposits and subsequently sell shares of his clients' stock, thereafter distributing the proceeds to Padilla's clients. These nominee accounts were held under the names of individuals or entities acting as nominees and were associated with bank accounts located in Russia and Kyrgyzstan. Following the sale of stock in the name of the Padilla Nominees, Padilla arranged for the proceeds to be transferred to similarly named accounts in foreign jurisdictions. From there, the proceeds were returned to his clients.

Additionally, Padilla Nominee accounts facilitated the distribution of stock-selling proceeds through crypto assets, adding a layer of complexity to the ownership of these funds and making it more challenging to trace their ultimate destinations. This utilization of cryptocurrency further obscured the flow of funds, making it harder to identify the beneficiaries and track the movement of illicit proceeds.

Padilla operated accounts for Padilla Nominees at offshore brokerage firms, including one located in the Cayman Islands, such as Valor Capital. Within this framework, Padilla interacted with Valor Capital primarily through Individual A, who acted as a liaison to oversee activities within the Padilla Nominee accounts. Although Individual A maintained an email address associated with Valor Capital, Padilla opted not to communicate with Individual A through this official channel. Instead, Padilla communicated with Individual A through secretive messaging applications and employed codenames, likely to maintain confidentiality and discretion in their exchanges. This clandestine communication method suggests an intent to conceal their activities and evade detection.

The Padilla Group

To facilitate the deposits and sales of his clients' stock through nominee accounts at offshore brokerage firms, Padilla frequently engaged in trading the same stocks in his own U.S. brokerage account or other U.S. brokerage accounts under his control. For instance, Padilla often utilized U.S. brokerage accounts associated with one of the Russian Individuals or owned by relief defendants Hernandez, Quick, Robinson, and Sandoval.

Padilla maintained regular communication with Hernandez throughout the scheme's duration. Hernandez, in turn, possessed trading authority over Quick's brokerage account. Robinson, who was Padilla's romantic partner, resided with him during the scheme's operation. Additionally, Sandoval, Padilla's cousin, granted him complete control over her brokerage account.

These interactions and relationships within the Padilla Group demonstrate a close association and coordination in carrying out the fraudulent scheme. Padilla's utilization of various U.S. brokerage accounts owned by members of the Padilla Group further illustrates their collaborative efforts to execute the scheme.

The trading activities conducted by the Padilla Group in U.S. brokerage accounts included manipulative buying actions aimed at creating a misleading impression of market interest in the thinly traded stock. Furthermore, these actions were sometimes intended to elevate the stock price to meet a minimum threshold required before Valor Capital could deposit and subsequently sell the stock.

In particular, Valor Capital facilitated the deposit and sale of stock through another broker-dealer based in Canada, which enforced a minimum price requirement. To meet this requirement and boost stock prices for his clients' sales, Padilla orchestrated the Padilla Group to enter limit buy orders. These orders involved offers to purchase stock at specific prices, including prices higher than the prevailing market rate at the time. By doing so, Padilla artificially inflated stock prices, thereby meeting the minimum price threshold set by the Canadian broker-dealer and enabling the deposit and subsequent sale of the stock through Valor Capital

The Padilla Group, operating under Padilla's control or direction, engaged in coordinated trading activities across multiple brokerage accounts. Evidence suggests that Padilla Group accounts were accessed from the same IP address on occasion, including the IP address associated with Padilla's residence. An IP address serves as a unique network identifier for devices connected to the internet.

Additionally, Padilla sometimes accessed brokerage accounts via a virtual private network (VPN), a tool used to mask the physical location of online activity. By using a VPN, Padilla obscured his actual location while accessing brokerage accounts, adding an extra layer of anonymity to his trading activities.

Padilla orchestrated the sale of shares in his brokerage account and arranged for selling in the accounts of others within the Padilla Group. This strategy enabled them to profit alongside Padilla's clients when they sold shares through Padilla Nominees at inflated prices following promotional campaigns or the release of press releases. This coordinated effort allowed Padilla and the Padilla Group to capitalize on the increased stock prices resulting from promotional activities or market manipulation, ultimately benefiting themselves and Padilla's clients.

Trader A’s Role

Trader A played a pivotal role in Padilla's scheme by facilitating the sale of stock for Padilla's clients from offshore Padilla Nominee accounts during periods of market demand. At Padilla's request, Trader A utilized his brokerage firm's account to create liquidity for the stock that Padilla wanted to sell for his clients. Trader A engaged in short selling, selling shares that he did not yet possess in his firm's account, with the expectation of obtaining the shares at a lower price in the future to cover his short position and make a profit.

Trader A understood that he would be able to cover his short position because Padilla assured him that he would provide shares to purchase on the market. Padilla and Trader A had an arrangement where Padilla would offer shares from his offshore nominee accounts at a price below the price at which Trader A sold short, allowing Trader A to purchase those shares and make a profit.

This arrangement benefited Padilla because Trader A could sell shares to investors in smaller amounts throughout the trading day, while Padilla had Trader A as a ready buyer for the large amounts of shares sold by Padilla Nominees. In essence, Trader A's involvement allowed Padilla to effectively offload significant quantities of stock while maintaining the appearance of ordinary market activity.

Trader A's involvement in trading the stocks implicated in Padilla's scheme was strictly at Padilla's behest. Trader A and his firm did not actively trade in those stocks unless prompted by Padilla, and Padilla himself was not an official customer of Trader A's brokerage firm.

At times, Padilla specifically directed Trader A to engage in trading activities to set particular prices, including manipulating the closing price at the end of the trading day, a practice known as "marking the close."

Padilla maintained communication with Trader A exclusively through the encrypted messaging platform Silent Circle, avoiding communication via Trader A's work phone or email address. Padilla used a codename when communicating with Trader A on Silent Circle, further concealing their identities and the nature of their exchanges. This clandestine communication method underscores Padilla's efforts to maintain secrecy and evade detection in carrying out the fraudulent scheme with Trader A.

Padilla’s Distribution of Proceeds to Control Person Clients

Padilla orchestrated overseas banking arrangements through which accounts at Valor Capital distributed proceeds from the scheme to Padilla's clients, with significant sums being channeled through bank accounts in Russia. Notably, in February 2022, amidst escalating tensions between Russia and Ukraine and the subsequent imposition of sanctions by the U.S. and E.U., Padilla exchanged multiple messages with Individual A regarding Valor Capital's banking arrangements in Russia.

For instance, on February 8, 2022, Padilla informed Individual A that he had met with a "straight gangster banker" linked to a Russian bank to organize banking services for Valor Capital. Padilla mentioned using a pseudonym in his communications with the Russian banker. Subsequently, on February 14, 2022, Padilla expressed concern about the outstanding sums owed to clients, emphasizing the urgency of resolving the matter. However, by February 24, 2022, Padilla informed Individual A that the banks in Russia associated with Valor Capital had been sanctioned by the United States, prompting uncertainty about the next course of action.

Despite these setbacks, on April 4, 2022, Individual A provided Padilla with account details for a Valor Capital account at a bank in Kyrgyzstan, indicating a potential alternative avenue for distributing proceeds to Padilla's clients. These exchanges illustrate Padilla's efforts to navigate the evolving financial landscape and find alternative banking solutions amidst geopolitical tensions and regulatory challenges.

On August 5, 2022, Padilla communicated to Individual A a plan to transfer funds out of Russia and distribute them to clients. He outlined a process involving converting the funds to rubles, transferring them to a bank in Kazakhstan, and then having an intermediary convert them back to their original currency for distribution to clients' accounts worldwide.

However, as August progressed, Padilla grew increasingly frustrated with Individual A's perceived sluggishness in authorizing wires from a Valor Capital account in Kyrgyzstan. On August 16, 2022, Padilla expressed his frustration, mentioning that he was facing pressure from other parties waiting for funds and suggesting that Individual A did not prioritize their business concerns enough.

By August 24, 2022, Padilla reiterated the urgency of the situation to Individual A, emphasizing the pressing need for a wire transfer to facilitate a deal and highlighting the absence of incoming commissions, indicating financial strain resulting from delays in fund transfers.

These messages demonstrate Padilla's frustration with delays in fund transfers and the importance of timely financial transactions for their business operations.

Dill’s Role In The Scheme: Oncology Pharma Shares

Dills played a significant but undisclosed role as a Control Person in Oncology Pharma. From 2019 to 2022, Dills, operating through his front companies Bright Star and Life Sciences, provided substantial funding for Oncology Pharma's operations. Dills' financial support was nearly the sole source of funding for Oncology Pharma during this period. Moreover, Dills exerted influence over Oncology Pharma's management, impacting various aspects of the company's operations.

One notable aspect of Dills' influence was his ability to dictate the timing of press releases issued by Oncology Pharma. Dills orchestrated the release of press statements on specific dates, strategically choosing moments when the information contained within the press releases would portray Oncology Pharma in a positive light. These press releases were designed to enhance the appeal of Oncology Pharma's shares to investors, potentially influencing their investment decisions.

Overall, Dills' involvement in Oncology Pharma extended beyond mere financial support; he wielded significant control over the company's operations and management decisions, utilizing tactics such as timing press releases to potentially manipulate investor sentiment and share prices.

Dills' influence extended to causing Oncology Pharma to indemnify its transfer agent for the transfer of stock, a move aimed at mitigating potential liabilities associated with stock transfers. Transfer agents typically require guaranteed signatures on stock transfer documents to safeguard against losses in case of signature forgery. However, instead of providing guaranteed signatures, companies may opt to indemnify their transfer agents, shifting the liability to the company itself. Dills utilized his authority over Oncology Pharma to compel the company to indemnify its transfer agent for transfers involving both Dills and Padilla Nominees.

Furthermore, Dills acquired shares of Oncology Pharma not in his name but rather in the names of Bright Star and Life Sciences, his front companies. To circumvent legal restrictions on stock resales by control persons, Dills took steps to distance himself from direct ownership of the shares. In early 2020, Dills installed his then-girlfriend as the nominal president of Life Sciences, ostensibly to create a perceived separation between himself and the company to avoid certain legal requirements. Despite this facade, Dills retained control over Life Sciences' activities and continued to exercise control over its shares in Oncology Pharma.

These actions demonstrate Dills' deliberate efforts to manipulate corporate structures and avoid legal constraints in his dealings with Oncology Pharma's shares, further underscoring his central role in the scheme.

As a key aspect of the scheme, Dills facilitated the transfer of Oncology Pharma shares to Padilla Nominees. Subsequently, Padilla orchestrated the Padilla Nominees to deposit these Oncology Pharma shares at Valor Capital and subsequently sell them during periods of heightened investor demand. Notably, these periods of increased investor interest often coincided with Dills exercising his influence over Oncology Pharma to issue press releases containing positive news about the company, strategically timed for maximum impact.

This coordinated effort between Dills and Padilla aimed to capitalize on the surge in investor demand for Oncology Pharma shares following the dissemination of positive company news. Padilla, in his role, received summaries of Oncology Pharma trading activities from Valor Capital across various accounts, enabling him to monitor the progress of the scheme and make informed decisions accordingly.

The collaboration between Dills, Padilla, and Valor Capital underscores the sophisticated nature of the scheme, which involved exploiting market dynamics and manipulating investor sentiment to maximize profits from the sale of Oncology Pharma shares.

Following the sale of Oncology Pharma shares by the Padilla Nominees during periods of heightened investor demand, the proceeds of the scheme were transferred from accounts in the Padilla Nominees' names in Russia and Kyrgyzstan to accounts held by Dills under the names of Bright Star and Life Sciences. Through this process, Dills received an approximate sum of $20 million from the scheme. Padilla meticulously maintained records documenting the payments made by the Padilla Nominees to Dills, ensuring a detailed account of the financial transactions involved in the scheme.

Throughout the scheme, Dills communicated with Padilla via telephone and through the encrypted messaging platform Silent Circle, employing codenames to conceal their identities and the nature of their communications. Additionally, Dills interacted with Oncology Pharma's transfer agent primarily through traditional mail correspondence and email, establishing a more formal means of communication for matters related to the company's shares and transfers. These communication channels allowed Dills and Padilla to coordinate their activities discreetly while ensuring effective management of the scheme's operations.

In February 2020, Dills initiated the scheme by transferring 12.5 million shares of Oncology Pharma to a Padilla Nominee, allegedly representing Bright Star, as part of the fraudulent scheme. These shares, issued to Bright Star in December 2019, constituted approximately 9 percent of Oncology Pharma's outstanding shares at the time and around 40 percent of its publicly available shares (public float). Notably, these shares were issued without a restrictive legend by Oncology Pharma's transfer agent, indicating they were available for public resale.

Dills purportedly orchestrated the sale of these shares to a Padilla Nominee, one of the Russian Individuals, for $62,500 in February 2020. To support this supposed sale, Dills provided falsified records, including an image of bank account activity purportedly showing the Russian Individual's payment for the shares. However, investigations later revealed that the bank statement for Bright Star's account from February 2020 contained no such payment.

Subsequently, the shares held by the Russian Individual were deposited at Valor Capital, with accounts selling 8.2 million of these shares from April 30, 2020, through May 18, 2020. Notably, during this period, Oncology Pharma's stock was subject to an email stock promotional campaign, with promotional emails circulating, suggesting significant potential gains in the company's share price. This promotional activity likely contributed to increased investor demand and facilitated the sale of the Oncology Pharma shares held by the Padilla Nominee at elevated prices.

Following a reverse stock split on October 9, 2020, Oncology Pharma reduced its number of outstanding shares. Subsequently, on October 22, 2020, Oncology Pharma issued 2 million shares to Dills' entity, Bright Star, stemming from the conversion of a portion of a convertible note. Additionally, on October 27, 2020, Oncology Pharma issued 1 million shares to Dills' other entity, Life Sciences, resulting from the conversion of a note that Bright Star purportedly sold to Life Sciences.

During October 2020, Dills' girlfriend served as the nominal president of Life Sciences, although Dills maintained actual control over the entity. The combined 3 million shares issued to Bright Star and Life Sciences, both under Dills' control, represented over 10 percent of Oncology Pharma's then-outstanding stock. These transactions highlight Dills' strategic maneuvering to acquire a significant stake in Oncology Pharma, further solidifying his influence over the company's operations and stock ownership.

In November 2020, Bright Star purportedly sold its 2 million shares to a Padilla Nominee, one of the Russian Individuals, for $50,000. Similarly, in December 2020, Life Sciences allegedly sold its 1 million shares to another Padilla Nominee, another Russian Individual, for $25,000. Subsequently, in January 2021, the two Padilla Nominees transferred their combined 3 million shares to accounts at Valor Capital.

During these transactions, email addresses associated with the Padilla Nominees communicated with Oncology Pharma's transfer agent regarding the transfer of shares. These communications likely facilitated the processing of the transfers and ensured compliance with relevant legal and regulatory requirements. These transactions further demonstrate the coordination between Dills, Padilla, and the Padilla Nominees in executing the fraudulent scheme involving Oncology Pharma shares.

In January 2021, concurrent with the deposits into the Valor Capital accounts of the Padilla Nominees, Padilla initiated trading activities in Oncology Pharma through the Padilla Group. In the thirty days leading up to January 19, 2021, Oncology Pharma's daily trading volume averaged 1,294 shares. However, on January 19, 2021, Padilla, operating through relief defendant Arlene Sandoval's account, purchased 5,300 shares using limit buy orders at increasing prices throughout the day.

Padilla also coordinated limit buy orders on the same day in brokerage accounts belonging to Quick and one of the Russian Individuals. Consequently, the closing price of Oncology Pharma's stock on January 19, 2021, stood at $1.09 per share, reflecting a substantial increase of over 135% compared to the previous trading day. Notably, Padilla accessed both his and the Russian Individual's brokerage accounts from Cabo San Lucas, Mexico, on that day.

Further scrutiny of the trades executed on January 19, 2021, revealed that both Sandoval's and the Russian Individual's accounts purchased shares for $0.75 simultaneously, precisely at 12:27 p.m. This synchronicity in trading activities raises suspicions of coordinated market manipulation orchestrated by Padilla and potentially implicates other individuals within the Padilla Group.

On January 28, 2021, a Padilla Nominee account, along with another account at Valor Capital to which the Padilla Nominee had transferred shares, initiated the sale of Oncology Pharma shares. Notably, Trader A emerged as the buyer for a substantial portion of these sales, covering shares he had previously sold short at prices reaching as high as $7.49 per share to unwitting investors.

Specifically, a Padilla Nominee account at Valor Capital sold 13,300 Oncology Pharma shares on that day for $5.10 per share. Coincidentally, Trader A purchased the same number of shares at the same price, indicating a synchronized transaction between the Padilla Nominee and Trader A. This coordinated sale and purchase of shares underscore potential collusion between Padilla's associates and Trader A to manipulate the market for Oncology Pharma shares, resulting in significant financial losses for innocent investors.

On January 28, 2021, Oncology Pharma issued its first press release since August 2020. The press release announced the appointment of a new Chief Financial Officer (CFO). Coinciding with this announcement, Dills communicated with an individual at Oncology Pharma on the same day, instructing them to ensure the new CFO change and corporate officers were updated on Yahoo. This communication suggests Dills' active involvement in orchestrating the dissemination of positive news about Oncology Pharma, potentially influencing investor sentiment and driving up the stock price. Such coordination further reinforces the suspicion of collusion and market manipulation within the scheme involving Oncology Pharma shares.

In August 2022, Padilla expressed frustration to Individual A regarding the need for funding to finance the marketing efforts for Oncology Pharma. In a message dated August 15, 2022, Padilla lamented that marketing activities had ceased due to the inability to make payments, stating, "Marketing has stopped because we can't get payment out." The following day, on August 16, 2022, Padilla emphasized the urgency of accessing funds from Oncology Pharma, stressing the importance of these funds for paying individuals and resuming marketing efforts, stating, "really need this ONPH money to pay out people and get marketing... this has stalled me and last week I informed you how important it was."

Padilla's sense of urgency was evident in subsequent messages to Individual A. On August 18, 2022, he reiterated the need for immediate action, stating, "I have stalled a campaign now from Nonpayment and this money needs to go out like last week." Despite continued efforts, as of August 23, 2022, Padilla expressed frustration that the funds required for marketing were still unavailable, stating, "I still can't pay for marketing."

These messages highlight Padilla's reliance on accessing funds from Oncology Pharma to sustain marketing activities and suggest potential financial constraints or delays within the scheme.

In 2021, a significant volume of Oncology Pharma shares was sold by known Padilla Nominee accounts and other accounts at Valor Capital, amounting to over 7 million shares. These transactions generated proceeds exceeding $100 million. Additionally, accounts associated with the Padilla Group, including those of Sandoval and Quick, were also involved in selling Oncology Pharma shares during the same period. Sandoval's account yielded net proceeds of $37,361, while Quick's account realized net proceeds of $23,879 from these sales.

These figures underscore the extensive scale of the scheme orchestrated by Padilla and his associates, involving the sale of Oncology Pharma shares for substantial profits. Such widespread involvement in trading Oncology Pharma shares highlights the coordinated efforts within the scheme to exploit market demand and maximize financial gains.

Dills' actions, including dividing his ownership of Oncology Pharma stock between two front companies, transferring shares to Padilla Nominees, and subsequently sharing in the proceeds of the Padilla Nominees' illegal sales to the public, demonstrate a deliberate disregard for the registration requirements of federal securities laws.

Under federal securities law, control persons are obligated to comply with certain requirements before selling stock to the public. These requirements include registering the stock sales with the Securities and Exchange Commission (SEC) under Section 5 of the Securities Act, selling the stock under an applicable exemption from registration, or selling the stock in compliance with conditions outlined in SEC Rule 144, which includes limitations on the volume of stock a control person can legally sell.

In the case of Dills' involvement with Oncology Pharma stock, none of these requirements were met. No registration statements were filed or in effect for the offers and sales of Oncology Pharma stock from Dills to the Padilla Nominees or from the Padilla Nominees to the public. Additionally, there was no exemption to registration applied, nor did the sales comply with the conditions outlined in SEC Rule 144. As a result, Dills' actions violated federal securities laws by circumventing registration requirements and engaging in illegal stock sales.

Dills' sales of Oncology Pharma shares not only violated registration requirements but also exceeded the volume limitation imposed by SEC Rule 144. This rule restricts sales by an affiliate over three months to one percent of the shares outstanding for shares quoted on the OTC Market.

In February 2020, Dills purported to sell shares to Padilla Nominees, relying on a falsified bank record, that was obtained in the name of Bright Star in December 2019. This sale amounted to approximately 9 percent of Oncology Pharma's then-outstanding shares, significantly surpassing the one percent limitation imposed by Rule 144.

Furthermore, in November and December 2020, Dills engaged in additional sales to Padilla Nominees, involving shares obtained by Bright Star and Life Sciences in October 2020. These sales collectively represented nearly 15 percent of Oncology Pharma's then-outstanding stock, far exceeding the allowable limit under Rule 144

By exceeding the volume limitation of Rule 144 in these transactions, Dills further violated federal securities laws and regulations, demonstrating a blatant disregard for legal requirements governing the sale of securities by affiliates.

Padilla's involvement in the unlawful distribution of Oncology Pharma shares to the public extended beyond mere facilitation; he acted as an underwriter in this illicit scheme.

In addition to the previously described transactions involving Oncology Pharma shares, Dills transferred an additional over 7 million shares, derived from convertible notes held by Bright Star or Life Sciences, to Padilla Nominees between mid-2021 and mid-2022. These additional transfers indicate a continued and substantial flow of shares orchestrated by Dills to be distributed through Padilla's network.

Moreover, on two separate occasions, one in 2021 and another in 2022, Dills transferred shares to two Padilla Nominees— a Russian Individual and Individual B— on the same day. Such simultaneous transfers further underscore the coordinated effort between Dills and Padilla to distribute Oncology Pharma shares to the public through the Padilla Nominees.

By orchestrating the transfer and distribution of millions of Oncology Pharma shares through the Padilla Nominees, Padilla actively participated in the unlawful distribution of securities to the public, acting as an underwriter in this unlawful scheme. This demonstrates a deliberate and systematic effort to circumvent securities regulations and exploit the public market for illicit gain.

Charges Against Dills

Dills has consented to a final judgment that includes several significant penalties and injunctions. He is permanently enjoined from violating Sections 5 and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Additionally, Dills faces a penny stock bar and other injunctive relief.

In terms of financial penalties, Dills is ordered to pay a penalty of $223,229. Furthermore, he is required to disgorge $6,225,448 in ill-gotten gains, along with prejudgment interest of $786,645. These payments are on a joint-and-several basis with Bright Star International and Life Sciences Journeys, the relief defendants. Bright Star International and Life Sciences Journeys have been ordered to pay a disgorgement of $6,920,345 and $91,747, respectively, along with prejudgment interest, jointly and severally with Dills.

It's worth noting that the disgorgement amount may be offset by a separate payment agreed upon by Dills to the U.S. Attorney’s Office for the District of Massachusetts in a related criminal action. However, if the court in the criminal action does not accept Dills’ plea agreement, then he would owe the full disgorgement amount to the Commission.

These penalties and injunctions underscore the severity of Dills' actions and serve as a deterrent to others engaging in similar fraudulent schemes in the securities market.

Key Takeaways For The Investors

Before investing in stocks, investors must ensure that if they are investing in restricted stocks, such stocks are registered with the SEC through the S-1 registration statement.

Gayatri GuptaApril 12, 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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