SEC Obtains Final Judgment Against Co-Defendant Daniel Cattlin In A Microcap Fraud Scheme

The Securities and Exchange Commission (SEC) secured a final judgment from a federal court in New York against United Kingdom resident Daniel Cattlin on March 26, 2024. Cattlin was involved in a fraudulent scheme of illegally selling stocks in two microcap companies that generated more than $5 million. The court ordered Cattlin to pay a total of $354,821.62 in addition to stopping him from further violating securities laws.

Facts Of The Case

On September 23, 2021, the SEC filed a complaint against the defendants Daniel Cattlin (“Cattlin”) and William R. Shupe (“Shupe” and together “Defendants”) for their involvement in securities fraud.

As per the complaint, Cattlin and Shupe planned a fraudulent scheme with two other individuals Timothy and Trevor Page (the “Pages”) to acquire and sell the stock of various publicly traded companies.

These publicly traded companies included:

EnviroTech, a Delaware Corporation, develops and markets organic products for diverse industries including the cannabis industry
BioHemp, a Nevada corporation, having a principal place of business in New York, New York
Cyberfort, a Nevada corporation, headquartered in San Francisco, California, focused on providing cybersecurity technology

In a separate complaint, the SEC also filed charges against the Pages and others for their combined involvement with Cattlin and Shupe in the securities fraud. The following are the details of the fraudulent scheme that Defendants and the Pages executed.

First, the Pages secretly obtained control over publicly traded companies mentioned in the above section. They acquired a significant percentage of those companies’ publicly traded stock through various nominee shareholders. Among those, there was a shareholder who was controlled on paper by Shupe.

Further, the Pages controlled the operations of those companies through Shupe and Cattlin. They tasked Shupe to serve as an officer and director of one company and the majority shareholder of others. On the other hand, the Pages tasked Cattlin to serve as the Chief Executive Officer (“CEO”) of two companies.

Thus, Shupe and Cattlin acted at the Pages’ behest to cause the companies to take various actions for the Pages’ benefit. Both Shupe and Cattlin took the following actions for the benefit of the Pages:

issued shares to nominee entities that the Pages controlled
effected stock splits and other transactions to consolidate and conceal the Pages’ control of outstanding shares; and
issued company press releases in coordination with promotional campaigns that the Pages financed to drive demand for the stock that he was secretly selling through nominee entities.

Thus, Shupe and Cattlin enabled the Pages to conceal their control of the companies.

Further, the Pages dumped their stock into the market and concealed their actions by selling through various nominee entities. Their sales yielded millions of dollars in illegal stock sale proceeds.

To conceal the profits generated through illegal stock sales, the Pages funneled a portion of these proceeds to Cattlin and Shupe’s business. They passed funds through entities that Cattlin and Shupe controlled.

Details Of The Microcap Fraud

Between the middle of 2016 and November 2019, Shupe and others fraudulently sold the stock of EnviroTech, BioHemp, and Cyberfort to investors in the public United States securities markets.

Defendant Cattlin was involved in the schemes relating to BioHemp and Cyberfort between 2017 and 2020.

Further, both Cattlin and Shupe were insiders at these companies. They defrauded investors by serving as the face of these companies to help the Pages and their associates conceal their control over these companies.

To execute the fraudulent scheme successfully, Shupe served as an officer and director of EnviroTech and as the major shareholder of BioHemp and Cyberfort. Shupe’s administration and control of these companies enabled the Pages and other associates to conceal their control of both companies.

Additionally, Cattlin served as the CEO of BioHemp and Cyberfort. This way Cattlin helped the Pages successfully to hide the fact that they controlled those companies.

It’s important to note that the Pages’ control over EnviroTech, BioHemp, and Cyberfort meant that they were legally unauthorized to sell stock to investors in the public securities markets. The Pages could sell such securities publicly only if they registered the sales of such securities with the SEC or otherwise complied with federal securities laws that strictly limit sales by persons who control corporations with publicly traded stock.

Unfortunately, the Pages did not do this. Instead, they concealed their control over EnviroTech, BioHemp, and Cyberfort by holding their securities through a network of nominee companies.

Role Of Shupe And Cattlin To Execute The Microcap Fraud Scheme

Shupe and Cattlin enabled the Pages to conceal their ownership and funding of EnviroTech, BioHemp, and Cyberfort. Additionally, both Shupe and Cattlin took certain actions to help the Pages generate profits by dumping their stock into the market.

Also, Shupe maintained bank accounts in the names of three corporate entities that he controlled to help the Pages hide their illegal securities trading. He allowed the Pages to send funds into those accounts and then channel the distribution of funds out of these accounts. Thus, Shupe helped the Pages conceal their use of the proceeds from their fraudulent scheme by allowing them to use his companies’ accounts in this way.

Then, to compensate for Shupe’s efforts, the Pages provided financing of at least $188,000 to EnviroTech. EnviroTech owned certain technology that Shupe wanted to develop. As can be observed, Shupe knew that much of this financing was derived from the Pages’ illegal sale of stock.

On the other hand, Cattlin operated Cyberfort and BioHemp on the Pages’ behalf and facilitated the Pages’ illegal stock sales. Additionally, Cattlin coordinated with the Pages to provide false and misleading information in response to the SEC’s investigative subpoenas or questions related to BioHemp. Also, Cattlin provided false and misleading answers to the SEC staff when they interviewed Cattlin in June 2020 about his role as Cyberfort’s CEO. Cattlin designed the answers to conceal the Pages’ involvement in the company.

For his efforts, the Pages paid Cattlin over one hundred thousand dollars on various dates from 2017 through 2020, some of which was derived from the Pages’ illegal stock sales.

Background Of The Case

SEC Restrictions On The Control Persons

Individuals who control companies with stock sold to the public (the “control persons”) are governed by numerous legal and regulatory requirements. The regulations require such companies to meet the following prerequisites:

Register stocks with the SEC
Restrict the sale of such stocks as per the SEC guidelines
Make disclosures as required by the SEC

Note that all these requirements are designed to keep the investors informed about the nature of the stock they are holding or considering buying and the company from whom they will purchase the stock.

Thus, considering the above requirements, the control persons are required to take the following actions before selling the stock:

1. Register the stock sales with the SEC as per Section 5 of the Securities Act

2. Sell the stock under an applicable exemption from registration

3. Sell the stock according to conditions outlined in SEC Rule 144 including limitations on the amount of stock a control person can legally sell. Also, investors in certain public companies must disclose publicly any ownership interest over 5% of the company’s publicly traded stock.

Before we go ahead with understanding the facts of the case, let’s have a look at some of the important terms related to the SEC v. Cattlin case.

Restricted Stock

Restricted stock refers to the company’s stock whose shares are traded publicly, however, such shares are not registered with the SEC and are acquired from an issuer or an affiliate in a private transaction.

Thus, a 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). A registration statement contains important information about an issuer’s business operations, financial condition, results of operations, risk factors, and management. It also discloses any person or group who is the beneficial owner of more than 5% of the company’s securities.

A registration statement is a comprehensive document filed by a company with the Securities and Exchange Commission (SEC) in the United States as part of the process of offering securities to the public. This statement is required under the Securities Act of 1933.

The registration statement provides detailed information about the securities being offered for sale, as well as information about the issuing company, its business, financial condition, management, and any other material facts that investors would need to make an informed investment decision. It also discloses any person or group who is the beneficial owner of more than 5% of the company’s securities.

Affiliate

An “affiliate” of an issuer of securities is a person or entity that controls, is controlled by, or is under common control with, such issuer (i.e., a control person), directly or indirectly through one or more intermediaries.

The term “control” means the power to direct management and policies of the company in question. Accordingly, affiliates include officers, directors, controlling shareholders, and any person under “common control” with or who has common control of an issuer. As used herein, the term “control group” means a group that collectively is an “affiliate” of an issuer.

Unrestricted Stock

“Unrestricted stock” refers to a stock that a non-affiliate legally offers and sells in the public securities marketplace after filing a registration statement with the SEC.

It’s important to note that the registration statements filed with the SEC are transaction-specific and apply to each separate offer and sale as detailed in the registration statement.

This means that registration with the SEC is not attached to the security itself. Further, registration at one stage for one party does not necessarily suffice to register subsequent offers and sales by the same or different parties.

Thus, when a control person buys publicly traded or otherwise unrestricted shares in a company he controls, those shares automatically become subject to legal restrictions on sales by an affiliate. Such restrictions allow an affiliate to sell only a limited number of unregistered shares in the public markets. In other words, without registration, affiliates are prohibited from selling large quantities of an issuer’s shares, regardless of how the affiliates obtained those shares.

Transfer Agent

A transfer agent is a financial institution or individual appointed by a publicly traded company to maintain records of shareholders and handle the transfer of securities between shareholders. Transfer agents play a crucial role in the administration of securities transactions and in ensuring that the ownership of securities is accurately recorded.

Many companies that have publicly traded securities use transfer agents to keep track of the individuals and entities that own their stock. Transfer agents routinely keep track of whether shares are restricted from resale.

Over-the-Counter (“OTC”) Markets, Inc.

Over-the-Counter (OTC) Markets, Inc. is a financial market for trading securities that are not listed on a centralized exchange such as the New York Stock Exchange (NYSE) or the Nasdaq Stock Market. Instead of being traded on a centralized exchange, OTC securities are traded directly between parties through a network of broker-dealers.

Public companies not obligated to file reports with the SEC may file public reports such as quarterly and annual statements on the OTC Markets website for investors to review and consider when making investment decisions.

Charges Against Daniel Cattlin

The final judgment against Cattlin stops him from future violations or aiding and abetting violations of (a) Section 17(a) of the Securities Act of 1933 and (b) Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

The judgment orders Cattlin to pay disgorgement and prejudgment interest of $124,357.62 and a civil penalty of $230,464. Further, the judgment imposes penny stock and officer and director bars on Cattlin. Shupe settled in April, paying a $100,000 penalty.

Key Takeaways For Investors

As an investor, you must conduct thorough research on the company, its management team, financials, business operations, and any potential risks before investing in any security. Further, you must look for red flags such as a history of regulatory issues or the nature of stocks, that is, whether they are restricted or unrestricted.

You must obtain and carefully review any offering documents or disclosures related to the stock sale. These documents should provide detailed information about the terms and conditions of the offering, including any restrictions on the stock and the purchaser's rights.

Gayatri GuptaApril 17, 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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