Securities and Exchange Commission v. Dean Shah

Background

The Securities and Exchange Commission moved for disgorgement and civil penalties against Henry Clarke. Disgorgement is an order requiring a defendant to give up ill-gotten gains. The complaint alleged that Clarke participated with Dean Shah and others in a scheme involving Zenosense, a thinly traded micro-cap company, from 2013 through at least 2018. According to the allegations, Clarke and Shah concealed their control of Zenosense shares through nominee entities, promoted the stock while hiding their involvement, and sold shares without registering them as required by Section 5 of the Securities Act of 1933. The complaint also alleged violations of the Securities Act’s antifraud provisions and Section 10(b) of the Securities Exchange Act of 1934.

In July 2022, the court entered a partial consent judgment permanently enjoining Clarke from violating specified provisions of the federal securities laws and from participating in certain penny-stock activity. The judgment required disgorgement and stated that the court would later determine the disgorgement, prejudgment interest, and any civil penalty. It also provided that, for the motion concerning those amounts, the complaint’s allegations would be accepted as true and Clarke could not argue that he had not violated the federal securities laws alleged in the complaint.

Disgorgement and Interest

The Securities and Exchange Commission sought $45,234 in disgorgement. Its accounting evidence attributed $23,484 to three payments of €8,000 made to Clarke in 2018 from TSW Services, using proceeds connected to Zenosense stock sales through a nominee account. It attributed another $21,750 to payments made from Zenosense’s law firm’s trust account, which had been funded by payments from Wintercap.

The court held that the Securities and Exchange Commission had established a reasonable approximation of profits causally connected to the securities fraud. The court relied on the complaint’s allegations that Clarke and Shah controlled the shares held in the relevant nominee accounts, directed sales during promotions they orchestrated, and sold shares that should have been registered. Clarke did not dispute receiving the payments. Although he characterized some payments as compensation under a consulting agreement, he provided no evidence that he performed consulting services. The court also rejected his arguments concerning stock-sale proceeds and promotional expenses, explaining that the alleged promotional and administrative costs were not legitimate expenses that had to be deducted.

The court also awarded $9,177 in prejudgment interest, calculated through October 1, 2022 using the Internal Revenue Service rate for unpaid federal taxes. The court concluded that the requested interest calculation was supported by the evidence.

Civil Penalty

The Securities Act and Exchange Act authorize civil money penalties. The court explained that the alleged conduct involved fraud, deceit, manipulation, and at least reckless disregard of regulatory requirements, which could support a second-tier penalty of up to $105,591. The court did not decide whether the evidence also supported a third-tier penalty because it concluded that such a penalty was not warranted for other reasons.

In setting the amount, the court considered the repeated and fraudulent nature of Clarke’s conduct, the evidence of at least reckless disregard, his smaller role compared with Shah, his post-complaint acceptance of responsibility through the consent agreement, and his financial circumstances. The court also considered the need for general deterrence. It imposed a $10,000 civil penalty, which it described as slightly below the maximum for a first-tier violation.

Disposition

The court granted the Securities and Exchange Commission’s motion for civil penalties and disgorgement against Clarke. It imposed disgorgement of $45,234, prejudgment interest of $9,177, and a civil penalty of $10,000.