Securities and Exchange Commission v. Legend Venture Partners, LLC
- Lewis Kaplan
- 1:23-cv-05326
- U.S. District Court · Southern District of New York
- 5
In SEC v. Legend Venture Partners, Judge Kaplan appointed a receiver instead of accepting Legend’s proposed alternative.
Legend Venture Partners LLC, its associated investment funds, their investors, Legend’s principals and sales agents, and Midway Venture Partners LLC and World Equity Group, Inc. were affected by the appointment of a receiver and the rejection of Legend’s proposed alternative.
What happened
The Securities and Exchange Commission sued Legend Venture Partners LLC over alleged violations of federal securities laws and the Investment Advisers Act. The court had already granted the SEC’s request for a preliminary injunction except for appointing a receiver.
Legend proposed using Midway Venture Partners LLC and its affiliated broker-dealer, World Equity Group, Inc., to distribute future investment proceeds directly to investors. The SEC supported appointing a receiver, arguing that Legend’s proposal did not protect assets, address potential claims, create a claims process, or provide adequate oversight.
The court appointed a receiver because it found that Midway, Legend, and Legend’s principals had conflicts of interest and that a receiver would better protect all investors. Judge Lewis A. Kaplan did not decide the SEC’s underlying allegations in this memorandum.
The detailed version
- Securities and Exchange Commission v. Legend Venture Partners, LLC · No. 1:23-cv-05326
- Lewis Kaplan
- July 11, 2023
Background
The Securities and Exchange Commission (SEC) brought the action against Legend Venture Partners LLC for alleged violations of federal securities statutes, the Investment Advisers Act of 1940, and related rules. The SEC’s allegations were substantially similar to allegations in its related action against StraightPath Venture Partners LLC and others.
The SEC sought emergency relief, including a temporary restraining order, a preliminary injunction, an accounting of Legend’s assets, and appointment of a receiver. After briefing and oral argument, the court granted the preliminary injunction in all respects except appointment of a receiver. The court gave Legend an opportunity to propose an alternative and asked the parties to brief the receivership issue after they did not reach an agreement.
Legend’s Proposed Alternative
Legend proposed that Midway Venture Partners LLC and its affiliated broker-dealer, World Equity Group, Inc., help distribute each investor’s proportional share of proceeds from seven pre-initial-public-offering investments. Under the proposal, brokerage accounts would be opened for investors, and stock or cash proceeds would be distributed after a company went public or experienced another liquidity event. Legend argued that this approach would be faster and less expensive than a receiver and that Midway and World Equity Group would not charge fees for these services.
Court’s Reasoning
The court identified several problems with the proposal. It found that the proposal did not establish a process for court approval of distributions by Midway, which was not a party to the case and would presumably operate at Legend’s direction. The proposal also did not provide safeguards for possible Legend or fund assets held by third parties, a process for investor claims, a distribution plan, or a way to keep investors and the court fully and accurately informed.
The court also noted that the proposal did not explain how to preserve for possible distribution the more than $12.8 million that the SEC alleged Legend’s principals had taken to pay themselves and their sales agents. The court found Midway conflicted because of its existing relationships with Legend and StraightPath, including transactions relevant to the SEC’s fraud allegations. Based on these conflicts and the relationships involving Legend’s principals, the court stated that it had no reason to trust Legend and its principals to act in the best interests of all Legend investors.
Ruling
The court appointed Judge Melanie Cyganowski as receiver. It concluded that a court-appointed receiver would best serve the interests of all investors in Legend and its funds. The memorandum did not decide the SEC’s underlying securities-law allegations. The court also did not address whether a receiver would have standing to bring claims against third parties, because no such claim had then been brought by the receiver.
Read the full 5-page opinion on CourtListener, the free public archive maintained by the Free Law Project.