Shares of Longfin Corp. (NASDAQ:LFIN) were halted during Friday’s U.S. trading session after a federal court in New York froze $27 million of the company’s assets regulators allege were acquired illegally.
“According to a complaint unsealed today in federal court in Manhattan, shortly after Longfin began trading on NASDAQ and announced the acquisition of a purported cryptocurrency business, its stock price rose dramatically and its market capitalization exceeded $3 billion,” said the Securities and Exchange Commission (SEC) in a statement released Friday.
Early Friday, Longfin sported a market value of $2.10 billion, according to Yahoo Finance data. The SEC alleges that Longfin insiders, including Amro Izzelden “Andy” Altahawi, Dorababu Penumarthi, and Suresh Tammineedi, sold large chunks of their restricted shares to the public while shares of Longfin were high. The stock’s 52-week range is $4.69 to $142.82. It resided just over $28 early Friday.
Tale of Woe
On March 22nd, Longfin issued a statement saying it was added to the Russell 2000 Index, one of the most widely followed benchmarks of domestic small-cap stocks. That sent the stock soaring amid expectations that mutual fund managers and passive index funds that benchmark to the Russell 2000 would be buying shares of Longfin.
The ebullience did not last long. Just five days later on March 27th, FTSE Russell, the index provider of the Russell 2000, said it was booting Longfin from its indices, news that sent shares of Longfin tumbling.
“We acted quickly to prevent more than $27 million in alleged illicit trading profits from being transferred out of the country,” said Robert Cohen, Chief of the SEC Enforcement Division’s Cyber Unit. “Preventing defendants from transferring this money offshore will ensure that these funds remain available as the case continues.”
The SEC has taken a hard line on blockchain-related investments. For example, the agency has aggressively warned investors about the risks associated with unregulated initial coin offerings (ICOs) while also barring companies from even using “blockchain” in their names. The SEC has also barred fund managers, including exchange traded fund (ETF) issuers, from using blockchain in fund names.
By selling restricted shares, the Longfin executives potentially violated federal laws “that restrict trading in unregistered shares distributed to company affiliates,” according to the SEC.
