Business Advisers Defeat SEC Allegations of Penny Stock Fraud

In a notable ruling, a Boston federal judge rejected the U.S. Securities and Exchange Commission’s (SEC) allegations that Roger Bendelac, a business adviser, and his brother-in-law, Thomas Capellini, participated in a $2.3 million penny stock fraud scheme. The decision followed a four-day bench trial in October and highlights the complexities of securities enforcement cases, where the evidence often lies in the fine details.

The Allegations

The SEC alleged that Bendelac and Capellini engaged in a pump-and-dump scheme involving shares of Token Communities Ltd., orchestrated alongside Trends Investments and its president, Clinton Greyling. According to the SEC, the pair executed trades designed to create the appearance of trading activity to attract retail investors. The alleged scheme unraveled when a planned merger fell apart.

While Greyling pled guilty in a separate criminal case and settled with the SEC, and other defendants defaulted in the case, Bendelac and Capellini fought back, resulting in a full acquittal of the SEC’s claims against them.

Key Findings From the Ruling

1. Lack of Knowledge of the Scheme
Judge Richard G. Stearns concluded that the SEC failed to prove that Bendelac knew his trades were being used to manipulate Token’s stock price. Evidence showed that Bendelac had no direct connection to the marketing contractor hired to promote Token, weakening the SEC’s claims of coordinated fraudulent activity.

2. Alternate Explanation for the Trades
The court credited an alternative explanation for the trades between Bendelac and Capellini, describing a “perhaps sketchy” but unrelated arrangement to settle joint business expenses without triggering tax penalties. Capellini reportedly transferred funds from his retirement account to purchase Token shares from Bendelac as part of this arrangement.

While the legality of this financial arrangement remains unaddressed by the court, it undermined the SEC’s argument that the trades were part of a broader pump-and-dump scheme.

3. Trades for Listing Requirements
Bendelac also traded Token shares at Greyling’s request to satisfy listing requirements with the Depository Trust Co., which the court found did not constitute fraudulent intent.

Implications for Securities Enforcement

This case underscores the importance of scrutinizing evidence in securities fraud cases, particularly where legitimate explanations might exist for otherwise suspicious conduct. The ruling highlights how trading activity that may appear manipulative at first glance can unravel under closer examination, especially when the SEC fails to connect defendants to broader fraudulent intent.

Defendants’ Reactions

Attorneys for Bendelac and Capellini praised the decision as a victory for their clients and a rebuke of the SEC’s case. Aaron Katz, who represented Bendelac, noted the importance of digging into the details to test the strength of the government’s allegations. Michael Homer, Capellini’s attorney, added that the SEC’s case “collapsed when tested at trial,” emphasizing the need for robust defenses in complex regulatory actions.

Looking Ahead

The case demonstrates the challenges the SEC faces in pursuing complex securities fraud claims, especially when evidence does not clearly establish fraudulent intent. While the agency has secured settlements and guilty pleas from other parties involved, the defeat in this instance serves as a reminder of the burden it carries in court.

Case Reference: SEC v. Trends Investments Inc., case number 1:22-cv-10889, U.S. District Court for the District of Massachusetts.

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