SEC Nails Three Firms For Dubious Facebook Trading

“We’re still wondering how and why it’s legal to keep selling shares privately after registering for an initial public offering,” we wrote in a post last month about private exchange trading of Facebook stocks. The Securities and Exchange Commission apparently wondered the same thing.

The SEC announced the end of a year-long investigation, saying it brought charges against Felix Investments and reached settlements with SharesPost and EB Financial Group, Forbes reported.

In the case against Felix Investments, the SEC charged the company and Partner Frank Mazzola with “improper self-dealing,” or earning secret commissions above the five percent investors thought they were being charged, according to Forbes.

The SEC also accused Mazzola and his associates of selling interests in Facebook fund Facie Libre without having Facebook shares to sell, and of similar acts involving shares in Zynga and Twitter.

The agency is seeking court orders against Felix Investments and Mazzola prohibiting them from engaging in securities fraud, as well as payment of back gains and penalties.

SharesPost reached a settlement with the agency over its actions in 2010 and 2011, with the company paying an $80,000 fine and Founder and former Chief Executive Officer Greg Brogger paying a $20,000 fine, and neither party admitting wrongdoing.

The violations occurred before the company was approved as a broker-dealer and alternative trading system in 2011.

Brogger told Forbes of the company’s arrangement with third-party broker-dealer Emerson, which SharesPost used before becoming certified:

We’d send that person to a registered broker-dealer who would qualify them and enter into an agreement. We felt that was appropriate and in keeping with SEC guidance and no action letters. The SEC came to a different opinion, saying that they felt that we should’ve been our own broker-dealer.

And SharesPost said in an email to clients last night:

We have reached a settlement agreement with the SEC regarding its inquiry concerning the broker-dealer registration requirements as they related to the operation of the SharesPost platform in 2010. Although SharesPost believed its arrangement with third-party brokers was compliant with the securities laws, the SEC expressed its view that SharesPost should itself have been a broker-dealer during this time period. SharesPost agreed to resolve the matter by entering into an administrative settlement. The settlement does not affect our members, their transactions, or the way in which SharesPost will serve our members.

Finally, hiding compensation from investors in two Facebook funds was what the agency objected to with EB Financial Group and main executive Laurence Albukerk, who agreed to pay the SEC $210,499 in “disgorgement and prejudgment interest,” along with a penalty of $100,000, without admitting wrongdoing, according to Forbes.

The SEC said Albukerk told investors that he charged five percent upfront and five percent when shares were distributed following the upcoming Facebook IPO, but he used an entity controlled by his wife to purchase Facebook stock, selling interests in that entity to EB funds at an inflated price.

EB Financial Group said in a statement:

EB Financial Group believes this settlement with the SEC is in the firm’s best interests, and we are pleased to put this matter behind us. The agreement with the SEC settles the SEC’s claims that EB Financial Group should have disclosed legally earned compensation in our offering materials, not just in response to investor inquiries and in post-closing disclosures. Furthermore, based on market prices at the time of their investment and today, each investor’s investment in our funds appears profitable. Under the terms of the settlement, EB Financial Group has neither admitted nor denied any of the SEC’s claims.

The SEC actions have not slowed pre-IPO trading of Facebook stock. SharesPost said in an email to clients last night that it completed an auction yesterday of 125,000 units of an investment vehicle designated to hold shares in the social network, at a clearing price of $41 per share.

That gives Facebook an implied valuation of $96.35 billion to $102.5 billion, with the lower number assuming 2.35 billion shares remain outstanding and the latter figure based on 2.5 billion.

Sharespost’s email added details on a new auction that started today:

We are announcing the auction of units of an investment vehicle designated to hold shares of Facebook Inc. (“Facebook”) initiated by SharesPost Financial Corp. today, March 15, 2012. The number of shares contractually committed for sale at this auction is 125,000 shares of the common stock of Facebook. The reserve price is $38 per unit. Each unit held by a successful auction bidder will correspond to one share of Facebook held in the designated investment vehicle. The auction will be conducted on a sealed-bid basis.

You will be required to complete a suitability certification to confirm that you qualify as an accredited investor and qualified client under U.S. securities laws and regulations prior to bidding in the auction and holding units of the designated investment vehicle. The administrator of the investment vehicle, SP Investments Management LLC, is a wholly-owned subsidiary of SharesPost Inc.

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