A beverage company planned to pivot to blockchain technology and three people were busted for insider trading for purchasing stock just ahead of the public announcement and dumping it after the price soared.
The Series
In May 2022, the U.S. Securities and Exchange Commission (SEC) announced they were nearly doubling the size of the Crypto Assets and Cyber Unit. This series will explore enforcement actions taken by this unit since its inception in 2017, plus earlier actions taken by the SEC prior to the formation of this unit.
The Crackdown
SEC Charges Three Individuals with Insider Trading
Description: The Commission charged three individuals with insider trading in advance of an announcement by Long Blockchain Company (formerly known as Long Island Iced Tea Co.) that it was going to "pivot" from its existing beverage business to blockchain technology, which caused the company’s stock price to soar.
Category: Hacking/Insider Trading
Date Filed: 09 July 2021
Penalty: TBD
Violations: The SEC's complaint charges Watson, Lindsay, and Giguiere with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks permanent injunctions and civil penalties as to all defendants, and, additionally, an officer and director bar as to Watson.
The Backstory
Long Island Iced Tea Corp was founded in 2011, producing non-alcoholic ready-to-drink iced teas. In July 2016, the company began trading on Nasdaq Capital Market, having previously been traded over-the-counter (OTC). In October 2017, Nasdaq sent a delist warning, which gave the company until April 2018 to regain compliance with Nasdaq Listing Rule 5550(b) by raising its market value above $35 million.
By December 2017, the company had concocted a plan to rebrand itself as Long Blockchain Corp, presumably to take advantage of the ongoing crypto frenzy, in an attempt to stay listed on Nasdaq. This plan involved spinning off their existing beverage business into a subsidiary named Long Island Brand Beverages, LLC.
As insane as that sounds, they weren't the first company to do this, nor the last. There were enough copycats that then SEC Chairman Jay Clayton mentioned this behavior during a speech in January 2018.
I doubt anyone in this audience thinks it would be acceptable for a public company with no meaningful track record in pursuing the commercialization of distributed ledger or blockchain technology to (1) start to dabble in blockchain activities, (2) change its name to something like "Blockchain-R-Us," and (3) immediately offer securities, without providing adequate disclosure to Main Street investors about those changes and the risks involved. The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering.
Jay Clayton, SEC Chairman
The SEC's insider trading complaint that was filed in 2021 involves three individuals that were involved in trades made using non-public knowledge that Long Island Iced Tea Corp was planning to pivot to blockchain.
Eric Watson was the inside man, said to have controlled more than 30% of Long Island Iced Tea shares and had helped drive the company's shift to the blockchain. Eric signed a confidentiality agreement to not disclose the company's plans but he tipped off his friend Oliver Barret Lindsay, a broker in the Cayman Islands. Eric even shared with him a draft version of the press release that the company was preparing.
Oliver Barret Lindsay was the middle man, allegedly passing the material nonpublic information on to his other friend, Gannon Giguiere.
Gannon Giguiere purchased 35,000 shares of the stock within hours of receiving this non-public information. After the company's press release was made public, the stock price skyrocketed, spiking more than 380% intraday. Within two hours, Giguiere had sold his shares for over $160,000 in illicit profits.
Prior to this incident, Lindsay and Giguiere already had a history together. In July 2018, the SEC charged them with stock manipulation schemes that occurred between December 2015 and March 2018. Both pled guilty to criminal charges and were sentenced to prison on May 12, 2022. Lindsay received a 17-month prison sentence; Giguiere was sentenced to 12 months.
In March 2019, Long Blockchain sold off its ready-to-drink tea business to ECC Ventures 2 Corp.
In February 2021, the SEC revoked the registration of Long Blockchain's securities, pursuant to Section 12(j) of the Exchange Act.
There is no final resolution yet for the charges against this trio for the Long Island Iced Tea / Blockchain inside trading.
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