On July 23, 2019, the Honorable Paul A. Magnuson of the U.S. District Court for the District of Minnesota denied a motion to dismiss filed by Lawrence Blaney, a resident of Sugar Grove, Illinois and the former Executive Vice President of Sales of Digiliti Money Group, Inc., a now-defunct Minneapolis, Minnesota financial technology firm.
The SEC’s complaint, filed in April 2019, alleges that between September 2016 and July 2017, Jeffrey C. Mack, Digiliti’s then CEO, and Blaney caused Digiliti to enter into sales contracts with its largest customer worth more than $1.8 million. The complaint further alleges that Mack and Blaney covertly entered into a series of undisclosed side agreements that gave the customer an unconditional right to cancel the contracts in the future – a contractual term which would preclude revenue recognition under Generally Accepted Accounting Principles. According to the complaint, Mack and Blaney concealed the side agreements from Digiliti’s finance and accounting personnel, Board of Directors, and external auditor. As a result, Digiliti improperly recognized revenue on the sales in its financial statements for the third and fourth quarters of 2016 and the first quarter of 2017. During this same period, Digiliti allegedly raised more than $18 million from investors.
The Court denied Blaney’s motion in its entirety. The Court held that, among other things, the SEC had sufficiently alleged that Blaney acted with scienter. The Court further held that, to be liable under Section 17(a)(2) of the Securities Act of 1933, the SEC did not have to allege that Blaney was the “maker” of a statement. Finally, the Court held that the SEC had sufficiently alleged Blaney’s knowledge of securities violations as required for aiding and abetting liability.
The SEC’s complaint charged Blaney with violations of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rules 10b-5(a) and (c) thereunder, the books and records provisions of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and with aiding and abetting Digiliti’s uncharged violations of the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and the books and records and reporting provisions of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The SEC seeks a permanent injunction, disgorgement with prejudgment interest, a civil penalty and a permanent officer and director bar against Blaney.
The litigation is ongoing, and is being led by Doressia L. Hutton, John E. Birkenheier and Kristopher Heston, all of the SEC’s Chicago Regional Office. For additional information, see Litigation Release No. 24439 (Apr. 3, 2019).