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SEC Charges Issuer and CEO with Violating Whistleblower Protection Laws to Silence Investor Complaints

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Last week, the U.S. Securities and Exchange Commission’s (SEC) issued a press release to announce that it filed an amended complaint against Collector’s Coffee, Inc. (d/b/a Collectors Café) and its CEO, Mykalai Kontilai (Defendants), alleging that they unlawfully sought to prohibit their investors from reporting misconduct to the SEC and other governmental agencies. 

What are the SEC’s allegations in the original complaint?

The SEC previously charged Defendants with a fraudulent $23 million securities offering based on false statements to at least 140 investors since April 2014, and alleged that Mykalai Kontilai misappropriated and used at least $6 million of those funds for personal expenses.  Specifically, Mykalai Kontilai misappropriated investor funds to purchase a variety of luxury goods and services (including from Chanel, Louis Vuitton, and Cartier), to pay gambling expenses, and to rent an oceanfront condo in Miami. 

Veronica Kontilai, Mykalai Kontilai’s wife, allegedly received over $300,000 of investor funds that she used for personal expenses.

What are the SEC’s allegations in the amended complaint?

The SEC’s amended complaint alleges that Defendants attempted to resolve investor allegations of wrongdoing by conditioning the return of investor money on the investors signing agreements prohibiting them from reporting potential securities law violations to law enforcement, including the SEC.  The amended complaint alleges that the Defendants went so far as to sue two investors that they believed breached on of the illegal agreements

What are the Defendants being charged with?

The SEC is charging the Defendants with the following violations:

  • Fraud (Misstatements and Omissions): Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b);
  • Fraud (Misstatements and Omissions): Section 17(a)(2) of the Securities Act of 1933;
  • Fraud (Scheme): Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c);
  • Fraud (Scheme): Section 17(a)(1) and (3) of the Securities Act of 1933; and
  • Impeding: Rule 21F-17 of the Securities Exchange Act of 1934.

The SEC is seeking equitable disgorgement from Veronica Kontilai, who allegedly received over $300,000 of investor funds that she used for personal expenses.

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