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Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 1 of 12
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`SECURITIES AND EXCHANGE COMMISSION,
`
`
`
`Plaintiff,
`
`
`
`
`
`
`
`v.
`
`
`
`
`
` Civ. Action No. 1:22-cv-09803
`
` JURY TRIAL DEMANDED
`
`
`
`GEL DIRECT TRUST,
`GEL DIRECT, LLC,
`JEFFREY K. GALVANI,
`STUART A. JEFFERY,
`
`
`
`
`Defendants.
`
`
`
`COMPLAINT
`
`Plaintiff Securities and Exchange Commission (“SEC”) files this Complaint against GEL
`
`Direct Trust (“GEL”), GEL Direct, LLC (“GEL Trustee”), Jeffrey K. Galvani (“Galvani”), and
`
`Stuart A. Jeffery (“Jeffery”) (collectively, “Defendants”), and alleges as follows:
`
`SUMMARY
`
`1.
`
`GEL, its managing trustee (GEL Trustee), and its co-owners and control persons
`
`(Galvani and Jeffery), have engaged in the business of selling penny stocks and other securities
`
`for the accounts of GEL’s customers without being registered as brokers or being associated with
`
`a registered broker.
`
`2.
`
`Galvani and Jeffery created GEL, which they manage through its trustee, GEL
`
`Trustee. Neither GEL nor GEL Trustee are registered with the SEC as a broker-dealer.
`
`3.
`
`Nonetheless, GEL’s business model is to act as an introducing broker. Among
`
`other actions, GEL: (a) takes possession of its customers’ penny stocks; (b) finds executing
`
`brokers willing to sell the stocks in the market; (c) directs the executing brokers on completing
`
`

`

`Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 2 of 12
`
`the sales; and (d) facilitates the settlement of the trades and disbursement of proceeds to its
`
`customers.
`
`4.
`
`From approximately June 2019 to at least May 2022, Galvani and Jeffery, acting
`
`through the unregistered GEL entities, used this business model to execute more than 19,000
`
`trades of more than 300 billion shares of stock of more than 400 issuers on behalf of
`
`approximately 60 customers. These trades generated more than $1.2 billion of trading proceeds
`
`for GEL’s customers. In turn, GEL received more than $12.4 million in compensation, including
`
`transaction-based compensation, from its customers.
`
`5.
`
`By engaging in the conduct alleged herein, Defendants violated Section 15(a) of
`
`the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78o(a)]. Pursuant to
`
`Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], Galvani and Jeffery -- as control persons
`
`of GEL and GEL Trustee -- are also liable for GEL’s and GEL Trustee’s Section 15(a)
`
`violations.
`
`NATURE OF THE PROCEEDINGS AND RELIEF SOUGHT
`
`6.
`
`The SEC brings this action pursuant to the authority conferred upon it by Sections
`
`21(d) and 21(e) of the Exchange Act [15 U.S.C. § 78u(d) and 78u(e)].
`
`7.
`
`The SEC seeks a final judgment permanently enjoining Defendants from violating
`
`Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)], ordering Defendants to disgorge all ill-
`
`gotten gains obtained as a result of the violations alleged herein (together with prejudgment
`
`interest), ordering Defendants to pay civil penalties pursuant to Section 21(d)(3) of the Exchange
`
`Act [15 U.S.C. § 78u(d)(3)], barring Defendants from participating in any offering of any penny
`
`stock pursuant to Section 21(d)(6) of the Exchange Act [15 U.S.C. § 78u(d)(6)], and ordering
`
`any other relief the Court may deem just and proper.
`
`
`
`2
`
`

`

`Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 3 of 12
`
`JURISDICTION AND VENUE
`
`8.
`
`This Court has subject matter jurisdiction pursuant to Sections 21(d), 21(e), and
`
`27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa].
`
`9.
`
`Defendants made use of the mails or means or instrumentalities of interstate
`
`commerce in connection with the acts, practices, transactions, and courses of business alleged in
`
`this Complaint.
`
`10.
`
`Venue in this District is proper pursuant to Section 27 of the Exchange Act [15
`
`U.S.C. § 78aa]. Certain of the transactions, acts, practices, and courses of business constituting
`
`the violations alleged herein occurred within this District. Defendants also transact business
`
`within this district.
`
`DEFENDANTS
`
`11.
`
`GEL is a Delaware statutory trust that maintains its principal office in New York,
`
`New York.
`
`12.
`
`GEL Trustee is a Delaware limited liability company that maintains its principal
`
`office in New York, New York. GEL Trustee is the managing trustee of GEL. Galvani and
`
`Jeffery co-own and co-manage GEL Trustee.
`
`13.
`
`14.
`
`Galvani is a resident of Hudson County, New Jersey.
`
`Jeffery is a resident of Nassau County, New York.
`
`FACTS
`
`A. Background
`Galvani and Jeffery have worked in the securities industry since approximately
`15.
`
`1997 and 2006, respectively, and they are currently affiliated as registered representatives at the
`
`same registered broker-dealer. They have known each other for many years.
`
`
`
`3
`
`

`

`Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 4 of 12
`
`16.
`
`In approximately early 2019, Galvani and Jeffery decided to start a new financial
`
`firm outside of their affiliation with the registered broker-dealer.
`
`17.
`
`To that end, Galvani and Jeffery formed GEL, and at all times have jointly
`
`controlled GEL.
`
`18.
`
`Galvani and Jeffery exercise control over GEL through its managing trustee, GEL
`
`Trustee. Galvani and Jeffery each own 50% of GEL Trustee.
`
`19.
`
`Galvani and Jeffery established GEL as a firm that could facilitate securities
`
`transactions for its customers by, among other things: (i) assisting in executing, clearing, and
`
`settling securities transaction; (ii) accepting, routing, matching, or otherwise handling customer
`
`orders; and (iii) handling customer funds and securities.
`
`20.
`
`Using their experience and connections in the industry, Galvani and Jeffery had
`
`no trouble finding customers for their new firm. GEL obtained many of its customers through
`
`customer referrals and referrals from other brokerage firms. As of May 2022, GEL had opened
`
`accounts for approximately 60 customers, including customers in multiple U.S. states.
`
`21.
`
`The vast majority of GEL’s trading activity related to the sale of penny stocks that
`
`its customers obtained through various sources, including the acquisition of convertible
`
`promissory notes or other forms of microcap financing.
`
`22.
`
`23.
`
`Neither GEL nor GEL Trustee has ever been registered as a broker-dealer.
`
`From at least June 2019 to May 2022, Galvani and Jeffery conducted GEL’s and
`
`GEL Trustee’s business without any affiliation with a registered broker-dealer.
`
`24.
`
`Although Galvani and Jeffery were affiliated brokers of a registered broker-dealer
`
`during that period, their GEL-related activities were conducted separate and apart from their
`
`affiliation with that broker-dealer, and Galvani and Jeffery listed their GEL-related activities as
`
`
`
`4
`
`

`

`Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 5 of 12
`
`“Other Business Activities” that were separate and apart from their affiliation with that broker-
`
`dealer.
`
`25.
`
`In February 2022, Galvani and Jeffery attempted for the first time to include their
`
`GEL-related activities with their affiliated broker-dealer. However, the broker-dealer did not
`
`supervise any of GEL’s trading activity before May 2022, at the earliest.
`
`B. GEL’s Business Model
`Every new GEL customer was required to fill out an “Account Application” that,
`26.
`
`among other things, confirmed that GEL would have trading authorization over the customer’s
`
`securities. The Account Application stated explicitly that: “you grant trading authorization [to
`
`GEL] when you sign your application.”
`
`27.
`
`Several GEL customers also provided their own documents to GEL confirming
`
`their understanding that they were opening a “brokerage account” with GEL and that GEL would
`
`provide broker-dealer services.
`
`28.
`
`After enrolling a new customer, GEL sent a “Welcome Packet” that:
`
`• Listed Galvani and Jeffery as GEL’s Managing Partners;
`
`• Stated that customers would use “the following form to authorize the transfer
`
`of assets, currently at another firm, to your brokerage account held at GEL”;
`
`• Provided a “Deposit Checklist” that included general requirements to ensure
`
`that customers could transfer their securities to GEL; and
`
`• Required customers to set up an account for GEL to wire their trading
`
`proceeds.
`
`29.
`
`GEL established omnibus accounts in its name to hold its customer’s trading
`
`proceeds and GEL’s fees. The omnibus accounts had sub-accounts associated with each
`
`
`
`5
`
`

`

`Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 6 of 12
`
`customer. GEL controlled the omnibus accounts and their subaccounts. Initially, the GEL
`
`omnibus accounts were maintained at a trust company, and later at the financial institutions
`
`maintaining the custodian accounts described in the following paragraph.
`
`30.
`
`GEL established custodian accounts in its name at several financial institutions.
`
`GEL’s customers, following GEL’s instructions, used electronic transfers to deposit their penny
`
`stocks and other securities into the custodian accounts, thereby giving GEL control over the
`
`handling and disposition of its customers’ securities.
`
`31.
`
`GEL further established approximately 20 delivery-versus-payment (“DVP’)
`
`brokerage accounts at domestic and offshore brokerage firms. GEL used these DVP brokerage
`
`accounts to place trades to sell its customers’ securities.
`
`32.
`
`After a customer deposited their penny stocks or other securities into one of
`
`GEL’s custodian accounts and they were under GEL’s control, GEL found executing brokers
`
`who were willing to sell the securities in the market through one of GEL’s DVP brokerage
`
`accounts.
`
`33.
`
`GEL provided trading instructions on behalf of its customers to the executing
`
`brokers and directed the executing brokers to sell the securities. As alleged in more detail below,
`
`these instructions often included directives on price and volume.
`
`34.
`
`The executing broker then sold the securities based on GEL instructions, typically
`
`by placing trades in the U.S. over-the-counter market. After an executing broker sold the
`
`securities through one of GEL’s DVP brokerage accounts, the funds settled at one of GEL’s
`
`custodian accounts.
`
`35.
`
`Thereafter, GEL would continue to facilitate the settlement process. Typically,
`
`GEL would transfer the settled funds from the custodian account to a GEL omnibus account.
`
`
`
`6
`
`

`

`Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 7 of 12
`
`36.
`
`GEL then allocated trading proceeds to the omnibus subaccount associated with
`
`the customer. GEL kept internal records to track securities from the settled trades to its
`
`customers’ accounts, which corresponded to the GEL-controlled subaccounts.
`
`37.
`
`After GEL directed the funds to the subaccount, GEL followed instructions from
`
`its customers for wiring the trading proceeds to the customers’ bank accounts. GEL wired
`
`hundreds of millions of dollars in customer trading proceeds to customer bank accounts or to
`
`third-party bank accounts on behalf of its customers.
`
`38.
`
`The following illustrates a typical GEL transaction:
`
`
`
`39.
`
`GEL’s customers -- and not GEL -- owned virtually all of the penny stocks and
`
`other securities that GEL traded through its custodian and DVP brokerage accounts.
`
`40.
`
`Between approximately June 2019 and May 2022, GEL executed more than
`
`19,000 trades of more than 300 billion shares of stock of more than 400 issuers on behalf of
`
`approximately 60 customers. These trades generated more than $1.2 billion of trading proceeds
`
`
`
`7
`
`

`

`Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 8 of 12
`
`for GEL’s customers.
`
`C. Defendants Directed Trading in Securities.
`GEL often used Bloomberg messaging to communicate trade requests to the
`41.
`
`executing brokers. In many instances, GEL provided specific price and volume directives to the
`
`executing brokers on behalf of GEL’s customers. GEL also exercised discretion over many of
`
`the trades it was directing on its customers behalf.
`
`42.
`
`For example, on July 2, 2019, the Bloomberg handle “GELDIRECT” instructed
`
`an executing broker to sell shares at “15% of volume please.”
`
`43.
`
`As another example, on July 11, 2019, the GEL Bloomberg account registered to
`
`Galvani told an executing broker on penny stock identified by name and ticker “…if there is
`
`anything else we can trade today, please let me know…please reoffer…at .80.”
`
`44.
`
`As another example, when an executing broker asked GEL if it wanted to sell
`
`additional shares of a penny stock identified by name and ticker, the GEL Bloomberg account
`
`registered to Galvani responded “yes” six seconds later.
`
`45. When GEL communicated with executing brokers, it made clear that GEL was
`
`entering trades. For example, on September 3, 2020, a GEL Trustee employee sent an email to
`
`an executing broker stating: “I’m working through the trades for today and yesterday that we
`
`[GEL] placed with you fine folks….”
`
`D. Galvani and Jeffery Directly Participated in and Controlled the Enterprise.
`At all times, Galvani and Jeffery shared ultimate decision-making authority over
`46.
`
`all of GEL’s and GEL Trustee’s activities and policies, and they co-managed the business of
`
`GEL and GEL Trustee.
`
`
`
`8
`
`

`

`Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 9 of 12
`
`47.
`
`No other individuals exercised managerial discretion or control over GEL or GEL
`
`Trustee. GEL Trustee had approximately two employees during the relevant period. Galvani
`
`and Jeffery were responsible for supervising those employees.
`
`48.
`
`Galvani and Jeffery both executed documents to open custodian accounts to
`
`accept customer securities and to open the DVP brokerage accounts necessary to execute trades
`
`on behalf of GEL customers. Galvani and Jeffery both controlled and were authorized
`
`signatories for the custodian accounts and DVP brokerage accounts. Galvani and Jeffery were
`
`both listed as authorized traders for GEL.
`
`49.
`
`Galvani and Jeffery both provided a range of brokerage services to GEL’s
`
`customers, including, but not limited to, providing trading directions to executing brokers on
`
`behalf of customers, providing instructions to facilitate the settlement of trades and wiring of
`
`trading proceeds, and communicating with customers about their securities and trading activity.
`
`E. Defendants Received Transaction-Based Compensation
`GEL received multiple types of compensation from its customers, including
`50.
`
`transaction-based compensation. The compensation structure was set forth in a fee schedule.
`
`51.
`
`52.
`
`GEL charged each customer a $2,500 monthly account maintenance fee.
`
`GEL charged its customers a transaction-based fee for each deposit of securities
`
`the customer made with GEL for GEL to sell through the executing brokers. The fee was $1,100
`
`per deposit in most instances, but varied depending on the type of securities deposited.
`
`53.
`
`GEL charged a $30 trade-settlement fee each time it completed a trade on behalf
`
`of a customer.
`
`54.
`
`GEL charged rush fees to expedite the review and trading process, and other fees
`
`related to brokerage-type services such as a: (i) $150 termination fee, (ii) $35 wire transfer fee,
`
`(iii) $250 alternative asset fee, and (iv) $75 Roth conversion fee.
`9
`
`
`
`

`

`Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 10 of 12
`
`55.
`
`Each month, GEL collected these fees from its customers, which account
`
`documents referred to as “commissions.” Between June 2019 and May 2022, GEL received
`
`more than $12.4 million dollars in fees from its customers.
`
`56.
`
`The fees that GEL collected from its customers were transferred from GEL’s bank
`
`accounts to GEL Trustee’s bank accounts and other bank accounts that Galvani and Jeffery
`
`controlled.
`
`57.
`
`Galvani and Jeffery split profits in accordance with their 50-50 ownership
`
`interest. Customer fees were paid out to Galvani’s and Jeffery’s personal accounts from fees
`
`deposited in the GEL, GEL Trustee, and other controlled accounts.
`
`FIRST CLAIM FOR RELIEF
`
`Violations of Section 15(a) of the Exchange Act
`(against all Defendants)
`
`58.
`
`The SEC re-alleges and incorporates by reference each and every allegation
`
`contained in the paragraphs above.
`
`59.
`
`By engaging in the conduct alleged above, Defendants acted as brokers within the
`
`meaning of Section 3(a)(4) of the Exchange Act [15 U.S.C. § 78c(4)], and made use of the mails
`
`or any means or instrumentality of interstate commerce to effect transactions in, or to induce or
`
`attempt to induce the purchase or sale of, securities.
`
`60. With respect to the securities transactions at issue, Defendants were not registered
`
`with, or an associated person of a firm registered with, the SEC.
`
`61.
`
`62.
`
`Defendants did not qualify for an exemption from the registration requirements.
`
`By reason of the foregoing, Defendants violated, and unless enjoined will
`
`continue to violate, Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)].
`
`
`
`10
`
`

`

`Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 11 of 12
`
`SECOND CLAIM FOR RELIEF
`
`Control Person Liability for Violations of Section 15(a) of the Exchange Act
`(against Galvani and Jeffery)
`
`63.
`
`The SEC re-alleges and incorporates by reference each and every allegation
`
`contained in the paragraphs above
`
`64.
`
`At all times, Galvani and Jeffery controlled GEL and GEL Trustee within the
`
`meaning of Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)].
`
`65.
`
`Galvani and Jeffery, directly or indirectly, induced the act or acts constituting
`
`GEL’s and GEL Trustee’s violations of Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)].
`
`66.
`
`By engaging in the conduct alleged above, Galvani and Jeffery are liable as
`
`control persons for GEL’s and GEL Trustee’s violations of Section 15(a) of the Exchange Act
`
`[15 U.S.C. § 78o(a)].
`
`67.
`
`Pursuant to Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], Galvani and
`
`Jeffery are liable for GEL’s and GEL Trustee’s violations of Section 15(a) of the Exchange Act
`
`[15 U.S.C. § 78o(a)] to the same extent as GEL and GEL Trustee.
`
`PRAYER FOR RELIEF
`
`
`
`
`
`WHEREFORE, Plaintiff respectfully requests that this Court enter a Final Judgment:
`
`I.
`
`Permanently restraining and enjoining Defendants from violating, directly or indirectly,
`
`Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)].
`
`II.
`
`Permanently restraining and enjoining Defendants Galvani and Jeffery from, directly or
`
`indirectly, controlling any person who violates Section 15(a) of the Exchange Act [15 U.S.C. §
`
`78o(a)].
`
`
`
`11
`
`

`

`Case 1:22-cv-09803 Document 1 Filed 11/17/22 Page 12 of 12
`
`Ordering Defendants to disgorge all ill-gotten gains derived from the conduct alleged in
`
`III.
`
`this Complaint, together with prejudgment interest thereon;
`
`IV.
`
`
`
`Ordering Defendants to pay civil penalties pursuant to Section 21(d)(3) of the Exchange
`
`Act [15 U.S.C. § 78u(d)(3)]; and
`
`V.
`
`Prohibiting each Defendant from participating in any offering of any penny stock
`
`pursuant to Section 21(d)(6) of the Exchange Act [15 U.S.C. § 78u(d)(6)].
`
`VI.
`
`
`
`
`
`Granting such other and further relief as this Court may deem just and proper.
`
`
`Plaintiff demands trial by jury in this action on all issues so triable.
`
`JURY DEMAND
`
`Dated: November 17, 2022
`
`
`
`
`
`
`
`
`
`
`Respectfully submitted,
`
`/s/ Keefe M. Bernstein
`Keefe M. Bernstein*
`Derek B. Kleinmann*
`
`*Application for admission pro hac vice pending
`
`Securities and Exchange Commission
`801 Cherry Street, Suite 1900
`Fort Worth, Texas 76102
`Tel: (817) 900-2607 (Bernstein)
`bernsteink@sec.gov
`Tel: (817) 900-2623 (Kleinmann)
`kleinmannd@sec.gov
`
`
`
`12
`
`

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