Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 1 of 28
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`UNITED STATES DISTRICT COURT
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`WESTERN DISTRICT OF WASHINGTON
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`SEATTLE DIVISION
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`CASE NO.
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`COMPLAINT
`JURY DEMAND
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`SECURITIES AND EXCHANGE
`COMMISSION,
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`Plaintiff,
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`JUSTIN COSTELLO and
`DAVID FERRARO
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`v.
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`Defendants.
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`Plaintiff Securities and Exchange Commission (the “SEC” or the “Commission”), for its
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`complaint against Defendants Justin Costello (“Costello”) and David Ferraro (“Ferraro”) alleges
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`as follows:
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`Securities and Exchange Commission
`100 Pearl Street, Suite 20-100
`New York, NY 10004-2616
`(212) 336-1100
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 2 of 28
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`SUMMARY
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`1.
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`This action involves Costello’s numerous schemes to defraud investors, all of
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`which violated the antifraud provisions of the federal securities laws. Costello, who claimed to
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`be building a conglomerate in the cannabis industry, falsely portrayed himself to the public as a
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`billionaire with a Harvard MBA, a military veteran, and a hedge fund manager with years of
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`experience on Wall Street. Between at least July 2019 and August 2020, Costello used these and
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`other fictitious credentials to gain investors’ trust and to defraud them out of millions of dollars.
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`2.
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`First, Costello disseminated materially false or misleading information about his
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`educational and professional credentials to the investing public, including in a Commission filing
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`for GRN Holding Corporation Nevada (“GRNF”), a publicly traded microcap company of which
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`Costello was CEO. In a press release for GRNF, Costello also disseminated materially false or
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`misleading information about a purported banking entity that Costello owned and that GRNF
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`would allegedly acquire.
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`3.
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`Second, after using his fabricated accomplishments to become an investment
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`adviser to a married couple, Costello sold the couple $1.8 million in stock at an over 9,000
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`percent markup without adequately disclosing the markup to them. Costello further used the
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`same advisory clients’ $4 million brokerage account to trade securities of companies in which he
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`had an undisclosed financial interest and to conduct insider trading.
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`4.
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`Third, Costello obtained approximately $700,000 in investments from 13
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`investors for a closely-held company that shared a name with GRNF but that was in fact a
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`separate, private entity owned and controlled by Costello. As a result of Costello’s materially
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`false or misleading statements, investors were led to believe that they were buying shares of
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`GRNF, and not shares of the private entity.
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`2
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`Securities and Exchange Commission
`100 Pearl Street, Suite 20-100
`New York, NY 10004-2616
`(212) 336-1100
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 3 of 28
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`5.
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`Fourth, Costello obtained approximately $200,000 in investments from 19
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`investors for a private company that Costello purportedly planned to turn into a publicly traded
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`cannabis-related company. Certain of the investors attended a presentation during which Costello
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`again emphasized his false professional credentials, including his purported experience as an
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`investment banker in the cannabis industry. In addition, for at least $50,000 of the investments in
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`the private company, Costello misappropriated the funds by depositing them in an account for
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`yet a different company that Costello controlled.
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`6.
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`Fifth, from at least October 2019 through January 2021 Costello and Ferraro
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`engaged in stock promotion schemes in which Ferraro recommended to his Twitter followers and
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`the public at least five microcap stocks that Costello owned. Ferraro failed to disclose that he and
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`Costello intended to sell shares of those stocks as the price of those stocks rose, or that Costello
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`would pay Ferraro a portion of his profits from those sales. Costello profited approximately
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`$683,000 from these schemes, of which he shared approximately $32,000 with Ferraro. Ferraro
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`profited approximately $41,000 from his own trading in these schemes.
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`7.
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`Additionally, in July 2019, December 2019, and January 2020, Ferraro separately
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`conducted his own stock promotion schemes with respect to two additional microcap stocks,
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`generating profits of approximately $68,000.
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`VIOLATIONS
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`8.
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`By engaging in the conduct set forth in this Complaint, Defendants violated
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`Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77q(a)] and Section
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`10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rule
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`10b-5 thereunder [17 C.F.R. § 240.10-b5]. Costello further violated Sections 206(1) and 206(2)
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`of the Investment Advisers Act of 1940 (“Advisers Act”) [15 U.S.C. §§ 80b-6(1) and 80b-6(2)].
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`3
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`Securities and Exchange Commission
`100 Pearl Street, Suite 20-100
`New York, NY 10004-2616
`(212) 336-1100
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 4 of 28
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`9.
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`Unless the Defendants are permanently restrained and enjoined, they will
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`continue to engage in the acts, practices, and courses of business set forth in this Complaint and
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`in acts, practices, and courses of business of similar type and object.
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`NATURE OF THE PROCEEDING AND RELIEF SOUGHT
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`10.
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`The Commission brings this action pursuant to the authority conferred upon it by
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`Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)], Section 21(d) of the Exchange Act [15
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`U.S.C. § 78u(d)], and Section 209(d) of the Advisers Act [15 U.S.C. § 80b-9(d)].
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`11.
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`The Commission seeks a final judgment: 1) permanently enjoining the Defendants
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`from ongoing or future violations of the federal securities laws and rules this Complaint alleges
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`they have violated; 2) ordering the Defendants to disgorge all ill-gotten gains they received as a
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`result of the violations alleged herein and to pay prejudgment interest thereon pursuant to
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`Sections 21(d)(3) [15 U.S.C. § 78u(d)(3)], 21(d)(5) [15 U.S.C. § 78u(d)(5)], and 21(d)(7) [15
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`U.S.C. § 78u(d)(7)] of the Exchange Act; 3) ordering the Defendants to pay civil money
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`penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)], Section 21(d)(3) of
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`the Exchange Act [15 U.S.C. § 78u(d)(3)], and, as to Costello, also Section 21A of the Exchange
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`Act [15 U.S.C. §§ 78u-1(a)(1)-(2)] and Section 209(e) of the Advisers Act [15 U.S.C.§ 80b-
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`9(e)]; 4) prohibiting the Defendants from participating in any offering of a penny stock, pursuant
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`to Securities Act Section 20(g) [15 U.S.C. § 77t(g)] and Exchange Act Section 21(d)(6) [15
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`U.S.C. § 78u(d)(6)]; 5) prohibiting Costello from serving as an officer or director of any public
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`company pursuant to Section 20(e) of the Securities Act [15 U.S.C. § 77t(e)] and Section
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`21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)]; and 6) ordering any further relief that the
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`Court may deem just and proper.
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`New York, NY 10004-2616
`(212) 336-1100
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 5 of 28
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`JURISDICTION AND VENUE
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`12.
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`This Court has jurisdiction over this action pursuant to Sections 22(a) of the
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`Securities Act [15 U.S.C. § 77v(a)], Section 27 of the Exchange Act [15 U.S.C. § 78aa], and
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`Section 214 of the Advisers Act [15 U.S.C. § 80b-14].
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`13.
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`The Defendants, directly or indirectly, have made use of the means or
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`instrumentalities of interstate commerce or of the mails in connection with the transactions, acts,
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`practices, and courses of business alleged herein.
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`14.
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`Venue lies in this District under Section 22(a) of the Securities Act [15 U.S.C.
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`§ 77v(a)], Section 27 of the Exchange Act [15 U.S.C. § 78aa], and Section 214 of the Advisers
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`Act [15 U.S.C. § 80b-14]. Certain of the acts, practices, transactions, and courses of business
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`alleged in this Complaint occurred within this District. Among other things, Costello made
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`certain of the false statements described herein, and placed certain of the trades described herein,
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`while physically present in this District. Costello also made certain transfers to Ferraro from
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`bank accounts owned by entities located in this District and engaged in stock promotion schemes
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`with Ferraro while within this District.
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`DEFENDANTS
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`15.
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`Costello, age 42, currently resides in La Jolla, California. Until August 2022,
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`Costello was the CEO and sole Director of GRNF. Costello also was the Chairman of
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`Hempstract Inc. (“Hempstract”) until May 2021. Costello is the majority shareholder of GRN
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`Holding Corporation Washington (“GRN Holding (WA)”) and is the sole owner of GRN Funds,
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`LLC (“GRN Funds”). Costello is not registered with the Commission as a broker or an
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`investment adviser.
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`16.
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`Ferraro, age 44, is a resident of Radford, VA. During the time period of the stock
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`promotion schemes described herein, Ferraro controlled a Twitter account under the handle
`5
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`Securities and Exchange Commission
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`New York, NY 10004-2616
`(212) 336-1100
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 6 of 28
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`“@computerbux,” which had nearly 10,000 followers as of December 2019. Ferraro is currently
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`employed as a “Business Transformation Consultant.”
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`OTHER RELEVANT ENTITIES
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`17. GRN Funds is a Washington limited liability company that is wholly owned by
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`Costello. GRN Funds purports to be a private equity and capital management company. It also
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`purports to provide banking services to marijuana-related businesses through a Costello-owned
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`entity formerly known as Pacific Banking Company and now known as Pacific Compliance
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`Corporation.
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`18. GRNF is a Nevada corporation that, until June 2022, had its principal executive
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`offices in Seattle, Washington. Its common stock is quoted publicly under the ticker symbol
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`“GRNF” on OTC Link, an exchange through which over-the-counter securities are traded. Until
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`August 19, 2019, GRNF was named Discovery Gold Corporation.
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`19. GRN Holding (WA) is a Washington corporation with its principal executive
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`offices in Seattle, Washington. GRN Holding (WA) is a private company founded by Costello
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`and of which Costello is its largest shareholder and CEO.
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`20. Hempstract is a Nevada corporation with its principal executive offices in
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`Warden, Washington. The company purports to develop and sell hemp-based products. Costello
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`was one of the initial founders of Hempstract, which became a publicly traded company after it
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`was acquired by Riverdale Oil and Gas Corporation (“RVDO”) in August 2020. Today, it is
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`quoted on OTC Link under the ticker symbol “HPST.”
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 7 of 28
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`I.
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`FACTS
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`Costello Made False and Misleading Statements to the Investing Public, Including in
`a Form 8-K and in a Press Release
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`21.
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`On June 20, 2019, Costello, through GRN Funds, acquired 139 million shares—a
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`majority interest—of GRNF. At the time, the company was named Discovery Gold Corporation.
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`22.
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`Costello purportedly planned to turn GRNF into a cannabis conglomerate by
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`merging companies in the cannabis industry into GRNF.
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`23.
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`On July 1, 2019, GRNF filed a Form 8-K announcing Costello’s purchase of
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`GRNF shares and his appointment as President, CEO, and sole Director of GRNF.
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`24.
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`The Form 8-K stated that Costello was a graduate of the University of Minnesota
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`and the Harvard Business School.
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`25.
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`The Form 8-K also stated that Costello was the CEO of GRN Funds and described
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`GRN Funds as a “private equity and hedge fund.”
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`26.
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`Contrary to these representations, Costello graduated from Winona State
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`University, and not the University of Minnesota.
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`27.
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`Costello did not graduate from Harvard Business School. Costello has taken just
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`one class through Harvard University’s Division of Continuing Education.
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`28.
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`29.
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`GRN Funds has never been registered with the Commission as a hedge fund.
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`Costello knew that he was not a graduate of the University of Minnesota or
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`Harvard Business School. Costello also knew that GRN Funds was not a hedge fund.
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`30.
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`Costello signed GRNF’s July 1, 2019 Form 8-K containing these false
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`representations.
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`Securities and Exchange Commission
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 8 of 28
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`31.
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`The July 1, 2019 Form 8-K and accompanying press release were issued after
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`trading hours that day. On July 2, 2019, GRNF share prices increased from $0.0028 to $0.03—a
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`971 percent increase—on trading volume 400 times that of the prior day.
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`32.
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`Around the time GRNF filed the July 1, 2019 Form 8-K, GRN Funds’s website
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`stated that it had $1.15 billion in assets under management. This statement was false.
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`33.
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`On November 12, 2019, GRNF issued a press release, which Costello drafted,
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`announcing that it had signed “strategic non-binding letters of intent” to acquire ten financial
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`services and hemp and cannabis companies. The press release asserted that the intended
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`acquisitions would “result in the acquisition of a significant amount of assets” and cause GRNF
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`to cease being a shell company.
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`34.
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`The press release described “Pacific Banking Corp.” as one of the entities with
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`which GRNF had signed a strategic non-binding letter of intent and stated that Pacific Banking
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`Corp. provided “specialized banking services” to its clients. Pacific Banking Corp. is majority-
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`owned by Costello.
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`35.
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`The press release omitted that Pacific Banking Corp. is not registered as a state or
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`federal bank, or as a money services business.
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`36.
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`Costello knew or recklessly disregarded that the statements in the press release
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`about Pacific Banking Corp. were false or misleading.
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`37.
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`GRNF’s stock, which opened at $0.845 on November 12, 2019, the day of the
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`press release, reached an intraday high of $0.98—an approximately sixteen percent increase—
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`before closing at $0.89.
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 9 of 28
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`II.
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`Costello Defrauded Two Advisory Clients and Engaged in Insider Trading
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`38.
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`In July 2019, Costello became an investment adviser to a 65-year-old real estate
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`agent (“Advisory Client 1”) and her husband, a 68-year-old retiree (“Advisory Client 2”)
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`(together, “the Advisory Clients”).
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`39.
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`As their investment adviser, Costello owed a fiduciary duty to act in the best
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`interest of the Advisory Clients at all times. Costello breached that duty in numerous ways.
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`A.
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`Costello Made Materially False Statements to the Advisory Clients, Failed to
`Act in the Best Interest of the Advisory Clients, and Failed to Make Full and
`Fair Disclosure of Conflicts of Interest
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`40.
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`Costello first met the Advisory Clients in January 2019. Costello made numerous
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`misrepresentations to them concerning his background, including that he is the youngest hedge
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`fund billionaire ever, that he has an MBA from Harvard University, that he is licensed to manage
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`money and investments, and that he had served in the military with the Special Forces.
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`41.
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`These false credentials led the Advisory Clients to hire Costello to manage their
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`joint brokerage account (“Brokerage Account A”).
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`42.
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`On July 14, 2019, the Advisory Clients opened Brokerage Account A and funded
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`Brokerage Account A with $4,000,600.
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`43.
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`On July 20, 2019, the Advisory Clients signed a “Trading Authorization Form”
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`that designated Costello as their authorized agent. The Advisory Clients agreed to pay Costello
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`twenty percent of the profits in Brokerage Account A. Costello told the Advisory Clients that he
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`was waiving his typical two percent management fee as a “friends and family” discount.
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`44.
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`The Advisory Clients provided Costello with discretion over, and full access to,
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`Brokerage Account A. Costello accessed Brokerage Account A electronically using Advisory
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`Client 1’s username and password. The Advisory Clients did not direct or execute any trades in
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`Brokerage Account A.
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`Securities and Exchange Commission
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`(212) 336-1100
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 10 of 28
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`45.
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`Costello told Advisory Client 1 not to sign into Brokerage Account A while he
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`was signed into the account. He also instructed Advisory Client 1 that, if contacted by Brokerage
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`Firm A, she should falsely state that she placed all trades in the account and that she should ask
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`the brokerage firm not to restrict her account in response to any trading activity.
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`46.
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`Although Costello had offered to develop a diverse financial portfolio for the
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`Advisory Clients, all of the investments in Brokerage Account A were in microcap companies
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`that Costello controlled or in which he personally invested.
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`47.
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`For example, Costello purchased 555,000 common shares and 250,000 preferred
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`shares of Canal Capital Corporation (“Canal Capital”), for a total purchase price of over $80,000,
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`in Brokerage Account A. Canal Capital was a shell company that Costello was directing others to
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`promote on Twitter and whose stock Costello had purchased in his own account.
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`48.
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`On November 1, 2019, the Commission suspended trading in Canal Capital’s
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`common and preferred stock. Prior to the announcement of the trading suspension, Costello had
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`sold over 489,000 shares of Canal Capital preferred stock in his own account for over $109,000
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`in profits. Costello, who did not disclose this trading to the Advisory Clients, did not sell any of
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`the Canal Capital stock that he had purchased in Brokerage Account A on their behalf.
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`B.
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`49.
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`Costello Engaged in Insider Trading in Brokerage Account A
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`Costello also used Brokerage Account A to purchase and sell GRNF stock while
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`he was the CEO and controlling shareholder of the company and in possession of material,
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`nonpublic information.
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`50.
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`As GRNF’s CEO and controlling shareholder, Costello had a fiduciary duty and
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`other relationship of trust with GRNF and its shareholders that obligated him not to trade on
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`GRNF’s information for his personal benefit.
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`(212) 336-1100
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 11 of 28
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`51.
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`In fact, Costello knew that he should not purchase any GRNF stock on the open
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`market because he was an insider with material, nonpublic information about the future plans of
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`the company and, given his access to this information, purchasing stock may violate the
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`securities laws.
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`52.
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`Nevertheless, Costello purchased over 670,000 shares of GRNF stock in
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`Brokerage Account A in advance of a July 22, 2019, Form 8-K filing announcing that GRNF
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`would change its name from “Discovery Gold Corporation” to “GRN Holding Corporation” and
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`would request to change its trading symbol accordingly.
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`53.
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`The information contained in the July 22, 2019 Form 8-K was material because it
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`signaled to investors that GRNF was taking actual steps toward becoming a purported cannabis
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`conglomerate. GRNF’s share price increased 137 percent on the day the Form 8-K was issued.
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`54.
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`The information contained in the July 22, 2019 Form 8-K was nonpublic because,
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`prior to the filing, it was not broadly disseminated to the investing public.
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`55.
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`Between July 22 and July 25, 2019, Costello sold the GRNF shares he had
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`acquired in Brokerage Account A for approximately $150,000 in profits. Costello included these
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`profits in an invoice that he sent to the Advisory Clients, who paid him twenty percent of the
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`realized profits on Costello’s trading of GRNF in Brokerage Account A.
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`56.
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`Based on their agreement with Costello, the Advisory Clients made two payments
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`to Costello totaling $37,916.05, including for twenty percent of the profits from the purchase and
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`sale of GRNF stock.
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`57.
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`In October 2019, Brokerage Firm A informed the Advisory Clients that it had
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`decided to end its business relationship with them.
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`(212) 336-1100
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 12 of 28
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`58.
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`At Costello’s instruction, the Advisory Clients thereafter opened Brokerage
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`Account B at a different brokerage firm and transferred approximately $1.27 million from
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`Brokerage Account A to Brokerage Account B.
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`59.
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`Like with Brokerage Account A, the Advisory Clients gave Costello full authority
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`over the new brokerage account at Brokerage Firm B, in which Costello continued to trade
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`microcap companies on the Advisory Client’s behalf until approximately February 2020.
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`60.
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`At the end of October 2019, the securities remaining in Brokerage Account A
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`were valued at approximately $2.9 million. By the end of April 2020, the month before the
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`Advisory Clients began to liquidate the stocks Costello had purchased in Brokerage Account A,
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`the value of those securities had declined by approximately 65 percent.
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`61.
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`At the end of February 2020, the securities in Brokerage Account B were valued
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`at approximately $299,700. As of the end of June 2022, the value of those securities had declined
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`by approximately 97 percent.
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`C.
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`Costello Defrauded the Advisory Clients in Connection with the Sale of
`GRNF Stock
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`62.
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`Around the time that the Advisory Clients hired Costello to manage Brokerage
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`Account A, the Advisory Clients also agreed to purchase nine million shares of GRNF stock
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`directly from Costello for $1.8 million (i.e., $0.20 per share).
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`63.
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`This $1.8 million purchase price represented a markup by Costello of over 9,000
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`percent from the price of $0.002 per share that Costello had paid for those same shares of GRNF
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`stock the previous month.
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`64.
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`Costello failed to fully and fairly disclose to the Advisory Clients that he had
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`acquired his shares of GRNF stock for $0.002 per share and that the $1.8 million purchase price
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`reflected a markup of over 9,000 percent.
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`100 Pearl Street, Suite 20-100
`New York, NY 10004-2616
`(212) 336-1100
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 13 of 28
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`65.
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`On July 23, 2019, the Advisory Clients paid for the shares by a cashier’s check
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`written to GRN Funds.
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`66.
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`In approximately April 2020, after numerous requests, Costello sent to the
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`Advisory Clients what purported to be share certificates reflecting their ownership of 9.5 million
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`shares of GRNF stock.
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`67.
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`In approximately October 2020, Costello directed GRNF to issue nine million
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`shares of GRNF stock to the Advisory Clients. Although the share purchase agreement for those
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`shares was between the Advisory Clients and GRN Funds, Costello directed that new shares be
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`issued by GRNF rather than transferring the shares he owned through GRN Funds and
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`purportedly sold to the Advisory Clients.
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`68.
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`Despite having instructed GRNF to issue new shares to the Advisory Clients
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`rather than transferring GRN Funds’s shares to the Advisory Clients, Costello never transferred
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`the $1.8 million the Advisory Clients paid for the stock to GRNF.
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`III. Costello Obtained Approximately $700,000 from the Sale of GRN Holding (WA)
`Stock Based on Misrepresentations
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`69.
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`From at least July to November 2019, Costello solicited the Advisory Clients and
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`11 other investors to invest in a “family and friends” share offering for GRN Holding (WA).
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`70.
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`Although GRN Holding (WA) shares the “GRN Holding Corporation” name with
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`the publicly traded GRNF, it is a separate, private company incorporated by Costello in a
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`different state and initially owned solely by Costello.
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`71.
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`Costello misled investors in GRN Holding (WA) to believe, however, that they
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`were receiving shares of the publicly traded GRNF entity.
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`72.
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`For example, Costello sent the Advisory Clients the subscription agreement for
`
`their investment in GRN Holding (WA) in the same email in which he sent the share purchase
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`New York, NY 10004-2616
`(212) 336-1100
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 14 of 28
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`agreement for the nine million shares of GRNF. The subject line of the email was simply
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`“Subscription Agreement and Common Shares,” and in his email Costello did not differentiate
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`between the two entities.
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`73.
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`Another investor (“Investor 1”) expressed to Costello that he and his father
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`(“Investor 2”) were interested in investing in GRNF after seeing the performance of the publicly
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`traded GRNF stock. Costello offered Investor 1 and Investor 2 a “friends and family” deal if they
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`each invested $25,000. When Costello sent Investor 1 and Investor 2 the subscription agreement
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`for their investments, however, Costello did not differentiate between GRNF and the entity in
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`which Investor 1 and Investor 2 would actually be investing.
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`74.
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`Like the Advisory Clients, other investors in GRN Holding (WA) also believed
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`that Costello was a billionaire with a Harvard MBA, a military veteran, and experienced in the
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`financial industry. These investors also believed that Costello owned legitimate, revenue-
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`generating businesses that could potentially be merged into GRNF.
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`75.
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`For example, Costello emailed Investor 1 and Investor 2 information about his
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`purported “banking program” at Pacific Banking Corp. The materials described Pacific Banking
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`Corp. as providing “safe, secure & compliant cannabis banking.” As alleged above, Pacific
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`Banking Corp. was not registered to conduct business as a bank or money services business.
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`76.
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`In total, Costello obtained approximately $700,000 in investments for GRN
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`Holding (WA) from 13 investors, including $250,000 from the Advisory Clients and $25,000
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`from each of Investor 1 and Investor 2.
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`(212) 336-1100
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 15 of 28
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`IV. Costello Obtained Approximately $200,000 from the Sale of Hempstract Stock
`Based on Misrepresentations and then Misappropriated a Portion of the Funds
`
`77.
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`Beginning in at least January 2020, Costello began purchasing shares of RVDO
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`on the open market. Costello planned to merge Hempstract, a private company that he co-owned,
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`into RVDO.
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`78.
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`79.
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`Costello made misrepresentations to secure investments for Hempstract.
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`For example, in approximately March 2020, Costello made a presentation to
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`potential investors, pitching an opportunity to purchase shares of Hempstract before it became a
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`public company. During that meeting, Costello falsely stated that he had sixteen years of
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`investment banking experience on Wall Street, that he was a banker in the cannabis industry who
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`managed money for over 400 clients, and that he had over a billion dollars of equity in his own
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`fund. Each of those representations was false.
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`80.
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`Costello also told potential investors that any shares they purchased would be
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`restricted from trading for six months, at which point they could sell their shares through a
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`brokerage account. However, because RVDO was a shell company that was not an SEC-
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`reporting company, any shares of RVDO would be required to be held for one year.
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`81.
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`In total, between March and August 2020, Costello obtained approximately
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`$200,000 in investments for Hempstract from 19 investors. Of that amount, checks for
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`approximately $50,000 from four investors were written to, and deposited in, a bank account for
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`a separate entity controlled by Costello. Costello never transferred the funds he received for the
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`four investors’ investments in Hempstract.
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`V.
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`Costello and Ferraro Engaged in Stock Promotion Schemes
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`82.
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`Costello and Ferraro met in mid-2019. Ferraro was a GRNF investor who had
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`posted about the company on various investor message boards.
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`COMPLAINT
`SEC V. COSTELLO ET AL.
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`Case 2:22-cv-01388 Document 1 Filed 09/29/22 Page 16 of 28
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`83.
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`Ferraro controlled a Twitter account with the handle “@computerbux” that at one
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`point had over 10,000 followers. Ferraro posted at least 7,900 tweets in 2019 and at least 5,000
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`tweets from January through June 2020. Nearly 90 percent of these tweets referenced a specific
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`stock or stocks.
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`84.
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`Costello and Ferraro used Ferraro’s Twitter account to perpetrate at least five
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`stock promotion schemes (each a “Stock Promotion Scheme” and collectively, the “Stock
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`Promotion Schemes”). In each Stock Promotion Scheme, Ferraro recommended a penny stock
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`that he and/or Costello owned to Ferraro’s Twitter followers and the public. As he wrote in a
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`January 2020 email to Costello summarizing their schemes, Ferraro understood that his
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`“announce[ments]” on Twitter would cause the stock to “run[ ] on hype,” i.e., cause the stock
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`price to increase. In his promotional tweets, Ferraro did not disclose that he and/or Costello
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`intended to sell their own holdings of those stocks into the inflated market that Ferraro’s tweets
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`helped create. Ferraro also did not disclose that Costello had agreed to pay Ferraro a portion of
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`Costello’s profits from certain of the Stock Promotion Schemes.
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`A.
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`85.
`
`The Canal Capital Corporation (“Canal Capital”) Stock Promotion Scheme
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`On October 7, 2019, Costello learned from an investor in Canal Capital, a defunct
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`company, that former executives at Canal Capital had agreed to sell their shares of Canal Capital
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`to the investor. Without that investor’s knowledge, on that day Costello began buying shares of
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`Canal Capital on the open market, and by October 10, 2019, Costello had accumulated over one
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`million shares of Canal Capital common stock (“COWP”) and over 740,000 shares of Canal
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`Capital preferred stock (“COWPP”).
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`86.
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`Costello messaged Ferraro: “COWP and COWPP attack it hard [I] have 70% of
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`float already.” Float refers to the total number of shares of a stock that are available for public
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`investors to buy and sell.
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`COMPLAINT
`SEC V. COSTELLO ET AL.
`
`
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`16
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`New York, NY 10004-2616
`(212) 336-1100
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`Case 2:2