SEC Says Co. Violated Whistleblower Protection Rules By
Impeding Investors

The U.S. Securities and Exchange Commission recently amended a
court Complaint to add charges that a company and its owner
violated SEC
whistleblower protection rules.  (For past cases in which the SEC brought actions against
companies for violating whistleblower protection rules, see my
earlier post
here.)

The recent case is
SEC v. Collector’s Coffee, Inc. d/b/a Collectors Café, and
Mykalai Kontilai.  According to the SEC’s
amended Complaint
in that case, the defendants violated SEC whistleblower
protection rules by:

(1) conditioning the return of investors’ money on their
agreement to sign stock purchase agreements that contained a
provision prohibiting them from contacting law enforcement
(Amd. Cplt. at 28);

(2) settling an investors’ lawsuit by inserting a clause into
the settlement agreement prohibiting the investors from
contacting the SEC or any other regulatory or governmental
agencies (Amd. Cplt. at 29);

(3) filing a lawsuit against investors who communicated with
the SEC (Amd. Cplt. at 30); and

(4) intimidating other investors by telling them that they
intended to add other investors as additional defendants in
the company’s lawsuit (Amd. Cplt. at 31).

Context Of The SEC Whistleblower Protection Rules Violations

The alleged violations of the SEC’s whistleblower protection
rules arose in the context of an SEC civil lawsuit against
Collectors Café and Mykalai Kontilai.  Kontilai is the
founder, president, and CEO of Collectors Café.

The SEC’s court Complaint alleges that Kontilai raised
approximately $23 million from at least 140 investors for
Collectors Café.  According to the SEC, Kontilai did this
through written and verbal communications that contained false
or misleading statements and material omissions.  The
Complaint also alleges that Kontilai misappropriated more than
$6.1 million of investors’ money to fund his lavish
lifestyle.  (Amd. Cplt. at 2, 8.)

In addition, the Complaint alleges that to conceal his conduct
and to mislead the SEC, “Kontilai knowingly created and
presented the SEC staff with fabricated documents”.  (Amd.
Cplt. at 11.)

The SEC’s amended court Complaint

Collectors Café’s Stock Purchase Agreement Allegedly Violated
SEC Whistleblower Protection Rules

The amended Complaint alleges that after certain investors
expressed concerns about their investments in Collectors Café,
Kontilai arranged for his sister-in-law to purchase their
stock in the company.  (Amd. Cplt. at 27.)

The sale was effectuated by a stock purchase agreement (“SPA”)
signed by Kontilai on behalf of Collectors Café.  The SEC
alleged that the SPA violated SEC whistleblower protection
rules by including language that prevented the investors from
communicating with governmental agencies.  The amended
Complaint quotes the SPA:

[Investors] …. further warrant and affirm that … they will
not, directly or indirectly, individually, collectively or
otherwise, contact any third-part, including, but not limited
to governmental or administrative agencies or enforcement
bodies, for the purpose of commencing or otherwise prompting
investigation or other action relative to [Collectors Café] or
the subject matter herein.

(Amd. Cplt. at 28)(brackets and ellipses in original.)  In a
perhaps unintentionally droll pleading, the amended Complaint
then alleges that “The SEC is a governmental agency that
investigates the type of misconduct raised by the investors”. 
(Amd. Cplt. at 28.)

Collectors Café’s Settlement Agreement Allegedly Violated SEC
Whistleblower Protection Rules

Approximately one and a half years after the SPA, two
investors sued Collectors Café for securities fraud, among
other things.  A little more than a month later, Collectors
Café, Kontilai, and the two investors resolved the lawsuit by
entering into a confidential settlement agreement.

As with the SPA, the settlement agreement allegedly violated
whistleblower protection rules by prohibiting the investors
from communicating with governmental agencies.  But this time,
the document specifically identified the SEC by name:

The Shareholders …
will not initiate on a going forward basis, any
communications with any regulatory agencies such as the
United States Securities and Exchange Commission or any
other Federal, State, or Local governmental agency
concerning the matters related to this Agreement.  Nothing herein would prevent the parties from responding
to, and/or fully complying with, a subpoena or other
governmental and or regulatory compulsory process.

(Amd. Cplt. at 29)(emphasis in original.)  After the
settlement agreement was executed, a lawyer for the investors
told the SEC that the settlement agreement “prevented his
clients from speaking to SEC staff voluntarily”.  (Amd Cplt.
at 30.)

Collectors Café’s Lawsuit Against The Two Investors Allegedly
Violated SEC Whistleblower Protection Rules

A little more than six months after the settlement agreement,
counsel for Collectors Café and Kontilai informed the two
investors’ lawyer that they had reason to believe that one or
more of them had been communicating with the SEC.

A few months later, Collectors Café and Kontilai sued the
investors for “fraud, breach of contract, unjust enrichment,
intentional interference with contractual relations, civil
conspiracy, and breach of implied covenant of good faith and
fair dealing”.  (Amd. Cplt. at 30.)  Their lawsuit against the
investors sought both punitive and compensatory damages. 
(Amd. Cplt. at 31.)

According to the SEC, “Each of the claims asserted in the 2019
Lawsuit are based on the factual allegation that the investors
communicated with the SEC about Collectors Café and
Kontilai”.  (Amd. Cplt. at 30.)

The SEC characterized the lawsuit as a violation of
whistleblower protection rules, in that it was intended “to
impede investors from communicating directly with SEC staff
about a possible securities law violation, including by
enforcing and threatening to enforce confidentiality
agreements”.  (Amd. Cplt. at 31.)

The SEC’s press release

Kontilai’s Telephone Call With Investors Allegedly Violated
SEC Whistleblower Protection Rules

The SEC claimed that Collectors Café and Kontilai “flaunted to
other investors the fact that they had sued investors for
communicating with the SEC”.  (Amd. Cplt. at 3.)  Allegedly,
in a telephone call with all investors, “Kontilai repeatedly
referenced this lawsuit to the investors, touting the damages
that he had claimed and that he intended to amend this lawsuit
to include others whom he viewed as the source of the
company’s troubles”.  (Amd. Cplt. at 31.)

As with the lawsuit against the investors, the SEC said that
this, too, violated whistleblower protection rules by impeding
investors from communicating directly with the SEC.  (Amd.
Cplt. at 31.)

The SEC’s Amended Complaint Includes A Claim For Relief For
“Impeding”

The SEC’s amended Complaint includes a claim for relief for
violating Securities Exchange Act Rule 21F-17, 17 C.F.R. §
240.21F-17.  (Amd. Cplt. at 40.)

The SEC named this cause of action “Impeding”.  (Amd. Cplt. at
39, Fifth Claim For Relief.)

In the
SEC’s press release
about the amended Complaint, the Director of the SEC’s Denver
Regional Office stated, “We allege that the defendants
attempted to cover up their fraud by holding investors’ money
hostage until the investors signed agreements preventing them
from seeking law enforcement intervention”.

The press release also quoted the Chief of the SEC’s Office of
the Whistleblower, “The SEC’s whistleblower protections
broadly protect not just employees, but anyone who seeks to
report potential securities law violations to the Commission”.

* * *

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