A company and several executives allegedly misled investors in an effort to facilitate a merger with a special purpose acquisition company (SPAC) — a shell company that raises capital from investors to carry out a deal — before the SPAC would have had to dissolve.
The U.S. Securities and Exchange Commission (SEC) charged Lottery.com Inc., along with three former executives, and the CEO of Trident Acquisitions Corp., a SPAC, in connection with an alleged fraud that centred around misleading disclosure.
According to the SEC’s complaint, between November 2020 and May 2022, the executives engaged in a scheme to mislead and defraud investors in Lottery.com and Trident, which acquired the online lottery ticket seller in 2021.
The SEC alleged that when the scheme was first hatched, Lottery.com was struggling to generate revenue. Trident, meanwhile, was facing a deadline to complete an acquisition; otherwise it would be forced to dissolve and return the US$60 million that it raised from investors as a shell company.
To make a deal happen, the SEC alleged that executives from the two companies allegedly crafted a scheme to inflate Lottery’s revenue to make it look like a viable acquisition candidate for Trident and its investors.
The alleged scam involved Lottery purportedly receiving US$9 million for valueless customer data, which it then used to overpay to acquire two Mexican lottery businesses — returning the US$9 million to its original source.
“Lottery’s executives never intended to provide US$9 million in goods or services and understood that they could not use the US$9 million, but this did not stop the company from booking the revenue,” the complaint said.
Then, in the weeks leading up to the acquisition, the Lottery executives allegedly engaged in additional fake transactions to inflate the company’s revenues — which resulted in Lottery overstating its 2021 revenues by more than 300% and its revenues for the first quarter of 2022 by nearly 800%, the SEC alleged.
The scheme was crafted to mislead investors, and to convince Trident shareholders not to redeem their shares prior to its acquisition of Lottery. That enabled Trident’s CEO to avoid millions of dollars in personal losses, which would have been incurred if the firm failed to make a deal and was dissolved, the SEC alleged — and, to boost the stock price of the combined company.
Without denying the SEC’s allegations, two of the Lottery executives consented to the entry of judgments that bans them from serving as an officer or director of a public company, and requires them to pay disgorgement and/or a civil penalty “in an amount to be determined by the court,” it said.
The SEC is seeking permanent injunctions, disgorgement with interest, civil penalties, and officer-and-director bans against the other respondents in the case. The allegations against them have not been proven.