SEC Final Judgments Against Stock Squirrel, Inc. and CEO for Securities Fraud

2024-05-05

On February 8, 2024, the Securities and Exchange Commission (SEC) obtained final judgments against John Feloni and his company, Stock Squirrel, Inc. Among other things, the judgments order payment of over $2 million in disgorgement of ill-gotten gains, prejudgment interest, and civil penalties to be paid variously by the two defendants.

The SEC filed a complaint against Massachusetts-based company Stock Squirrel, Inc. and John Feloni, its president and CEO, for defrauding investors of approximately $1.6 million in an unregistered securities offering on September 29, 2023.

Case Summary

The SEC brings forth the following allegations against defendants John Feloni (“Feloni”) and Stock Squirrel, Inc. (“Stock Squirrel” and collectively referred to as “Defendants”):

From at least 2019 to April 2023, Feloni and Stock Squirrel allegedly misled roughly 180 retail investors, acquiring nearly $2.5 million. They purportedly falsely assured investors that the funds would be utilized for Stock Squirrel’s operations, primarily to develop a smartphone application (“Stock Squirrel App”) catering to the rapidly expanding youth market for financial services. Additionally, they asserted that Feloni would not draw a salary from Stock Squirrel. 

Contrary to these claims, Feloni reportedly diverted about $1.6 million—equivalent to 66% of the total investor capital—towards personal expenses and unrelated payments, sustaining himself primarily through these funds throughout the duration of the purported scheme. In exchange for investors’ contributions, Feloni and Stock Squirrel issued stock in Stock Squirrel to investors and promised returns on investments reaching up to 20-24% within short time frames via promissory notes.

The alleged conduct by the defendants, if proven, constitutes violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (the “Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder. 

The Commission seeks the following remedies based on these alleged violations:

  1. permanent injunctions;
  2. disgorgement of defendants’ illicit gains, plus prejudgment interest;
  3. civil penalties;
  4.  a permanent injunction restraining Feloni, directly or indirectly— including through any entity under his ownership or control—from: 
  5. engaging in the issuance, purchase, offer, or sale of any security, or 
  6. conducting activities aimed at inducing or attempting to induce the purchase or sale of any security; however, such an injunction would not restrict Feloni from trading securities for personal investment;
  7. a prohibition against Feloni’s involvement in any penny stock offerings; (f) an officer and director bar against Feloni; and 
  8. any other relief deemed just and appropriate by the Court.

Defendants

  • John Feloni, aged 64, lives in Somerville, Massachusetts. He holds the positions of President and CEO within Stock Squirrel, where he serves as the sole officer and director.
  • Stock Squirrel, Inc. is a Delaware Corporation headquartered in Somerville, Massachusetts, with its primary office located at Feloni’s residence. Neither Stock Squirrel nor its stock are registered with the Commission in any capacity.

Facts Of The Case

I. FELONI AND STOCK SQUIRREL ATTRACTED INVESTMENTS FROM RETAIL INVESTORS ACROSS MULTIPLE STATES

Between at least 2019 and April 2023, Feloni and Stock Squirrel presented a purported investment opportunity to engage in Stock Squirrel’s business endeavors, primarily focused on developing the Stock Squirrel App for public release. 

Through Stock Squirrel's website and communications with investors, they claimed that the app would enable users to buy fractional shares of stock from public companies when making purchases through those companies’ stores.

For instance, they described a scenario where a user spending $4 at an international coffee chain using a Stock Squirrel-linked debit card would trigger an automatic purchase of forty cents’ worth of fractional shares in the coffee company's public stock.

Feloni and Stock Squirrel reached out to approximately 180 investors residing in various states, including Massachusetts, Rhode Island, Maine, and Texas, through email, in-person meetings, and phone calls. While Feloni had personal connections with some investors, this was not the case for all.

In return for invested capital, typically ranging from $1,000 to $10,000, Feloni and Stock Squirrel provided investors with two instruments: 

  • a promissory note bearing Feloni's signature and 
  • shares of Stock Squirrel stock

These promissory notes generally promised a 10% interest to be paid within six months, with additional interest rates between 18 and 24% annually on any outstanding amounts after the due date. Notably, the promissory notes did not explicitly mention Stock Squirrel.

The quantity of stock allotted to each investor was documented in a one-page letter (the “Stock Letter”), affirming the investor's ownership of a specified number of shares in Stock Squirrel, Inc., a Delaware corporation. These letters, signed by Feloni both personally and in his capacity as President of Stock Squirrel, assured investors of their official ownership, pending the issuance of physical shares.

Feloni and Stock Squirrel failed to register the offering of Stock Squirrel stock or promissory notes with the Commission. Generally, they issued Stock Squirrel shares to investors at a rate of five million shares per ten thousand dollars invested.

II. DEFENDANTS MISREPRESENTED THE UTILIZATION OF INVESTOR FUNDS FOR STOCK SQUIRREL'S DEVELOPMENT

Feloni, in interactions with investors and potential investors, detailed Stock Squirrel's business progression, outlining its operations and financial allocations. He explicitly or implicitly assured that investor contributions would fuel Stock Squirrel's advancement, especially in the development of the Stock Squirrel App. 

However, Feloni and Stock Squirrel deceitfully withheld from investors and potential investors that:

  • Feloni intended, and indeed utilized, the bulk of investor funds for personal expenses and unrelated payments, and
  • Feloni employed funds from subsequent investors to reimburse earlier investors. These significant omissions rendered Feloni's and Stock Squirrel’s statements materially deceptive.

Defendants were cognizant, deliberately disregarded, or displayed negligence in failing to acknowledge that Feloni diverted the majority of investor funds for personal expenses and unrelated payments, detached from Stock Squirrel's business. Feloni, as Stock Squirrel's sole officer and director, exerts full control over the company, thus attributing his actions to Stock Squirrel by virtue of his authority.

As described above, Defendants made explicit false representations to investors regarding the allocation of funds purportedly for Stock Squirrel's development. Throughout these communications, Defendants deceitfully omitted that Feloni diverted the majority of investor funds for personal use. Despite receiving these communications, several individuals proceeded to invest in Stock Squirrel.

On June 19, 2020, Feloni and Stock Squirrel dispatched a series of emails to investors and potential investors, outlining various features planned for the Stock Squirrel App, services aimed at public companies, and engagements with multiple marketing, public relations, and legal firms. Subsequently, on July 17, 2020, one investor invested $2,000, and on August 3, 2020, another investor invested $5,000, both after receiving these emails.

Commencing June 24, 2020, Feloni and Stock Squirrel circulated emails to investors and potential investors, accompanied by an “Executive Summary Overview” of Stock Squirrel, detailing the company's business strategy and anticipated expenditures, including:

  • Establishing a user database to market services
  • Initiating marketing endeavors such as "Squirrel Fest"
  • Engaging marketing and public relations firms
  • Contracting vendors for a loyalty and reward program
  • Resultantly, on August 14, 2020, an investor invested $2,500 in Stock Squirrel following receipt of these communications.

In a July 6, 2020 email to an investor, Feloni asserted, "I'll be putting a lot of money into tech development."

On December 30, 2020, Feloni and Stock Squirrel sent emails to at least three investors, claiming plans to engage a new customer acquisition agency with experience in youth-focused markets. Subsequently, on January 19, 2021, an investor invested $1,000 after receiving this communication.

On December 17, 2022, Feloni and Stock Squirrel disseminated emails to investors, outlining extensive plans for Stock Squirrel's future ventures, including compliance measures and diverse business expansions. Consequently, on December 19, 2022, an investor invested $10,000 in Stock Squirrel after receiving these emails.

Around January 2023, Feloni personally met with a group of investors and prospects, affirming he received no salary from Stock Squirrel and reiterated plans for investor funds to bolster the company's growth, particularly regarding the Stock Squirrel App. Subsequently, on January 23, 2023, an investor invested $10,000 after participating in this discussion.

III. FELONI DIVERTED INVESTORS’ FUNDS FOR PERSONAL BENEFIT

Between 2019 and April 2023, Feloni and Stock Squirrel amassed around $2.5 million from investors, alongside approximately $350,000 from alternative sources. Notably, most investors channeled their investments via checks made out to Feloni personally, as per his instructions, rather than to Stock Squirrel. 

Feloni subsequently deposited these checks into his personal bank accounts. Additionally, some investors opted for cash payments, which Feloni similarly directed into his personal accounts, while others conducted wire transfers directly to Feloni’s personal accounts.

Numerous investors annotated the memo lines of their checks, indicating their funds were intended for Stock Squirrel investment, exemplified by entries such as:

  • On March 18, 2021, an investor issued a $5,000 check to Feloni with a memo line specifying, “Stock Squirrel 2.5m shares common stock.”
  • On March 26, 2021, another investor forwarded a $5,000 check to Feloni, designating in the memo line, “Stock Squirrel common stock 2.5m shares.”
  • On May 1, 2021, an investor inscribed “Stock Squirrel Investment” on a $10,000 check made out to Feloni.

Similar annotations were made on checks ranging from $1,000 to $5,000 on various dates between February 2022 and January 2023.

Throughout the period of investor influx, Stock Squirrel's finances intermingled entirely with Feloni's personal finances. Notably, Stock Squirrel possessed no active bank accounts or assets under its name.

In this duration, Feloni and Stock Squirrel neglected to uphold records regarding Stock Squirrel’s financial status or business-related expenses, relying solely on Feloni’s personal bank account statements. Furthermore, they failed to document the principal or accrued interest on the promissory notes issued to investors.

Out of the $2.5 million garnered from investors, Feloni diverted roughly $1.6 million for personal expenditures or expenses unrelated to Stock Squirrel’s operations. Notable examples include:

  • Cash withdrawals and self-issued checks amounting to approximately $1 million.
  • Brokerage account deposits totaling $287,000, utilized for personal stock and stock option trading.
  • Personal living expenses exceeding $594,000, comprising:
  • $92,000 for personal rent
  • $111,000 for food and dining
  • $23,000 for liquor store purchases
  • $23,000 for health care and wellness
  • $20,000 for insurance payments
  • $56,000 for retail purchases, encompassing cigars, jewelry, electronics, and sporting goods.

IV. DEFENDANTS ENCOURAGED INVESTORS TO EXTEND THEIR INVESTMENTS

Commencing on November 13, 2020, Feloni and Stock Squirrel initiated email communications with specific investors, urging them to prolong their investment commitments by “rolling over” their promissory notes, thereby deferring Feloni’s repayment obligations.

These emails contained deceptive assertions that omitted Feloni’s diversion of the majority of investors’ funds for personal expenditures unrelated to Stock Squirrel’s operations, including:

  • A November 13, 2020 email, asserting Feloni’s desire for investors to extend their promissory notes due to his purported allocation of funds toward engineering endeavors for the Stock Squirrel App.
  • A November 17, 2020 email, stating Feloni’s request for investors to extend their promissory notes, citing a critical juncture in the Stock Squirrel App’s development and the importance of maintaining liquidity.

Several investors complied with Feloni’s requests to extend their promissory notes, with some receiving additional shares of Stock Squirrel stock as incentives.

V. DEFENDANTS UTILIZED FRESH CAPITAL FROM SUBSEQUENT INVESTMENTS TO SETTLE OBLIGATIONS TO EARLIER INVESTORS

Feloni and Stock Squirrel allocated approximately $242,000 of newly acquired investor funds to satisfy the principal owed to approximately 25 pre-existing Stock Squirrel investors who demanded repayment in line with the terms of their promissory notes.

Many of these repayments to investors exhibited characteristics reminiscent of a Ponzi scheme. On multiple instances, Feloni and Stock Squirrel received a check from a new investor, depositing it into one of Feloni’s personal bank accounts with an insignificantly low or even negative balance. Shortly thereafter, Feloni issued a check from the same account to repay a prior investor, often exceeding the account’s balance before the influx of new funds. Examples include:

  • On October 24, 2022, Feloni deposited a $10,000 investor’s check into his personal bank account with a previous balance of $204.69. Within one day, he issued a $6,000 check to partially reimburse a previous investor.
  • On November 4, 2022, Feloni deposited a $25,000 investor’s check into his personal bank account with a previous balance of $21.33. Within three days, he issued a $4,000 check to partially reimburse a previous investor while also cashing multiple checks made out to himself, totaling $11,500.
  • On December 9, 2022, Feloni deposited a $15,000 investor’s check into his personal bank account with a previous balance of $101.03. Within three days, he issued a $6,000 check to partially reimburse a previous investor.

Claims

I. SECURITIES FRAUD INVOLVING VIOLATIONS OF SECTION 17(A) OF THE SECURITIES ACT

Defendants have:

  • devised or are devising tactics, schemes, or stratagems to deceive; 
  • acquired money or assets by disseminating untrue statements regarding significant facts or by omitting pertinent facts crucial for ensuring the veracity of the statements made; or
  • undertaken or are undertaking transactions, conduct, or business strategies that functioned as fraudulent or deceitful acts against the purchasers of said securities.

By virtue of the aforementioned actions, Defendants have contravened, and unless restrained, will persist in contravening, the provisions stipulated in Securities Act Section 17(a).

II. SECURITIES FRAUD INVOLVING VIOLATIONS OF SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B-5 THEREUNDER

Defendants have:

  • employed or are employing methods, stratagems, or contrivances to deceive; 
  • disseminated or are disseminating untrue statements of significant facts or have omitted to disclose material fact(s) necessary for ensuring the accuracy of the statements made; or
  • undertaken or are undertaking actions, practices, or business conducts that operate as fraudulent or deceitful acts against specific individuals

By virtue of the aforementioned actions, Defendants have violated, and unless restrained, will persist in contravening, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

III. UNREGISTERED OFFERS AND SALES OF SECURITIES INVOLVING VIOLATIONS OF SECTION 5(A) AND 5(C) OF THE SECURITIES ACT)

Defendants, in the absence of a valid registration statement concerning that security, engaged in the following actions:

  • utilized interstate commerce communication channels or postal services to vend securities through any form of prospectus or other mediums;
  • dispatched or caused to be dispatched, via mail or interstate commerce channels, any such security with the intention of sale or delivery post-sale; and
  • utilized interstate commerce communication channels or postal services to propose the sale, through the utilization of a prospectus or alternative means, of securities for which no registration statement had been lodged.

By virtue of the aforementioned actions, Defendants contravened, and absent injunction, will continue to contravene, Sections 5(a) and 5(c) of the Securities Act.

Relief Sought

The Commission respectfully demands that the Court:

Issue a permanent injunction preventing Defendants and any individuals in active concert or participation with them, who receive actual notification of the injunction through personal service or other means, including facsimile transmission or overnight delivery service, from directly or indirectly engaging in the aforementioned conduct, or similar conduct violating Sections 5(a), 5(c), and 17(a) of the Securities Act (a), e(c), and q(a)], and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Issue a permanent injunction preventing Feloni, directly or indirectly, including but not limited to through any entity under his ownership or control, from (i) participating in the issuance, purchase, offer, or sale of any security, or (ii) engaging in activities aimed at inducing or attempting to induce the purchase or sale of any security; provided, however, that such injunction shall not prohibit Feloni from engaging in securities transactions for his personal account.

Order Defendants to disgorge their unlawfully obtained profits, plus prejudgment interest, in accordance with Exchange Act Sections 21(d)(3), (5), and (7).

Order Defendants to pay civil monetary penalties as per Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act

Direct that Feloni be barred from serving as an officer or director of any publicly traded company pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act.

Order that Feloni be prohibited from participating in any penny stock offering pursuant to Section 20(g) of the Securities Act and Section 21(d) of the Exchange Act.

Retain jurisdiction over this case to enforce and carry out the terms of all orders and decrees that may be issued.

Grant any other relief that the Court deems just and equitable.

Key Takeaways For Investors

Investors should take heed of several key takeaways from this case:

I. DILIGENCE IN DUE DILIGENCE

It's crucial for investors to conduct thorough due diligence before investing in any opportunity. This includes researching the company, its executives, and the investment offering itself. Scrutinizing financial documents, verifying claims, and seeking independent advice can help investors avoid falling victim to fraudulent schemes.

II. SKEPTICISM OF PROMISES

Investors should approach investment opportunities with a healthy dose of skepticism, especially when promises of high returns in short periods are made. Unrealistic or overly optimistic projections should raise red flags, prompting investors to dig deeper and question the legitimacy of the investment.

III. BEWARE OF UNREGISTERED OFFERINGS

Unregistered securities offerings can be a sign of potential regulatory violations. Investors should ensure that any investment offering complies with securities regulations and is properly registered with the appropriate regulatory authorities. Failure to do so could result in legal consequences and financial losses for investors.

IV. WATCH FOR RED FLAGS

Certain warning signs, such as commingling of funds, lack of transparency, and unusual financial transactions, should prompt investors to exercise caution. Paying attention to these red flags and conducting thorough investigations can help investors identify potential scams and protect their investments.

V. LEGAL RECOURSE

In cases where investors fall victim to fraudulent schemes, legal recourse may be available. Regulatory bodies like the Securities and Exchange Commission (SEC) play a vital role in investigating and prosecuting securities fraud. Investors who believe they have been defrauded should report the incident to the relevant authorities and seek legal advice to explore their options for recourse.

Overall, investors should approach investment opportunities with caution, conduct thorough due diligence, and remain vigilant for signs of fraud or misconduct. By staying informed and proactive, investors can mitigate risks and safeguard their investments against fraudulent schemes.