This Week In Securities Litigation (Week ending Feb. 23, 2018)
The Supreme Court handed down its decision in Digital Realty Trust this week, rejecting the SEC’s interpretation of the anti-retaliation provisions of Dodd-Frank. Specifically, the Court construed the provisions in accord with the text of the statute which narrows the scope of those provisions in comparison to the more expansive view adopted by the Commission in writing rules under the section. Under the Court’s interpretation only those whistleblowers who report to the Commission are entitled to invoke the Dodd-Frank provision. Others must rely on the protections offered under the Sarbanes-Oxley Act.
SEC
Cybersecurity: The Commission adopted a statement and interpretive guidance on public company cybersecurity disclosures (here). Commissions Stein and Jackson issued statements suggesting that more needs to be done in this area.
Supreme Court
In Digital Realty Trust, Inc., v. Somers, No. 16-1276 (Feb. 21, 2018) the Court narrowed the scope of the Dodd-Frank anti-retaliation provisions as interpreted by the SEC and rejected the approach adopted by the Commission in its rules as inconsistent with the statute. The case is discussed in detail here.
Canadian Securities Class Actions
Increasing numbers of securities class actions have been filed in the U.S. in recent years. That trend contrasts sharply with Canada where the number of actions filed last year declined again, according to a new report prepared by NERA Economic Consulting. Trends in Canadian Securities Class Actions: 2017 Update (February 2018)(here). Last year there were only six new securities class actions filed in Canada. That compares to nine in 2016, four in 2015 and 13 in 2014. This means that the litigation risk for companies listed on Canadian securities exchanges is not only generally lower than that of U.S. issuers, it is declining. Indeed, the risk of being named in a securities class action for issuers whose shares are listed on major U.S. exchanges compared to that of Canadian firms whose shares are listed on an exchange is that country is 10 times higher, according to NERA’s calculation.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 5 civil injunctive case and 1 administrative proceeding, excluding 12j and tag-along proceedings.
Cryptocurrency—unregistered securities: SEC v. Montroll, Civil Action No. 1:18-cv-01582 (S.D.N.Y. Filed Feb. 21, 2018) is an action which names as defendants Jon Montroll and Bitfunder, respectively, the developer and founder of BitFunder and an unincorporated entity involved with a portal through which users supposedly can create, offer and sell virtual shares. Over a period of several months beginning in December 2012 Mr. Montroll operated the BitFunder on-line platform through which participants were told the had the ability to create, offer, buy and sell virtual “shares” of various virtual currency related enterprises by depositing their bitcoins into a WeExchange Wallet he controlled. During the period Mr. Montroll misappropriated portions of the money deposited. At one point Mr. Montroll also offered investors what he called “shares” of Ukyo.Loan on BitFunder’s platform. Those shares were unregistered securities. Over a period of several weeks there was a cyber attach which resulted in the theft of more than 6,000 bitcoins. This event was not disclosed. Investors were lead to believe that in fact BitFunder was properly funded and profitable when it was not. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Sections 5(a), 5(c) and 17(a). The case is pending. A parallel criminal action was filed by the Manhattan U.S. Attorney’s Office.
Cherry picking: SEC v. Strong Investment Management, Civil Action No. 8:1-cv-00293 (C.D. Cal. Filed Feb. 20, 2018) is an action which names a defendants the registered investment adviser, Joseph Bronson, its founder and owner, and John Engebretson, the owner’s brother and the CCO. Over a two year period beginning in January 2012 Defendants engaged in a cherry picking scheme. Specifically, Mr. Bronson placed trades though an omnibus account and later allocated them based on performance with the profitable trades going to the firm and the others to client accounts. As the COO Mr. Engebertson was failed to maintain the proper systems to detect this. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Sections 17(a)(1) and (2) and Advisers Act Sections 206(1), 206(2), 206(4) and 207. The case is pending. See Lit. Rel. No. 24054 (Feb. 21, 2018).
Insider trading: SEC v. McPhail, Civil Action No. 24053 (D. Mass.) is a previously filed action centered on the repeated tipping by Eric McPhail of his golf friends, including Jamie Meadows, regarding American Superconductor Corp. The Court entered final judgments by consent against Mr. McPhail and Mr. Meadows. As to Mr. McPhail the Court entered a permanent injunction prohibiting future violations of the antifraud provision of the federal securities laws. Previously, Mr McPhail was convicted of insider trading after a jury trial and sentenced to serve 18 months in prison. The judgment as to Mr. Meadows imposes a similar injunction and requires him to pay disgorgement of $191,521, prejudgment interest of $41,841 and a penalty of $191,521. The other defendants previously settled. See Lit. Rel. No. 24053 (Feb. 20, 2018).
Disgorgement: SEC v. Thibeault, Civil Action No. 24052 (D. Mass.) is a previously filed action against investment adviser Daniel Thibeault. The complaint alleged that the adviser misappropriated funds from an investment fund that he managed. Essentially, the complaint claims that Mr. Thibeault told investors that there funds were going into purchasing consumer loans and that they would profit as the loans were repaid. Defendant Thibeault and others falsified the loan documents so that investor funds could be misappropriated. Relief defendant Shawnet Thibeault, the wife of the Defendant, is alleged to have received a portion of the funds. The judgment entered against her requires the payment of $468,236 along with prejudgment interest of $49,826. See Lit. Rel. No. 24052 (Feb. 16, 2018).
Shell factor scheme: SEC v. Perlstein, Civil Action No. 1:18-cv-0126 (E.D.N.Y. Filed Feb. 16, 2018) is an action which names as defendants Sharone Perlstein, Aric Swartz and Hadas Yaron, all residents of Israel, who are alleged to have created at least 15 shell companies by filing false registration statements and other, related documents. Although public offerings were supposedly conduced, the three men continued to retain control of the companies. Eventually the entities were sold for about $1.8 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the case each defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. In addition each Defendant will pay disgorgement prejudgment interest of: Mr. Perlstein — $307,510.15; Mr. Swarts – $106,146.64; and Mr. Yaron – $62,899.82. Each defendant also consented to the entry of a penny stock bar. See also SEC v. Strum, Civil Action No. 1:18-cv00361 (D.D.C. Filed Feb. 16, 2018)(action against Washington, D.C. attorney Jonathan Strum for assisting with the preparation of the papers for the entities; the complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b)); SEC v. Weinberg, Civil Action No. 118-cv-00360 (D.D.C. Filed Feb. 16, 2018)(action against Alan Weinberg, CPA, an Israeli resident and his firm Weinberg & Baer LLC for filing misleading audit reports as to certain of the entities involved; complaint alleges aiding and abetting the actions of those named as defendants in the Perlstein complaint and also Mr. Weinberg with violations of Exchange Act Section 10A(a) and the firm with violating Rule 2-02(b)(1) of Reg. SK; each defendant consented to a suspension of their privilege of appearing and practicing before the SEC); In the Matter of Simcha Baer, CPA, Adm. Proc. File No. 3-18374 (Feb. 16, 2018)(auditor alleged to have failed to properly conduct certain of the audits for the firms and to have falsified documents produced to the staff; settled with a consent to be permanently barred from practicing before the Commission). The SEC also suspended the registration of one of the shell companies. See Lit. Rel. No. 24051 (Feb. 16, 2018).
CFTC
Fin-Tech: The agency entered into an arrangement with the U.K.’s Financial Conduct Authority under which each agency will collaborate and support innovative firms through each others financial technology or FinTech.
Criminal Cases
Insider trading: U.S. v. Little, No. 1:17-cr-00450 (S.D.N.Y.) is an action in which Walter Little was sentenced to serve 27 months in prison for conspiracy to commit insider trading. Mr. Little had been an associate at an international law firm. He accessed their confidential files and used the information to profitably trade in the securities markets. He also tipped his friend Andrew Berke who traded profitably and agreed to kick back portions of his trading profits to him. The court also ordered the Defendant to forfeit $452,998. See also SEC v. Little, Civil Action No. 1:17-cv-03536 (S.D.N.Y.).
Insider trading: U.S. v. Chang, No. 5:18-cr-00034 (N.D. Cal.) is an action in which Peter Chang, the founder and CEO of Sunnyvale-based fiber optics company Alliance Fiber Optic Products, Inc. pleaded guilty to three counts of insider trading. Mr. Chang admitted that he traded in advance of unfavorable earnings announcements and avoided significant losses. Sentencing is scheduled for May 30, 2018. See also SEC v. Chang, Civil Action No. 5:17-cv-05438 (N.D. Cal.).
Circuit Courts
Insider trading: U.S. v. Metro, No. 16-3813 (3rd Cir. Feb. 14, 2018). Defendant Steven Metro was a clerk at a prominent New York City law firm. From February 2009 through January 2013 he disclosed inside information to his friend, Frank Tamayo, about pending take-over transactions. Mr. Tamayo, in each instance, transmitted the information to broker Vladimir Eydelman who placed trades for his client, himself, his family and other clients. Total trading profits for all of the trades were $5,573,682.
Messrs. Metro and Tamayo both pleaded guilty. Specifically, Mr. Metro pleaded guilty to one count of conspiracy and one count of securities fraud. At his sentencing, Mr. Metro objected to using the entire $5.5 million amount of trading profits in the sentencing calculation, arguing that he was unaware of the broker and his trading activity despite the fact that Mr. Eydelman’s name was included in the conspiracy count to which he pleaded guilty. The government claimed that in fact he was aware of the broker and sought to attribute all $5.5 million to him. The district court overruled Defendant Metro’s objection and, based on the $5.5 million in trading profits, sentenced him to serve 46 months in prison. This appeal followed.
The Circuit Court reversed, finding that the district court made insufficient factual findings to support the attribution of all the trading profits to Appellant Metro. Under the sentencing guidelines all of the gains from illegal insider trading can be attributed to a defendant which he or she realized, from those to whom the defendant provided information, and from those with whom he or she is found to have been acting in concert, the Court stated.
In this case Mr. Metro objected to the attribution of those trading profits which came from the broker, his family and his clients. While the indictment alleged in the conspiracy count that Defendant Metro acted in concert with the broker and others, that is not sufficient the Court held.
In conducting a sentencing hearing, and before attributing gains to a defendant, the district court should analyze the conduct to determine with whom the defendant acted in concert with and those to whom he provided inside information. This was not done here. Accordingly, the sentence was vacated and the case remanded for resentencing.
Australia
Fees: The Australian Securities and Investment Commission permanently banned John Poynter, formerly a representative at Charter Financial Planning Ltd. from the securities business. The Commission determined that over a period of about eighteen months beginning January 2015 Mr. Poynter had charged ten clients a total of about $39,700 for services that were not rendered.