The exit from the staff at the Commission continued this week with the acting Director of Enforcement resigning. At the same time, it seems relatively certain that Gary Gensler, former CFTC Chairman, will become the new Chair of the SEC – but it is not official yet.
This week the Supreme Court made it clear that the federal fraud statutes are not going to be used to prosecute insider trading, thereby by-passing the elements created by the courts over the years. The case arose from an insider trading scheme based on information from federal agency CMS.
Be careful, be safe this week
Whistleblowers: The Commission awarded nearly $600,000 to a whistleblower, according to a January 14, 2021 announcement.
Insider trading: Blaszczak v. U.S., No. 20-5649 (January 11, 2021) is an action in which David Blaszczak, a political intelligence consultant, appealed the affirmance of his convictions for violations of two federal fraud statutes, the wire fraud and securities fraud statute passed as part of the Sarbanes Oxley Act, Section 1343 and Section 666(a)(1)(A) of Title 18. The convictions were based on the illegal tipping of confidential information regarding changes in certain federal regulations by Mr. Blaszczak’s friend, and former co-worker, at Center for Medicare and Medicaid Services or CMS. The information was given to a hedge fund which Mr. Blaszczak was affiliated and used to profitably trade.
The Supreme Court granted his petition for certiorari based on a claim that the statutes on which his convictions are predicated only apply to property rights which were not implicated by the insider trading scheme. The Supreme Court granted the writ and remanded the case to the Second Circuit for reconsideration in view of its recent decision in Kelly v. United States . . .” 590 U.S. — (May 7, 2020) regarding property rights and certain federal fraud statutes. The decision of the Second Circuit is at Blaszczak v. U.S., 947 F. 3rd 19 (2nd Cir. 2019).
SEC Enforcement – Filed and Settled Actions
The Commission filed 2 new civil injunctive actions and 1 administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters.
Offering fraud: SEC v. Hoffman, Civil Action No. 19-cv-4409 (N.D. Ill.) is a previously filed action in which the Court entered a final judgment on January 8, 2021. The complaint in the case alleged that Mr. Hoffman and another individual raised over $3.3 million through the sale of securities to 46 investors in an offering fraud. Previously, Mr. Hoffman had served as an investment advisory representative. The judgement imposes a permanent injunction based on Securities Act Sections 17(a)(2) and (3), Advisers Act Section 206(2) and Exchange Act Section 15(a). In addition, Mr. Hoffman was ordered to pay disgorgement of $60,000, prejudgment interest of $10,788 and a penalty of $93,000. The litigation continues against Defendant Thomas Conwell. See Lit. Rel. No. 25008 (Jan. 14, 2021).
Offering fraud: SEC v. Malley, Civil Action No. 1:21-cv-00237 (S.D.N.Y. Filed Jan. 12, 2021) names as defendants: Eric Malley and his firm, MG Capital Management L.P. Mr. Malley, according to the complaint, solicited investments for two funds. Investors were told that the funds they were highly profitable. They were also told that the $250 million balance sheet of Capital Management assured no losses. The track record of the investments was false; the balance sheet was false. Defendants raised about $58 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The complaint is pending. See Lit. Rel. No. 25007 (Jan. 12, 2021).
Offering fraud: SEC v. Contxt, Inc., Civil Action No 2:21-cv-00013 (D.Ut. Filed Jan. 7, 2021). Named as defendants are: ConTXT, Inc., a firm formed in 2016; Thomas Robbins, an undisclosed owner of ConTXT; Daniel Merriman, also an undisclosed owner of ConTXT; Mark Wiseman, chief marketing officer of ConTXT; and Clark Madsen, President and CEO of ConTXT. The case centers on two interrelated offering frauds created by Messrs. Robbins and Merriman who met while in prison for unrelated securities fraud cases. The two men were behind each of the offerings in this action. The first centered on a trading program tied to ARC Holdings, a firm controlled by the two recidivists. Investors solicited to put their funds into the firm were told that Mr. Robbins had a “spiritual revelation” in 2008 about an exclusive algorithm for trading currencies, commodities, indices, stocks, bonds, ETFs and other instruments. The vision would become a reality in 2011 when the necessary technology could be developed according to the story. It did not – the program was a fraud. The second program centered on the sale of shares in ConTXT. In 2017 Defendants Madsen and Wiseman, along with their firm, entered into an agreement with Messrs. Robbins and Merriman to raise funds for ConTXT. The firm and its executives were aware that Defendants Robbins and Merriman had criminal records which would have to be concealed. Under the terms of the agreement between ConTXT and its two executives and Defendants Robbins and Merriman, the two recidivists would receive 37.5 million shares of the company in exchange for a payment of at least $1,018,769.41. The funds would come from selling shares of ConTXT and the trading program. The ConTXT shares were marketed through the use of a PPM and related documents. Those documents falsely attributed the corporate duties of Messrs. Robbins and Merriman to a nominee. The PPM also contained false financial information for the company. Much of the money raised was never invested in the company. The complaint alleges violations of Securities Act Section 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). To resolve the action each Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, Defendant Robbins and Merriman agreed to the entry of conduct-based injunctions. Each Defendant also agreed to pay disgorgement and prejudgment interest as follows: Robbins, $828,567 and $142,714; Merriman $744,191 and $121,869 along with a penalty of $192,384; Madsen $29,00 and $3,531 and a penalty of $96,384; Wiseman $68,500 and $8,341 and a penalty of $96,187; and ConTXT $269,187 and $32,779. In the parallel criminal case based on the trading program, Mr. Robbins pleaded guilty to securities fraud and money launderings. He was sentenced to serve five years in prison and ordered to pay $10,170,700.69 in restitution. See Lit. Rel. No. 25005 (January 8, 2021).
In the Matter of Deutsche Bank AG, Adm. Proc. File No. 3-20200 (January 8, 2021). Deutsche Bank is a multinational financial service company based in Germany. Its shares are traded on the NYSE. The firm had a Global Anti-Corruption Policy that prohibited the payment of bribes and required that before any Business Development Consultant or BDC could be retained rigorous procedures be met. Despite what appeared to be a comprehensive policy, beginning in 2009, the Bank repeatedly employed numerus BDCs to obtain and retain business. Those retained included foreign officials and their relatives and associates in at least three different countries. While there were risks of bribery, they were not assessed. In each instance the Bank was able to obtain and/or retain business as a result of payments through the BDCs. The Order alleges violations of Exchange Act Sections 13(b)(2)(A)_ and 13(b)(2)(B). In resolving the matter, the Commission considered the cooperation of the Bank, its remedial acts and the disposition in the related criminal case with the Department of Justice. To resolve that matter the firm entered into a three-year deferred prosecution agreement. The Bank also agreed to pay a criminal penalty of $85,329,622, criminal disgorgement of $681,480, and victim compensation payments of $1,223,738. U.S. v. Deutsche Bank, No. 20-CR-584 (E.D.N.Y. Jan. 8, 2021).To resolve the action with the Commission, the Bank consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Respondent agreed to pay disgorgement of $35,145,619 and prejudgment interest of $8,184,003.