by T. GormanPosted on Posted in SECActions

Critical to conducting an offering fraud is trust. Those running the scheme frequently reach out to potential investors in an effort to build the trust and confidence necessary to secure a sale of shares. In many instances schemers approach friends and family, members of their church or those in some group for which they can claim a bond that becomes the beginning of trust and, all too often, the end of investors’ cash. The Commission’s most recent offering fraud action centered on a Korean national selling shares in that country, SEC v. Seong Yeol Lee, Civil Action No. 3:23-cv-00125 (D. Conn. Filed February 1, 2023).

Defendant Lee is a Korean national who has resided in Stanford Connecticut since 2020. Defendant Amritrust Corporation, a firm with no business, is also a defendant. That entity is now incorporated in Wyoming. Previously the firm was incorporated in Michigan and Georgia.

Since early 2020 Defendant Lee has held executive positions with Amritrust. In that year, he appointed his daughter, Alice Choi, to the board of directors. She had not experience for the position. The firm reported the appointment in a filing with the Commission and, in addition, that it has a corporate secretary. That person also lacked the experience required by the position.

Amritrust eventually became a public company. Nevertheless, it typically failed to timely file the required documents with the Commission.

Beginning in 2019, and continuing through late 2022, Amritrust received over $20 million from individuals in Korea who were recruited to invest in the company by Defendants and their affiliates. The stock records of the company reflect about 2,000 Korean shareholders. Witnesses in Korea estimate that the number of investors is closer to 4,000.

Defendants recruited investors in Korea through information sessions, email, solicitations and word of mouth. According to one Witness, Defendants used another entity, Bespoke Korea, to assist with the recruiting efforts. Bespoke Korea had few employees. Amritrust has no employees and no operations. Yet investors in that firm were assured of guaranteed returns and furnished other misrepresentations. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. In a separate proceeding the Commission delisted Amritrust. See Lit. Rel. No. 25627 (February 1, 2023).

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by T. GormanPosted on Posted in SECActions

Cornerstone Research published its review of security class actions for 2022, illuminating key trends for the year (here). The number of actions filed year is, perhaps, the most closely watched number. For 2022 the number of securities class actions declined slightly compared to the prior year. Last year 208 securities class actions were initiated, compared to the 218 in 2021. While the change is small, the more important metric is the decline – the fact that the number of cases initiated declined by 5%.

The downward trend in the number of cases filed, mirrors that in other areas. For example, the number of filings of M&A class actions also declined. The decline there was much sharper – 61% compared to the prior year.

Similarly, the percentage of U.S. exchange listed companies named in a securities class action fell for the third straight year in 2022. In that year it fell to 3.1%, its lowest percentage since 2012. That decrease is mitigated, however, since there was a 21% increase in U.S. exchange listed firms at the beginning of 2022 relative to 2021. Many of the new issuers, however, were SPACs that had not announced a de-SPAC transaction.

In contrast, the filing of actions related to cryptocurrency significantly increased compared to the prior year. At the same time, the number of those cases dismissed typically exceeds that of others. For example, during the period 2018 – 2019 56% of cases involving crypto were dismissed compared to 53% of other actions; in 2020 69% of those involving crypto were dismissed compared to 48% of the other cases; and in 2021 27% were dismissed compared to just 21% of other actions.

The most prevalent claim in securities class actions is misrepresentations made in financial documents, according to the Report. Indeed, in each year, starting in 2018 and continuing to last year at least 90% or more of the actions filed claimed were based on claimed misrepresentations in financial documents. The only exception was 2022 during which the number of cases containing such an allegation was 89% of those filed. During the same period the second most alleged claim was false forward looking statement, an claim made in over 40% of the cases. Again, however, the sole exception was 2022 when percentage fell to 39. Finally, accounting violations were the third most popular allegation, appearing in over 20% of the cases during the same period.

Finally, the largest number of securities class actions were filed in the Second Circuit Court of Appeals in 2022. The same is true for 2021. In 2020, however, the Ninth Circuit edged out the Second Circuit by one filing – 77 for the former and 76 for the latter.

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