This Week In Securities Litigation (Week of December 19, 2022)
Last week was peppered with huge headlines. First, The Commission, CFTC and DOJ filed charges tied to the collapse of FTX. That was followed another agency action charging social influencers with market manipulation, a case sure to impact social media. And, the PCAOB announced that China is finally permitting its inspectors to review the audits of China based issuers.
Be careful, be safe this week
Rules: The Commission adopted final rule amendments regarding Rule 10(b)(5)-1 trading plans. Specifically, the amendments require that those entering into a plan represent that they are not aware of any inside information and are adopting the plan in good faith. Issuers must also make disclosures regarding their insider trading policies. The amendments place certain restrictions on the use of multiple, overlapping plans, according to the December 14, 2022 release (here).
Proposed rules: The Commission proposed a new rule that would establish a framework for best execution of orders, according to a December 14, 2022, release (here).
SEC Enforcement – Filed and settled actions
Last week the Commission filed 6 new civil injunctive actions and no administrative proceedings, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.
Front running: SEC v. Billimek, Civil Action No. 1:22-cv-10542 (S.D.N.Y. Filed December 14, 2022) is an action which names as defendants Lawrence Billimek and Alan Williams. Each Defendant has worked in the financial industry for a number of years. For a period of about six years, beginning in September 2016, Defendant Billimek traded at a major U.S. based asset management firm. During the period he provided advance notice of his large trades to Defendant Williams who would place the same trades at about the same time, thus front running the positions. The positions were later closed and, over time, generated millions of dollars in profits. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Investment Company Act Section 17(j). The case is pending. Parallel criminal charges were filed by the U.S. Attorney’s Office for Manhattan.
Crypto pyramid scheme: SEC v. Da Silva, Civil Action No. 22-civ-10554 (S.D.N.Y. Filed December 14, 2022) is an action which names as defendants: Francisley Aldevino Da Silva, Ramon Antonio Perez Arias, Juan Antonio Tacuri Fajardo and Jose Ramiro Coronado Reyes. Beginning in about mid-2017 Defendants, led by Mr. DaSilva, promoted and sold interests in a firm called Forcount Trader Systems, Inc. which were actually investment contracts. Investors were told there would be large profits tied to the crypo trading of a robot. In fact, the firm had no product – it was a classic pyramid scheme. The interests – or memberships as they were called — were sold to Spanish speaking persons in the U.S and other countries. Defendants facilitated the collapse of the firm by misappropriating assets. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25592 (December 15, 2022).
AML: SEC v. Danske Bank A/S, Civil Action No. 7:22-cv-10509 (S.D.N.Y. Filed December 13, 2022) names as defendant, a Danish financial institution. The complaint alleges that over a period of about six years, tracing back to 2009, the bank, through its branch in Estonia provided services to suspicious customers despite the fact that those persons represented a high degree of risk regarding money laundering. During the period the bank was aware it had weak controls despite its public statements to the contrary. In 2017 the bank disclosed that it had major deficiencies in controls and governance regarding its AML policies. The firm’s stock price dropped significantly. The Bank has agreed to settle the action by consenting to a permanent injunction based on the Section cited in the complaint. It also agreed to pay disgorgement of $178.6 million, $55.8 million in prejudgment interest and a penalty of $178.6 million. The Commission deems the disgorgement and prejudgment interest satisfied by the forfeiture and confiscation ordered in the parallel criminal cases. The Bank has agreed to pay over $2 billion as part of an integrated global resolution with the SEC, DOJ, USAO-SDNY and Denmark’s Special Criminal Unit.
Manipulation – social media: SEC v. Constantin, Civil Action No. l4:22-cv-04306 (S.D. Tx. Filed December 13, 2022) is an action which names as defendants: Edward Constantin, Perry Matlock, Thomas Cooperman, Gary Deel, Mitchell Hennessey, Stefan Hrvatin, Daniel Knight and John Rybarcyzk. Each named Defendant is a well established social media influencer. Their followers believe each provides correct information regarding various stocks. In reality, since at least 2020, the influencers have provided information to the public as part of their efforts to repeatedly manipulate various securities. Those efforts have netted them about $100 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Crypto-fraud: SEC v. Backman-Fried, Civil Action No. 1:22-cv-10501 (S.D.N.Y. Filed December 13, 2022). In 2018 Defendant Backman-Fried began work on a crypto asset trading platform and ultimately co-founded FTX. The firm began operations in May 2019. The new trading platform was closely associated with Alameda Research LLC, a firm that had operations in the U.S., Hong Kong and The Bahamas. Known as a “crypto hedge fund,” its CEO was Defendant Bankman-Fried. He became the ultimate decision maker. Defendant Bankman-Fried raised over $1.8 billion from U.S. and other investors who acquired an equity stake in FTX. Investors were repeatedly told that the firm had the necessary and appropriate controls. Mr. Bankman-Fried fostered this belief throughout the period of operations. Yet from the beginning Mr. Bankman-Fried diverted investor assets from FTX to Alameda. As the cash diversions continued Defendant touted FTX as having “top-notch, sophisticated, automated risk measures in place to protect customer assets, that those assets were safe and secure . . .” Alameda was portrayed as just another investor, not a funnel for investor cash to Defendant. The statements were false. Much of the investor money was diverted to Defendant. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. CFTC v. Samuel Bankman-Fried, Civil Action No. 1:22-cv-10503 (S.D.N.Y. Filed December 13, 2022. The Department of Justice also filed criminal charges.
AML: SEC v. J.H. Darbie & Co., Inc., Civil Action No. 1:22-cv-10482 (S.D.N.Y. Filed December 12, 2022) is an action which names the registered broker-dealer as defendant. The complaint alleges that between January 2018 and January 2020 the firm brokered over $105 million transactions in low price securities traded in the OTC markets. Although the firm had AML procedures it failed to implement them properly — SARs were not filed. This constitutes violations of Exchange Act Section 17(a) and Rule 17a-8. The case is pending. See Lit. Rel. No. 25590 (December 13, 2022).
The Public Company Accounting Oversight Board declared victory yesterday in the battle to inspect audit workpapers for China based issuers whose shares are listed on U.S. exchanges, according to a press release dated December 15, 2022. Specifically, the release headline states “PCAOB Secures Complete Access to Inspect, Investigate Chinese Firms for First Time in History.” The release goes on to claim that the new policy has been verified: “Today’s announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong. It is a recognition that, for the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them.” This success is based on the Foreign Companies Accountable Act of 2020. That Act sets up a procedure through which the SEC is required to ban an issuer if the PCAOB concludes that it has refused to permit inspection. It is the potential sanctions from this Act which the PCAOB claims have now changed the landscape (here).
Remarks: Ravi Menon, Managing Director of the Monetary Authority of Singapore, delivered the Keynote Remarks at the COP 15 Finance and BioDivdersity Day, titled Network for Greening the Financial System, on December 14, 2022 (here). His remarks focused on the impact of our actions on the environment.