This Week In Securities Litigation (Week of Sept. 9)
A look forward; a look back:
The future looms as September begins. A Commissioner position will be opening on the SEC. A position is open on the PCAOB. Budget hearings will begin next month on Capitol Hill for the agency following a Congressional hearing at the end of September at which Chairman Clayton and the four Commissioners will testify. Individually, and collectively, these events may bode change for the Securities and Exchange Commission and those subject to its regulation.
The SEC brought an action in conjunction with the CFTC against the OCC. The regulatory action centered on the adequacy of the OCC’s procedures. In many respects the Order is a primmer on basic compliance procedures. Last week Enforcement continued brining its typical array of actions. Those included cases focused on insider trading, financial fraud and undisclosed conflicts.
SEC Enforcement – Filed and Settled Actions
The Commission filed 4 civil injunctive actions and 3 administrative proceedings this week, exclusive of 12j and tag-along actions.
Insider trading: SEC v. Daubenspeck, Civil Action No. 1:19-cv-05939 (N.D. Ill. Filed September 5, 2019) is an action which names as defendants Keith Dauberspeck and Geoffrey Homer. Mr. Dauberspeck was sanctioned previously in a Commission enforcement action for failure to supervise. Mr. Homer works in the personnel staffing business. The two men have been close friends since childhood. The action centers on two earnings announcements, one issued in August 2015 and second in March 2016 for Ulta Beauty, Inc., a seller of cosmetics and salon services. Defendant Homer misappropriated inside information regarding the quarterly financial results of Ultra Beauty from his girlfriend, a high-ranking employee at the company, and furnished it to his friend. Defendant Daubenspeck spent over $1.5 million on Ultra shares in advance of the two announcements. Following their issuance, he had total profits of $111,472. The complaint alleges violations of Exchange Act Section 10(b). Mr. Daubenspeck resolved the matter, consenting to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to pay disgorgement in the amount of $111,472, prejudgment interest of $17,586 and a penalty of $111,472. See Lit. Rel. No. 24587 (September 5, 2019).
Financial fraud: In the Matter of Daniel Khesin, Adm. Proc. File No. 3-19422 (September 5, 2019) is an action which names as a Respondent Mr. Khesin, the former president of DS Healthcare Group, Inc. In the first three quarters of 2015 Respondent and others took actions to fraudulently inflate the revenue of the firm. Specifically, fictitious revenue was recognized using a variety of techniques such as overbilling, shipping product without an order, bill and hold and other techniques. As a result, the firm reported inflated revenues in three quarterly reports and an S-3 registration statement. Respondent also selectively disclosed some information while failing to file required reports. The Order alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a) and 16(a) along with the related rules. Mr. Khesin resolved the proceedings, consenting to the entry of a cease and desist order based on the sections and rules cited in the Order. He also agreed to be barred from serving as an officer or director of a public company for eight years and to be denied the privilege of appearing and practicing before the Commission as an accountant with the right to reapply after eight years. He will pay a penalty of $130,000.
Offering fraud: SEC v. Hafen, Civil Action No. 19-c-v-8234 (S.D.N.Y. Filed September 4, 2019). This case is discussed below under Criminal Cases.
Compliance: In the Matter of the Options Clearing Corporation, Adm. Proc. File No. 3-19416 (September 4, 2019); In the Matter of The Options Clearing Corporation, CFTC Docket No. 19-19 (September 4, 2019). The Options Clearing Corporation is the only U.S. clearing agency for exchange-listed option contracts on equities. As such in 2012 the Chicago based organization was designated as a systematically important financial market utility or SIFMU under the Dodd-Frank Act. The self-regulatory organization is subject to four groups of regulations which collectively focus on its policies and procedures. Examinations by the SEC established even before the OCC was required to comply with certain of the rules cited above, that its policies and procedures, if not corrected before the rule effective dates, might result in violations of certain rules. Nevertheless, the OCC failed to establish and implement the required policies and procedures. Those relate to the following key points: 1) The OCC did not implement, maintain and enforce policies and procedures designed to review risk-based margin models on a monthly basis;2) the OCC did not adopt and implement policies and procedures commensurate with the risks and particular attributes of each relevant product cleared by the regulator; 3) the organization did not establish and implement policies and procedures designed to cover its credit exposure; 4) the self- regulatory organization failed to establish and implement policies and procedures regarding the maintenance of adequate liquid resources; 5)the OCC failed to establish, implement and maintain policies and procedures to maintain a comprehensive risk management framework; and 6)the regulator failed to establish, maintain and enforce policies and procedures designed to protect the security of certain OCC information systems. The SEC’s Order concluded that the OCC violated Exchange Act Section 17(A)(d)(1) and a series of related rules. In resolving the proceedings, the SEC considered the cooperation and remedial efforts of the OCC. The OCC consented to the entry of a cease and desist order based on the section and rules cited and to a censure. The organization will also pay a penalty of $15 million. The settlement with the CFTC is on similar terms and included a $5 million penalty.
Undisclosed conflicts: In the Matter of Lefavi Wealth Management, Inc., Adm. File No. 3-19411 (Sept. 3, 2019). Respondent is a registered investment adviser that is affiliated with Bruce A. Lefavi Securities, Inc., a registered broker-dealer. Over a two year and one half year period, beginning in June 2014, Respondent recommended a number of Alternative Investments that included non-traded real estate investment trusts, business development companies and placements. Those investments carried an imbedded 7% commission. Also available in almost all instances, but not recommended, were the same investments with a lower share price. Respondent failed to disclose this fact in recommending the higher priced investments. Respondent also failed to disclose the conflict arising from its investment advisory representatives who received higher compensation as a result of the higher priced investments. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). In resolving the proceedings Respondent agreed to certain undertakings which included updating its policies and procedures. The firm consented to the entry of a cease and desist order based on sections cited in the Order and to a censure. The advisory will pay disgorgement in the amount of $994,296.10, prejudgment interest of $144,439.12 and a penalty of $150,000.
Aiding & abetting prime bank fraud: SEC v. Kanetkar, Civil Action No. 1:19-cv-03915 (N.D. Ga. Filed August 30, 2019) is an action which names as defendants Jayat Kanetkar and his firm, Guaranteed Investigations, Inc. Over a three-year period, beginning in 2013, Defendants rendered substantial assistance to four fraudulent schemes know as prime bank fraud. In each instance Respondents served as the escrow agent and held funds of those drawn into the fraud. The complaint alleges aiding and abetting violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24584 (September 3, 2019).
Offering fraud: SEC v. Thomas, Civil Action No. 2:19-cv-01515 (D. Nev. Filed August 30, 2019) is an action which names as defendants two convicted felons, John Thomas and Jonathan West, six entities they control and others they enlisted to help sell the securities. The complaint centers on a nearly $30 million offering fraud that involved about 600 investors in what was claimed to be sports betting. Specifically, the individual Defendants claimed to have a proprietary handicapping system that they would share with investors. The system was supposed to be low risk. Investors were told their money would triple in less than six months. The claims were false. Most of the funds were misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The complaint is pending. See Lit. Rel. No. 24585 (September 4, 2019).
Offering fraud: U.S. v. Hafen, (S.D.N.Y. Plea Sept. 4 2019). Ellis H. Hafen was a financial adviser at two investment banks with offices in Manhattan. Over a period of about five years, beginning in 2013, he convinced a group of clients from those banks to entrust him personally with their funds because of his supposed access to an investment fund that had guaranteed returns. Specifically, Mr. Hafen convinced 11 of his bank clients that he had access to an investment fund that had high yields and guaranteed returns. This fund was outside of the banks which employed Mr. Hafen. Accordingly, the investors gave Mr. Hafen their investment funds which he placed in his personal accounts. Periodically, the investors were furnished account statements from the outside fund. Those statements reflected the investments and the guaranteed returns. Unfortunately, all of Mr. Hafen’s claims were false. This week Mr. Hafen pleaded guilty to one count of investment adviser fraud. Sentencing is set for January 14, 2020. See also SEC v. Hafen, Civil Action No. 19-civ-8234 (S.D.N.Y. Filed September 4, 2019).
The regulator announced that it has launched a Global Investigations Division. It will be responsible for implementing targeted investigation tied to the regulator’s authority stemming from the Bank Secrecy Act to combat domestic and international financial threats.
Investment advisers: The European Securities and Markets Authority published a stress simulation framework for investment funds (Sept. 5, 2019)(here).
Digital Banks: The Monetary Authority of Singapore announced that it will now accept Applications for New Digital Bank Licenses (Aug. 29, 2019)(here).
Remarks: Lisa Osofsky, Director of the Serious Fraud Office, addressed the Cambridge Symposium on Economic Crime (Sept. 2, 2019). Her remarks focused on the duties of prosecutors to gather evidence, not bring charges when the public interest is not served despite the evidence, and to prosecute when the evidence would support a jury verdict (here).