This Week In Securities Litigation (Week of December 7, 2020)
A Commission subcommittee recommended that the agency adopt standards requiring disclosure of material environmental, social and governance risks at the beginning of last week. This follows, in part, a report on the impact of climate change on the U.S. economy published by the CFTC in September 2020. That report concluded that climate change could pose systemic risks for American financial system. It also recommended the disclosure of material climate related financial risks (here).
Enforcement filed actions last week centered on offering frauds, market manipulation and the misappropriate of assets by an unregistered investment adviser.
Be safe and healthy this week
Rule: The agency adopted a new rule under the Investment Company Act on the valuation of asserts. That rule focuses on assessing and managing material risks associated with valuation determinations. It was adopted on December 3, 2020 (here). Commissioner Hester M. Peirce filed a separate statement on the rule (here).
Risk Alert: OCIE – the Commission’s Office of Compliance Inspections and Examinations – published a Risk Alert on November 19, 2020 discussing key issues for registered investment advisers regarding their compliance programs. OCIE: Observations: Investment Adviser Compliance Programs (here). The Alert contains a good discussion of key issues connected with crafting and maintaining an effective compliance program. The Office identified several areas of concern which include: Inadequate resources; lack of authority by the CCO; deficiencies in the annual review; a failure to maintain or establish written policies; portfolio management; not properly supervising advertising; and a failure to employ appropriate safeguards regarding customer privacy (here).
Whistleblowers: Awards of over $6 million were made to joint whistleblowers who rendered substantial assistance to the Commission and another agency by submitting documents, participating in interviews and identifying key individuals involved in the misconduct, according to a December 1, 2020 press release.
SEC Enforcement – Filed and Settled Actions
The Commission filed 4 civil injunctive actions and no administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters.
False statements: SEC v. SCANA Corp., Civil Action No. 3:20-cv-00882 (D.S.C.) is a previously filed action centered on misstatements by two former senior executives about a project to expand a nuclear power plant was ultimately abandoned. Potential investors had been told that the project would qualify for certain tax credits when in fact it was far behind. The false statements did boost the share price. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 13(a) and 10(b) by the firm, its subsidiary and its former CEO Kevin Marsh and former EVP Stephen Byrne. To resolve the matter the firm and its subsidiary consented to the entry of permanent injunctions. In addition, those entities agreed to pay $112.5 in disgorgement plus prejudgment interest that will be deemed satisfied by the firms’ settlement payments in related rate payer and shareholder litigation. The parent firm will also pay a $25 million penalty. See Lit. Rel. No. 24976 (Dec. 3, 2020).
Manipulation: SEC v. O’Rourke, Civil Action No. 19-cv-4137 (E.D.N.Y.) is a previously filed action which names as defendants Garrett M. O’Rourke and Michael J. Black. The complaint alleges that Defendants engaged in a pump-and-dump market manipulation. Specifically, the complaint claims that Defendants solicited retail investors and the elderly to purchase shares in select microcap stocks that they had secretly been hired to dump for the owners. Mr. O’Rourke agreed to settle with the Commission, consenting to the entry of a permanent injunction based on Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). In addition, a penny stock bar was imposed and Mr. O’Rourke directed to pay $5,763,719 in disgorgement and prejudgment interest. Defendants were charged in a parallel criminal action. See Lit. Rel. No. 24971 (Nov. 30, 2020).
Offering fraud: SEC v. Brothers Investment Group International, Inc., Civil Action No. 1:20-cv-24842 (S.D. Fla. Filed Nov. 24, 2020) is an action that named as defendants the firm and Anson Jean-Pierre. Over a period of just over a year, beginning in August 2017, the firm and its CEO, defendant Anson Jean-Pierre, raised about $794,000 from at least 208 Haitian-American investors through the sale of “membership interest” in Brothers. The investor funds were supposed to be used in development projects in Haiti. In reality a large portion of the investor money was misappropriated. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24970 (Nov. 30, 2020).
Manipulation: SEC v. Rubin, Civil Action No. 20 Civ 10084 (S.D.N.Y. Filed Dec. 2, 2020). The Defendants in the action are Richard J. Rubin and Thomas J. Craft. Each has a law degree. Defendant Rubin was admitted to practice in New York in 1968. Later he was disbarred under an order from the Appellate Division of the Supreme Court of New York. Mr. Rubin also settled an administrative proceeding with the Commission, consenting to the entry of an order which denied him the privilege of appearing and practicing before the Commission. Richard Jeffrey Rubin, Exchange Act Rel. No. 88258 (Feb. 21, 2020). Defendant Craft is also an attorney, admitted to practice in Florida. On February 25, 2020 he resolved a Commission administrative proceeding by consenting to the entry of an order suspending him from appearing and practicing before the Commission. Thomas J. Craft Jr., Exchange Act Rel. No. 88280 (Feb. 25, 2020). Over a three-year period, beginning in December 2015, Mr. Rubin submitted at least 128 attorney opinion letters to the Commission for the purpose of registering securities for public sale. The letters were also submitted to transfer agents and OTC Markets Group, Inc. for the purpose of removing restrictive legends on share certificates or issuing share certificates without restrictive legends for over 85 million shares of microcap issuers. Mr. Rubin personally singed at least 98 of the letters. Each was fraudulent. During the period Defendant Craft joined with Mr. Rubin in issuing at least 29 of the fraudulent attorney opinion letters. Specifically, Mr. Rubin drafted the letters for the signature of Mr. Craft. He also executed one letter forwarded to OTC Markets that had been drafted by a third party. All were fraudulent. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal case was filed by the U.S. Attorney’s Office for the Southern District of New York.
Misappropriation: SEC v. Garcia, Civil Action No. 3:20-cv-01682 (D. Puerto Rico Filed Dec. 1, 2020) is an action which names as a defendant, Eugenio Garcia Jimenez, Jr. Over a two-year period, beginning in 2016, Defendant served as an unregistered investment adviser to a Puerto Rico city, Municipio Autonomo de Mayaguez. Defendant induced the city to invest $9 million in unused funds for two years based on a promise of 8 to 10% returns with no risk. Rather than invest the funds, Defendant put the capital into an account and purchased U.S. treasury notes that were margined. He then misappropriated about $4.1 million in client funds. After the broker terminated the account another was opened. An additional $3 million was misappropriated. False documents were given to the city to cover the scheme. At one point, Defendant “advanced” $1.8 million from the account to the City as its returns. Overall, Defendant misappropriated about $7.1 million. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending.
Offering fraud: SEC v. Lisser, Civil Action No. 2:20-cv-05798 (E.D.N.Y. Filed Dec. 1, 2020) is an action which names as a defendant Mark A. Lisser a/k/a Mark Alan. Over a period of several months, beginning in October 2018, Defendant Lisser, acted as the operator of Knightsbridge Capital Partners, an unregistered fund manager for two Funds. He also operated two boiler rooms. Mr. Lisser instructed those employed in the boiler to solicit investors for the Funds by claiming that they had “pre-IPO” shares of firms about to go public. Investors were told that no commissions were charged but would be collected after the IPOs. The claims were false. In fact, much of the $2.1 million raised was not invested but misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Report: The Financial Conduct Authority published its report on the impact of the Retail Distribution Review and the Financial Advice Market Review on December 3, 2020 (here). The Report concludes that the number of UK adults receiving financial advice continues to increase as does the number of advisers. Consistent with those findings the estimated assets under automated advices services increased as did the awareness of consumers of such services.