Trends in SEC Enforcement 2Q23 – Part II

The first installment of this series focused on statistics for the second quarter of 2023, noting that 46 enforcement actions were filed by the SEC. This second part of the series provides examples of the cases in four largest categories of actions filed during the period – offering frauds, insider trading, manipulation and financial fraud.

This is typically one of the largest categories of actions filed by SEC enforcement. The variations and variety of cases and schemes on which they are based are no doubt endless, ranging from a simple solicitation to purchase securities to elaborate schemes and claims about the reasons the stock price is sure to increase. The first case below centers on a cannabis farm while the second is based on two schemes.

SEC v. American Patriot Brands, Inc., Civil Action No. 3:23-cv-01124 (D. Puerto Rico Filed March 16, 2023) is an action which names as defendants: American Patriot, a Nevada company that owns subsidiaries raising and selling cannabis; Urban Pharms, LLC, a cannabis farm; DJ&S Property # 1, LLC, a firm that operates a cannabis farm; TSL Distribution, LLC which sells cannabis from APB; Robert Y. Lee, CEO of APB; Brian L. Pallas, COO of APB, Urban Pharms and TSL; and J. Bernard Rice, CFO of APB. APB and the individual defendants have raised about $30 million from investors who have acquired shares of APB. During the offering the Commission revoked the registration statement. Although APB was only a small firm, investors were led to believe that it was a huge operation. Millions of dollars were siphoned off from the investor funds and diverted to personal use. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25675 (March 24, 2023).

SEC v. Williams, Civil Action No. 1:23-cv-02774 (N.D. Ga. Filed June 21, 2023) is an action which names as defendants: Michael Williams, an investment adviser representative; Highguard Capital LP, a Georgia state registered investment adviser; and Guardian Opportunity Management, LP an investment adviser to the Guardian Opportunity Fund. Over a six-year period, beginning in February 2016, Defendants engaged in two offering frauds: 1) They sold over $1.8 million of securities interests in Guardian Management that were described as interests in a new private Fund called Guardian Opportunity Fund, LP. The investor money was supposed to be used to grow the fund. In fact, it was largely misappropriated. 2) Defendants, acting as the investment managers of the Fund, falsified its performance by underreporting the Fund’s assets to create an artificially high rate of return. The false return information was furnished to investors. Investors were told that the Fund would be profitable. In fact, the one investor who owned about 90% of the shares had given notice that he was withdrawing, effectively precluding positive returns. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as Advisers Act Section 206(4). See Lit. Rel. No. 25752 (June 23, 2023).

Insider trading is a traditional focus of SEC enforcement. The two cases described below are good examples of those actions.

SEC v. Wygovsky, Civil Action No. 2:23-cv-01810 (D. N.J. Filed March 30, 2023) is an action which names as defendants Sean Wygovskv and Christopher Matthaei, respectively a former trader at a Canadian Asset Manager and a former partner at a U.S. broker-dealer. From May 2021 to April of the same year Defendant Wygovsky was furnished inside information on SPAC mergers by Defendant Matthaei. To help conceal the communications an encrypted app was frequently used. In April 2021 Mr. Mathaei learned that his friend was the subject of an unrelated securities fraud investigation being conducted by the Commission. The two men decided to halt their scheme. Following the arrest of Mr. Wygovsky, Defendant Mathaei gave him $5,000 in cash and showed him a bank account balance of about $2.5 million in cash which he promised to give him at a later time. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. A parallel criminal action was filed by the U.S. Attorney’s Office for the District of New Jersey.

SEC v Meadow, Civil Action No. 1:23-cv-05573 (S.D.N.Y. Filed June 29, 2023) is an action which names as defendants Jordan Meadow and Steven Teixeira, respectively, an employee of a brokerage firm and an employee of an international payment processing firm that serves as its Chief Compliance Officer. The action centers on insider trading in several stocks based on information Mr. Teixeira misappropriated from his romantic partner’s laptop while both worked from home during the COVID-19 pandemic. The romantic partner was an executive assistant at a New York based investment bank. The inside information was misappropriated from late 2020 through May 2022. It related to M&A deals for Domtar Corporation, Proofpoint Inc., Score Media and Gaming Inc, and VMWare, Inc. The trading profits for Mr. Teixeira exceeded $28,000. Mr. Teixeira shared the information with several friends. Mr. Meadow was tipped by Individual 1 and Mr. Teixeria. His trading profits from two stocks totaled $730,000. The complaint alleges violations of Exchange Act Section 10(b). The case is in litigation. The U.S. Attorney’s Office filed parallel criminal charges against Messrs. Meadow and Teixeira. The cases are pending.

SEC v. Sun, Civil Action No. 1:23-cv-02433 (S.D.N.Y. Filed March 22,2023) is an action which names as defendants Justin Sun, a Chinese national who is an entrepreneur acting through the entity Defendants; Tron Foundation Ltd., a Singapore entity conducted the offerings of TRX and BTT assets involved here; BitTorrent Foundation Ltd., also a Singapore entity; Rainberry, Inc., a California entity; Austin Mahone, a singer; and Deandre Cortez Way, also a singer. Beginning in August 2017, and continuing, Defendant Sun, working through the entity Defendants, engaged in the offer and sale of crypto assets TRX and BTT while creating an active market for the assets. The crypto assets were sold under a claim that they were exempt from registration; they were not. Mr. Sun also engaged in wash trading involving the assets, again using the entity Defendants. The transactions were touted by the two singer Defendants. Mr. Sun falsely claimed the fees paid the two singers to tout the crypto assets were disclosed; they were not. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Sections 9(a)(1) & (2) and 10(b). The case is pending. See Lit. Rel. No. 25676 (March 24, 2023); See also. In the Matter of Lindsay Dee Lohan, Adm. Proc. File No. 3-21349 (March 22, 2023)(one of a series of actions against celebrities based on Securities Act Section 17(b); resolved with the entry into a cooperation agreement, a cease-and-desist order based on the Section cited and the payment of disgorgement in the amount of $10,000, prejudgment interest of $670 and a penalty of $30,000). Similar actions were filed against Michele Anne Mason; Miles Parks McCollum; Jake Joseph Paul; Shaffer Chimere Smith; and Allaune Danala Badara Akon Thiam. See Lit. Rel. No. 25676 (March 24, 2023).

SEC v. IRB Brasil Ressegurous S.A., Civil Action No. 1:23-cv-03905 (S.D. N.Y. Filed May 9, 2023) is an action which names as defendant the Brazilian insurance firm. The complaint alleges that following a decline in the firm’s stock price in 2020 former firm executive vice president of finance and investor relations fabricated and spread a story to analysts and others that Berkshire Hathaway Inc. invested in the stock of the company. The stock price rose; the story was false. Following an internal investigation, the company self-reported, took remedial steps and cooperated with the Commission. To resolve the matter the company consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). No penalty was imposed in view of the significant cooperation of the company. Suit was filed earlier by the agency against the employee involved. See Lit. Rel. No. 25718 (May 10, 2023).

Financial fraud, like the other three areas discussed above, is also one of the traditional areas of focus for SEC enforcement. The first action centers on a ship builder doing work for the Navy while the second is based on a U.S. subsidiary of a foreign firm.

SEC v. Evoqua Water Technologies Corp., Civil Action No. 1:23-cv-00105 (D. R.I. Filed March 13, 2023) is an action which names as defendants the company, a provider of water and wastewater treatment solutions, and Imran Parekh, its finance director after a merger, as defendants. Beginning in 2016 the firm improperly recognized revenue in violation of GAAP. The firm earns revenue by selling water technology and treatment products. The firm prematurely recognized revenue on these products thereby improperly inflating its revenue. In addition, in 2017 the firm was under pressure to further increase revenue. The Finance Director then took additional steps to further inflate revenue through the adoption of a “bill and hold” scheme – transactions in which the seller bills the buyer but holds onto the product. These techniques were pervasive at the firm involving. The firm reported almost $12 million of additional revenue for 2017, for example. This approach was also used when the firm conducted an IPO – it is reflected in the prospectus – and in subsequent filings with the Commission. When the auditors challenged the accounting methods being used. The firm declared the amounts immaterial when the practice came to light. Subsequently, the firm also moved the location where “bill and hold” materials were stored. The complaint alleges violations of Securities Act Sections 17(a)(1), (2) and (3) and Exchange Act Sections 10(b), 13(a), 13(a)(1)(A) and 13(a)(2)(B), 13(b)(5) and related rules. The company resolved the action, consenting to the entry of a permanent injunction based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The company will pay a penalty of $8.5 million. Mr. Parekh also resolved the matter, consenting to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b) as well as the same books and records and control Sections as the firm. The amounts of any monetary remedies will be determined by the court. See Lit. Rel. No. 25662(March 14, 2023).

SEC v. Perciavalle, Civil Action No. 23-cv-00109 (S.D. Ala. Filed March 31, 2023). This action revolves around events at a subsidiary of Austal Ltd., an Australian defense contractor. The subsidiary — Austal USA, LLC – employed three officers who are named as defendants in the case: Craig Percivalle, president; Joseph Runkel, director of financial analysis; and William Adams, director of the firm’s Combat Ship program. Over more than three years, beginning in January 2013, Defendants overstated revenues and earnings before interest and tax or EBIT at Austal USA which was building ships for the United States Navy. Specifically, Defendants used artificially low estimates at completion when building Navy ships. Reducing the estimates at completion permitted Defendants to inflate revenue and EBIT. This resulted in overstated revenue and EBIT in the filings that were available to U.S. investors. And, it falsely inflated the stock price. The scheme was implemented by instructing the responsible personnel to reduce the estimated costs. Defendants also sought to conceal the fraud by lying to AUSA’s auditors. Reducing the estimates at completion permitted the firm to inflate revenue and EBIT. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25684 (March 31, 2023).