by T. GormanPosted on Posted in SECActions

This is Part I of a four part series which analyzes trends in SEC enforcement during the second quarter of 2023. A previous series analyzed the trends during the first quarter of the year (here).

During the second quarter of the year the Commission’s enforcement program filed a total of 46 new enforcement cases. During the period 36 civil injunctive actions were filed in federal court while 10 actions were filed as administrative proceedings.

The four largest categories of cases filed during 2Q23 were:

Offering frauds 29%

Insider trading   9%

Manipulation 8%

Financial fraud. 7%

As the statistics above reflect, the 46 actions filed during the quarter were heavily concentrated in one area — offering frauds. That concentration in one area contrasts sharply with the results from one year ago, the second quarter of 2022. During that period 101 new enforcement actions were filed. That number is more than double the number filed during the second quarter of 2023.

The cases filed during 2Q22 were also spread over a wider variety of areas as the statistics from the period demonstrate:

Offering frauds 8.9%

Transfer agents 6.8%

Manipulation. 6.9%

Financial fraud  4.9%

Insider Trading. 3.9%

With the exception of the cases involving transfer agents, the categories were the same as those one year later. Those involving transfer agents resulted from a special initiative or sweep in that area.

Of more significance, however, is the fact that none of the percentages for 2Q22 are in double digits. This resulted because the number of categories in which cases were filed which was significantly larger during 2Q22 than in 2Q23. Thus, for example, while during each period cases involving offering frauds was the largest group of actions initiated, the percentage of those cases constituted just under 30% in 2Q23 while in the prior year the percentage was just under 10%. This was not because more cases were filed in the second quarter of 2022 compared to 2Q23. Rather it was because the number of categories of actions in which cases were brought in the second quarter of 2022 was much larger than in the second quarter of 2023.

If this trend continues it would represent a significant change in SEC enforcement. For the last several quarters the agency has consistently expanded its reach, bringing cases in what seemed to be ever increasing numbers of areas creating a kind of ubiquitous reach we called “a cop on every corner” in an earlier series on Enforcement trends (here). If the results for the second quarter of 2023 continue, it may suggest that the agency has narrowed the focus of its enforcement program. Stated differently, Enforcement has diminished its market place presence not because the number of cases brought declined in 2Q23 compared to 2Q22, but more importantly, because the presence or reach of enforcement in the market place contracted. That could have significant ramifications for investor and market protection, particularly since the markets continually expand.

The total number of cases for the first half of 2023 filed by the Commission also diminished compared to 2022. In 2023 a total of 94 enforcement actions were filed during the first half of the calendar year. That contrasts with 2022 when a total of 154 actions were filed during the first half of the calendar year. While the total number of cases filed is not, in and of itself, significant, in 2023 the number was reduced by over 30%. Again, if that trend continues during the following periods, which will be examined in future articles, it may be significant.

Next: Part II – Examples of cases filed in each of the largest four largest categories for 2Q23.

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by T. GormanPosted on Posted in SECActions

The Commission filed three new actions this week. One focused on the custody rule, a second centered on accounting for loss contingencies and a third manipulation.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 1 new civil injunctive action and 2 new administrative proceeding, excluding tag-along actions and those that present a conflict for the author.

Custody rule: In the Matter of Egan Capital Management, LLC, Adm. Proc. File No. 6491 (December 1, 2023) is a proceeding which names as respondent the registered investment adviser. The Order alleges violations of the custody rule in two respects. First, since 2018 Egan Capital has failed to comply with the custody rule for funds it advises. Second, for two other private real estate funds it also advises, the firm violated the custody rule. In resolving the matter, the advisor agreed to implement certain undertakings, including the retention of an independent compliance consultant who will conduct a review. The Order alleges violations of Advisers Act Section 206(4) and the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section and Rules cited in the Order and a censure. The firm will also pay a penalty of $50,000.

Loss contingency: In the Matter of Mallinckrodt PLC, Adm. Proc. File No. 3-21806 (November 30, 2023) is a proceeding which names as respondent the pharmaceutical firm. The company was informed by the Centers for Medicare and Medicaid Services that it had overcharged Medicaid for the flagship drug of the company. By January 2019, the amount of the overcharge had increased to over $500 million. The amount was not disclosed despite the fact that GAAP requires a public company to disclose material loss contingencies that are reasonably possible, and trends or uncertainties that are reasonably likely to affect future net sales. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings, Respondent consented to a cease-and-desist order based on the Sections cited in the Order. It also agreed to pay a penalty in the amount of $40 million and implement certain undertakings.

Misappropriation—manipulation: SEC v. Larmore, Civil Action No. 2:23-cv-02470 (D. Az. Filed November 28, 2023) is an action which names as defendants: Mr. Larmore, co-founder and CEO of Defendant ArciTerra; ArciTerra Companies, LLC; ArciTerra Note Advisors II LLC; ArciTerra Note Advisors III LLC; ArciTerra Strategic Retail Advisors, LLC; and Cole Capital Funds, LLC. Over a period of years, beginning in 2006, Mr. Larmore managed a complex of entities involved in commercial real estate. Starting in 2006 Defendants Larmore engaged in a scheme under which he diverted millions of dollars from the Funds’ to Defendant ArciTerra Strategic Retail Advisors, LLC, also an entity controlled by Defendant Larmore. In 2023, after abdicating direct control over ArciTerra, Defendant Larmore began manipulating the share price of WeWork, Inc. stock. This began with a false press release regarding the firm. Two days prior to that press release Mr. Larmore purchased a large block of call options for the stock. If the share price increased Defendant Larmore would make substantial profits. Because Mr. Larmore mis-timed the press release, his options expired over an hour before WeWork stock price spiked from the manipulative conduct. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2) and Exchange Act Sections 10(b) and 14(e). The case is in litigation.

Insider trading: SEC v. Dupont, Civil Action No. 1:23-cv-05565 (S.D.N.Y.) is a previously filed action which named as defendants Joseph Dupont, previously a vice president of Alexion Pharmaceuticals, Inc., and Stanley Kaplan, a close friend. The complaint alleged that Defendant Dupont tipped his friend, Mr. Kaplan. Both men traded and profited in the stock of Alexion. Previously, Messrs. Dupont and Kaplan pleaded guilty to federal criminal charges for securities fraud in a parallel action. In the Commission’s action, each Defendant consented to the entry of permanent injunctions prohibiting future violations of Exchange Act Section 10(b) and 14(e). Each Defendant was also barred from serving as an officer or director. The court has entered the judgments. See Lit. Rel. No. 25903 (November 28, 2023).

Singapore

Remarks: Ravi Menon, Managing Director, Monetary Authority of Singapore or MAS, delivered remarks at the Launch of COP28 Singapore, titled Catalyzing Climate Solutions, November 30, 3023. The Director focused on his view that the world is running out of time to address climate change (here).

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