by T. GormanPosted on Posted in SECActions

I. Introduction

While the pandemic continues, relegating Washington D.C. to a shadow of what the city once was like, it is not hindering the filing of new cases by the Commission. The SEC Headquarters office may be largely empty; Chair Gensler may give most of his interviews from his home; Investigative testimony may be on Webex, not in person. But Commission enforcement cases are being filed.

Despite the limitations the agency continues to develop new rule proposals as the Enforcement Division files new cases and litigates others seemingly drawn from every corner of the markets. The statistics discussed below are a reflection of an active and far-reaching program that continues to expand its reach. This was particularly evident in the last week of the government fiscal year when 45 new enforcement actions were filed.

This report, which reviews the enforcement work of the Commission during the third quarter of the calendar year or fourth quarter of the government fiscal year, 2022 is divided into four sections: 1) Statistics tabulating the number of cases filed; 2) Examples of the cases filed in each of the leading categories; 3) A selection of other, significant actions initiated during the quarter, a good illustration of the reach of the enforcement program; and 4) The Conclusion.

II. The Statistics

In the third quarter of 2022 the Commission filed 202 new enforcement actions, excluding matters that are based on Section 12j, tag along and defaults. The actions were primarily civil injunctive cases. Specifically 129 were filed in federal district court while 73 were initiated as administrative proceedings. This means that in the first three quarters of 2022 the agency has filed a total of 353 cases: 53 in the first quarter, 101 in the second and 202 in the most recently completed period.

In contrast, during the first three quarters of 2021 a total of 267 new actions were filed. Specifically, in the first quarter of that year 48 actions were filed while 75 were initiated in the second quarter of 2022 and 144 in the third.

The mix of cases filed in the third quarter of 2022 is not significantly different than in the earlier two quarters of the year, however. During the third quarter the largest groups of cases, expressed as a percentage of the total number of actions filed were:

1) Offering fraud 12%

2) Insider trading 11.3%

3) Investment advisers 6%

4) Financial Fraud 5%

Each category above represents a traditional area of focus for the Enforcement Division. In the first and second quarters of 2022 the key areas of focus were also traditional areas of concentration — investment advisers, insider trading, offering fraud and corporate and financial.

Similarly, in the third quarter of 2021 the focus was also on traditional areas of concentration, although the categories were not identical:

1) Investment advisers 5%

2) Insider trading 4.8%

3) Microcap fraud 4.8%

4) Unregistered brokers 3.4%

The trend of focusing on traditional enforcement areas in the leading categories of cases filed traces back to at least early 2021.

Perhaps the largest difference between 3Q22 and the earlier quarters this year and those in 2021 is the variety of cases initiated by the agency. Those ranged from municipal bonds, Regulation BI, transfer agents, complex products, crypto assets, identity theft and related party transactions to SPACS. The large number of cases filed in 3Q22 is due in part to the variety of areas in which the Division investigated and filed actions. That reach effectively broadened the Division into a “cop on the beat,” covering the large variety of issues involved in the securities market place.

Next: Cases representative of the significant categories listed above.

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by T. GormanPosted on Posted in SECActions

The Commission concluded an action during this holiday shortened week with an admission of wrongdoing. In a municipal bond case the agency required an official who lied to investors to conceal the fact that there were significant questions regarding his ability to properly execute his position. The case was settled on a negligence basis.

Be careful, be safe this week

SEC

Strategic Plan: The Commission filed is Strategic Plan for FY 22-26 on November 23, 2022. The plan discusses the focus of the agency over the period for fighting fraud and maintaining the capital markets (here).

SEC Enforcement – Filed and settled actions

Last week the Commission filed 1 civil injunctive actions and 1 administrative proceeding, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.

Muni offering: SEC v. Rojas, Civil Action No. 5:19-cv-01799 (C.D. Cal.) is a previously filed action which named as defendant the Chief Business Officer of Montebello Unified School District. The complaint alleged that Defendant misled bond investors by not telling them that he had fired the independent auditor after the firm raised concerns about Defendant’s qualifications and integrity. Defendant agreed to resolve the matter by admitting wrongdoing and agreeing to the entry of a permanent injunction based on Securities Act Section 17(a)(3), agreeing to pay a penalty of $50,000. The Court signed an amended judgment which resolves the action. See Lit. Rel. No. 25580 (November 21, 2022).

Stop order: In the Matter of The Registration Statement of American CryptoFed DAO LLC, Adm. Proc. File No. 3-21243 (November 18, 2022). Respondent was established on July 1, 2021 as the successor to American CryptoFed, Inc. The firm has filed two registration statements with the Commission. The first was a Form 10 registration statement that sought to register the Ducat and Locke tokens under Exchange Act Section 12(g). The second was filed on September 17, 2021, on Form S-1. It sought to register the offer and sale of the tokens. Subsequently, the Commission issued an order Directing Examination and Designating Officers Pursuant to Section 8(e) of the Securities Act. The next day it issued an Order and Notice of Proceeding under Section 12(j) of the Exchange act against American CypoFed. Respondent claims to be a Decentralized Atomos Organization. The tokens, according to the firm, are not securities but utility tokens. Essentially the Registration Statements fail to comply with the applicable rules – little information is actually contained in the filings. There are, however, misstatements and material omissions. Respondent is also alleged to have failed to cooperate with the Section 8(e) examination. The matter will be set for hearing.

Unregistered broker: SEC v. Gel Direct Trust, Civil Action No. 1:22-cv-09830 (S.D.N.Y. Filed November 17, 2022) is an action which names as defendants GEL Direct Trust; GEL Direct, LLC, Jeffrey K Galvani; and Stuarts A. Jeffery. Beginning in 2019 the individual Defendants operated a business model through the two entity Defendants that focused on acting as an introducing broker in acquiring penny stocks and then selling them to customers and ultimately into the market. No defendant is registered in any capacity with the Commission. Nevertheless, from June 2019 through May 2022 Defendants used the business model to execute over 19,000 trades involving more than 300 billion shares. The transactions yielded over $12.4 million in compensation. The complaint alleges violations of Exchange Act Section 15(a). The case is pending. See Lit. Rel. No. 25579 (November 17, 2022).

Cornerstone-NYU on SEC Public Company and Subsidiary Cases

Cornerstone Research and NYU Pollack Center for Law and Business published their annual report on statistics and trends in SEC Enforcement actions involving public companies and subsidiaries on November 17, 2022 (here). The Report begins by noting that the number of actions filed against public company and subsidiary defendants increased to 68 in fiscal 2022. That represents an increase over the 53 such actions filed in FY 2021 and the 62 in 2022. The Report also notes that 16 cases were settled based on admissions of wrongdoing during the fiscal year. Finally, the it states that 63% of the public company and subsidiary cases brought in FY 2022 noted cooperation. That fact is consistent with the prior year when 62% of the cases noted cooperation. Despite the acknowledgement of cooperation by Commission, 97% of the settlements involved a monetary component, the highest percentage of any fiscal year in SEED. It is also consistent with the fact that in fiscal 2022 the percentage of actions that settled without a monetary component was the lowest in any fiscal year in SEED.

ESMA

Agreement: The EU Agency for Cooperation of Energy Regulators or ACER and the European Securities and Markets Authority or ESMA announced on October 18, 2022, an agreement between the two regulators to further improve information exchange with a view to avoiding potential market abuse in Europe’s spot and derivative markets.

Singapore

Agreement: The UK and Singapore held their seventh dialogue to deepen their commitment to the UK-Singapore Partnership agreed in 2021. The discussions focus on topics which include sustainable finance, FinTech and innovation (here).

UK

ESG: The Financial Conduct Authority announced on November 11, 2022 the formation of a group to develop a Code of Conduct for Environmental Social and Governance or ESG data and ratings. Previously, the regulator encouraged firms to develop standards. The FCA has determined, however, that typically third parties are consulted. The development of ESG metrics will be an expansion of the regulator in this area.

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