Any firm marketing COVID –19 related services, or who have applied for or obtained benefits under recently enacted legislation tied to the virus, should carefully examine their activities in this area in view of the regulatory investigations being conducted by the SEC. The SEC is currently conducting a number of investigations related to the COVID virus. In aid of those investigations the SEC staff frequently requests voluntary cooperation in the form of document productions and telephone interviews. The requests present important and difficult questions.

The current SEC investigations can be divided into two groups. The first centers on firms that are actively marketing COVID related products. Investigations in this group typically center on press releases or statements made by a company or its executives about medications or equipment that may tie to the virus. See, e.g. SEC v. Turbo Global Partners, Inc., Civil Action No. 8:20-01120 M.D. Fla. Filed May 14, 2020); (company falsely claimed to have a device that could scan crowds for those with COVID or symptoms); SEC v. Applied Biosciences Corp., Civil Action No. 1:20-cv-03729 (S.D.N.Y. Filed May 14, 2020)(spurious claims that home testing kits could be purchased for COVID virus).

The investigations frequently begin with the staff contacting the company and requesting the voluntarily production of documents related to the statements. In some instances, the SEC staff may request an informal, voluntary telephone interview with an executive from the company even before the documents are produced.

If the staff requests a voluntary telephone interview the risks presented should be carefully assessed. While the interview is indeed voluntary it is still testimony before law enforcement officials subject to 18 U.S.C. 1001 which makes it a felony to not tell the truth. Any firm or executive considering such a request should carefully consider the risks and stakes. The restrictions and social distancing practices currently in place in probability mean that any preparation for the interview likely will be limited to telephone calls and perhaps a Zoom meeting. The inability of counsel and the client to sit face to face in a room with the pertinent materials substantially limits the effectiveness of any preparation. The impact of the limitations must be carefully assessed.

A second area of inquiry centers on those who have applied for or obtained funds under the recent COVIT legislation. The initial contacts are made in the same manner described above. The staff typically askes for the pertinent documents to be produced and may also request an informal telephone interview. While these are also fraud inquiries the issues are more complex than in the actions discussed above.

The inquiries here begin with the application filed under the pertinent provisions of the legislation. An accurate, factual application form is only the beginning, however. In assessing the situation the SEC staff is likely to review the firm’s most recent public statements and its filings. These points, and perhaps others depending on the firm, need to be analyzed in view of the statements in the application and the statutory requirements. Since many SEC fraud actions center on the company failing to comply with its representations and/or policies or for not making the full and complete disclosures, proper preparation for any discussion with the staff is key. Again, before agreeing to a request for an informal chat it is critical that counsel and client carefully evaluate the risks in view of the limitations. While COVID poses risks, these investigations establish a new layer of complexity.

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The Commission is focusing its enforcement program, at least in part, on COVID-19. This week the regulator filed two fraud actions centered on solicitations by firms related to on virus. Neither case settled. A co-director of enforcement discussed these efforts in a speech.

The Enforcement Division is also conducting informal inquiries centered on the pandemic. One facet of the inquires centers on cases like those cited above and discussed below. A second, which is more complex, is analyzing applications by firms that sought funds under recently enacted COVID related legislation. The inquiries appear to be centered on the application process as well as firm disclosures that may relate to those events and the applications.

Two cases filed this week by the Commission centered on COVID related frauds. Others involved undisclosed conflicts, the premature recognition of revenue and an offering fraud.

Stay safe, stay healthy.


Remarks: Chairman Jay Clayton delivered remarks to the Financial Stability Oversight Council on May 14, 2020. The Chairman’s remarks focused on the duty of the regulator during the current crisis (here).

Remarks: Steven Pelkin, C0-Director, Division of Enforcement, delivered the Keynote Address, Securities Enforcement Forum West 2020 on May 15, 2020. Mr. Pelkin discussed the Commission’s work in the COVID area and the on-going hard work of the staff (here).,

CAT: The agency adopted amendments to the consolidated audit trail NMS plan on May 15, 2020. The amendments are designed to increase transparency and financial accountability (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 6 civil injunctive action and 2 administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.

Advertising: In the Matter of Morningstar Credit Ratings, Adm. Proc. File No. 3-019802 (May 15, 2020) is a proceeding which names as a Respondent, the Nationally Recognized Statistical Rating Organization. The proceeding centers on Exchange Act Rule 17g-5(c)(8)(i), a conflict rule which governs issuing credit ratings when employees who participated in the process or monitored it are also participating in the sales or marketing of a product or service of the firm. Here in June 2015 asset-backed securities analysts at the firm, encouraged by MCR’s then director of business development for ABS, identified and contacted prospective clients to arrange marketing calls and meetings to offer to furnish indicative ratings to potential clients. During the period the firm also failed to establish and maintain written polices and procedures regarding compliance with the Rule. To resolve the matter the firm consented to the entry of a cease and desist order based on Exchange Act Section 15E(h)(1), the Rule cited above and to a censure. The firm also agreed to pay a penalty of $3.5 million. In addition, Respondent agreed to implement a series of undertakings centered on compliance with the rule.

COVID-19: SEC v. Applied Biosciences Corp., Civil Action No. 1:20-cv-03729 (S.D.N.Y. Filed May 14, 2020). In March 2020 as the pandemic blossomed, the microcap firm shifted its focus from cannabinoid-based products to COVID-19. It issued a press release offering to sell home testing kits which would confirm in a few minutes if a person had the virus. The claim was false. In fact, the firm did not intend to sell testing kits to the public. The kits also did not have FDA approval. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24819 (May 14, 2020); see also SEC v. Turbo Global Partners, Inc., Civil Action No. 8:20-cv-01120 (M.D. Fla. Filed May 14, 2020)(action against the firm and its chairman, Robert Singerman, which falsely offered to sell equipment to scan crowds re COVID-19 or symptoms of it, alleging violations of Exchange Act Section 10(b); case is pending, see Lit. Rel. No. 24820(May 14, 2020)).

Offering fraud: SEC v. Swanson, Civil Action No. 3:20-cv-0666 (D. Conn. Filed May 14, 2020) is an action that named as a defendant Ronald Swanson, the CEO of Sonic Cavitation LLC, a firm that supposedly had a device which purified liquids. Beginning in late 29013, and continuing into early the next year, Defendant solicited investors to acquire interests in Sonic. To induce investment, Defendant falsely claimed that a large publicly traded energy firm was interested in the entity. He also claimed that the technology worked when in fact it did not according to a report from a research institute, and that the investment was safe — there was no way that investors could recover their investment. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24818 (May 14, 2020).

Undisclosed conflicts: SEC v. Ambassador Advisors, LLC, Civil Action No. 5:20-cv-02274 (E.D. Pa. Filed May 13, 2020) is an action which names as defendants the registered investment adviser along with Bernard Bostwick, Robert Kauffman and Adrian Young. The named individuals are, respectively the EVP, founder and CCO of the advisory. Over a four-year period, beginning in August 2014, advisory client funds were invested into fund shares on which 12b-1 fees were paid. Investors were not told of the conflict or advised that the same shares were available at a better price. Investors also did not receive best execution. The complaint alleges violations of Advisers Act Sections 206(2) and 206(4). The case is pending. See Lit. Rel. No. 24817 (May 13, 2020).

13(d): In the Matter of Iglobe Capital, LLC, Adm. Proc. File No. 3-19799 (May 13, 2020) is a proceeding which names as Respondents the Boston based firm and its owner Jiaqiang Li, a PRC citizen. By the end of 2017 the firm and related parties held nearly one third of the common stock of Sinovac Biotech Ltd. and began taking an activist role. They participated in a plan to replace several directors. Respondents failed, however, to disclose their full beneficial ownership of the stock. To resolve the matter Respondents consented to the entry of a cease and desist order based on Exchange Act Sections 13(d)(1) and (2). The firm will pay a penalty of $200,000 and Mr. Li will pay $90,000.

Offering fraud: SEC v. Burkhotz, Civil Action No. 19 Civ 24713 (S.D. Fla.) is a previously filed action which named as defendants Neil Burkholz and Frank Bianca. Previously the court entered a preliminary injunction against defendants based on the operation of a Ponzi scheme. The Court entered final judgments against defendants. The judgement against Mr. Burkholz, entered by default, precludes future violations of Exchange Act Section 10(b) and directs that he pay disgorgement and prejudgment interest of $429,580 and a penalty of $920,825. The judgment against Mr. Bianco, entered by consent, prohibits future violations of Exchange Act Section 10(b) and directs the payment of disgorgement and prejudgment interest of $443,997 and a penalty of $920,825. Previously, judgements were entered against the entities involved. See Lit. Rel. No. 24816 (May 12, 2020).

Premature revenue recognition: SEC v. TCA Fund Management Group Corp., Civil Action No. 1:20-cv-21964 (S.D. Fla. Filed May 11, 2020). TCA is a registered investment adviser. Defendant TCA Global Credit Fund GP, Ltd., is a Cayman firm. That firm serves as the general partner of Master Fund and Feeder Fund. The adviser is compensated based on the amount of the Funds’ assets or NAV. The other entities involved are compensated based on the profitability of the Master Fund. Over a nine-year period tracing back to 2010, TCA falsely inflated NAV and its compensation by prematurely recognizing revenue in two ways. First, fees paid to the Master Fund were prematurely recognized. When that Fund entered into a lending arrangement typically a term sheet was executed. Rather than waiting for the deal to close and the fees to be earned, TCA had Master Fund recognize the fees at the time the term sheet was signed. Second, over a three-year period, beginning in 2016, the adviser caused the Master Fund to prematurely recognize fees for investment banking services. Specifically, when an agreement for services was entered into TCA immediately recognized the fees as income despite the fact that little if any of the services had been provided. Collectively, these practices left Master and Feeder Funds in difficult financial conditions. NAV had been falsely inflated by almost $160 million. In 2017 and 2018 the auditors issued a qualified opinion with respect to 89% of the Master Fund’s NAV. In January the Feeder Funds were forced to suspend redemptions. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending.

SEC v. Tucker, Civil Action No. 8:20 – cv- 00875 (C.D. CA. Filed May 11, 2020). Defendant Clinton Tucker II launched what became a multi-year manipulative and deceptive scheme keyed to matched trades of microcap stocks and boiler room transactions that was profitable for him and those with whom he worked . It began in 2014 with an investor who controlled a microcap Nevada firm. The Investor managed to secure large blocks of shares in the Nevada firm. Mr. Tucker arranged to help sell the shares. Selling large blocks of microcap stocks frequently takes a considerable period of time or crushes the market price since there is often little liquidity in the market. Mr. Tucker devised a scheme to facilitate the purchase-sale transactions and avoid the difficulties inherent in the microcap market by arranging to have a boiler room solicit interest and then matching those orders with ones from the Investor. Later Mr. Tucker expanded the scheme and also solicited additional investor funds which were misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a)(1). The case is pending. See Lit. Rel. No. 24814 (May 11, 2020).


Remarks: Director Kenneth A. Blanco addressed the Consensus Blockchain Conference this week. His remarks reviewed compliance, opportunities to collaborate in the fight against illicit use of virtual currencies and key challenges (here).


Markets: The Australian Securities and Investments Commission announced on May 14, 2020 its expectations for all market participants to ensure that the markets remain resilient. Those include directions to nine large equity market participants to limit the number of trades executed each day and notice that the agency will closely monitor the behavior of market participants (here).


CLOs: The European Securities and Markets Authority issued a release concerning challenges for rating CLO obligations on May 13, 2020 (here).


Grant: The Monetary Authority of Singapore, in conjunction with the Singapore FinTech Association, AMTD Group and AMTD Foundation, the launched a $6 million FinTech Solidarity Grant to support Singapore based FinTech firms during the pandemic, according to a release issued on May 13, 2020 (here).


COVID-19 insurance: The FCA announced on May 15, 2020 that it has filed a test case regarding insurance coverage related to the pandemic. The result of the case will be binding. The action does not preclude others from filing suit (here).

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