by T. GormanPosted on Posted in SECActions

Much of the business world is fascinated with Elon Musk and Twitter. The speculation is rampant – will he buy it now that the share price has dropped significantly, drop the deal, renegotiate it or . . . it goes on.

Another favorite topic of discussion is the extension the Commission took on its climate related proposed rules. Again, the speculation is running high as many hover, looking for some hidden agenda in the proposed rules that many do not seem to understand. Yet aside from giving all would-be commentators more time to think about their position, as well as the opportunity to consider all of the proposals made this year simultaneously, little in the way of something new has emerged.

Be careful, be safe this week

SEC

Rules: The Commission extended the comment period for the rule proposals proffered earlier this year tied to climate related issues. This includes the period for rules regarding climatre disclosures, private fund advisers and Regulation ATS, according to a release dated May 9, 2022.

Whistleblowers: The agency paid out about $3.5 million to four whistleblowers, according to a release dated May 6, 2022.

Enforcement: The Commission nearly doubled the size of the Enforcement Division’s Crypto Assets and Cyber Unit, adding twenty new positions.

SEC Enforcement – Filed and settled actions

Last week the Commission filed 3 civil injunctive actions and 2 administrative actions, exclusive of 12j, tag-a-long and other similar proceeding.

Microcap fraud: SEC v. Sharp, Civil Action No. 1:21-cv-11276 (D. Mass.) is a previously filed action which named as defendant Frederick L. Sharp, a Canadian citizen. In August 2021 the Commission filed an action against Mr. Sharp which charged him with leading a fraudulent scheme in which owners of controlling interests in microcap stocks concealed their identity and position while dumping their stock. The scheme began in about 2011 and continued to 2019. It facilitated over a billion dollars in share sales during the period. A default judgment was entered on May 12, 2022. The judgment imposes permanent injunctions based on Securities Act Section 17(a), and Exchange Act Section 10(b). It also directs the Canadian resident to pay disgorgement and prejudgment interest in the amount of $289,934,433 and a civil penalty of $23,990,781. In addition, a penny stock bar and a conduct-based inunction restricting Mr. Sharp’s future trading in stocks was imposed. See Lit. Rel. No. 25392 (May 12, 2022).

Offering fraud: SEC v. Parnas, Civil Action No. 1:21-cv-00995 (S.D.N.Y.) is a previously filed action which named as defendants Lev Parnas and David Correia. The case was based on an offering fraud centered on a firm named Fraud Guarantee. Potential investors were told the money being raised which would be invested to pay those who had been defrauded. In fact the scheme was a fraud. The scheme went on over a period of six years beginning in 2013. Defendant Correia previously settled. Mr. Parnas settled, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 25391 (May 11, 2022).

Offering fraud: SEC v. Romero, Civil Action No. 3:220-cv-02067 (N.D. Ca.) is a previously filed action which named as defendant Manuel A. Romero, the former CFO of a real estate investment and management company what was actually a Ponzi scheme. The complaint alleged a scheme over a four-year period, beginning in 2016, by selling shares in Professional Financial Investors, Inc. While investors believed the funds would be used to acquire real estate in fact much of the money raised was used to pay prior investors. The complaint alleged violations of Securities Act Sections 17(a) and Exchange Act Section 10(b). Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to pay disgorgement of $91,819, prejudgment interest of $6,655 and a penalty of $50,000. See Lit. Rel. No. 25389 (May 10, 2022).

Misappropriation – IA: SEC v. Muntin, Civil Action No. 5:21-cv-12607 (E.D. Mich.) is a previously filed action which names as defendant Steven Muntin, a former investment adviser representative. Over a four-year period, beginning in March 2016, Defendant solicited one elderly investor and had her write checks totaling $305,750 which he took for his personal benefit. Defendant also overcharged the client at least $9,000 in assets under management fees. To settle this matter Defendant consented to the entry of permanent injunctions based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). In addition, Defendant will pay disgorgement of $314,799, prejudgment interest of $46,121 and a penalty of $258,557. See Lit. Rel. No. 25388 (May 9, 2022).

Insider trading: SEC v. Sareshar, Civil Action No. 20-civ-06865 (S.D.N.Y.) is a previously filed action which named as a defendant Sepehr Sareshar. Defendant learned in February and March of 2015 through his position at Auspex Pharmaceuticals, Inc. that Teva Pharmaceuticals and others were considering a bid for his firm. He told this confidential information to his family and friends who traded. Eventually Teva did conduct a tender offer. To resolve the matter Defendant consented to the entry of a permanent injunction based on Exchange Act Section 14(e). In addition, he agreed to pay a civil penalty of $56,222. See Lit. Rel. No. 25387 (May 9, 2022).

Offering fraud: SEC v. MCC International Corp., Civil Action No. 2:22-cv-14129 (S.D.N.Y. Filed April 7, 2022) is an action which names as defendants: MCC International Corp., a Florida based firm operated through its President, Defendant Luiz Carlos Capuci, Jr.; CPTLCoin Corp., a Massachusetts based firm; Luiz Carlos Capuci Jr., previously a resident of Florida but is now believed to be in Brazil; and Emerson Sousa Pires, MCC’s co-founder. The sales pitch focused on two points. First, investors were offered the opportunity to invest in MCC which supposedly had a phalanx of trading robots who continually located and exploited arbitrage opportunities in stock, foreign exchange and crypt markets. Part of this plan was guaranteed returns with a 1% per day profit share return paid weekly on a $10,000 investment with withdrawals permitted. In addition, there was an opportunity to get into a new Capital Coin token firm. In short order Defendants were able to raise at least $8 million from investors. In the end, however, while investors could put funds in, they could not take them out. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Court entered a TRO. The case is pending.

Disclosure: In the Matter of NVIDIA, File No. 3-20844 (May 6, 2022) is an action which names as respondent the firm which has two segments, GPUs and Tegra processors. The GPUs, designed for desktops, notebooks, or crypto-mining, reported revenue through that segment. The firm also reported revenue from specialized market platforms that include gaming and original equipment manufacturer. During two consecutive quarters in 2018 the firm failed to disclose the impact of crypto-mining on the growth of revenue from the sale of graphics processing unites or GPUs. During the second and third fiscal quarters of 2018 as certain crypto assert prices rose, t firm’s revenues were also were also increasing. The firm had information that this revenue was significant. Nevertheless, it was not disclosed in MD&A and in accord with the pertinent provisions of Regulation S-K. The firm also had inadequate disclosure controls. The Order alleges violations of Securities Act Sections 17(a)(2) and (3), Exchange Act Section 13(a) and Exchange Act Rules 12b-20, 13a-13 and 13a-15. To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections and Rules cited. In addition, Respondent will pay a penalty of $5.5 million.

Offering fraud: SEC v. TKO Farms, Inc., Civil Action No. 8:22-cv-00941 (C.D. Ca. Filed May 6, 2022) is an action which names as defendants: TKO Farms, ostensibly in the exotic hardwood business from a farm in Belize; Agravitae, Inc., a firm that supposedly marketed the hardwoods of TKO; Kenneth Owen, a twice convicted criminal who has control over TKO, Agravitae and certain solicitors; James Brian Blaylock, a resident of Folsom State Prison who is also subject to certain administrative orders from California agencies; Reynaldo Aguilar who was involved in the solicitations; Ross Erskine who was involved in some of the solicitations in the matter and is a defendant in a CFTC enforcement action; and the Estate of Gilbert Penhollow who, prior to his death, had been retained with respect to certain solicitations. The action centers on two offering conducted over a four-year period, beginning in May 2017. Each offerings centered on solicitating investors for TKO. The offerings raised about $20 million from approximately 200 investors. In making the solicitations, investors were not told that outsized commissions would be paid to the solicitors or that parts of their money would be misappropriated to pay for the personal expenses of those involved in the deal. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 25386 (May 9, 2022).

Enforcement of disbarment order: SEC v. Hackman, Civil Action No. 22-c v-01234 (D. Nev. ) is an action which names as defendant Shawn F. Hackman. The action was initiated to enforce an order entered in 2002 by the agency precluding attorney Hackman from practicing before the Commission as an attorney. Subsequently, he was employed by Nevada attorneys Elaine Dowling and Harold Gewerter as a paralegal. In that role he gave legal advice to “scores” of persons. The Court entered an order directing Mr. Hackman to comply with the Commission’s order and pay nearly $1 million as disgorgement of the sums he earned from practicing law since the entry of the order as disgorgement. The agency also entered orders precluding Ms. Dowling and Mr. Gewerter from appearing or practicing before the Commission as attorneys. See Lit. Rel. No. 25385 (May 6, 2022).

BaFin

Remarks: BaFin President Mark Branson reminded firms that financial stability cannot be taken for granted, in remarks made on May 3, 2022. Specifically, Mr. Branson noted that in view of the war in the Ukraine, multiple layers of sanctions and inflation, the impact of these and other matters must be evaluated in the context of evaluating financial reports (here).

ESMA

IFRS: The European Securities and Market Authority published a reminder to issuers of the IFRS requirements amid the war in the Ukraine. In particular, the regulator pointed to issues that may be considered regarding assets, risks and uncertainties in the current context (here).

Singapore

Climate: The Monetary Authority of Singapore published a report of an industry taskforce consult, second version, of green and transition taxonomy. Specifically, the regulator published a release detailing the thresholds and criteria for economic activity in the energy, transport and real estate sectors. It also incorporates a user guide for financial institutions and companies to apply the taxonomy (here).

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by T. GormanPosted on Posted in SECActions

This is the concluding segment to a three-part series analyzing the enforcement actions filed during the first quarter of this year. The first segment reviewed and discussed the statistics for the quarter and identified the largest categories of cases. The second segment provided examples of the cases in the four largest categories of cases. It also detailed examples of significant cases that were not part of the four largest groups.

At the end of the fourth quarter of last year, the concluding segment of a series analyzing the enforcement cases filed in that period noted that the Commission’s enforcement program continued to struggle with the pandemic. That continues to be true today, although there are signs that perhaps the pandemic in this country may be easing.

Nevertheless, in-person testimony is still not the norm as it was prior to the pandemic. The staff still has not returned to the office, although there are discussions on how and when that may occur. Similarly many law firms and other businesses have not yet returned to the office. Just when normal or a “new normal”, whatever that might be, will emerge is unclear.

Equally clear is the fact that the “back to the future” enforcement approach forecast for the future at the close of the series on 4Q21 has continued. That approach centers on the traditional areas of focus for the Enforcement Division. Those have long been, for example, microcap fraud, investment advisers, offering fraud, insider trading and at times corporate and financial. Indeed, it was this approach that the Enforcement Director discussed in his October 2021 remarks. It is this approach that is reflected in the categories of cases discussed in Parts I & II of this series.

Using a “Back to the Future” approach does not mean that the Division of Enforcement is being complacent or failing to consider emerging areas and trends. The additional cases cited at the end of Part II, which focus on a manipulation case keyed to scalping using Twitter and a sham transaction, are good examples of cases which reflect the reach of the approach today. While the array of significant cases filed outside of those in the largest categories is not nearly as broad as in 1Q21, the actions are significant.

Equally important is the fact that the content of the major categories identified has changed. The best illustration of this fact is the “offering fraud” category. Traditionally, those cases are microcap fraud “pump-and-dump” actions. While a number of those cases were brought during the period, a significant number of “offering fraud” cases were filed based on crypto asserts. Given the popularity of all things digital and crypto, plus the volatility of those assets, there is a significant potential for Main Street investors to jump in and quickly lose all.

Fortunately, the back to the future approach is working – the “new offering fraud cases” based on crypto are being brought. This trend, coupled with the others identified in this series, and the fact that approximately the same number of cases were filed in 1Q22 and in 1Q 21 (depending on how the filing cases discussed earlier are treated) more than demonstrates that back to the future enforcement is having a positive impact in the marketplace.

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