by T. GormanPosted on Posted in SECActions

Insider trading has long been a staple of the Division of Enforcement. Recent reports by the Commission, as well as those compiled by this publication, demonstrate that while those cases may not represent the leading category of actions being initiated by the Division, insider trading continues to be a key focus for the agency.

Many of those cases are based on patterns of circumstantial evidence – there is no direct testimony that anyone actually made available, or was furnished with, material non-public information. Rather, the patterns often focus on the actual trading coupled with additional facts such as the relationship between a corporate insider and the person engaged in the trading, to create an inference that may permit the trier of fact to infer illegal insider trading. While it can be difficult to establish insider trading based solely on circumstantial evidence, the Commission has been very successful in such cases. Typically the agency has been able to present suffice evidence, in addition to the evidence sketched above, to support the drawing of an inference of illegal conduct.

In SEC v. Clark, Civil Action No. 1:20-cv-01529 (E.D. Va.), however, the Court granted a defense motion following the completion of the Commission’s case at trial in a circumstantial evidence insider trading case. Specifically, the Court concluded that the agency had failed to present sufficient evidence which, if accepted, would constitute insider trading.

Named as defendants in the case were Christopher Clark, a mortgage banker, and William Wright, formerly a controller at CEB, Inc. Mr. Clark is the brother-in-law of Mr. Wright. The case centered on the acquisition of CEB, announced on January 5, 2017.

Between November 2016 and early January 2017 CEB engaged in merger discussions. During the period leading up to the announcement, Mr. Clark engaged in very risky trading involving CEB options. Beginning about one month after the talks began, Defendant Clark, according to the complaint, started purchasing call options. He continued until about the time of the deal announcement. During the discussion period he also told his son to purchase CEB securities.

To support its claim that Mr. Clark’s “suspicious trading” actually constituted illegal insider trading, the Commission pointed to repeated contacts between the two men such as text messages and personal meetings. In addition, the agency offered evidence of what were called “extraordinary” efforts to raise the capital necessary to acquire the options. Those included borrowing $6,000, obtaining an additional $20,000 by maxing out a credit card and obtaining a loan backed by his car. The Commission also pointed to the less than forthcoming responses to investigative questionnaires circulated by market regulators. All of this, coupled with 15 transactions in CEB options which yielded over $243,000 in trading profits, constituted proof of insider trading, according to the Commission.

Finally, to try and bolster its case, the agency pointed to the fact that beginning as early as 2008, and continuing through 2016, Mr. Clark traded in advance of 18 CEB quarterly announcements.

The Court was not convinced. Prior to trial it denied the Commission’s motion for summary judgment, concluding that there were material facts in dispute. Following the presentation of the Commission’s case at trial, however, the Court was not convinced that the agency had met its burden of proof. The Court ordered the case dismissed. The Court did not write an opinion.

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by T. GormanPosted on Posted in SECActions

Recent trends in SEC enforcement continued this week. While the conversations among regulators focused again on crypto, SPACs and at times the environment, cases initiated or resolved centered on other areas. Those included offering frauds as well as insider trading, illegal trading and financial fraud.

SEC

Whistleblowers: The Commission paid a whistleblower nearly $5 million, according to a December 8, 2021 report.

Remarks: ChairGary Gensler, Remarks Before the Healthy Markets Association Conference, Washington, D.C., December 5, 2021. Mr. Gensler expressed doubts regarding the use of SPACs centered on whether there was adequate disclosure and essentially if investors were being treated fairly (here).

Be careful, be safe this week

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 3 civil injunctive actions and no administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.

Offering fraud: SEC v. BitConnect, Civil Action No. 1:21-cv-07349 (S.D.N.Y.) is a previously filed action which named as defendants the company, Glenn Arcaro and his firm Future Money Ltd. that ran a so-called lending program. Over a period of several months, beginning in August 2017, defendants promoted a digital asset scheme being operated by BitConnect that involved the sale of unregistered securities. Mr. Arcaro previously pleaded guilty to conspiracy to commit wire fraud based on his work for the company. Last week the court entered judgments against Mr. Arcaro and his firm prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) as well as Exchange Act Sections 10(b) and 15(a). Monetary remedies will be determined in the future. See Lit. Rel. No. 25286 (December 9, 2021).

Insider trading: SEC v. Pithapurwala, Civil Action No. 2:21-cv-9384 (C.D.Ca. Filed December 3, 2021) is an action which names as defendants: Mohammed Pithapurewala, a lead engineer at Snap, Inc.; Ammar Kuttyanawalla, defendant Kutiyanawalla’s brother-in-law; and Alifiya Kutiyanawalla, the spouse of defendant Pithapurwala. The action is based on the February 6, 2018 announcement by Snap of its quarterly results which caused the share price to increase by 48%. Prior to that announcement Defendant Ammar Kjuttyanawalla purchased options on the shares of Snap based on a tip from Mr. Pithapurwala. After the earnings announcement he had profits of $261,515.78 – an increase in value of about 1088%. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25285 (December 9, 2021).

Financial fraud: SEC v. American Renal Associates Holdings, Inc., Civil Action No. 21-cv-10366 (S.D.N.Y. Filed December 6, 2021). The action names as defendants: the company, a firm whose shares are listed on the NYSE – it provides dialysis services; Jonathan Wilcox, a CPA who served as the firm’s CFO for a period; Jason Boucher, a CPA who served as the VP of Finance and CFO for a period; and Karen Smith, a CPA who served as VP of Finance for a period. Over a period of about 18 months, beginning in 2017, Defendant’s manipulated the revenue of the firm by making what they called “top side” adjustments. American Renal operated by partnering with those who required renal services. Under the terms of the partnerships the physicians furnished the medical services. American Renal provided accounting and bookkeeping services, a business model that facilitated the scheme. Since American Renal could not always estimate the amount various insurance carriers would pay for the services, the amounts were estimated in two steps. The initial estimate was what the firm called a “contractual allowance.” The later adjustments could be positive or negative, depending on the circumstances. It was called a “top side” adjustment. The adjustments made at the second step were not based on patient level data. Rather, a variety of other metrics were used to adjust the revenue. In the end, however, after all the adjustments, the revenue was sufficient to hit the pre-determined metrics. In addition, the increases ensured payments to the individual defendants – and were inconsistent with the firm’s internal controls which required patient level data. The scheme to adjust revenue was discovered after the company received an inquiry from the Commission staff. At that point the company was forced to undertake a restatement of the firm’s financial statements for 2017 and the first three quarters of 2018. The restatement acknowledged a weakness in internal controls. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a) 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and Sox Section 304(a). The company settled with the Commission, consenting to the entry of permanent injunctions based on the Sections cited in the Order except Exchange Act Section 13(b)(5). The case is pending as to each of the individual defendants. See Lit. Rel. No. 25282 (December 6, 2021).

Illegal trading: SEC v. Boccara, Civil Action No. 3-21-cv-2022 (N.D. Tx.) is a previously fild action in which defendant David Boccara, an investment professional, breached his obligations to a family fund that retained him to manage their funds. Over a three year period Defendant continually used their funds to trade for his own account and against his clients. Defendant had ;profits; his clients did not. The matter was resolved with a consent to the entry of a permanent injunction based on Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The injunction also bars Defendant from opening any additional brokerage accounts without first providing the broker with a copy of the judgment and orders Mr. Boccara to pay disgorgement of $510,921, prejudgment interest and a penalty of $350,000. See Lit Rel. No. 252879 (December 3, 2021).

Offering fraud: SEC v. The Heartland Group Ventures, LLC, Civil Action No. 4:21-cv-01310 (N.D. Tx. Filed December 1, 2021) is an action which names ten entities and five individuals as defendants. The action centers on a three year offering fraud that began in October 2018. It raised more than $122 million from over 700 investors and involved five different offerings. Over the period, for example, Defendants Heartland Production and Recover Fund II LLC, The Heartland Group Fund III, LLC, Heartland Drilling Fund I, LP and Carson Oil Field Development Fund II, LP, the Heartland Defendants raised capital by selling interests in what were supposed to be operating wells. In soliciting investors, a series of false statements were made. Those included claims that hundreds of barrels of oil were being produced, that the operators had years of experience and that the money was being reinvested. In fact, the representations were false – much of the money was not reinvested and the operators had little experience. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The Court recently granted the Commission’s request for emergency relief. The case is pending. See Lit. Rel. No. 25284 (December 8, 2021).

False statements: SEC v. Simeo, Civil Action No. 25280 (S.D.N.Y.) is a previously filed action which named as defendant Tom Simeo, the CEO of Viking Energy Group, Inc. In filings made for the company Defendant repeatedly represented that the firm had a CFO by affixing a signature for a person represented to be the firm’s CFO. In fact, the firm had no CFO. The Court granted summary judgment in favor of the Commission and issued a permanent injunction based on Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The judgment also precludes Defendant from serving as an officer or director and imposes a penny stock bar. Defendant was ordered to pay a penalty of $350,000. See Lit. Rel. No. 25280 (December 3, 2021).

Offering fraud: SEC v. Sperry, Civil Action No. 2:20 – cv – 01337 (W.D. Wash.) is a previously filed action which named as defendants Kirk Sperry and his firm, Sperry and Sons Capital Investments, LLC. The action centered on the sale of interests in failing real estate investments purchased by two investors. During the solicitations Defendants made misrepresentations regarding the investments; later part of the investor capital was used to pay investors from other transactions. Defendants consented to the entry of a bifurcated resolution. Accordingly, the Court entered final judgments against each Defendant, imposing permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). Monetary remedies will be considered at a later date. See Lit. Rel. No. 25278 (December 3, 2021).

FinCEN

Proposed rules: The regulator issued proposed rules to give definition to the beneficial ownership provisions of the rules on December 7, 2021 (here).

Australia

Notice: The Australian Securities and Investment Commission issued a call to directors and preparers of financial reports to focus on select key areas of financial reporting when preparing year end reports in view of the on-going pandemic in a release issued December 9, 2021 (here).

Hong Kong

Report: The Securities and Futures Commission issued its quarterly report in a release dated December 7, 2021 (here).

Singapore

Announcement: The Monetary Authority of Singapore and the China Banking and Insurance Regulatory Commission reaffirmed their close relationship and commitment to strengthening supervisory cooperation at a recent event, according to a December 8, 2021 release (here)

Program: Bank Counsel Roundtable – Extended Director’s Cut: Trends at Regulators: SEC, FinCEN and CFIUS. Wednesday, December 13, 2021 at 1: p.m. ET (here).

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