by T. GormanPosted on Posted in SECActions

Chair Gensler turned again to the question of climate change last week, this time in remarks delivered in London. The staff has been asked to put together recommendations on mandatory company disclosures on climate risk and human capital, according to the Chair. In the same remarks Mr. Gensler again referenced market structure, noting that the staff has been asked to examine the question of payment for order flow, another topic he has previously mentioned. Later this year it seems apparent that that there will be rule writing initiatives in these two areas along with the use of Rule 10b-5-1 plans by executives.

Be careful, be safe this week

SEC

Whistleblowers: The Commission made two awards this week. One was for over $1 million to a whistleblower whose information impacted multiple successful enforcement actions, according to a June 24, 2021 release. The second was for more than $5.3 million for assistance with a successful enforcement action, as noted in a release dated June 21, 2021.

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 4 civil injunctive actions and 3 administrative proceedings, exclusive of tag-along and other similar proceedings.

Conflicts: In the Matter of Crown Capital Securities, L.P., Adm. Proc. File No. 3-20371 (June 24, 2021) names as a respondent the dual registered investment adviser and broker-dealer. Since at least 2014 the firm has invested client funds in shares that paid 12b-1 fees to the firm, and a cash sweep product that resulted in revenue sharing for the firm. The conflicts from these transactions were not disclosed to the clients. The Order alleges violations of Advisers Act Sections 206(2) and (4). To resolve the matter the firm agreed to implement a series of undertakings and consented to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. The firm also agreed to pay disgorgement in the amount of $1,138,740.02 and prejudgment interest of $295,000. The funds will be put into a fair fund for investors.

False data: In the Matter of Gateway One Lending & Finance, LLC, Adm. Proc. File No. 3-20372 (June 24, 2021) names as a respondent the finance firm which dealt in the securitization of auto loans until 2016. The firm stopped servicing the loans in 2019. From about 2014 the firm raised over $2 billion from investors through the securitization of interests in pools of auto loans it originated. The investments were supposed to provide investors with a steady stream of income. Gateway, however furnished investors with false financial information regarding the loans which understated the expenses. Ultimately investors suffered huge losses. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). Respondent resolved the proceedings by consenting to the entry of a cease-and-desist order and agreeing to pay disgorgement in the amount of $3,915,077 and prejudgment interest of $998,115.82. The firm will also pay a penalty in the amount of $1.6 million. The disgorgement will be returned to investors.

Bribery: SEC v. Berko, Civil Action No. 1:20-cv-01789 (E.D.N.Y.) is a previously filed action which named as a defendant Asante Berko, an executive of a foreign-based subsidiary of a U.S. bank holding firm. Mr. Berko is alleged to have arranged for a Turkish energy company that was a client of the firm to funnel at least $2.5 million to a Ghana-based intermediary to pay illicit bribes to Ghanaian govern officials. The purpose was to gain approval for an electric power plant company. To resolve the charges Mr. Berko consented to the entry of a final judgment that enjoins him from future violations of Exchange Act Section 30A. He was also ordered to pay disgorgement of $275,000 plus prejudgment interest of $54,163.92. See Lit. Rel. No. 25121 (June 23, 2021).

Misappropriation: SEC v. Geromini, Civil Action No. 1:21-cv-12880 (D.N.J. Filed June 23, 221) is an action which names as a defendant Joseph Geromini, an employee of Group K Diagnostics, Inc., an early stage medical device company. Over a period of less than a year he misappropriated over $200,000 from the firm’s investors for his personal use. During the period he encouraged investors to invest through the use of false offering documents. He misappropriated the funds by wiring them to a bank account he controlled, through unauthorized ATM withdrawals, by issuing company checks and by charging personal expenses to firm credit cards. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25120 (June 23, 2021).

Crypto coins: In the Matter of Loci, Inc., Adm. Proc. File No. 3-20369 (June 22, 2021). Respondent Loci was formed in Reston, Virginia in 2016 by John Wise, also a Respondent, who served as CEO of the firm which is now nearly defunct. Over about a three-year period, beginning in August 2017, Respondents raised capital selling digital tokens called LOCIcoin through an ICO. At the time InnVenn, a trading platform created by Loci, permitted its registered users to access the platform through unpaid or free subscriptions. Respondents planned to use part of the ICO proceeds to expand the capabilities of the trading platform. A presale of the coins began in August 2017. Initially, LOCcoin was sold in exchange for Ether using Simple Agreements for Future Tokens or FAFTs. To generate interest a white paper was sent directly to potential purchasers and made available on social media. The focus was on investor profits that would be generated through InnVenn where the coins were traded beginning shortly after the close of the ICO. Respondents also sought to initiate trading of the coins on other platforms. Since investor profits were a key part of the sales pitch, Loci and Mr. Wise told potential investors about the experienced management team and potential profits. For example, in August 2017 a pitch deck and one version of the white papers contained growth statistics for the venture and potential revenues. The statistics were also included in marketing materials. The information was false. The Order alleges that the interests marketed were unregistered investment contracts and the false statements constituted fraud. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Respondents resolved the proceedings, consenting to the entry of cease-and-desist orders based on the Sections cited above. Respondents will, in addition, comply with their undertakings which require, among other things, the destruction of all the coins and not engaging in future offerings. Mr. Wise was also ordered to pay disgorgement of $38,163 and prejudgment interest of $6,209.40, payment of which was waived based on financial condition. Respondent Loci was directed to pay a civil penalty of $7,600,000. The funds may be distributed by the Commission.

Misappropriation: SEC v. Abarbanel, Civil Action No. 1:21-cv-05429 (S.D.N.Y. Filed June 21, 2021) is an action which names as defendants: Ofer Abrbanel, an Israel citizen who controlled a registered investment adviser; Victor Chilelli, a portfolio manager for the adviser until 2020; and Income Collecting 1-3 Months T-Bills Mutual Fund, an off shore mutual fund with shares listed on Nasdaq. The firm had multiple share classes. Beginning in early 2018 Defendants engaged in an investment scheme designed to induce investors to put their funds in Income Collecting. The largest group put in about $106 million. The prospectus claimed that investor capital would be invested in stable, secure, liquid and easily redeemable securities that were either US Treasuries or loan agreements known as reverse repos. Rather than invest the funds in accord with the prospectus large portions of the investor money was misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

Manipulation: SEC v. Miller, Civil Action No. 0:21-cv-01445 (D. Minn. Filed June 18, 2021) is an action which names as a defendant Mark Miller. Over a period of about two years, beginning in September 2017, Defendant Miller engaged in repeated pump-and-dump schemes using microcap stocks. His schemes followed the typical pattern of purchasing stock in the open market, gaining control of the company, and issuing false press releases to pump-up the price of the securities during which time he sold his shares. At the conclusion of each scheme he dumped his shares. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25118 (June 21, 2021).

Cherry picking: SEC v. Sugranes, Civil Action No. 1:21-cv-22152 (S.D. Fla. Filed June 10, 2021) is an action which names as defendants: Ramiro Jose Sugranes, a registered investment adviser; UCB Financial Advisers, Inc., a Florida registered investment adviser; and UCB Financial Services Ltd., also an investment adviser. Beginning in 2015 Defendants engaged in a cherry picking scheme by first placing trades and then holding them in an account. By the end of the day if the shares purchased increased in value they were allocated to a favored account. If the shares declined in value, they were allocated to one of the accounts that were not favored. The scheme had a negative impact on at least 75 accounts and involved about $4.6 allocated to the favored accounts. Overall the non-preferred accounts were allocated over $5.5 million in first day losses with 16 of the accounts having over $25,000 in first day losses and two others sustaining over $1 million in first day losses. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The Court granted a motion for emergency relief, ordering an asset freeze, an accounting and expedited discovery. The case is pending.

Hong Kong

Remarks: Ashley Alder, CEO, Securities and Futures Commission of Hong Kong, delivered the Keynote address at City Week 2021 titled The Emerging Global Framework for Climate Change Regulation, June 23, 2021 (here). His remarks reviewed the IFRS Foundation proposal, ESG data and ratings and the global fund management industry.

Singapore

Remarks: Lim Tuang Lee, Asst. Managing Director, delivered remarks titled Financial Services Post-COVID: Addressing Emerging Risks, June 21, 2021 (here). His remarks focused on climate change and collaboration.

by T. GormanPosted on Posted in SECActions

Class certification, which centers on the key element of reliance on the alleged misrepresentations, is often a critical question in securities class actions. While the burden of persuasion on the motion has been addressed in a number of decisions, critical issues frequently arise since the question can be outcome determinative for the case. The Supreme Court handed down a ruling on the question of the burden of persuasion at class certification that clarifies key points Goldman Sachs Group v. Arkansas Teacher Retirement System, No. 20-222 (decided June 21, 2021).

Background

Respondent-Plaintiffs are shareholders of Goldman Sachs. They alleged violations of Exchange Act Section 10(b) and Rule 10b-5 based on an inflation maintenance theory. Using this theory Plaintiffs claimed that the price of Goldman shares remained artificially and inflated over a four-year period beginning in 2006 because of repeated false general statement about the firm’s conflict of interest policies in its SEC filings and annual reports. Those claims stated, for example, that the firm had “extensive procedures and controls” to address conflicts; that “our clients’ interests always come first;” and that “integrity and honesty are at the heart of our business.” In fact, Goldman engaged in several allegedly conflicted transactions without disclosing the conflicts, according to Plaintiffs.

The District Court certified the class. The Second Circuit initially held that Goldman had the burden of persuasion to prove a lack of price impact by a preponderance of the evidence. It then concluded that the District Court errored by holding the firm to a higher burden of proof. On remand the District Court again certified the class. This time the Court of Appeals affirmed the District Court decision but certified the appeal. The Supreme Court vacated the decision and remanded to the Circuit Court for reconsideration.

The opinion

Justice Barrett, writing for the Court, began by noting that the key question centered on the element of reliance. While plaintiff in a fraud case may prove this element by demonstrating knowledge of the claimed fraudulent statement, in class actions proof of individual reliance is obviated by use of the “fraud-on-the-market theory adopted by the Court in Basic v. Levinson, 438 U.S. 224 (1088). Under that theory if the alleged misrepresentation was widely known, it was material and the market for the shares is efficient a presumption of reliance is established. Defendant can rebut the presumption by presenting evidence that severs the link between the alleged misrepresentation.

While the parties initially disputed the role of generic claims when invoking the presumption, they now agree that all evidence – general and specific – must be considered at class certification. The Court agreed. At certification it is important that the Court consider all evidence, aided by common sense the Court stated. Viewed in this context, the “generic nature of a misrepresentation often will be important evidence of a lack of price impact, particularly in cases proceeding under the inflation-maintenance theory” as here.

While the parties agreed that all evidence should be considered, the were unable to agree on the allocation of the burden of proof at class certification. Yet the Court’s decisions in Basic and Erica P. John Fund v. Halliburton, 563 U.S. 804 (2011) (Halliburton II), when fairly read, hold that “defendant bears the burden of persuasion to prove a lack of price impact,” Justice Barrett wrote. Under those decisions defendant must “in fact” “sever the link” between the misrepresentation and price paid by the plaintiff. This allocation of proof, however, is unlikely to have much impact on the “ground” according to the Court. This is because most parties at certification submit expert testimony. The task of the District Court is thus to sort the evidence and determine if it is “more likely than not that the alleged misrepresentations had a price impact. The defendant’s burden of persuasion will have bite only when the court finds the evidence is in equipoise – a situation that should rarely arise.”

Comment

While the Court’s opinion paints the determination of class certification as a straight-forward decision centered largely on sorting the evidence it is anything but. The certification question is key in many class actions. The expert testimony can be difficult to assess and evaluate. The decision can be outcome determinative of the case. Stated differently, it is often a critical decision. The resolution of Goldman does, however, clarify the process.

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