by T. GormanPosted on Posted in SECActions

A new – or almost new – insider trading bill passed in the House of Representatives and was sent to the Senate for consideration last week. The legislation bans insider trading as well as tipping. The bill initially passed in the House in 2019 but died in the Senate. This time it is expected to pass in the Senate.

The incredibly prolific Marc Steinberg has a new book coming out shortly. It is titled Rethinking Securities Law. The new book considers the shortcomings of the current statutes and recommends possible solutions. The book is in pre-order now on Amazon (here).

Be careful, be safe this week

SEC

Whistleblowers: The Commission made several awards last week; one for over $28 million tied to an agency enforcement action and a related matter being conducted by another agency; a second made in four separate segments to different whistleblowers totalling over $31 million; a third of $3.6 million to a person who furnished information that resulted in the opening of a new investigation; and a forth award composed of two separate awards to different individuals totaling $22 million.

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 4 civil injunctive actions and 1 administrative proceeding, exclusive of tag-along and other similar proceedings.

Offering fraud: SEC v. LFS Funding Ltd. Partnership, Civil Action No. 2:21-cv-4211 (C.D. CA. Filed May 20, 2021) is an action which names as defendants the partnership, Stephen Thompson, Steven Comisar, Dale Engelhardt and Ross Erskine. The action centers on an offering fraud conduced over a one year period beginning in May 2018. It raised over $618,000 from about 14 investors through the use of false offering documents, undisclosed fees and skimming. The investor capital was supposed to be used for the development of two Podiatry Clinics. Instead, it went to pay substantial undisclosed fees. The offering materials also concealed the fact that Defendant Stephen Thompson, who had prior state securities laws violations, was in fact the actual control person. The fees went to those conducting the solicitations, Defendants Comisar, Engelhardt and Erskine, each of whom had a criminal record or a record of regulatory discipline. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). Defendants LPS Funding and Stephen Thompson agreed to settle, consenting to the entry of judgments that permanently enjoin each from violating the charged provisions. The judgment against Mr. Thompson also contains a conduct-based injunction. See Lit. Rel. No. 25093 (May 20, 2021).

Order execution: SEC v. BTIG, Inc., Civil Action No. 21 Civ 4521 (S.D.N.Y. Filed May 19, 2021) is an action which names as a defendant, a registered broker-dealer. During the period of late December 2016 through the first half of 2017 the firm mismarked over 90 transactions in violation of Regulation SHO which requires brokers to mark orders as long, short, or short exempt. The regulation also generally prohibits broker-dealers from either accepting a short sale order or effecting one for its own account unless the broker has borrowed the security, entered into an arrangement to borrow it or has a good faith belief it can be obtained. The transactions involved in the six-month period here had a value of over $250 million. The customer benefitted by not having to take the steps to comply with the Regulation. The firm had profits of about $1.6 million from the transactions. The complaint alleges violations of Regulation SHO Rules 200(g) and 203(b)(1). The case is pending. See Lit. Rel. No. 25092 (May 20, 2021).

Offering fraud: SEC v. The Premier Healthcare Solution, LLC, Civil Action No. 2:21-cv-11460 (D.N.J. Filed May 19, 2021) names as defendants the firm and Josiah David, a man with an extensive criminal and regulatory history who changed his name. Beginning in 2017 Defendants sold membership interests in Premier. The sales pitch excluded the long and sordid history of Mr. David, a consultant to the board. The pitch also misrepresented the nature of the interests being marketed, the financing the firm claimed it had with the bank and the key points of the business model. About $3.9 million was raised from approximately 131 investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25094 (May 21, 2021).

Disclosure: In the Matter of S&P Dow Jones Indices LLC, Adm. Proc. File No. 3-20310 (May 17, 2021) is a proceeding which names the firm as a Respondent. The Order centers on the events of February 5, 2018 when the CBOE Volatility Index or VIX spiked 115%, an unprecedented jump. Respondent publishes an index that measures the return from a rolling long position for VIX futures contracts called the S&P 500 VIX Short-Term Futures Index ER – the Index. That Index is licensed to others. Despite the unprecedented volatility on February 5, 2018 the Index was static during certain intervals between about 4 PM until just after 5 PM. While it should have calculated the pertinent values and reflected the volatility, it did not because of an Auto Hold. That process, which essentially freezes the values, comes into play when certain thresholds are breached. If there is a repetition, the freeze continues. Yet the index is the primary input for the calculation of XIV’s indicative or economic value. It impacts products such as the Credit Suisse VelocityShares Daily Inverse VIX Short term ETNs which rely on it for updates. The Auto Hold resulted in static Index values being published that were not based on the real time process of certain VIX futures contract. Thus, during the closing hour of 4-5 p.m. investors did not know that they had been purchasing and/or holding a product that had an economic value that was substantially less than what XIV’s calculation agent had publicly reported and were at risk of being accelerated by its issuer. The next day the Credit Suisse index exercised its right to accelerate XIV. The Order alleges violations of Securities Act Section 17(a)(3). Respondent implemented certain remedial steps. The firm also consented to the entry of a cease-and-desist order based on the Section cited in the Order. Respondent will pay a penalty of $9 million.

Unregistered broker: SEC v. Gagaza, Civil Action No. 0:21-civ-61030 (S.D. Fla. Filed May 17, 2021) is an action which names as a defendant Roy Gagaza, the owner of a registered investment advisory firm in California. The complaint alleges that he was one of the top sales agents of 1 Global securities with over $1.8 million in sales. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). The case is pending. For additional information about 1 Global see (here). See Lit. Rel. No. 25091 (May 17, 2021).

Offering fraud: SEC v. Sperry, Civil Action No. 2:20-cv-01337 (W.D. Wash.) is a previously filed action in which the Court entered partial summary judgment in favor of the Commission. The complaint alleged an offering fraud based on misleading statements furnished to investors. Defendants Kirk Sperry and Sperry and Sons Capital Investments LLC agreed to settle. Accordingly, each consented to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). The Court will consider monetary relief at a later date. See Lit. Rel. No. 25090 (May 17, 2021).

Singapore

Agreement: The Monetary Authority of Singapore announced the renewal of a bilateral swap arrangement between Japan and Singapore (here).

Remarks: Ravi Mennon, Managing Director, MAS, delivered the opening remarks at the Climate Impact X Announcement Event (May 20, 2021). His remarks focused on the upward trajectory of carbon emissions and the necessary future steps (here).

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by T. GormanPosted on Posted in SECActions

The question of extraterritorial reach under Section 10(b) was resolved by the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). There the Court concluded that the federal securities laws do not apply to extraterritorial transactions. Rather, the statutes apply to transactions that occur on domestic exchanges and to domestic transactions. The latter occur when the focus of the transaction in the U.S. For Exchange Act Section 10(b) that is where the purchase or sale of the security takes places. Since Morrison was decided Congresses amended the statute, adding a new conduct-and-effects test which governs the questions. Nevertheless, the First Circuit confronted a question about the reach of Section 10(b) in SEC v. Morrone, No. 19-2007 (1st Cir. Decided May 10, 2021).

Morrone centers on an offering fraud in an action brought by the Commission, alleging violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). Bio Defense Corporation is a Massachusetts based firm created by Michael Lu in 2001. The firm was a response to the widely publicized mailing of letters containing anthrax following the September 11, 2001 terrorist attacks. Defendants in the action also conclude Jonathan Morrone, Anthony Orth, Paul Jurberg and his firm Brookline Capital and Brett Hamburger.

Over a four-year period, beginning in 2004, the firm and its members encountered regulatory difficulties in marketing Bio Defense shares – none of its member were registered brokers. First, in 2007 the firm and Messrs. Lu, Morrone and Jurberg consented to the entry of cease-and-desist orders issued by the Texas State Securities Board. The next year securities regulators in Massachusetts opened an investigation. Bio Defense, on the advice of counsel, decided to stop selling securities to U.S. based investors.

The next year the group decided to work with Agile Consulting, a firm that ran call centers targeting investors in Europe. The difficulty was the fee – it was 75% of the proceedings. Despite the high commissions, the deal was made – solicitations would be through Agile in what was latter dubbed the “EU Project.”

The documents used at the call centers for the investor pitch were generated in the U.S. by Messrs. Morrone and Jurberg. When an investor entered into an agreement with Bio Defense after hearing the sales pitch from the call center, the agreement was forwarded to either Defendant Morrone or Mr. Jurberg in Boston. There the documents were counter-signed. A Bio Defense stock certificate was mailed from Boston to the investors. The fees were paid. Bio Defense entered into other, similar arrangements, that required the payment of fees ranging from 70% to 75%. The district court held in favor of the Commission on a motion for summary judgment on the Section 10(b). The Circuit Court affirmed.

Appellants argued that the Supreme Court’s decision in Morrison was misapplied in this case – the transactions were outside the reach of Section 10(b) since they occurred in Europe. The First Circuit had not previously considered the application of Morrison in a securities fraud suit. Other circuits, however, “have held that a transaction is domestic under Morrison if ‘irrevocable liability’ occurs in the United States.” This happens when the purchaser incurs irrevocable liability in the U.S. That standard has been adopted by the Second, Third and Ninth Circuits.

Here the Court adopted the standard of those Circuit Courts. Under this standard irrevocable liability occurs when there is an obligation to deliver the security. In this case that occurred when the office in Boston accepted the agreement and executed it in that office.

Defendants acknowledge this standard but argued that it does not resolve the question. Under the rule as applied by the Second Circuit, if the claims are “so predominantly foreign as to be impermissibly extraterritorial” then Section 10(b) has no application.

The Court, following the Ninth Circuit, rejected this rule as inconsistent with Morrison. The key to that decision, the Circuit Court concluded, is “not upon the place where the deception originated, but upon purchases and sales of securities in the United States.” In this matter that happened in Boston. Thus, Exchange Act Section 10(b) applies. The ruling of the District Court is affirmed.

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