This is the final segment of a three part series reviewing and analyzing the actions brought by SEC enforcement during the first quarter of 2021. Part 1, which analyzed the overall number and types of cases brought during the quarter and provided examples of the cases in the largest groups of actions was published on Wednesday (here). Part II, published yesterday, reviewed select cases brought during the quarter that were not in the largest four categories of cases (here). This concluding segment analyzes the quarter, the cases brought, select related issues and suggests the future direction of the program.

The cases discussed above illustrate the primary areas of focus during the first quarter of 2021. More importantly, they depict a broad range of issues that range from the FCPA and internal controls to Regulation FD. Thus, while the number of cases filed is low compared to 2020, the diverse range of actions initiated in 1Q21 suggests that the new senior staff was moving forward and building the program. This is particularly true in view of the significant increase in actions filed in March compared to the earlier two months of the period.

Three other points regarding the Enforcement program should be considered when evaluating its direction for the remainder of the year.

First, in Blaszczak v. U.S., No. 20-5649 (January 11, 2021) the Supreme Court remanded an insider trading case to the Second Circuit for reconsideration. In that case the convictions for insider trading were based on the Sarbanes Oxley Act, Section 1343 and Section 666(a)(1)(A) of Title 18, not Exchange Act Section 10(b). Many believed the Second Circuit decision might suggest an alternative to the court crafted elements of a Section 10(b) insider trading claim.

No so. The High Court remanded the decision on a writ of certiorari to the Second Circuit for reconsider in view of its decision in Kelly v. United States . . .” 590 U.S. — (May 7, 2020). The remand essentially rejects the notion that federal statutes other than Exchange Act Section 10(b) may be used to prosecute insider trading. See Blaszczak v. U.S., 947 F. 3rd 19 (2nd Cir. 2019).

Second, the statute of limitations for SEC actions was extended to ten years by Congress at the close of 2020. The adverse rulings the Commission suffered in the Supreme Court’s Kokesh and Liu decisions were legislatively overruled in part by a provision tucked into the National Defense Authorization Act. Section 6501 of the Investigations and Prosecution of Offenses for Violations of the Securities Laws, incorporated in the National Defense Authorization Act, modified Exchange Act Section 21(d), adding language authorizing the agency to obtain disgorgement and reach back 10 years rather than five years. See e.g., Section 6501(a)(7)(Commission can obtain disgorgement); (a)(8)(extends statute of limitations to 10 years); (a)(8)(B)(can seek equitable remedies including an junction, bar, cease and desist order for up to 10 years). Interestingly, while the statute affirms the right of the agency to recover disgorgement without defining the term it says nothing about prejudgment interest, a question that may be litigated in the future.

Finally, just prior to the close of the quarter Gary Gensler was sworn in as the new Chairman of the agency. While Mr. Gensler got off to a bit of a rocky start with his new Enforcement Director resigning after just two weeks, he has a track record for being an aggressive enforcer. That more than suggests that the enforcement program can be expected to build quickly on the broad based approach represented by 1Q21 and continue to increase the number of actions brought in the future.

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This is the second part of a three part series reviewing and analyzing the cases brought by SEC enforcement during the first quarter of 2021. Part 1, which analyzed the overall number and types of cases brought during the quarter and provided examples of the cases in the largest groups of actions was published yesterday (here). Part II, being published today, will review select cases brought during the quarter that were not in the largest four categories of cases. Part III, to be published tomorrow, concludes the series with a discussion of the quarter and other key events, suggesting the future direction of the program.

Other significant cases (listed in order of filing)

FCPA: In the Matter of Deutsche Bank AG, Adm. Proc. File No. 3-20200 (January 8, 2021). Deutsche Bank is a multinational financial service company based in Germany. Its shares are traded on the NYSE. The firm had a Global Anti-Corruption Policy that prohibited the payment of bribes and required that before any Business Development Consultant or BDC could be retained rigorous procedures be met. Despite what appeared to be a comprehensive policy, beginning in 2009, the Bank repeatedly employed numerus BDCs to obtain and retain business. Those retained included foreign officials and their relatives and associates in at least three different countries. While there were risks of bribery, they were not assessed. In each instance the Bank was able to obtain and/or retain business as a result of payments through the BDCs. The Order alleges violations of Exchange Act Sections 13(b)(2)(A)_ and 13(b)(2)(B). In resolving the matter, the Commission considered the cooperation of the Bank, its remedial acts and the disposition in the related criminal case with the Department of Justice. To resolve that matter the firm entered into a three-year deferred prosecution agreement. The Bank also agreed to pay a criminal penalty of $85,329,622, criminal disgorgement of $681,480, and victim compensation payments of $1,223,738. U.S. v. Deutsche Bank, No. 20-CR-584 (E.D.N.Y. Jan. 8, 2021).To resolve the action with the Commission, the Bank consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Respondent agreed to pay disgorgement of $35,145,619 and prejudgment interest of $8,184,003.

Controls: SEC v. Morningstar Credit Ratings, LLC, No. 1:21-cv-01359 (S.D.N.Y. Filed February 16, 2021). Morningstar is a New York City based nationally recognized statistical ratings organization. Its parent’s shares – Morningstar, Inc. — are traded on Nasdaq Global Select Market. This action centers on ratings for $30 billion of commercial mortgage-backed securities for 30 transactions. The ratings and transactions span a two-year period beginning in 2015. Morningstar used a two-step process to prepare the ratings. The first step focused on key cash flow and valuation amounts for the properties and associated values backing the securities. The second employed a subordination process and model. The results from the two steps, each of which were disclosed, spawned the ratings. Those ratings are viewed as a crucial step in the sales process for the “certificates” issued on the securities. In the first step, the company underwrote a representative sample of the pool of commercial real estate loans that collateralized each CMBS transaction. Morningstar calculated the expected net cash flow that each commercial property would generate over the life of the loan. This step was disclosed and published on the firm’s website. The second step – the subordination step and model – was also disclosed on the website. Here the cash flow and the capitalization rate were put on an excel spreadsheet. The Subordination Model was used to subject the values to what are called “defined sets of stresses.” The point was to determine the likelihood of default under select stresses. The result is expressed as a percentage. What was not disclosed were certain loan specific adjustments made during step two of the process. The adjustments were made on the excel spreadsheet that reflected the model used in the step. There was no guidance to direct the analyst making the adjustments. The model did not constrain how the analyst made the adjustments or the size. The loan specific adjustments had a material impact. Most of the adjustments decreased the stress. The result was an increase in the rating. Overall the net impact was that “investors were not able to assess the ratings determined by Morningstar and their associated risks.” The ratings that resulted from the process were, however, beneficial to those who paid for them. The firm failed to disclose the adjustments or identify them on forms filed with the Commission. Morningstar also did not have effective internal controls regarding the use of the loan-specific adjustments. The complaint alleges violations of Exchange Act Section 15E(b)(2) and Rule 17g-1(f).

Executive perks: In the Matter of Gulfport Energy Corp., Adm. Proc. File No. 3-2032 (February 24, 2021) is a proceeding which names as a Respondent the Oklahoma City based oil, gas and development firm. In 2014 when Michael G. Moore became CEO he repeatedly charged travel and related expenses to the firm and used company charge cards for his expenses. Overall, in excess of $650,000 in expenses were incurred and during 2015 about $152,000 was paid to his son. Mr. Moore failed to furnish the company with sufficient information to make appropriate disclosures. He resigned in 2018. The Order alleges violations of Exchange Act Section 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. A penalty was not imposed based on cooperation. See also In the Matter of Michael G. Moore, Adm. Proc. File No. 3-20231 (February 24, 2021)(based on facts above; alleges violations of Securities Act Section 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a); resolved with a cease-and-desist order based on the Sections cited in the Order and the payment of $88,248 penalty which will be transferred to the U.S. Treasury).

Manipulation: SEC v. Airborne Wireless Network, Civil Action No. 1:21-cv-01772 (S.D.N.Y. Filed March 2, 2021) is an action which names as defendants the company, Kalistratos Kabilafkas, Timoleon Kabilafkas, Chrysiliou, Panagiotis Bolvis, Jack Daniels, and Moshe Rabin. In late 2015 K. Kabilafkas, purchased a controlling block of stock in a firm named Ample-Tee, Inc. which later became Airborne Wireless. A large block of shares was also supposedly owned by 30 residences of Thailand who in fact were nominees. Defendant Daniels was installed as president as recorded in filings made with the Commission. Those filings did not mention K. Kabilafkas or the fact that he controlled the shares. Subsequently, millions of shares were distributed with the assistance of the other Defendants. During the period false financial information was distributed regarding the firm. False representations were also made to induce brokers and the transfer agent to handle and process the shares; false publicity about the company created demand; and the price rose. Eventually Defendant K. Kabilafkas dumped his shares reaping profits of about $23 million. During the period the company also raised about $22 million from other investors. Collectively, Defendants netted over $45 million. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a). The case is pending. See Lit. Rel. No. 25043 (March 2, 2021).

Reg FD: SEC v. AT&T, Inc., Civil Action No. 1:21-cv-01951 (S.D.N.Y. Filed March 5, 2021). The complaint names as defendants the firm and three of its executives, Christopher Womack, Kent Evans and Michael Black. In early 2016 the company learned that it was going to miss its revenue projections for the third consecutive quarter. This resulted from a steep decline in the upgrade of smartphones by customers. The Director of Investor Relations then had Messrs. Momack and Black call analysts and talk down their equipment revenue number to ameliorate what could be a billion-dollar miss. The executives made the calls despite the firm’s Reg FD regulations and compliance procedures. A total of 20 firms were called. In some instances those contacted were told the information being furnished was public – it was not. Following the calls from AT&T executives, the analysts adjusted their numbers. When the 1Q16 numbers were released AT&T beat the reduced consensus estimates. The complaint alleges violations of Exchange Act Section 13(a). The case is pending. See Lit. Rel. No. 25045 (March 5, 2021).

Insider trading: SEC v. Jones, Civil Action No. 1:21-cv-00659 (S.D. Ind. Filed March 18, 2021). James Roland Jones trolled the Dark Web. In 2016 Mr. Jones discovered a site that claimed to provide material non-public information. Access to the site was not for everyone. To enter a potential user had to demonstrate that they had genuine inside information about a publicly traded stock. Mr. Jones, lacking actual inside information, created MNPI – a lie. He failed to gain entry. He tried again. He failed. He tried again, but only after carefully studying a stock. Success at last! His guess was right and won him entry. Moderators of the site were told the supposed illegal tip came from a friend. To stay in the club Mr. Jones and others had to provide a continuing stream of illegal tips. His membership was only for three months. Undeterred, Mr. Jones devised a new scheme. If he could not stay in the Dark Web Insider Trading Club he would create his own. In the spring of 2017 Mr. Jones listed “inside tips” for sale on one of the Dark Web marketplaces. Defendant claimed that his information came from the Dark Web Insider Trading Forum and/or corporate insiders. Mr. Jones’ information was typically general predictions that the shares would go up or down. Payments for the information were in bitcoin. The tips provided by Mr. Jones were false. In many instances they were vague enough that buyers might have questioned if the information was material. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Middle District of Florida filed parallel criminal charges. U.S. v. Jones, No. 8:21-cr-33 (MD. Fla.).

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