Rule 10b-5-1 plans have been around for about 20 years. The theory of the plans is straight forward. Typically, a corporate executive not in possession of inside information constructs a plan, usually with his or her broker, for the automatic sale of employer securities in the future. Since the executive is not making any decisions regarding the purchase or sale of firm securities under the plan, it serves as a defense to insider trading claims. While there have been allegations that these plans have been manipulated and studies, on the question of abuse, few cases have been brought.

SEC Chairman Gensler recently declared, however, that “these plans have led to real cracks in our insider trading regime” in remarks delivered at the CFO Network Summit on Friday, June 7, 2021 (here). While he did not identify the “cracks,” he did direct the staff to study four key issues:

1) Cooling off: Currently there is no “cooling off” period when a plan is instituted. Those creating a plan are prohibited from doing so only if they are not then in possession of material non-public information. Once that requirement is met the plan can be implemented and trades under it executed.

2) Cancellation: There are currently no limitations on when a plan may be terminated.

3) Disclosure: There are no mandatory disclosure requirements for such plans.

4) Limits on numbers: There are no limits on the number of plans a person can create.

These points may have merit. For example, having a “cooling off” period of, for example, thirty to sixty days before transactions can be implemented under the plan can reinforce the requirement that the person is not in possession of insider information. Similarly, requiring that firm’s disclose the use of plans and that there should be a limit regarding the number of plans one executive can create also appear to have merit. On the other hand, canceling a plan does not appear to be nefarious absent other circumstances presenting questions – at that point the executive has no safe harbor.

With all of the questions facing the Commission, there is little apparent reason for all this new study. For years the plans have proven to be successful – they help simplify transactions for executives which encourages stock ownership by those individuals. Such ownership – having skin in the game – has long been considered beneficial for the firm and shareholders. If the Commission is going to institute additional “guard rails” on the plans it should take care not to undercut the long established benefits of the plans.

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PCAOB Chair William D. Duhnke III was removed last week. Earlier suit had been filed against him by a former employee which is being litigated in District Court. Each of the other board members may be replaced shortly. Last week the Commission began soliciting interest from those who would like to join the board.

Be careful, be safe this week

SEC

Removal: The Commission announced the removal of William D. Duhnke III as the Chair of the PCAOB. Duane M. DesPartes was named as the Acting Chair.

Whistleblowers: The agency announced awards totaling $23 million. A $13 million award was made to one individual while a $10 million was made to another.

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 5 civil injunctive actions and no administrative proceedings, exclusive of tag-along and other similar proceedings.

Offering fraud: SEC v. Carney, Civil Action No. 2:21-cv-720 W.D. Pa. Filed June 1, 2021) is an action which names as defendants: Kevin Carney, the founder and CEO of Alternative Energy Holdings, LLC or AEH, co-founder of Maxximus Group LLC and a convicted felon; Jonathan Freeze, a former registered representative and the CIO of AEH; and Robert Irey, the Chief Development Officer of AEH and a co-founder of Maxximus. Beginning in June 2016, and continuing until early 2018, Defendants raised about $2.1 million from 25 investors through a fraudulent offering of securities in AEH. Much of the money raised was diverted to the personal use of the Defendants rather than invested as promised. The investors were former customer’s of Mr. Freeze from his time as a broker and friends of the defendants. A portion of the funds were used to pay Mr. Carney’s criminal fines. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal action was filed by the U.S. Attorney’s Office for the Western District of Pennsylvania. See Lit. Rel. No. 25107 (June 2, 2021).

Financial fraud/offering fraud: SEC v. Mack, Civil Action No. 19-cv-918 (D. Minn.) is a formerly filed action which named as defendants two former executives of now defunct financial tech firm, Digliti Money Group, Inc. The executives were the former CEO, Jeffrey Mack and CEO Lawrence Blaney. The two executives induced customers of the firm to execute sales contracts totally $1.8 million. What investors did not know is that there were side agreements with a customer that would preclude revenue recognition under GAAP. As a result, the revenue recognized in the third and fourth quarter of 2017 was improper. During the period the company also raised about $18 million from investors. The two executives resolved the charges with each consenting to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). Each Defendant is barred from serving as an officer or director. Mr. Mack will pay $71,341.45 in disgorgement and prejudgment interest and a penalty of $195,047. Defendant Blaney will pay disgorgement and prejudgment interest totaling $195,047 and a penalty of $160,000. See Lit. Rel. No. 25105 (June 2, 2021).

Offering fraud: SEC v. Couture, Civil Action No. 1:21-cv-10908 (D. Mass. Filed June 1, 2021) names as a defendant James Couture, the founder and owner of The Private Wealth Management Group, LLC, an investment advisory and insurance firm. Over a period of about 10 years, beginning in 2009, Defendant convinced his clients to authorize the transfer of their funds to another company so the money could be reinvested for their benefit. While about $2.9 million of investor funds were transferred the money was not invested for the benefit of the clients. The money was misappropriated – a fact concealed by furnishing clients false statements. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 25104 ( June 1, 2021).

Bribes: SEC v. Pulier, Civil Action No. 2:17-cv-07124 (C.D.Cal.) is a formerly filed action which named as a defendant Eric Pulier, a former IT executive at Computer Sciences Corp. and the co-founder of ServiceMesh, Inc. Defendant paid over $2 million in bribes to a former executive at Commonwealth Bank of Australia to entice the entity to enter into contracts with Computer Sciences. Defendant also arranged transactions so that ServiceMesh could receive a $98 million earn-ot-payment from Computer Sciences as part of an acquisition of which he received $30 million. To resolve the charges Defendant consented to permanent injunctions based on the anti-fraud sections and the books and records provisions. In addition, he was ordered to pay disgorgement of $3,900,000, prejudgment interest of $649,976.48 and a penalty of $260,000. See Lit. Rel. No. 25103 (May 28, 2021).

Fraudulent statements: SEC v. Rayat, Civil Action No. 1:21-cv-4777 (S.D.N.Y. Filed May 28, 2021) is an action which names as defendants Harmel Rayat and his firm Renovacare, Inc. Over a period of about six months, beginning in July 2017, Defendants defrauded investors by having StreetAthority, LLC, an online financial publishing company, run a promotion designed to increase the firm’s share price while concealing that fact. Mr. Rayay worked closely with the firm to implement the scheme. The complaint alleges violations of Exchange Act Sections 10(b) and 15(d). The case is pending. See Lit. Rel. No. 25102 (May 28, 2021).

Unregistered offering: SEC v. Brown, Civil Action No. 1:21-cv-04791 (S.D.N.Y. Filed May 28, 2021) is an action which named as defendants: Trevon Brown, Craig Grant, Josua Jeppesen, Ryan Maasen and Michael Noble. BitConnect is an unincorporated organization established in 2016 by the BitConnect Founder. The firm registered related entities in the U.K. Beginning in 2017, and continuing until early 2018, BitConnect raised about $2 billion by conducting an unregistered securities offering in the form of investments in its “lending program.” That program promised investors that their funds would be invested in their program that in turn invested in bitcoin. Returns could be as high as 40% per month. Defendants touted the investments in return for substantial fees. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). The case is pending.

Risk-deception: SEC v. Caine, Civil Action No. 1:21-cv-02859 (N.D. Ill. Filed May 27, 2021). The action named as defendants: Anthony Caine, the founder, owner and Chairman of both entity defendants; Anish Parvataneni, co-portfolio manager for P&G Fund and the private funds; LJM Funds Management, LTD., a registered investment adviser until 2018; and LJM Partners, LTD., an investment adviser to several, related private funds. Defendant Caine is the author of a short-term investment strategy used by LJM Funds and LJM Partners. The strategy involved writing (selling) short-dated out-of-the money options on S&P 500 futures contracts known as short options or short volatility trading. The approach could generate stable profits, but in the late stages carried risk of significant losses during large market swings. Investors were offered three variations of the strategy. LJM had a risk officer. The firm materials also addressed the subject of risk. The firm, however, had no real integrated risk control framework except one: Ownership had the last word – Mr. Caine. Nevertheless, Defendants created a marketing narrative, talking points and other materials; investors were told the firm had sophisticated risk management procedures to handle their investment portfolios and control risk. Not only were investors not told the actual risks, in 2017 and early 2018 the firm increased the risk in an effort to achieve targeted returns. In February 2018 the financial markets suffered a large spike in volatility over two consecutive trading days. The funds managed by LJM and LJM Partners suffered trading losses of over $1 billion. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 20(a), Advisers Act Sections 206(1), 206(2) and 206(4) and Investment Company Act Sections 15(c) and 34(b). In a related proceeding Arjuna Ariathural , LJM’s Chief Risk Officer agreed to be barred with the right to apply for reentry after three years. He also agreed to pay disgorgement and prejudgment interest of $97,444 and a civil penalty of $150,000. See Lit. Rel. No. 2510 (May 28, 2021).

Manipulation: SEC v. Gomes, Civil Action No. 1:20-cv-11092 (D. Mass.) is a previously filed action against defendants Michael Luckhoo-Bouch and others. The complaint centers on a scheme that began in January 2018 run by Canadian citizen Nelson Gomes. He operated a business which shielded persons who had control of certain entities while the shares of their firms were manipulated. The scheme involved fraudulent promotional campaigns that in some instances inappropriately capitalized on the current pandemic. Defendant Luckhoo-Bouch participated in the scheme by at times falsely posing as a director for the firms and at other times making misrepresentations. Mr. Luckhoo-Bouch resolved the matter, consenting to the entry of a permanent injunction based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). He also agreed to the entry of a penny stock bar and will pay a civil penalty of $20,000. See Lit. Rel. No. 25100 (May 28, 2021).

Hong Kong

Risk management: The Securities and Futures Commission issued a circular on June 1, 2021urging firms to review their business continuity plan and consider Covid-19 vaccination as a critical part of their operational risk management. In this regard the firm should identify functions that are critical to operations and encourage staff in those areas to get vaccinated (here).

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