This Week In Securities Litigation (Week of April 8, 2024)
The Commission filed four new cases last week. One centered on a failure to keep records while a second was based on a fraudulent scheme. The final two cases involved front running.
Be careful, be safe this week.
SEC
Rule: The Commission adopted Rules relating to internet investment advisers on March 27, 2024. Specifically, the new provisions require internet advisers to at all times have a website and eliminates the current de minimis exception (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 4 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Conflicts: SEC v. Commonwealth Equity Services, LLC, Civil Action No. 1:19-cv-11655 (D. Mass.) is a previously filed action which names the registered investment adviser as Defendant. The adviser had an arrangement with the broker it generally required be used. Under the arrangement payments were made back to the advisory. This fact was not disclosed to the clients involved. Nor were the clients advised that there were less expensive versions of the fund shares being purchased as well as some which did not make any payments back to broker. The adviser also received payments from the broker under its revenue sharing program. The adviser failed to inform clients about any of these arrangements. The advisory settled the matter, consenting to the entry of a permanent injunction based on Advisors Act Sections 206(2) and 206(4). Previously the court had entered summary judgment in favor of the Commission. On March 29, 2024, the Court entered the final judgment in the action, imposing the injunction and requiring the advisory to pay $21,185,162 in prejudgment interest and a penalty of $6.5 million. See Lit. Rel. No. 25968 (April 4, 2024).
Misappropriation: SEC v. Churchville, Civil Action No. 15-cv-00191 (D.R.I.) is a previously filed action which named as defendants ClearPath Wealth Management, LLC and its owner and president, Patrick Churchville. The complaint alleged that Defendants misused client assets for their personal benefit by causing at least $27 million in investor losses and diverting investor capital to their personal use. The final judgment enjoined Defendants from future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1),(2) &( 4). Defendants were also directed to pay, on a joint and several basis, $22,553,095 in disgorgement and $4,577,810 in prejudgment interest less any amounts distributed by the receiver appointed in the action or paid by Mr. Churchville in a parallel criminal action. See Lit. Rel. No. 25966 (April 3, 2024).
Manipulation: SEC v. DiScala, Civil Action No. 1:14-cv-4346 ((E.E.N.Y) is a previously filed action in which the Commission’s complaint alleged that Defendant Ronald Heineman, chief compliance offer of Halcyon Cabot Partners, Ltd., ignored red flags related to trading in CodeSmart securities and the conduct of one of Halcyon’s registered representatives. Specifically, Defendant was aware that one of the principals of the scheme was using Halcyon to facilitate his manipulative trading. The complaint alleged violations of Exchange Act Section 10(b). Defendant consented to the entry of a permanent injunction based on the Section cited in the complaint. Defendant also agreed to pay a penalty of $25,000. On April 1, 2024 the Court entered final judgment.
Manipulation: SEC v. Nielsen, Civil Action No. 5:20-cv-03788 (N.D. Cal.) is a previously filed action which named as defendant Jason C. Nielsen. In early 2020 Defendant began to drive the share price of Arrayit Corporation stock up and posting repeated messages containing a false claim about the approval for a COVID-19 test. Defendant did not disclose that he held a large block of Arrayit securities. The complaint alleged violations of Securities Act Section 10(b) and Exchange Act Sections 9(a)(2) and 10(b). Defendant resolved the action by consenting to the entry of a permanent injunction based on the Sections cited in the complaint and agreeing to pay $149,915 in prejudgment interest and disgorgement. He also consented to the entry of a penny stock bar. See Lit. Rel. No. 25964 (April 3, 3024).
Records: In the Matter of Senvest Management, LLC, Adm. Proc. File No. 3-21900 (April 3, 2024) is a proceeding which names as Respondent the registered investment adviser. Beginning in January 2019, and continuing for about two years, employees of the advisory used personal texting platforms and other personal devices to conduct client business. The records from the transactions were not maintained as required. In addition, certain firm employees engaged in securities transactions without obtaining preclearance. The firm agreed to institute certain undertakings in connection with resolving the proceedings. In addition, a Compliance Consultant was retained to compile a Report. The Order alleges violations of Advisers Act Sections 204, 204A, 206(4) and the related rules. Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the order and to a censure. In addition, the firm will pay a penalty of $6.5 million.
Fraudulent scheme: SEC v. GA Investors, Civil Action No. 1:23-cv-11050 (D. Mass.) is an action against the firm whose owners are not known. The scheme promised investors huge returns for investments in securities, some of which were well known. As part of the scheme investors were directed to purchase crypto assets on a separate crypto asset trading platform and transfer the assets to a GA Investor wallet address. Defendant consented to the entry of a final judgment which the Court entered. It enjoined Defendant from engaging in future violations of Exchange Act Section 10(b). It also directed GA Investors to pay disgorgement in the amount of $70,058, prejudgment interest of $5,740 and a penalty of $1,116,140. See Lit. Rel. No. 25963 (April 2, 2024).
Front running: SEC v. Treusch, Civil Action No. 1:24-cv-01050 (E.D.N.Y. Filed February 11, 2024). Defendant Travis Treusch agreed to help his cousin, Christopher Flagg and his partner, Eduardo Hernandez, continue implementing a sophisticated version of the typical free riding scheme. In this version Defendants essentially stole the instant credit extended by the broker-dealer. The account was then abandoned. The scheme was built on the following steps: First, Defendants Flagg and Hernandez converted the instant deposit credits into cash for themselves; they used a trading strategy that involved executing matched trades in illiquid options between unfunded accounts they designated as the “loser” at certain brokers and profit generating or winner at others. Since Defendants controlled each side of the transaction involving matched trades, they were able to execute the transactions at artificial prices. By doing this repeatedly they generated trading profits in the Winner Accounts and losses in the Loser Accounts. Second, Defendant Treusch joined his cousin and the scheme in August 2020 after it had been running for about two years. Mr. Treausch recruited dozens of new employees for the scheme and instructed them in the trading mechanics. Cousin Treausch was paid $300 to $500 for each loser account. The complaint alleges violations of Exchange Act Sections 10(b) and 20(e). Third, Mr. Treusch resolved the matter, consenting to the entry of a permanent injunction based on the Sections cited in the complaint and a conduct injunction. The duration of the conduct injunction and the amount of monetary relief will be determined by the Court. See Lit. Rel. No. 25962 (April 2, 2024). See SEC v. Hernandez, Civil Action No. 2:23-cv-08110 (E.D.N.Y.)(the free riding scheme joined by Defendant above; named as defendants are Eduardo Hermandez, Christopher Flagg, Daquan Lloyd and Corey Ortiz; alleges violation of Exchange Act Sections 10(b) and 20(b). The case is in litigation).
False statements: SEC v. FLiK, Civil Action No. 20-cv-03739 (N.D.Ga.) is a previously filed action which named as defendants Ryan Felton, FLiK and CoinSpark. The complaint claimed that Defendant Felton promised to build a digital streaming platform for FLiK and a digital asset trading platform for CoinSpark. Mr. Felton, however, misappropriated the funds along with a number of tokens which he sold at a profit of about $2.2 million. To resolve the matter Mr. Felton, FLiK and CoinSpark consented to the entry of permanent injunctions based on Securities Act Sections 5(a) and 17(a) and Exchange Act Section 10(b). Mr. Felton was also enjoined from violating Exchange Act Sections 9(a)(2) and prohibited from participating directly or indirectly in the issuance, purchase, offer, or sale of any digital asset security or serving as an officer or director. In addition, Defendants were ordered to pay disgorgement in the amount of $2.8 million along with prejudgment interest of $704,981. Those amounts will be deemed satisfied by the criminal judgment and restitution and forfeiture orders entered against Mr. Felton in U.S. v. Felton, No. 20-CR-347 (N.D. Ga.). See Lit. Rel. No. 20-cv-03739 (March 29, 2024).
Offering fraud: SEC v. Galvin, Civil Action No. 2:24-cv-00636 (D. Ariz.) is a previously filed action which named as defendant Christopher E. Galvin. According to the complaint, Mr. Galvin sold interests in Hypur Ventures II, L.P. to two investors for $500,000 based on claims that the funds would be used to invest in cannabis related firms. The funds were, however, diverted to his personal use. The complaint alleged violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is in litigation. See Lit Rel. No. 25960 (March 29, 2024).
Accounting & Class Cases
Cornerstone Research published another report providing insight into a corner of the markets. The new report is titled Accounting Class Action Filings and Settlements, 2023 Review and Analysis. As the title states, the Report provides an overview of the case activity in the accounting class action market. In 2023 the number of filings increased compared to the last two years. Last year 56 new accounting class action cases were filed. The prior year 51 actions were filed while in 2021 the number of accounting class actions initiated was 46. The largest number of accounting class actions filed in one year, according to the Report which has statistics tracing back to 2014, was 70 in 2020. Most of the accounting class actions filed in 2023 involved restatements and allegations centered on the internal controls of the company, Cornerstone concluded. In 2023 38% of the cases filed involved a restatement. That represents an increase over 2022 when 33% of the new accounting class actions filed involved a restatement. And, in 2021 only 11% of the cases filed included a restatement. Interestingly, in 2023 38% of the new cases filed had no claims centered on internal controls. That represents a decline from the prior year when 51% of the new actions filed had no allegation regarding internal controls, although in 2021 Cornerstone determined that 61% of the complaints had no allegation regarding internal controls. Finally, the number of settled accounting cases decreased in 2023. The number of settled actions last year was below the average for the prior nine years.
BaFin
Outsourcing functions: The regulator has determined that certain firm functions can be outsourced to cloud service providers. The functions are discussed with Ms. Kosche-Srteinbrecher and Dr. Kleinknecht-Dennart, both of the regulator, held on April 4, 2024 and published here.
ESMA
Newsletter: The European Securities Markets Authority published the latest edition of its News Letter for February and March on April 4, 2024 (here).
Hong Kong
Discussion: The Securities & Futures Commission of Hong Kong co-hosted a high-level roundtable on distributing Hong Kong funds in Dubai International Financial Centre on April 5, 2024 (here).
Singapore
Remarks: Chia Der Jiun, Managing Directors, Monetary Authority of Singapore, delivered the opening address at the IMAS Investment Conference 2024 on March 27, 2024 (here).
This Week In Securities Litigation (Week of April 8, 2024)
The Commission filed four new cases last week. One centered on a failure to keep records while a second was based on a fraudulent scheme. The final two cases involved front running.
Be careful, be safe this week.
SEC
Rule: The Commission adopted Rules relating to internet investment advisers on March 27, 2024. Specifically, the new provisions require internet advisers to at all times have a website and eliminates the current de minimis exception (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 4 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Conflicts: SEC v. Commonwealth Equity Services, LLC, Civil Action No. 1:19-cv-11655 (D. Mass.) is a previously filed action which names the registered investment adviser as Defendant. The adviser had an arrangement with the broker it generally required be used. Under the arrangement payments were made back to the advisory. This fact was not disclosed to the clients involved. Nor were the clients advised that there were less expensive versions of the fund shares being purchased as well as some which did not make any payments back to broker. The adviser also received payments from the broker under its revenue sharing program. The adviser failed to inform clients about any of these arrangements. The advisory settled the matter, consenting to the entry of a permanent injunction based on Advisors Act Sections 206(2) and 206(4). Previously the court had entered summary judgment in favor of the Commission. On March 29, 2024, the Court entered the final judgment in the action, imposing the injunction and requiring the advisory to pay $21,185,162 in prejudgment interest and a penalty of $6.5 million. See Lit. Rel. No. 25968 (April 4, 2024).
Misappropriation: SEC v. Churchville, Civil Action No. 15-cv-00191 (D.R.I.) is a previously filed action which named as defendants ClearPath Wealth Management, LLC and its owner and president, Patrick Churchville. The complaint alleged that Defendants misused client assets for their personal benefit by causing at least $27 million in investor losses and diverting investor capital to their personal use. The final judgment enjoined Defendants from future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1),(2) &( 4). Defendants were also directed to pay, on a joint and several basis, $22,553,095 in disgorgement and $4,577,810 in prejudgment interest less any amounts distributed by the receiver appointed in the action or paid by Mr. Churchville in a parallel criminal action. See Lit. Rel. No. 25966 (April 3, 2024).
Manipulation: SEC v. DiScala, Civil Action No. 1:14-cv-4346 ((E.E.N.Y) is a previously filed action in which the Commission’s complaint alleged that Defendant Ronald Heineman, chief compliance offer of Halcyon Cabot Partners, Ltd., ignored red flags related to trading in CodeSmart securities and the conduct of one of Halcyon’s registered representatives. Specifically, Defendant was aware that one of the principals of the scheme was using Halcyon to facilitate his manipulative trading. The complaint alleged violations of Exchange Act Section 10(b). Defendant consented to the entry of a permanent injunction based on the Section cited in the complaint. Defendant also agreed to pay a penalty of $25,000. On April 1, 2024 the Court entered final judgment.
Manipulation: SEC v. Nielsen, Civil Action No. 5:20-cv-03788 (N.D. Cal.) is a previously filed action which named as defendant Jason C. Nielsen. In early 2020 Defendant began to drive the share price of Arrayit Corporation stock up and posting repeated messages containing a false claim about the approval for a COVID-19 test. Defendant did not disclose that he held a large block of Arrayit securities. The complaint alleged violations of Securities Act Section 10(b) and Exchange Act Sections 9(a)(2) and 10(b). Defendant resolved the action by consenting to the entry of a permanent injunction based on the Sections cited in the complaint and agreeing to pay $149,915 in prejudgment interest and disgorgement. He also consented to the entry of a penny stock bar. See Lit. Rel. No. 25964 (April 3, 3024).
Records: In the Matter of Senvest Management, LLC, Adm. Proc. File No. 3-21900 (April 3, 2024) is a proceeding which names as Respondent the registered investment adviser. Beginning in January 2019, and continuing for about two years, employees of the advisory used personal texting platforms and other personal devices to conduct client business. The records from the transactions were not maintained as required. In addition, certain firm employees engaged in securities transactions without obtaining preclearance. The firm agreed to institute certain undertakings in connection with resolving the proceedings. In addition, a Compliance Consultant was retained to compile a Report. The Order alleges violations of Advisers Act Sections 204, 204A, 206(4) and the related rules. Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the order and to a censure. In addition, the firm will pay a penalty of $6.5 million.
Fraudulent scheme: SEC v. GA Investors, Civil Action No. 1:23-cv-11050 (D. Mass.) is an action against the firm whose owners are not known. The scheme promised investors huge returns for investments in securities, some of which were well known. As part of the scheme investors were directed to purchase crypto assets on a separate crypto asset trading platform and transfer the assets to a GA Investor wallet address. Defendant consented to the entry of a final judgment which the Court entered. It enjoined Defendant from engaging in future violations of Exchange Act Section 10(b). It also directed GA Investors to pay disgorgement in the amount of $70,058, prejudgment interest of $5,740 and a penalty of $1,116,140. See Lit. Rel. No. 25963 (April 2, 2024).
Front running: SEC v. Treusch, Civil Action No. 1:24-cv-01050 (E.D.N.Y. Filed February 11, 2024). Defendant Travis Treusch agreed to help his cousin, Christopher Flagg and his partner, Eduardo Hernandez, continue implementing a sophisticated version of the typical free riding scheme. In this version Defendants essentially stole the instant credit extended by the broker-dealer. The account was then abandoned. The scheme was built on the following steps: First, Defendants Flagg and Hernandez converted the instant deposit credits into cash for themselves; they used a trading strategy that involved executing matched trades in illiquid options between unfunded accounts they designated as the “loser” at certain brokers and profit generating or winner at others. Since Defendants controlled each side of the transaction involving matched trades, they were able to execute the transactions at artificial prices. By doing this repeatedly they generated trading profits in the Winner Accounts and losses in the Loser Accounts. Second, Defendant Treusch joined his cousin and the scheme in August 2020 after it had been running for about two years. Mr. Treausch recruited dozens of new employees for the scheme and instructed them in the trading mechanics. Cousin Treausch was paid $300 to $500 for each loser account. The complaint alleges violations of Exchange Act Sections 10(b) and 20(e). Third, Mr. Treusch resolved the matter, consenting to the entry of a permanent injunction based on the Sections cited in the complaint and a conduct injunction. The duration of the conduct injunction and the amount of monetary relief will be determined by the Court. See Lit. Rel. No. 25962 (April 2, 2024). See SEC v. Hernandez, Civil Action No. 2:23-cv-08110 (E.D.N.Y.)(the free riding scheme joined by Defendant above; named as defendants are Eduardo Hermandez, Christopher Flagg, Daquan Lloyd and Corey Ortiz; alleges violation of Exchange Act Sections 10(b) and 20(b). The case is in litigation).
False statements: SEC v. FLiK, Civil Action No. 20-cv-03739 (N.D.Ga.) is a previously filed action which named as defendants Ryan Felton, FLiK and CoinSpark. The complaint claimed that Defendant Felton promised to build a digital streaming platform for FLiK and a digital asset trading platform for CoinSpark. Mr. Felton, however, misappropriated the funds along with a number of tokens which he sold at a profit of about $2.2 million. To resolve the matter Mr. Felton, FLiK and CoinSpark consented to the entry of permanent injunctions based on Securities Act Sections 5(a) and 17(a) and Exchange Act Section 10(b). Mr. Felton was also enjoined from violating Exchange Act Sections 9(a)(2) and prohibited from participating directly or indirectly in the issuance, purchase, offer, or sale of any digital asset security or serving as an officer or director. In addition, Defendants were ordered to pay disgorgement in the amount of $2.8 million along with prejudgment interest of $704,981. Those amounts will be deemed satisfied by the criminal judgment and restitution and forfeiture orders entered against Mr. Felton in U.S. v. Felton, No. 20-CR-347 (N.D. Ga.). See Lit. Rel. No. 20-cv-03739 (March 29, 2024).
Offering fraud: SEC v. Galvin, Civil Action No. 2:24-cv-00636 (D. Ariz.) is a previously filed action which named as defendant Christopher E. Galvin. According to the complaint, Mr. Galvin sold interests in Hypur Ventures II, L.P. to two investors for $500,000 based on claims that the funds would be used to invest in cannabis related firms. The funds were, however, diverted to his personal use. The complaint alleged violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is in litigation. See Lit Rel. No. 25960 (March 29, 2024).
Accounting & Class Cases
Cornerstone Research published another report providing insight into a corner of the markets. The new report is titled Accounting Class Action Filings and Settlements, 2023 Review and Analysis. As the title states, the Report provides an overview of the case activity in the accounting class action market. In 2023 the number of filings increased compared to the last two years. Last year 56 new accounting class action cases were filed. The prior year 51 actions were filed while in 2021 the number of accounting class actions initiated was 46. The largest number of accounting class actions filed in one year, according to the Report which has statistics tracing back to 2014, was 70 in 2020. Most of the accounting class actions filed in 2023 involved restatements and allegations centered on the internal controls of the company, Cornerstone concluded. In 2023 38% of the cases filed involved a restatement. That represents an increase over 2022 when 33% of the new accounting class actions filed involved a restatement. And, in 2021 only 11% of the cases filed included a restatement. Interestingly, in 2023 38% of the new cases filed had no claims centered on internal controls. That represents a decline from the prior year when 51% of the new actions filed had no allegation regarding internal controls, although in 2021 Cornerstone determined that 61% of the complaints had no allegation regarding internal controls. Finally, the number of settled accounting cases decreased in 2023. The number of settled actions last year was below the average for the prior nine years.
BaFin
Outsourcing functions: The regulator has determined that certain firm functions can be outsourced to cloud service providers. The functions are discussed with Ms. Kosche-Srteinbrecher and Dr. Kleinknecht-Dennart, both of the regulator, held on April 4, 2024 and published here.
ESMA
Newsletter: The European Securities Markets Authority published the latest edition of its News Letter for February and March on April 4, 2024 (here).
Hong Kong
Discussion: The Securities & Futures Commission of Hong Kong co-hosted a high-level roundtable on distributing Hong Kong funds in Dubai International Financial Centre on April 5, 2024 (here).
Singapore
Remarks: Chia Der Jiun, Managing Directors, Monetary Authority of Singapore, delivered the opening address at the IMAS Investment Conference 2024 on March 27, 2024 (here).