by T. GormanPosted on Posted in SECActions

Gary Gensler was sworn in as a member of the Commission by Senator Ben Cardin on April 17, 2021 after his nomination as Chairman was confirmed by the Senate. Previously, Mr. Gensler served as a Professor of the Practice of Global Economics and Management at the MIT Slone School of Management and held a number of other academic posts. He also served as the Chairman of the CFTC during the Obama Administration where he led the reform of the swaps markets.

Mr. Gensler faces a daunting agenda in assuming his new position as SEC Chairman. The issues range from questions regarding climate and ESG which appear to divide the other Commissioners, to those focused on the GameStop and Archegos Capital Management market disruptions. They also include issues such as those revolving about the Nasdaq application to alter its listing standards regarding diversity requirements, the increasing number of SPAC IPOs and the push by crypto to create instruments such as ETFs in the wake of the CoinBase IPO.

Be careful, be safe this week

SEC

Rules: The agency announced the reopening of the comment period on the Universal Proxy rules on April 16, 2021. This will permit investors to present additional comments and data on this key issue (here).

Whistleblowers: The Commission awarded over $50 million to joint whistleblowers who informed the agency staff about violations involving complex and difficult to detect transactions, according to an April 15, 2021 release.

Remarks: Commissioner Hester Peirce published remarks titled “Rethinking Global ESG Metrics,” published on the agency website April 14, 2021 (here). The remarks focus on the many facets of ESG, concluding that the complexity may make it most difficult to craft proper disclosure standards. The Commissioner ultimately concludes that the entire question of climate and ESG must be rethought before “it is too late.” The statement was initially published by Eurofi Magazine.

Risk Alert: The Division of Examinations published a Risk Alert based on its observations of deficiencies and control issues tied to ESG Investing (April 9, 2021)(here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 new civil injunctive actions and no administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters. The Alert focuses on risks, deficiencies and control issues related to ESG investing observed by the Division during its examinations.

Manipulation-pump & dump: SEC v. Sterritt, Civil Action No. 1:21-cv-2008 (E.D.N.Y. Filed April 14, 2021) centers on an offering fraud and two pump-and-dump manipulations which turned into FBI sting operations. Named as defendants are: Richard Starritt, a securities law recidivist; Michael Greer; Deanna Looney; Robert Magness; Katie Mathews; James Pittman; and Mark Ross. The companies involved are: Zona Energy, Inc.(later ERF Wireless, Inc. or ERFB) and OrgHarvest, Inc. or ORGH. First, an offering fraud was conducted over a two-year period beginning in March 2018. Defendant Sterritt and others raised over $16 million from about 300 investors through what they claimed was the private placement of Zona securities. While specific representations were made regarding the proposed use of the proceeds, the funds were misappropriated and much of the capital was channeled through a number of entities controlled by Mr. Sterritt. Second, in 2020 Defendants Sterritt and Magness arranged to deposit about 5.2 million shares of ORGH’s stock at a brokerage firm. The plan was to manipulate the price through a series of matched trades. Key conversations of Defendants during the planning stage were on recorded lines, however. In addition, while corrupt stockbrokers were supposed to help implement the plan in return for a 35% kickbacks, one member of the group was an under cover FBI agent. Defendants attempted to implement the plan in late May 2020. The plan was foiled when the Commission suspended trading in the stock. Nevertheless, a third manipulation was planned for the stock of ERFB, another firm controlled by Mr. Sterritt. Again, the plan was thwarted when the Commission suspended trading in the stock. The case is pending. The U.S. Attorney’s Office for the Eastern District of N.Y. filed a parallel criminal action. See U.S. v. Sterritt, No. 21-CR-193 (E.D.N.Y. Filed April 14, 2021).

Unregistered broker: SEC v. Graham, Civil Action No. 1:20-cv-02505 (N.D. Ohio) is a previously filed action which named as defendants Hughe Graham and others. The action focused on the solicitation by Defendants of investors to purchase the stock of U.S. Lighting Group, Inc. Those soliciting the investors were not registered. On April 13, 2021 the Commission dropped the action as to Defendant Donald L. Howard and added Donald Howard as a Defendant by filing an amended complaint. See Lit. Rel. No. 25069 (April 13, 2021).

Criminal Cases

Offering/forex fraud: U.S. v. Gallagher (S.D. Fla. indictment returned April 8, 2021). Patrick Gallagher and Michael Dion are U.S. citizens. Emade Ecadi is from the Netherlands. Each was named in an indictment containing counts of conspiracy to commit securities fraud, securities fraud, conspiracy to commit wire fraud and conspiracy to commit money laundering. The underlying scheme traces to 2012. The three men began soliciting investors to entrust their investment funds to Global Forex Management, their firm. Large returns were promised. The returns were to be generated by the online trading platform of Mr. Echadi’s firm, 1B Capital. Defendants began trading. They suffered losses. Defendants cut the losses by halting the trading. About $30 million in investor funds was stolen. The investor money was channeled through a series of off-shore entities they had set-up in various parts of the world. Clients were then shown fabricated trading records reflecting profits. The case is pending.

Australia

Report: The Australian Securities and Investment Commission released its enforcement update report for the period for July 2020 through December 2020 on April 16, 2021 (here).

Hong Kong

Remarks: Ashler Alder, CEO of the Securities and Futures Commission of Hong Kong, delivered remarks at the Eurofi High Level Seminar 2021 titled Corporate Sustainability Disclosure Standards: The Way Forward on April 15, 2021 (here). His remarks centered on implementing a greed finance agenda (here).

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by T. GormanPosted on Posted in SECActions

Climate change and ESG have been topics of repeated conversations at the Commission. The Acting Chair, for example, directed the Division of Corporation Finance to consider the issues. The Division of Enforcement formed a task force. There were others. Clearly many are interested in the topics.

Commissioner Hester Peirce has now joined the discussion. In remarks titled “Rethinking Global ESG Metrics,” published on the agency website April 14, 2021 (here) and earlier in Eurofi Magazine, the Commissioner suggests that we “rethink the path we are taking before it is too late.”

What does “too late” mean? It begins with the “unassailable” conclusion that “prosperity alone is not a sufficient measure of a society’s progress . . .” This is because, according to Ms. Peirce, the “challenge we face in addressing the ever-increasing number of issues underlying E,S, and G is daunting. The task before us is to find a way to bring about lasting, positive change to our countries on a range of issues without sacrificing in the process the very means by which so many lives have been enriched and bettered.”

From this foundation the question is broached: “In the United States, the idea of enlisting the securities laws to achieve ESG objectives is gaining traction among activists and policy elites with a particular emphasis on requiring disclosures of specific ESG metrics.” This results in a variety of ideas and metrics, a kind of ESG smorgasbord.

While this all sounds good the Commissioner posits, it has consequences that may be far reaching and not necessarily desirable. Indeed, this leads to “[h]ampering the ability of the markets to collect, process, disseminate, and respond to price signals by boxing them in with preset, government-articulated metrics . . . .” This may stifle innovation and end with a failure to address the critical questions.

Ultimately, the process could lead to the adoption of the “European concept of ‘double materiality’ [which] has no analogue in our regulatory scheme . . .” according to the Commissioner. That of course is a departure from U.S. traditions; it is not responsive or helpful to shareholders. Since the basis of the U.S. disclosure system is the shareholder, it is time to rethink this path “before it is too late” the Commissioner concludes.

Comment

No doubt the questions about the environment, ESG and disclosure are being careful consideration by the Commissioners and the senior staff who have remained with the agency through its transition to the arrival of newly confirmed Chairman Gensler. A review of comments made in recent weeks by various Commissioners and staff members paints a daunting picture of how to craft the appropriate disclosure in view of a landscape littered with a variety of environmental issues and ESG metrics. That picture, of course, is the byproduct of the many substantive discussions on these issues which have been and are taking place around the globe.

Does this mean that the SEC should do nothing lest it pick the wrong metrics and ideas? If the only solution were a kind of blindman’s bluff to creating disclosure standards, perhaps.

It is not. The solution is to return to the basic premise that has driven the federal securities laws from the beginning – disclosure. The foundation of the federal securities laws began with, and continues to be, the idea that the company tells its shareholders what it is doing with their money. The idea behind MD&A, for example, is to put the shareholders in the chair of the board and CEO so they can see not just where the enterprise has been or is, but where it wants to go. That is not picking and choosing by regulators – a kind of state corporation law substantive approach – but the kind of disclosure that has fueled the U.S capital markets since the 1930s. It is never too late for the company to share its story with those who have invested in it.

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