by T. GormanPosted on Posted in SECActions

Those conducting offering frauds often tie the company and the shares they are peddling to the latest public craze. For a while blockchain and crypto was all the rage. The prices of some coins and firms vacillated wildly up and down. Then came marijuana and again the prices were highly volatile. The SEC’s latest case in this area used a different hook to sell investors on the idea of putting in their hard-earned cash into the venture – a streaming service. Everyone knows that streaming is the future of the film and TV business, right? Maybe; but maybe not; or at least not in this form. SEC v. Vuuzle Media Corp., Civil Action No. 2:21-cv-01226 (D. N.J. Filed January 27, 2021).

The company Defendant is in the video streaming business. Defendant Ronald Flynn is a resident of the Philippines and the UAE and the founder of the firm. He is also its majority shareholder and is subject to at least two state cease-and-desist orders, one issued by the Ohio Department of Securities and the other by the California Department of Business Oversight. Defendant Ricard Marchitto, a retired dentist, claimed to be a vice president of marketing.

The history of Vuuzle is one of shifting sale pitches to raise cash from investors – sales programs orchestrated by Mr. Flynn – while concealing the truth. Beginning in September 2016 Mr. Flynn told investors that Vuuzle was in the process of building a mobile phone application called Bonk.live initially and later Bonk.be.live. The application was supposed to stream live performances.

Revenues were supposed to be in the millions of dollars as investors were expected to flock to put their money into the company. Yet from late May through mid-November 2018 the average number of devices using Bonk.live was 371. Indeed, Defendant Flynn was told by one of the firm’s advisers that discussions about the application were “terrifying” since it was so “weak and underdeveloped.” By year end the company and its major shareholder were refocusing on TV streaming.

Subsequently, the firm became a “front” in the words of the complaint for Mr. Flynn and a boiler room operation. The focus was to sell shares of the company, primarily from the Philippines. While investors were told that 99% of the funds raised would be plowed into developing the business, it was a lie. Large portions of the funds raised were used to pay commissions. About $10 million was misused by Mr. Flynn.

Marketing was conducted using a series of misrepresentations. Those include false promises of an IPO; false claims of future dividends; and concealing the role of Mr. Flynn in the company. Overall, only $2 million of the $14 million raised from investors was put back into the company. Defendant Marchitto substantially assisted with these efforts.

The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a)(1). The complaint is pending. See Lit. Rel. No. 25017 (January 27, 2021).

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by T. GormanPosted on Posted in SECActions

Climate change, global warming and similar subjects are the daily grist of the news. The Washington Post reported earlier this week, for example, that huge quantities of ice are melting at an alarming rate. The newly installed Biden administration has made the environment and global warming a central issue, moving almost immediately to get the U.S. back into the Paris Agreement. The SEC, the premier U.S. disclosure agency in the view of many, has disclosure provisions tracing to 2010 that are at best minimalist. Although it just concluded an aggressive rule writing campaign which included provisions of Regulation S-K which govern the 2010 rules, no significant changes were made. Is it time for the agency to address the issue?

The Acting Chair of the Commission, and at least one Commissioner, seem to think so. Acting Chair Allison Herman Lee and Commissioner Caroline A. Crenshaw have addressed the question and called for better disclosure standards (here). None have been adopted.

Shortly before Chair Lee and Commissioner Crenshaw made their statements, the CFTC published a report prepared by the Climate-Related Market Risk Subcommittee on September 9, 2020 (here). The Report contained a number of important conclusions. Those included the fact that: Climate change could pose systemic risk to the U.S. financial system; and regulators should be concerned about the risks of climate-related shocks. Perhaps most importantly, the Report concluded that disclosure by corporations of information on material climate related financial risks is essential, although existing disclosure requirements have not resulted in sufficient information to be useful to market participants and regulators.

At the beginning of 2020 the SEC undertook a rule making initiative to modernize Regulation S-K which governs the Commission’s disclosure standards on climate and a series of subjects. As the rule making initiative was launched Ms. Lee noted that “investors are overwhelmingly telling us, through comment letters and petitions for rule making, that they need consistent, reliable, and comparable disclosures of the risks and opportunities related to sustainability measures, particularly climate risk. Investors have been clear that this information is material to their decision-making process, and a growing body of research confirms that. And MD&A is uniquely suited to disclosures related to climate risk; it provides a lens through which investors can assess the perspective of the stewards of their investment capital on this complex and critical issue.”

Previously, however, the agency has reached out and explored the questions relating to the environment. In 2016 a Regulation S-K Concept Release was issued. It posed questions regarding sustainability reporting. While the agency did not follow-up, the private sector did. BlackRock, for example, issued a letter that discussed climate-related issued in April 2019.

Just days before the Commission issued the Regulation S-K amendments initiated in January 2020, Ms. Lee, speaking at a PLI conference noted that investors, asset managers, lenders, credit rating agencies and others use climate data and information when investing billions of dollars. This, she noted, “requires uniform, consistent, and reliable disclosure (here).” Yet when the final amendments to S-K were issued, the rule failed to address climate risk, “similar to other recent modernization rule makings . . . “

Comment

It is time for the Commission to step-up. The agency has had at least a decade to augment its initial entry into the area. It accumulated valuable information four years ago with its concept release. The agency has had the benefit of the CFTC report and the prodding of its Acting Chair and a Commissioner. There is no doubt that investors are considering climate information. If the agency wants to remain the premier disclosure agency it is time to act.

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