by T. GormanPosted on Posted in SECActions

At the center of the broker- trader relation is a duty which governs the relationship when trading. Reflected in Reg. BI is a duty which seeks to ensure that the relationship is fair and governed by the full and fair disclosure of all material facts relating to the scope and terms of the relationship. Thus, when a broker allocates trades to clients based on which had profits and which suffered losses, the duty is breached. That is what happened in SEC v. Leech, Civil Action No. 1:24-cv-09017 (S.D.N.Y. Filed Nov. 25, 2024).

Defendant Stephen K. Leech is the former co-chief investment officer of Western Asset Management Company, LLC. Over a period of years he engaged in what is typically called a “cherry picking” scheme. Specifically, beginning in January 2021, and continuing through October 2023, Defendant was named portfolio manager for several investment strategies. As part of his duties he placed trades using omnibus brokerage accounts.

When placing trades Mr. Leech did not immediately allocate the trade to a particular account. Rather, he waited until later in the day, and in some instances after market close, to assign a particular trade to an accountant. During much of the period the trader assigned the trades which had favorable first day results to select accounts which also benefited him. Those that had unfavorable accounts were assigned to other accounts. Ultimately, he cherry-picked the trades, a disregard of his duties. The complaint alleges violations of Securities Act Section 17(a)(1), Exchange Act Section 10(b) and Rule 10b-5, Advisors Act Sections 206(1) and 206(2) and Investment Company Act Sections36(a) and 37.

A parallel action was filed by the U.S. Attorney’s Office for the Southern District of New York. See, Lit. Rel. No. 26183 (Nov. 25, 2024).

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by T. GormanPosted on Posted in SECActions

It is axiomatic firms must disclose of material information that is complete and accurate. Thus, for example, when the president of a regulated entity speaks to investors regarding communications with the firm’s regulator, it is critical that the information about the communications be fully and accurately conveyed. Yet a recently, however, the Commission filed an action alleging that when the founder and President of a biotherapeutics firm discussed the company and approved filings, the disclosures about communications with the FDA were materially inaccurate. SEC v. Chiriva-Inrternati. Civil Action No. 4:24-cv-4729 (S.D. Tx. Filed Dec. 3, 2024).

Defendant Maurizio Chiviva-Internati is the founder and president of Kiromic BioPharma, Inc. The firm is a publicly traded biotherapeutics company based in Huston. It is attempting to develop and commercialize cell therapies that focus on immune-oncology.

About two weeks before the company raised $40 million through a public offering in July 2021, the U.S. Food and Drug Administration placed a clinical hold on two Investigational New Drug applications the firm filed several months earlier. The firm did not, however, disclose the holds in filings, at road shows or in diligent calls.

Rather, the filings and other communications disclosed a hypothetical centered on such a communication. Mr. Chiviva-Internati did not specifically disclose that in fact the FDA had told the company that consideration of two firm drugs had been put on hold. Indeed, in June 2021 after the FDA call, and again in August 2021, Defendant signed off on filings for the company made with the Commission that did not disclose the FDA communications. The complaint alleges violations of Securities Act Sections 17(2)(2) and 17(a)(3). It also alleged aiding and abetting the firm’s violation of Exchange Act Section 13(a).

Defendant resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, he will pay a penalty of $125,000 and will be barred from serving as an officer or director of a public company for three years. See Lit. Rel. No. 26184 (Dec. 3, 2024).

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