by T. GormanPosted on Posted in SECActions

Background

The Commission created Rule 10b5-1 plans two decades ago. The rule essentially creates a safe haven for those who in good faith trade securities and are not in possession of inside information. Thus the plans provide a mechanism for trades to be executed at designated times in the future – essentially the decision making process to buy or sell transfers to the plan from the trader. Since the plans are created when the person does not have inside information, and provide for the execution of a transaction in the future under the plan, they can constitutes an affirmative defense to insider trading claims.

The First Criminal Case>

While the Rule has been popular, there have been abuses. This is illustrated by the first criminal prosecution tied to the Rule and illustrated by the actions filed first by the U.S. Attorney’s Office for the Central District of California and later the SEC. U.S. v. Terren Peizer, Case No. 2:23-cr-89 (C.D. Cal. Filed February 23, 2023): SEC v. Peizer, Civil Action No. 2:23-cv-01511 (C.D. Calif. March 1, 2023).

Each case names as Defendant Terren S. Peizer, the founder and Executive and Chairman of the Board of Ontrak, Inc., a virtualized outpatient healthcare treatment company. The SEC action also incudes Acuitan Group Holdings, LLC, an entity controlled by Mr. Peizer. The cases center on trading while in possession of material non-public information in the shares of Ontrak.

Onrak is a behavioral health firm, according to the allegations in the SEC complaint. It contracts with health plans to identify members whose chronic disease will improve with behavior change. The company provides the members with solutions. Ontrak has suffered significant losses since its founding in 2003. By March 2021 its business was dependent on three large customers.

From May through August 2021 Mr. Peizer adopted two Rule 10b-5-1 trading plans. He used those plans to sell 641,357 shares of Ontrak. At the time of the transactions Mr. Peizer knew that in August 2021 when a large customer left Ontrak the share price dropped significantly. He also knew prior to the adoption of the two Rule 10(b)-5-1 trading plans that another large shareholder was considering leaving Ontrak. The criminal case contains counts of securities fraud, insider trading and criminal forfeiture. SEC case alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The cases are pending.

Amendments to the Rule

The Commission crafted amendments to the Rule in an effort to avert abuses like the one at the center of the case above. The amended rule must meet several new requirements which include:

Cooling off periods: These apply to directors and officers and generally require waiting 90 days after the adoption of the plan or two business days following disclosure in certain periodic reports of the issuer’s financial results for the fiscal quarter in which the plan is adopted or modified; for persons other than issuers or directors and officers the period is 30 days before trading can commence.

Representation: Officers and directors must represent that they are not aware of any inside information and adopted the plan in good faith.

Overlapping plans: Only issuers can use multiple overlapping plans.

Good faith: All persons entering into a plan must act in good faith regarding it.

Disclosures: Registrants must make quarterly disclosure regarding the use of a plan and certain other written trading arrangement.

Policies: A registrant is also required to annually disclosure its insider trading policies and procedures.

Tabular and narrative disclosures: Certain tabular and narrative disclosures about awards of options close in time to the release of inside information must also be disclosed.

Form 4 & 5 filers: These files must indicate that they intend to satisfy the affirmative defense conditions of the Rule.

The effective date of the new Rule is 60 days following publication of the modifications.

Conclusion

Rule 10b-5-1 plans have proven popular. At the same time some have abused the rule as illustrated by the case discussed above. The amendments are designed to tighten the rules governing the plans and add disclosure. Accordingly, the new provisions are designed to give better definition to the manner in which the plans are to be implemented and maintained and, for the first time, add transparency to their use.

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by T. GormanPosted on Posted in SECActions

The Senate voted to overturn a rule which permits pension managers to consider ESG factors when making investments last week. The President previously started he supports the rule and would veto the action. This is the latest controversy surrounding the well known investment considerations despite the fact that they are at best not well defined and are viewed by many as vague and open ended.

Be careful, be safe this week.

SEC Enforcement – Filed and settled actions

During the last week the Commission filed 6 new civil injunctive actions and 3 new administrative proceedings, exclusive of 12j, default, conflicts (which are included in tabulating the number of cases), tag-a-long and other similar proceedings.

SARs: In the Matter of Cambria Capital, LLC, Civil Action No. 3-21319 (March 2, 2023) is a proceeding which names the dual registered broker-dealer/investment advisor as a Respondent. The firm specialized in assisting clients liquidating holdings in microcap securities. Over a period of two years, beginning in March 2017, the firm repeatedly failed to file SARs when faced with red flags. Those included suspicious activities such as the liquidation of large amounts of microcap stock followed by the immediate transfer out of the funds. The Order alleges violations of Exchange Act Section 17(a) and Rule 17a-8. Respondent resolved the charges, consenting to the entry of a cease-and-desist order bae on the provisions cited in the Order and a censure. The firm also agreed to pay a civil penalty of $100,000

Undisclosed perks: In the Matter of The Greenbrier Companies, Inc., Adm. Proc. File No. 3-21318 (March 2, 2023) names the firm, an international supplier of equipment and services to global freight transportation markets, as a respondent. The Order alleges that former CEO William A. Furman, and other executives, failed to disclose certain information regarding related person transactions as required. Specifically, in proxy statements from 2017 to 2022 Greenbrier failed to disclose about $320,000 in perquisites to Mr. Furman and others for travel related expenses. Those filings also failed to disclose that the former CEO received about $1.6 million of the $3 million total Greenbrier paid for the charter of his private aircraft. The internal accounting controls also failed to require the recording in the books and records of certain travel-related personal security expenses as perquisites. The firm took remedial steps considered by the Commission regarding the controls over recording expenses in resolving this matter. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(a)(1)(A), 13(a)(2)(B) and 14(a). Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, Greenbrier will pay a penalty of $1 million. See also In the Matter of William A. Furman, Adm. Proc. File No. 3021317 (March 2, 2023)(action against former CEO; resolved with the entry of a cease-and-desist order based on same Sections as above and payment of a penalty in the amount of $100,000).

Insider trading: SEC v. Peizer, Civil Action No. 2:23-cv-01511 (C.D. Calif. March 1, 2023) is an action which names as defendants Terren S. Peizer, the founder and Executive and Chairman of the Board of Ontrak, Inc., a virtualized outpatient healthcare treatment company, and his personal investment vehicle, Acuitan Group Holdings, LLC. The action centers on trading while in possession of material non-public information in the shares of Ontrak. The company is a behavioral health firm. It contracts with health plans to identify members whose chronic disease will improve with behavior change. Ontrak then provides the members with solutions. Ontrak has suffered significant losses since its founding in 2003. By March 2021 its business was dependent on three large customers, one of whom was Customer A. When that customer left, the share price of Ontrak dropped 44%. From May through August 2021 Mr. Peizer adopted two Rule 10b-5-1 trading plans. He used those two plans to sell 641,357 shares of Ontrak. At the time of the transactions Mr. Peizer knew that in August 2021 when a large customer left Ontrak — Customer A — the share price dropped significantly. He also knew prior to the adoption of the two Rule 10(b)-5-1 trading plans that another large shareholder was considering leaving Ontrak. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Central District of California filed parallel criminal charges.

Offering fraud: SEC v. Woodward, Sr., Civil Action No. 1:23-cv-00112 (D. Hawaii Filed March 1, 2023). Steven Keith Woodward, Sr. is the sole defendant in this investment fraud action. He has been a registered representative with four registrants. He has been a registered investment adviser. He was also terminated by a broker-dealer for failing to comply with its advertising rules. The same year the Hawaii Business Registration Division sanctioned him for giving investment advice that was misleading. Beginning in 2016, and continuing for the next four years, Defendant operated Morganwood Ltd. which he also controlled. The firm issued promissory notes over the period, raising $6 million from about 30 investors. Investors were assured Mr. Woodward had a history of making safe investments with returns of 15% to 30% per year. Investments were also insured investors were told. In reality, the investor funds were put into risky investments; virtually all investments turned into losses. During the years the scheme continued Defendant Woodward kept the majority of the investor contributions liquid. That permitted him to pay fantom returns to some investors as monthly payments. Other investors were furnished with false account statements. Eventually, there was insufficient cash to make even small payments to investors. In July 2021 Mr. Woodard penned a letter to investors stating that all the money was gone. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 25654 (March 1, 2023).

Breach of duty: SEC v. Kane, Civil Action No. 1:23-cv-00371 (M.D. Pa. Filed March 1, 2023) names as defendants a father and son, Kevin and Sean Kane, each of whom was employed by a dual registered broker-dealer/investment advisory firm from 2018 through 2021. On February 23, 2021, the Investment Advisory firm terminated father and son for violating firm policies and procedures. Subsequently, Defendants continued to contact clients of the firm from which they had been terminated. In various calls they represented that they voluntarily ended their association with the firm, told clients they continued to be employed, failed to alert clients to their termination and placed phone calls to their former employer in which they pretended to be the client to effect securities transactions. All of these representations were false. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 25655 (March 1, 2023).

Offering fraud: SEC v. Riley, Civil Action No. 1:23-cv-00273 (E.D. Va. Filed March 1, 2023) is an action which names as respondent Ryan R. Riley, a registered broker-dealer and investment adviser. He is also the sole member, owner and employee of Green Light Energy, LLC, Mustang Oil & Gas, Inc. and Calibre Consulting Group, LLC. The latter is a Virginia registered investment adviser. Over a five-year period, beginning in 2014, he solicited investments for his companies, raising over $48,000 from about 12 individuals using a series of misrepresentations. He also misused client funds, diverting portions of the money to his personal use. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1) and (2). The U.S. Attorney’s Office for the Northern District of Virginia filed parallel criminal charges. See Lit. Rel. No. 25653 (March 1, 2023).

Misappropriation: SEC v. Holts, Civil Action No. 1:23-cv-00081 (E.D. Tx. Filed February 27, 2023 (E.D.Tx. February 27, 2023). Defendant Bradley Morgan Holts, resident of Beaumont, Texas, holds a Series 7 and 66 licenses from FINRA. From October 2022 he was associated with a broker-dealer. He had worked for broker-dealers since 2010. In 2020 three investors came to Defendant Holts. They had applications to invest with Invesco. The total amount invested was about $1.9 million. Defendant Holts invested the funds as directed. Early in 2021 the broker opened an account titled “Bradley Morgan Holts d/b/a Invesco Investment Texas”. The account opening documents listed Defendant Holts’ home address. Invesco did not have a relationship with Invesco Investment Texas. Subsequently, the three investors returned. The sum to be invested was far less than earlier – $187,382. The funds were not invested as earlier, despite representations by Defendant Holts. To the contrary, the money went to the Invesco Investment Texas account – actually Mr. Holts. The investors have never been repaid or recovered. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

Fraudulent trading – crypto: SEC v. Singh, Civil Action No. 23-cv-1691 (S.D.N.Y. Filed February 28, 2023) is an action which names as defendant Nishad Singh, the head of engineering at Alameda and later FTX who resides in Hong Kong and The Bahamas. Mr. Singh is alleged to have participated with Caroline Ellison, Zixiao Wang and Samuel Bankman-Fried in executing a scheme to defraud investors who utilized FTX Trading, Ltd. a crypto asset trading platform. The scheme is detailed in earlier posts regarding FTX here. He is also a named defendant in the parallel criminal action filed by the U.S. Attorney’s Office for the Southern District of New York.

Australia

Remarks: Australian Securities and Investment Commission Chair Joe Longo delivered remarks at the Australian Governance Summit on March 2, 2023 (here). His remarks focused on the Commission’s work in the area of enforcing the duties of directors.

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