When discussing SEC Enforcement many focus on the type of cases, the number of matters filed and the amounts of money ordered to be paid. Offering frauds, insider trading and financial fraud are some of the key areas that are discussed. Yet the underlying theory for virtually all of the cases brought by the agency is disclosure. Fundamentally, the SEC is a disclosure agency, ensuring that investors are furnished with the material facts.

The recent case involving the former Chairman of the Board of Directors of Nissan Motor Co. Ltd. centers on the question of disclosure. Specially, the case focuses on the claimed efforts by the former Chairman, with the assistance of Gregory Kelly, a Director and others to conceal the full amount of his compensation to avoid adverse public reaction. SEC v. Ghosn, Civil Action No. 1:19-cv-08798 (S.D.N.Y. Filed Sept. 23, 2019).

Nissan is a Japanese auto manufacturer whose securities are traded on the Tokyo Stock Exchange and has sponsored ADRs that trade in the U.S. in the OTC markets and through brokerage firms. Nissan is exempt from registering its securities in the U.S. as long as translated English language copies of its foreign securities filings are available on the internet for U.S. investors. The firm is also required to publish English translations of its annual reports along with the financial statements, interim reports, and press releases. The company published its annual reports in accord with these requirements as well as those of Japan’s securities regular. That report includes a corporate governance section disclosing director compensation.

Prior to 2009 Japanese firms such as Nissan were only required to disclose the total amount of compensation paid to all directors. After 2009 firms were required to include in the corporate governance section of the report individual director compensation where it exceeded 100 million yen.

Following the change regarding the disclosure of director compensation, Mr. Ghosn became concerned about possible criticism in the Japanese and French media if his total compensation was disclosed. To avoid this result, the Chairman and his subordinates executed a scheme to defer portions of the compensation he awarded himself each year. Thus, for example, the company annual report for fiscal 2009 stated that Mr. Ghosn’s compensation was $$13 million. The additional $2 million he was awarded was not disclosed. In 2010 the firm’s annual report stated that Mr. Ghosn’s compensation was $11 million. The additional $9 million he was awarded was not disclosed. Messrs. Kelly and Ghosn both approved the filing of the reports. This pattern continued through fiscal 2017.

During this process Mr. Ghosn began searching for ways to be paid the undisclosed remainder of his compensation. After considering several options he, and those assisting him, settled on the idea of using letter agreements which would memorialize the amounts as postponed compensation. Included in the letter agreement was a provision which protected the executive from currency price changes.

The first was executed in April 2011, backdated, and covered the undisclosed compensation for 2009 and 2010. The letter stated that the amount was for compensation that had been postponed. It included a chart showing the amounts to be paid. Payments were to begin in the first year after his retirement. A similar letter was executed in 2013. Records were also prepared to memorialize the amounts of deferred compensation for the period 2013 through 2017. Mr. Ghosn was assisted with this process by certain employees, including Mr. Kelly.

During the period, steps were taken to secure payment of the deferred compensation. For example, misrepresentations were made to induce the firm to record sums as expenses to a company program. Later, when the shareholders voted to discontinue the Nissan pension program for directors, Mr. Ghosn arranged to have the amount due him increased by about $50 million. That sum was actually disclosed in the reports of the company based on backdated documents.

Over the period from 2009 through 2017 Mr. Ghosn had total fixed compensation of $186 million of which $94 million was deferred. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See also In the Matter of Nissan Motor Co., Ltd., Adm. Proc. File No. 4086 (Sept. 23, 2019)(failed to disclose compensation; settled with cease and desist order based on Exchange Act Section 10(b) and the payment of a $15 million).

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ICOs have been a key focus of SEC enforcement in recent years. Initially the Commission brought a series of these actions while cautioning investors with tools such as the “Howey” coin presentation, used to illustrate the risks. At the same time Chairman Clayton warned market professionals to enforce their gatekeep obligations or risk a visit from the staff. While crypto coins and digital assets have continued, the market that started as a way to “get off the grid” is now focusing at least in part on becoming mainstream.

Nevertheless, the Commission has continued to bring actions centered on digital offerings. The latest is one based on a coin that tied to an adult fantasy market. SEC v. Lucas, Civil Action No. 1:19 -cv-08771 (S.D.N.Y. Filed Sept. 20, 2019).

Defendant Jonathan Lucas is the founder and CEO of Fantasy Market, an unincorporated now defunct entity which was an online market place. In August 2017 Mr. Lucas created and launched the market and tied it to social media. Subsequently, he created the FM Whitepaper to generate investor interest in the Fantasy Market platform and an ICO. The offering was to be in two stages, a two week presale followed by a four week public token sale.

The FMT tokens were issued on the ERC-20 blockchain with a conversion ratio of 5 for $1.00. The sales were advertised in the U.S. and abroad. The Whitepaper used for the sales urged investors to purchase early at discount prices.

The Whitepaper stated that there would be an aggressive repurchase program through which investors could profit. The price was expected to increase over 600%, according to the paper. Investor funds would be pooled in digital asset wallets through which the investor could profit. The interests offered were in fact securities.

Investors were induced to purchase the securities with a series of misrepresentations. Those include representations about the development of the Fantasy Market’s platform and the use and amount of the proceeds.

In conducting the offering Mr. Lucas highlighted the credentials and talents of FM employees. The founding team was supposedly a unique group of industry specialist that had extensive experience working with the most talented women in the online performance industry. Three of the team members identified did not exist. Mr. Lucas also falsified his biography.

In investors were told that a pre-sale was held in which 150 institutional and accredited investors filled out the legal paperwork to participate. The claim was false. A representation by Mr. Lucas that about $4.5 million had been raised was also false as were claims regarding the proposed use of the proceeds. In fact, the offering only raised about $63,000 from 100 investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b).

To resolve the case Defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. He also agreed to the entry of a five year officer director bar and a five year conduct based injunction prohibiting any offering of securities except for personal use. Mr. Lucas will pay a penalty of $15,000. See Lit. Rel. No. 24607 (Sept. 23 2019).

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