by T. GormanPosted on Posted in SECActions

Cornerstone Research published another report providing insight into a corner of the markets. The new report is titled Accounting Class Action Filings and Settlements, 2023 Review and Analysis. As the title states, the Report provides an overview of the case activity in the accounting class action market.

In 2023 the number of filings increased compared to the last two years. Last year 56 new accounting class action cases were filed. The prior year 51 actions were filed while in 2021 the number of accounting class actions initiated was 46. The largest number accounting class actions filed in one year, according to the Report which had statistics tracing back to 2014, was 70 in 2020.

Most of the accounting class actions filed in 2023 involved restatements and allegations centered on the internal controls of the company, Cornerstone concluded. In 2023 38% of the cases filed involved a restatement. That represents an increase over 2022 when 33% of the new accounting class actions filed involved a restatement. And, in 2021 only 11% of the cases filed included a restatement.

Interestingly, in 2023 38% of the new cases filed had no claims centered on internal controls. That represents a decline from the prior year when 51% of the new actions filed had no allegation regarding internal controls, although in 2021 Cornerstone determined that 61% of the complaints no allegation regarding internal controls.

Finally, the number of settled accounting cases decreased in 2023. Indeed, the number of settled actions last year was below the average for the prior nine years.

 

by T. GormanPosted on Posted in SECActions

The traditional free-riding scheme has been around for years. It takes advantage of the instant credit broker-dealers often extend to new accounts by immediately using the money to trade and eventually taking the money. The schemes are typically short-lived. A variation of the scheme employed recently, however, continued for years. SEC v. Treusch, Civil Action No. 1:24-cv-01050 (E.D.N.Y. Filed February 11, 2024).

Defendant Travis Treusch agreed to help his cousin, Christopher Flagg and his partner, Eduardo Hernandez continue to implement a sophisticated version of the typical free riding scheme. In this version Defendants essentially stole the instant credit extended by the broker-dealer. The account was then abandoned. The scheme was built on the following steps:

Defendants Flagg and Hernandez converted the instant deposit credits into cash for themselves; they used a trading strategy that involved executing matched trades in illiquid options between unfunded accounts they designated as the “loser” at certain brokers and profit generating or winner at others.

Since Defendants controlled each side of the transaction involving matched trades, they were able to execute the transactions at artificial prices. By doing this repeatedly they generated trading profits in the Winner Accounts and losses in the Loser Accounts.

Defendant Treusch joined his cousin and the scheme in August 2020 after it had been running for about two years. Mr. Treausch recruited dozens of new employees for the scheme and instructed them in the trading mechanics. Cousin Treausch was paid $300 to $500 for each loser account. The complaint alleges violations of Exchange Act Sections 10(b) and 20(e).

Mr. Treusch resolved the matter, consenting to the entry of a permanent injunction based on the Sections cited in the complaint and a conduct injunction. The duration of the conduct injunction and the amount of monetary relief will be determined by the Court. See Lit. Rel. No. 25962 (April 2, 2024).

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