SEC Enforcement Trends: First Quarter 2024, Part II
This is the second installment of a four part series on trends in SEC enforcement reflected in the actions filed during the first quarter of 2024. Part I of this series discussed the number of cases filed by the Commission during the quarter and identified the largest categories of actions (here). It also provided comparisons to earlier periods.
This segment of the series provides examples of cases from each of the five largest categories of actions initiated during the first quarter of 2024. Those were books and records, offering fraud actions, those based on false statements, actions focused on manipulation and those involving financial frauds. Examples of the actions in each group are summarized below.
Books and records
There were sixteen actions filed in the first quarter based on deficient books and records. This is the largest group of cases initiated during the first quarter of 2024. The example below is typical of the cases in this group.
In the Matter of Certain Broker-Dealer Practices, Adm. Proc. File No. 11270 (February 9, 2024) is a proceeding under which 16 firms agreed to pay over $81 million and admitted violations tied to record keeping. The firms engaged in longstanding practices of using unapproved communication methods known as off-channel communications. The market professionals involved admitted that from at least 2019 and 2020 their employees used personal text messages about business. The required records regarding the communications and advice given or proposed were not maintained or preserved. The Orders alleged, as appropriate, violations of Exchange Act Section 17(a) and Rule 17a-4 and Advisers Act Section 204 and Rule 204-2. In resolving the proceedings, Respondents consented to the entry of a cease-and-desist order based on the provisions cited, a censure and a financial penalty, along with admitting the facts in the Order. Respondents also agreed to implement certain procedures.
Offering fraud
Offering fraud cases typically constitute one of the largest groups of cases filed by the Commission during any period. Over time the agency has filed a wide variety of these cases. Two examples are detailed below.
SEC v. Kapoor, Civil Action No. 1:23-cv-24903 (S.D. Fla. Filed December 27, 2023) is an action which names defendants: Rishi Kapoor, the CEO of Location Ventures until he was removed from that position in August 2023 and as the manager of URBIN; Location Ventures, LLC; URBIN, LLC and other affiliates. Location Ventures purportedly invested in real estate; URBIN claimed to invest in certain specialized real estate projects. Investors were told that Mr. Kapoor and his partners made a $13 million investment in the ventures. He used a plethora of entities to conceal the claimed investment. Potential investors were given budgets for various entities that were false. He also told investors that their money was segregated and not comingled. Both claims were false. As investor fund were shuffled among a long list of entities, the funds were comingled and Mr. Kapoor misappropriated part of the money. Eventually, the Location Ventures and URBIN projects stalled from a lack of funds. About $93 million had been raised from approximately 50 investors over a five-year period beginning in January 2018. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a). The case is in litigation. See Lit. Rel. No. 25921 (January 3, 2024).
SEC v. Prosper E Beyond Moore, Civil Action No. 1:24-cv-00242 (N.D. Ga. Filed January 18, 2024) is an action which names as defendants: a resident of Loganville, Georgia who did business as Prosperity Investment & Solutions, LLC, and the firm. Over a two-year period, beginning in late 2021, Defendants raised over $1.4 million from over 60 individuals. Potential investors were told that the firm was a large, reputable financial organization that could generate profits of 50% per month through a diverse range of investments. In fact, Defendants use the money for other investments and personal expenses. Defendants created false documents showing investor returns of over 10% per week and 40% per month. To the extent investor funds were invested, there were losses of over $67,000. The complaint alleges violations of Securities Act Section 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Defendants resolved the action by consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, Mr. Moore is barred from participating in the issuance, purchase, offer or sale of securities except for his personal account and an officer/director bar. The court will determine monetary penalties. See Lit. Rel. No. 25928 (January 18, 2024).
False statements
Enforcement actions centered on false statements is another long-standing area of focus for agency. Two examples are set forth below.
In the Matter of Northern Star Investment Corp.II, Adm. Proc. File No. 3-21838 (January 25, 2024) is a proceeding with names as Respondent an entity formed in 2020 which is a special purpose entity. It had no operations or business. In late January 2021 the firm completed an IPO of 40 million units priced at $10 each. In February 2021 the firm announced an agreement to merge with Apex Clearing Holdings, LLC. The Form S-1 filed for the deal denied that there had been substantive conversations involving the parities prior to the deal. In fact, the statement was not true. Conversations about a deal traced back months. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceedings Norther Star consented to the entry of a cease-and-desist or based on the Section cited in the Order. The firm also agreed to pay a penalty of $1.5 million. If, however, the company returns all the funds in its trust account to the investors by April 30, 2024, the Commission will not impose the penalty.
SEC v. Barbera, Civil Action No. 1:20-cv-10353 (S.D.N.Y.) is an action which names as defendant Carl Smith. The complaint alleged that over a three-year period, beginning in 2015, Defendant sold shares of Nanobeak Biotech Inc., using a series of false statements. The complaint also claimed that former company CEO, Jeremy Barbera, solicited and sold shares of the company using false and misleading statements. Mr. Smith resolved the matter, consenting to the entry of permanent injunctions based on Exchange Act Section 10(b). The final judgment imposed a penalty of $100,0900 and ordered the payment of disgorgement in the amount of $173,875 plus prejudgment interest of $23,470.5. See Lit. Rel. No. 25927 (January 18, 2024).
Market manipulation is yet another traditional focus for the Commission’s enforcement program. Interestingly, the two examples presented below focus on cases in which foreign nationals were alleged to have manipulating shares on the U.S. markets.
SEC v. Huang, Civil Action No. 24 Civ.028 (S.D.N.Y. Filed January 11, 2024) is an action which names as defendant Shanchun Huang, a resident of London and the CEO of Future FinTech Group, Inc., a firm whose shares are listed for on Nasdaq. Over a four-month period, beginning in 2020, Defendant placed very large, multiple trades in the shares of Future FinTech to push up the price. For example, at times he placed repeated limit orders with escalating prices. The point was to ensure that the share price would stay at $1 or more, the minimum price required by Nasdaq for a listing. In fact, Defendant did cause the share price to rise as a result of the trading. The complaint alleges violations of Exchange Act Sections 9(a)(2), 10(b) and 16(a). The case is pending. See Lit. Rel. No. 25924 (January 11, 2024).
SEC v. Rayat, Civil Action No. 1:21-cv-04777 (S.D.N.Y.) names as defendants Hamel Rayat, a Canadian citizen, Jatinder Bhogal and RempvaCare, Inc. and others. The complaint alleged a pump-and-dump market manipulation scheme and asserted violations of Securities Act Section 17(a) and Exchange Act Section 9(a)(2), 10(b), 15(d) and 20(b). Each Defendant resolved the action. Defendant Rayat consented to the entry of permanent injunctions based on each of the Securities Act and Exchange Act Sections cited in the complaint (except Section 15(d)). He will pay disgorgement of $1,270,352, prejudgment interest of $207,656 and a penalty of $1,270,352. Defendant Rayat also agreed to the imposition of an officer/director bar and from participating in any penny stock transaction. The final judgment as to Defendant Bhogal is based on each of the Sections cited except 20(b). He is also barred from serving as an officer or a director and participating in any penny stock offering. Mr. Bhogal, along with a relief defendant, will pay disgorgement of $1,136, 182prejudgment interest of $194,562 and a penalty of $669,687. The final judgment as to the company is based on each of the Sections cited in the order except 20(b). The company will pay a penalty of $500,000. See Lit. Rel. No. 25945 (February 27, 2024).
Financial fraud
Financial fraud actions, the last of the largest groups of cases filed by the Commission in the first quarter of 2024, is also a traditional focus of SEC enforcement. The two examples below involve a Cayman Island company and a start-up electric car company trying to launch the first EV truck from the huge car plant in Lordstown, Ohio.
In the Matter of Cloopen Group Holding Ltd., Adm. Proc. File No. 3-21844 (February 6, 2024) is an action which names the firm as a respondent. Cloopen is a Cayman Island company, based in Beijing. Its ADRs were listed on the NYSE but are now quoted over-the-counter. Shortly after the firm’s shares were first quoted on the NYSE in February 2021, two senior managers at the firm discovered that revenue had been overstated for the second and third quarters of 2012. Following an internal investigation, it was determined that for the third quarter revenue was overstated by about $2.8 million or 6% of total revenue and $1.8 million for the second quarter of 2021 or 4%. The firm subsequently announced the findings. The price of its ADRs dropped 12.7 %. The Order instituting proceedings alleges violation of Exchange Act Section 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm cooperated with the Commission and took remedial steps which included forming an independent committee of the board of directors to investigate and terminating the senior managers involved. To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. A penalty was not imposed based on cooperation.
In the Matter of Lordstown Motors Corp., Adm. Proc. File No. 3-21875 (February 29, 2024) is an action which names as respondent the vehicle manufacture, currently utilizing the Lordstown, Ohio car manufacturing plant. The firm was founded by Scott Burns. The Order alleges that Respondents announced plans for the company to develop an electric car. The company, born of a SPAC transaction, would be the first to market a viable electric pickup truck. The company also filed audited financial statements. The claims regarding an electric vehicle were false, according to the complaint. In addition, the audit firm that prepared the company financial statements issued a false opinion – it was not independent since it had provided prohibited book keeping services to the company. The manufacturer filed for bankruptcy. The Order alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Sections 13(a) and 14(a). To resolve the matter the company consented to the entry of a cease-and-desist order based on the Sections cited above. The firm also agreed to implement certain undertakings and pay disgorgement of $25.5 million which is deemed paid by the entry of certain orders in the Chapter 11 proceeding in Ohio. See also In the Matter of Clark Schaefer Hackett & Co., Adm. Proc. File No. 3-21878 (audit firm for the company; charged with violations of Rule 2-02(b) of Regulation S-X and found to have caused Lordstown’s violations as detailed above; resolved by consenting to the entry of a cease-and-desist order and paying $50 million as a penalty).
Next: Examples of other significant cases filed during the first quarter of 2024