This Week In Securities Litigation (Week ending Feb. 16, 2018)

Each SEC Commissioner joined a statement saying “Thank you Jacob” and fair well to perhaps the longest tenured staff member at the agency, Jacob Stillman. Jake joined the staff in 1962 and served in various capacities for 55 years. For 17 years he served as Solicitor.

The Division of Enforcement announced a new self-reporting — cooperation initiative targeted at investment advisers who are paid 12b-1 fees without disclosing that fact to their investors and then purchased mutual fund shares that pay those fees for their clients rather than less expensive shares. The proposal, called SCSDI, is reminiscent of the Division’s earlier, successful initiative regarding muni bond market participants known as MCDCI.


Remarks: Commissioner Robert J. Jackson Jr. delivered remarks titled Perpetual Dual-Class Stock: The Case Against Corporate Royalty, San Francisco, Calif. (Feb. 15, 2018). His remarks reviewed dual-class stock, the fact that it can perpetuate control of the firm through generations and the valuation of dual class firms (here).

Remarks: Commissioner Kara Stein delivered remarks at Stanford University titled Mutualism: Reimagining the Role of Shareholders in Modern Corporate Governance (Feb. 13, 2018). Her remarks discussed the relationship between shareholders and corporations, noting that shareholder empowerment is essential (here).

Budget: The Commission issued a release titled Investor Protection, Capital Formation and Market Integrity are Top Priorities in SEC Budget Request (Feb. 12, 2018). The release, as reflected by the title, discusses key priorities regarding the proposed budget (here).

SCSDI: The SEC’s Division of Enforcement announced a new cooperation initiative addressed to investment advisers who failed to disclose conflicts arising from the receipt of 12b-1 fees from mutual funds. In essence, the initiative offers advisers who failed to make the proper disclosures significant incentives to self-report, repay investors and resolve the issues in a manner which is reminiscent of Division’s very successful outreach to those involved with municipal offerings – the Municipalities Continuing Disclosure Cooperation Initiative or MCDCI through which 85 firms self-reported in 2016. See Share Class Selection Disclosure Initiative (Feb. 12, 2018)(here).


Cryptocurrencies: The agency issued a warning to customers to avoid pump-and-dump schemes involving thinly traded or new “alternative” virtual currencies, digital coins or tokens.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 1 civil injunctive case and 2 administrative proceedings, excluding 12j and tag-along proceedings.

Financial fraud: SEC v. Commonwealth Advisors, Inc., Adm. Proc. File No. 3:12-cv-00700 (M.D. La.) is a previously filed action which named as defendants the registered investment adviser and Walter A. Morales. The complaint alleged that the Defendants defrauded investors by concealing losses from investments tied to residential mortgage-backed securities in 2012. To resolve the action the firm consented to, and the Court entered, a permanent injunction based on Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4) as to each Defendant. In addition, as to the firm the injunction is also based on Advisers Act Sections 204 and 207 and as to Mr. Morales on Advisers Act Sections 206(4) and 207. The order also revokes Commonwealth’s registration as an investment adviser and bars Mr. Morales from associating with an investment adviser with the right to reapply after five year. Mr. Morales will pay a penalty of $130,000. See Lit. Rel. No. 24050 (Feb. 15, 2018).

Offering fraud/misappropriation: SEC v. Southridge Capital Management LLC, Civil Action No. 10-cv-1685 (D. Conn.) is a previously filed action which named as defendants the firm and its principal, Stephen Hicks. The complaint claimed that the investor funds were not utilized in accord with representations made to investors. It also alleged that those investors were defrauded by the transfer of fund assets without notice to them – a claim Defendants admitted and on which the Court entered findings. The Court entered, by consent, a permanent inunction prohibiting each defendant from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as Advisers Act Sections 206(1), 206(2) and 206(4). Defendants were also directed to pay disgorgement of $7,864,064 and prejudgment interest. Mr. Hicks was directed to pay a penalty of $5 million. See Lit. Rel. No. 24049 (Feb. 15, 2018).

Offering fraud: SEC v. Batchelor, Civil Action No. 1:18-cv-0650 (N.D. Ga. Filed Feb. 13, 2018) is an action which names as a defendant, Timothy Batchelor. Beginning in October 2014, and continuing over the next year, Defendant raised about $2.4 million from four investors who were told the money would be used to invest in portfolio companies tied to national security. Portions of the funds were used for firm expenses but about half was diverted to the unauthorized personal expenses of the Defendant. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Adviser’s Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 24045 (Feb. 13, 2018).

Financial fraud: SEC v. Block, Civil Action No. 16 civ. 7003 (S.D.N.Y.) is a previously filed action which named as defendants Brian Block, former CFO of American Realty Capital Properties, a publicly traded REIT, among others. The complaint alleged that Mr. Block overstated the financial performance of the firm by inflating a key metric used by analysts and investors to assess the company. The Court entered a final judgment by consent which imposed a permanent injunction based on Exchange Act Sections 10(b) and 13(a). An officer and director bar was also imposed. Mr. Block was also ordered to pay a civil penalty of $160,000. Defendant Block agreed to the entry of an order suspending him from appearing and practicing before the Commission as an accountant. Previously, Mr. Block and Lisa McAlister, the chief accounting officer, were charged in a parallel criminal case. Mr. Block was found guilty by a jury and sentenced to serve eighteen months in prison and pay a $100,000 fine. Ms. McAlister pleaded guilty to securities fraud and related charges. She also settled with the SEC. See Lit. Rel. No. 3921 (Feb. 14, 2018).

Insider trading: In the Matter of Ara Chackerian, Adm. Proc. File No. 3-18370 (Feb. 12, 2018) is a proceeding centered on the acquisition of Emeritus Corporation, a senior living service provider, by Brookdale Senior Living Inc., announced on February 20, 2014. Respondent Chackerian was the sole member of an LLC that invested in early-stage private companies, including Home Medical Solutions, LLC, a medical product distribution company on whose board he sat. In September 2013 Emeritus began merger discussions with Brookdale. By year end the talks had progressed. Since the pending merger had significant consequences for In Home, a senior officer of an Emeritus subsidiary informed the COO of Home Medical who then told that firm’s CEO. In Home Medical’s COO also related the information to Mr. Chackerian in his capacity as an officer and board member of In Home Medical. Respondent then purchased shares of Emeritus prior to the deal announcement. Following that announcement which caused the share price to increase by 36% the shares were sold. The Order alleges violations of Exchange Act Section 10(b). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order. He also agreed to pay disgorgement of $157,207.80, prejudgment interest of $18,635.55 and a penalty of $157,207.80.

Trading: In the Matter of Deutsche Bank Securities Inc., Adm. Proc. File No. 3-18367 (Feb. 12, 2018). The action is based on the trading of commercial mortgage backed securities from 2011 to 2015 by the registered broker-dealer and the head of its trading desk for those securities, Benjamin Solomon. During the time period the firm traded CMBS in the secondary market.

During the period certain salespeople made false and misleading statements, often in coordination, while negotiating with customers. In many instances the misrepresentations were made through electronic chats or were captured on Bloomberg chats. Examples of the misrepresentations are cited in the Order. Those include instances where during negotiations over the price, the firm sales person or trader misrepresented the price paid for the security in order to induce the customer to make a purchase at a specific price. In other instances where there were negotiations regarding the sale of a bond, the sales person would falsely claim to be negotiating its acquisition from a counter-party at a certain price. Based on this conduct the Order alleges that those involved violated Securities Act Section 17(a) and Exchange Act Section 10(b). The firm failed to properly implement its policies and procedures as to specific types of securities. In resolving the matter Deutsche Bank cooperated with the Commission’s investigation and undertook remedial actions. The bank implemented improved procedures and conducted an internal investigation. The firm also agreed to certain undertakings which include making payments to certain customers totaling $3,727,743 – the amount of profit made by the bank. In resolving the action the Bank agreed to the entry of a censure, to pay disgorgement of $1,476,245, prejudgment interest of $123,741 and a penalty of $750,000. Mr. Solomon will be suspended from the securities business for a period of 12 months and pay a penalty of $165,000.

Criminal Cases

Offering fraud: U.S. v. Lattanzio, No. 2:15-cr-00446 (D. N.J.) is an action against Nicholas Lattanzio. Following a trial Mr. Lattanzio was found guilty by a jury on two counts of wire fraud and two counts of securities fraud. The convictions are based on the Defendant’s scheme, implemented from June 2013 through November 2014, during which time he raised millions of dollars in up front fees for Black Diamond Capital Appreciation Fund L.P. Investors were told the fees were for certain investment opportunities that never materialized. Rather, Defendant diverted the funds to his own use. The date for sentencing has not been set.

Offering fraud: U.S. v. Chahal, No 1:18-mj-70 (E.D. Va.) is an action which names Amrit Jaswant Singh Chahal as a defendant. Mr. Chahal, in conjunction with his firm, Kane Capital Investment Group, LLC, falsely represented to investors that they had earned returns of between 28 and 34% when in fact he had suffered substantial losses as a result of his management of their funds. The account statements furnished to the investors were false. Payments made to them came from the funds of other investors. The Defendant has been charged with wire fraud. The case is pending.

FCPA – Anti-corruption

U.S. v. DeLeon, No. 4:17-cr-00514 (S.D.Tx.) is an action which names as defendants Luis De Leon, Nervis Villalobos, Cesar Rincon, Rafel Reiter and Alejandro Isturiz. Each defendant is a citizen of Venezuela. Mr. De Leon is also a U.S. citizen. Defendants De Leon, Villalobos, Reiter and Isturiz are each charged with one count of conspiracy to commit money laundering. Defendant Cesar Rincon is charged with two counts of conspiracy to commit money laundering. In addition, Defendants De Leon, Cesar Rincon and Reiter are charged with four counts of money laundering while Mr. Villalobos is charged with one count of money laundering and Mr. Isturiz is charged with five counts of money laundering. Defendants De Leon and Villalobos were also charged with one count of conspiracy to violate the FCPA.

The scheme on which the charges are based took place between 2011 and 2013. Each of the defendants was an official of Petroleos de Venezuela S.A. or PDVSA, the state owned and controlled energy company, one of its subsidiaries or at another Venezuelan government agency or instrumentality. Collectively the Defendants were known as the management team – they had significant influence with PDVSA. The team solicited PDVSA vendors for bribes and kickbacks. The proceeds of the scheme were then laundered through a series of international transactions. Three of the defendants are being held in Spain, while one has been extradited to the U.S. and one is at large.

Roberto Rincon and Abraham Shiera sent over $27 million in bribe payments to an account in Switzerland in connection with the scheme. Messrs. Rincon and Shiera previously pleaded guilty to FCPA charges in connection with a scheme to bribe PDVSA officials. The two men paid the bribes for their firms to ensure that each was placed on PDVSA bidding panels and given priority on payments. The two men are awaiting sentencing.

Hong Kong

Algorithmic trading systems: The Securities and Futures Commission fined Interactive Brokers Hong Kong Ltd. $4.5 million in connection with its electronic and algorithmic trading systems. In 2015 and 2016 there were two instances in which the system caused market disruptions as the share price of the securities involved were pushed up significantly, one by over 48% and a second by about 126%. The market disruptions occurred because of the manner in which the program executed the trades and in part because the volume of trading was not monitored. In resolving the action the SFC considered the fact that it worked with the senior management of the firm to resolve the situation and that the firm cooperated.


Algorithmic Trading: The Financial Conduct Authority published a report on the supervision of algorithmic trading. The report defines the practice, reviews the development and testing process, discusses risk controls along with governance and oversight and covers market conduct (here).

Tagged with: , , ,