This Week In Securities Litigation (Week ending Feb. 2, 2017)
Spoofing pushed crypto currencies off the front page of securities litigation this week, although the SEC did bring another action centered on virtual currencies as well as a suspicious trading case. The DOJ filed six criminal spoofing cases this week – the most it has ever filed. The CFTC filed eight spoofing cases. Five of the CFTC civil spoofing actions paralleled the criminal cases brought by the DOJ. All of those cases are in litigation. The CFTC also filed three settled spoofing cases. Each named an international bank as a Respondent in an administrative proceeding.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 3 civil injunctive cases and no administrative proceedings, excluding 12j and tag-along proceedings.
Retail investors – misappropriation: SEC v. Polese, Civil Action No. 1:18-cv-10186 (D. Mass. Filed Jan. 31, 2018). Defendants James Polese and Cornelius Peterson were both investment adviser representatives and broker-dealer representatives, employed in the Boston, Massachusetts office of the Financial Institution. In 2012 Mr. Peterson began serving as an advisor to Client A who moved his account to the Boston office. Client A gave Mr. Peterson full discretionary authority. Client B had been with Mr. Polese for a period of eight years. Client B was retired, planned to donate his assets to charity and relied on the Defendants to recommend investments and update him on the status of his portfolio. In a series of transactions over three years the two Defendants defrauded Clients A and B out of thousands of dollars. For example, in 2014 Mr. Peterson became a director of a private fund that was raising money for a wind-farm. The fund was not affiliated with the Financial Institution. The Financial Institution consented to Mr. Peterson serving as a director of the fund – a firm requirement. To secure approval Mr. Peterson represented he would not solicit Financial Institution clients to invest in the private fund. At the time he made that representation, Mr. Peterson had already caused Client A to invest $100,000 in the private fund. In addition to being an unauthorized investment, the private fund investment was contrary to the client’s stated investment objectives and risk tolerances. Later the two Defendants used the client’s account without his permission as collateral for a loan the private fund took out. Subsequently, each Defendant took $50,000 from Client B’s account – but to fund the transactions Mr. Peterson wired out $350,000 and had the excess funds sent to himself. Finally, in the spring of 2017 Mr. Polse misappropriated over $930,000 from Client B’s account. The Financial Institution discovered the transaction. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 204, 206(1) and 206(2). The case is pending. The U.S. Attorney’s Office for the district of Massachusetts filed a parallel criminal action. See Lit. Rel. No. 24037 (Jan. 31, 2018).
Crypto currency: SEC v. AriseBank, Civil Action No. 3:18-cv-00186 (N.D. Tx. Unsealed Jan. 29, 2018). The action names as defendants AriseBank, an unincorporated entity based in Dallas, Texas, and its CEO Jared Rice, and COO Stanly Ford. AriseBank was founded by Defendants Rice and Ford in March 2017. The firm began selling its AriseCoin in October 2017 with an “Elevator Whitepaper” – an abridged offering document. By December 26, it claimed to have raised over $400 million and commenced its ICO with a goal of raising an additional $500 million. When soliciting investors three key claims were made. First, investors were told that the interests being purchased were not securities and that AriseBank was gearing up to fight the SEC. Second, AriseBank claimed that it was acquiring a 100 year old bank and that it could offer customers FDIC insured accounts. Third, AriseBank claimed that it could offer an AriseBank branded VISA card that would permit customers to pay for goods and services using any of 700 different virtual currencies that they could hold in their AriseBank account. Each claim was false. Finally, defendants failed to inform potential investors about the criminal history of Defendant Rice. Mr. Rice is currently on probation for felony theft and tampering with government records. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(2) and Section 10(b). The court entered a freeze order as to each Defendant and has appointed a receiver. The Commission is urging those who invested to contact the agency.
Manipulation: SEC v. Dynkowski, Civil Action No. 1:09-361 (D. Del.) is a previously filed action against Richard Bailey a former officer of GH3 International, Inc. and others. The action centered on a pump-and-dump scheme involving the manipulation of GH3’s common stock in which the Defendants allegedly made over $700,000. Mr. Bailey settled with the Commission, consenting to the entry of a permanent injunction based on Exchange Act Section 10(b) and Securities Act Sections 5 and 17(a). As part of the settlement Mr. Bailey agreed to the entry of a penny stock bar and to be barred from serving as an officer or director of a public company. Monetary relieve will be determined at a later date based on a motion of the SEC. See Lit. Rel. No. 24036 (Jan. 30, 2018).
Unregistered offering: SEC v. Sonfield, Civil Action No. 08-cv-2351 (S.D.Tex. Filed July 29, 2008) is a previously filed action action against attorney Jason Landess, Robert Sonfeld and others based on an unregistered offering of securities. To resolve the action (and conclude the case) the Court entered final judgments by consent against each defendant. In addition, Mr. Landess will pay a penalty of $25,000 while Mr. Sonfeld will pay $6,500. See Lit. Rel. No. 24034 (Jan. 25, 2018).
Suspicious trading: SEC v. One or More Unknown Traders in the Securities of Bioveratlv, Inc. Civil Action No. 18-cv-00701 (S.D.N.Y. Filed Jan. 26, 2018) is an action centered on the acquisition of Bioverativ, Inc. by Sanofi, announced on January 22, 2018. Following the deal announcement the share price of Bioveranti increased by about 61.9%. Beginning on January 12, 2018, and continuing up to January 19, 2018, one or more traders purchased 1,610 out of the money Bioverativ call options. The options had strike prices between $65 and $75 with an expiration date of February 16, 2018. On the date of the deal announcement Defendants sold 732 of the option contracts for a profit of about $2,518,622.70. An additional 75 contracts were sold the next day yielding profits of $207,825. The remaining options of the traders are valued at about $2.2 million. The trades were made through an account in Zurich, Switzerland in the name of Credit Suisse (Switzerland), Ltd. and executed through an omnibus account at CSSU. CS Ltd. provides its clients access to the U.S. markets through the CS Omnibus Account. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The emergency order obtained by the Commission requires the traders to repatriate any funds or assets located outside the U.S. obtained from the trading and prohibits them from destroying any records. See Lit. Rel. No. 24035 (Jan. 26, 2018).
CFTC – DOJ Spoofing Cases
The Department of Justice filed six criminal spoofing cases this week, its largest number of criminal spoofing cases. The Commodity Futures Trading Commission simultaneously announced the filing of eight spoofing case, five of which parallel the DOJ actions and three against large, international banks. Previously, only three spoofing cases had been filed. The parallel civil and criminal cases, each of which is in litigation, are: CFTC v. Vorley, Case No. 1:18-cv-00603 (N.D. Ill. Filed Jan. 26, 2018) which names as defendants James Vorley, a resident of the U.K, and Cedrick Chanu, a resident of the U.A.E; CFTC v. Thakkar, Case No. 1:18-cv-00619 (N.D. Ill. Filed Jan. 28, 2018) which names as defendants Jitesh Thakkar and his firm, Edge Financial Technologies, Inc.; CFTC v. Zhao, Case No. 1:18-cv-00625 (N.D.Ill. Filed Jan 28, 2018) which alleges that defendant Jiongsheng Zhao of Australia engaged in spoofing and manipulative conduct; CFTC v. Flotron, Case No. 3:18-cv-00158 (D. Conn. Filed Jan. 26, 2018) which names as a defendant Andre Flotron, a precious metals trader from Switzerland employed at UBS; CFTC v. Mohan, Case No. 4:18-cv-00260 (S.D. Tx. Filed Jan. 28, 2018) which names as a defendant Krishna Mohan of New York City; traders Edward Bases and John Pacilio were also charged in a criminal case. The action alleges commodities fraud and spoofing in the precious metals and futures markets. The CFTC did not charge Messrs. Bases and Pacilio.
The CFTC also filed settled administrative proceedings as to three international banks:
In the Matter of HSBC Securities (U.S.A.) Inc., CFTC Docket No. 18-08 (Jan. 29, 2018)(settled with and agreement to pay a civil monetary penalty of $1.6 million, the entry of a cease and desist order based on CEA Section 4c regarding spoofing, and an agreement to implement certain procedures); In the Matter of Deutsche Bank AG, CFTC Docket No. 18-06 (Jan. 29, 2018)(settled with the payment of a $30 million penalty and an agreement to undertake certain remedial relief); In the Matter of UBS AG, CFTC Docket No. 18-07 (Jan. 29, 2018)(settled with an agreement to pay a penalty of $15 million and to undertake certain remedial relief).
Manipulation: The Australian Securities and Investment Commission filed a penalty proceeding against Commonwealth Bank of Australia, alleging that the firm manipulated the BBSW price. The BBSW is the primary interest rate benchmark in Australia. The bank had several instruments with prices pegged to the benchmark. Between January 31, 2012 and October 2012 the firm traded with the intention of manipulating the benchmark for its benefit. The ASC is seeking findings and a penalty.
Insider trading: The ASIC retained outside counsel to conduct an investigation regarding its website and possible insider trading, according to an ABC news report. Last year a flawed research tool apparently permitted users to view company research of private equity investors under certain circumstances. Locating certain search histories could possibly reveal sensitive company data regarding mergers and acquisitions and other similar information. The ASIC has informed about 700 persons that their data was viewed through the site.