The Commission secured partial summary judgment in an action involving a recidivist securities law violator who failed to disclose that fact while soliciting investors that were not permitted to redeem their shares while the defendants redeemed their interests. The court held that defendant’s prior violation and bar should have been disclosed and that selective redemptions tied to misrepresentations violated the antifraud provisions. The agency also filed another offering fraud case.
Two new reports on securities class actions suggest that the number of filings is slowing, although one states that the total number for 2018 increased while the other shows it declined slightly. Finally, the Director of FinCEN delivered remarks on activities at the agency and emphasized the importance of AML compliance.
Securities Class Actions
Two recent reports analyze trends in securities class actions for 2018. One was prepared by NERA Economic Consulting. Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review (Jan. 2019)(here). The other by Cornerstone Research. Securities Class Action Filings (Jan. 2019)(here). While the reports are generally similar, they are not identical.
NERA reports that last year 441 federal securities class actions cases were filed. That compares to 434 filed in 2017 and 299 in 2016. Indeed, the number filed in 2018 is the highest since 1996 when the Reform Act was passed, according to NERA. Those cases involved about 8.2% of the publicly listed firms. The overall risk of litigation for listed firms has, according to NERA, substantially increased since early in the decade.
In contrast, Cornerstone reports that only 403 cases were filed last year. That compares to 412 in 2017 and 271 in 2016. While the numbers between the two reports differ, that may result from the manner in which cases are tabulated and what is counted since NERA includes ICOs and similar matters. The overall trend, however, is largely the same, although Cornerstone does report a slight decline for 2018 while NERA notes the very slow growth in the number of cases filed compared to the prior year.
SEC Enforcement – Litigated Actions
Selective redemptions: SEC v. Conrad, Civil Action No. 1:16-cv-02572 (N.D. Ga. Order entered Jan. 19, 2019) is an action in which the Commission secured partial summary judgment against the Defendants on two fraud claims. Thomas Conrad and his son Stuart were named as defendants along with Financial Management Corporation and Financial Management Corporation, S.R.L. Thomas had been barred from association with any broker or dealer and the registration of his then broker-dealer firm revoked in a 1971 administrative proceeding which concluded that he was unfit for “engaging in the securities business in any capacity.”
Subsequently, Financial Management Corporation acted as the general partner and unregistered investment adviser for the hedge funds operated by Mr. Conrad under the World Opportunity Fund name. A master-feeder arrangement was used. Financial Management Corp. assumed the role of general partner and adviser to the World Opportunity feeder funds. Mr. Conrad appointed himself a sub-adviser to the master. Neither his fees nor his prior violation of the law was disclosed.
In November 2008 Mr. Conrad notified investors that FMC was temporarily suspending all withdrawals, redemptions and terminations of capital accounts in view of the market crisis. Nevertheless, Mr. Conrad redeemed about $2 million in one transaction and received other payments. Son Stuart received payments in a number of transactions and redeemed $25,000 from an account. The complaint alleged violations of Securities Act Section 17(a), Exchange Act Section (b) and Advisers Act Sections 206(1), 206(2) and 206(4).
The Court granted the Commission’s request for summary judgment on the counts regarding Mr. Conrad’s prior violations of the law and selective redemptions. Defendants admitted the disciplinary history and that it had not been disclosed. They claimed it was not material because it was followed by a number of other positive accomplishments. To resolve the question of materiality posited by Defendants — typically a mixed question of fact and law — as a matter of law on summary judgment the court “must find the established omissions . . . so obviously important to an investor, that reasonable minds cannot differ on the question of materiality.” Indeed, mixed questions of law and fact are peculiarly within the province of the trier of fact.
Here the “undisputed facts remain that the SEC prohibited Defendant Conrad from ever again associating with a registered broker-dealer and revoked the registration of Conrad & Company, a registered broker-dealer Defendant Conrad controlled.” The information is clearly material the Court held. Similarly, there was no question about the selective redemption claim – Defendants said one thing to investors and then did the opposite – clear misrepresentations. The Court granted the requested for summary judgment. Defendants violated Securities Act section 17(a) and Exchange Act section 10(b). See Lit. Rel. No. 24390 (Feb. 4, 2019).
SEC Enforcement – Filed and Settled Actions
The Commission filed 1 civil injunctive action and no administrative proceedings this week, exclusive of 12j and tag-along actions.
Offering fraud: SEC v. Alexander, Civil Action No. 1:19-cv-01161 (S.D.N.Y. Filed Feb. 7, 2019) is an action which names as defendants Robert Alexander and Kizzang, LLC, a firm founded by Mr. Alexander in January 2013 that is based in Las Vegas. Over a period of about 4 years beginning in 2013 Defendants raised about $9 million from approximately 53 investors. Those investors were solicited to invest in Kizzang, supposedly a gambling-style platform. The investor funds were to be used for the development of the business. Mr. Alexander, however, misappropriated a substantial portion of those funds for his personal use. The complaint alleges violations of Securities Act section 17(a) and Exchange Act section 10(b). The case is pending. See Lit. Rel. No. 24392 (Feb. 7, 2019). A parallel criminal action was filed by the U.S. Attorney’s Office for the Southern District of New York.
Offering fraud: U.S. v. Moody, No. 2:180-cr-0154 (E.D. Va. Sentencing Feb. 5, 2019). Defendant Edward Lee Moody, who previously pleaded guilty to mail fraud and engaging in a monetary transaction in criminally derived property, was sentenced to serve 13 years in prison. Over a period of years he solicited investors to place their money in his firm, claiming it would be properly invested. A number of the investors who placed their funds with Mr. Moody were elderly and liquidated retirement accounts, transferring the proceeds his investment firm, GM Capital Management LLC. Rather than invest the funds as represented, Mr. Moody misappropriated them. The Court also ordered that Mr. Moody pay over $4.8 million in restitution to his victims.
Remarks: Kenneth A. Blanco, Director FinCEN, delivered remarks at the SIFMA Anti-Money Laundering & Financial Crimes Conference (Feb. 4, 2019). Mr. Blanco’s remarks discussed regulatory reform in terms of reviewing and improving the approach of the agency, the need for innovation since they are dealing with a national security issue and the recent case against UBSFS for failing to have an adequate AML system for years (here).
Program: Save the Date of March 19, 2019 for: “Women in Compliance” held at Dorsey & Whitney LLP, 51 West 52nd St. New York, New York, 10019-6119. The program begins at 6:00 p.m. and is followed by cocktails. The announcement is here.