This Week In Securities Litigation (Week of April 10, 2023)
Last week the Commission filed four new actions. The actions centered on false statements, prohibited transactions, financial fraud and an offering fraud. The agency also announced its 42nd Small Business Forum for later this year.
Be careful; be safe this week.
Registration: The Commission opened registration for its 42nd Annual Small business Forum, an initiative designed to impact capital raising policy, according to an April 6, 2023 release.
Education: During April, which is Financial Capability Month, the Commission plans to highlight free investor education resources, according to a release dated April 3, 2023.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 3 civil injunctive cases and 1 administrative proceeding, excluding 12j and tag-along proceedings as well as those presenting conflicts for the author (which are counted in totals).
Offering fraud: SEC v. Nicosia, Civil Action No. 1:22-cv-05761 (E.D.N.Y.) is a previously filed action which named as defendants Matthew Nicosia, William Reininger and Ronald Touchard. The complaint alleges that Defendants engaged in a microcap fraud by selling stock based on false statements to investors. The Court entered a final judgment. Defendant were each enjoined from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The final judgments as to Defendants Nicosia and Reininger also included injunctions based on Securities Act Section 5 and imposed 5 year officer/director bars. Mr. Nicosia was ordered to pay disgorgement of $526,050, prejudgment interest of $46,311 and a penalty of $223,229. Defendant Reiningere was ordered to pay disgorgement of $272,000, prejudgment interest of $23,940 and a penalty of $80,000. Defendant Touchard was directed to pay disgorgement of $7,400, prejudgment interest of $830 and a penalty of $50,000. See Lit. Rel. No. 25689 (April 5, 2023).
False statements: SEC v. Javice, Civil Action No. 1:23-cv-02795 (S.D.N.Y. Filed April 4, 2023) is an action which names a defendant Charles Javice, the founder, CEO and a stockholder of TAPD, Inc., a for profit firm known as “Frank.” During the summer of 2021 Frank negotiated a deal in which Major Financial Institution would acquire the firm. Key to the deal supposedly was the 4.25 million Frank student customers looking to finance their educations. Major Financial Institution wanted the customer identifying data for the students to market student loans. In fact, Frank only had information on about 300,000 students. Knowing that Major Financial Institution was interested in the student data, throughout the negotiations Frank made misrepresentations about its data and even created false documents. Following the closing of the deal Major Financial Institution conducted an internal investigation which concluded that the data did not exist. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Offering fraud: SEC v. French, Civil Action No. 1:23-cv-01443 (N.D. Ga. Filed April 3, 2023) is an action which names as defendants Michael French, MJF Holdings, LLC and MJF Capital, LLC. Each of the entity defendants is controlled by Defendant French. Over a two year period, beginning in 2020, Defendants raised over $20 million by selling promissory notes to investors across the country. Those investors were told that the notes paid 12% returns for a one-year investment and were backed by a low-risk investment program. The transactions were a shame. Much of the money raised from investors was misappropriated. The complaint alleges violations of Securities Act Section 5(a) and (5)(c) and each subsection of 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25688 (April 4, 2023).
Prohibited transactions: In the Matter of Chatham Asset Management, LLC, Adm. Proc. File No. 3-21355 (April 3, 2023) is a proceeding which names as respondents the registered investment adviser and its founder, Anthony Melchiorre. A number of the fund clients held high yield debt securities issued by American Media Inc., a subsidiary of AMI Parent Holdings, LLC. Over a two-year period, beginning in 2017, the managed funds engaged in transactions involving the same AMI Bonds in which one fund sold AMI bonds and a different fund would purchase AMI bonds. These “rebalancing” trades were undertaken to address portfolio constraints such as industry or issuer fund constraint limits, to meet investor redemptions and to allocate capital inflows and outflows. Over time the transactions had the impact of moving the price up. Many of the transactions involved open-ended mutual funds regulated as registered investment companies. For those funds the rebalancing transactions were prohibited affiliate transactions that violated the Investment Company Act. In resolving the matter Respondents agreed to assist the Commission staff in administrating a distribution plan. To resolve the proceedings each Respondent consented to the entry of a cease-and-desist order prohibiting future violations of Advisers Act Section 206(2) and Investment Company Act Section 17(a). Mr. Melchiorre is also prohibited from serving as an employee, officer, director or member of an advisory board, investment advisor or principal underwriter of an investment company or an affiliate. Respondents will pay, jointly and severally, disgorgement of $11 million and prejudgment interest of $3,375,072. Mr. Chatham will pay a civil penalty of $4.4 million. A Fair Fund was created.
Manipulation: SEC v. DiScala, Civil Action No. 1:14-cv-4346 (E.D.N.Y.) is a previously filed action which named as defendants Darrent Ofsink and attorney Michael T. Morris. The Court entered final judgments as to each Defendant and imposed other remedies. The complaint claimed that Defendants manipulated the share of CodeSmart Holdings, Inc. It alleged violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 9(a) and 10(b). In separate judgments the Court also imposed penny stock bars. Each Defendant also agreed to pay disgorgement — $292,409.11 for Defendant Ofsink and $276,526 for Defendant Morris, along with prejudgment interest. The payments were deemed satisfied by the restitution ordered in the parallel criminal action. U.S. v. DiScala, 14 Cr. 399 (E.D.N.Y.). See Lit. Rel. No. 25686 (April 3, 2023).
Offering fraud: SEC v. Carnovale, Civil Action No. 1:21-cv-11938 (D. Mass.) is a previously filed actin which named as defendant Amar Bahodoorsingh. Over a four-year period, beginning in 2016 Defendant secretly obtained control of thinly traded microcap firms, hired stock promoters to create demand for the shares of the company, and sold them at a profit to unsuspecting investors. A final judgment was entered which includes injunctions based on Securities Act Sections 5(a) and 17(a) and Exchange Act Section 10(b). It also includes a penny stock bar and an order to pay disgorgement of $231,020, prejudgment interest of $28,416 and a penalty of $28,416. See Lit. Rel. No. 25685 (March 31, 2023).
Offering fraud: SEC v. Stack, Civil Action No. 1:21-cv-0-0051 (W.D. RTex.) is a previously filed action which names a defendant attorney Andrew Stack who acted as a front for now defunct Preston Corporation which is supposedly a financial services firm. While acting in that capacity Defendant misled investors by claiming the company had a royalty agreement with a third party and that it had entered into a “gold mine agreement.” The claims were false. In resolving the matter Defendant consented to the entry of a permanent injunction based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The judgment also includes a five-year officer/director bar and an order which prohibits rendering professional services in connection with Regulation D or other exemptions from registration. In addition, Defendant also agreed to pay disgorgement and prejudgment interest totaling $438,103.21 and a $333,100 civil penalty. The Court entered the judgment on March 10, 2023. See Lit. Rel. No. 25682 (March 31, 2023).
Financial fraud: SEC v. Perciavalle, Civil Action No. 23-cv-00109 (S.D. Ala. Filed March 31, 2023). This action revolves around events at a subsidiary of Austal Ltd., an Australian defense contractor. The subsidiary — Austal USA, LLC – employed three officers who are named as defendants in the case: Craig Percivalle, president; Joseph Runkel, director of financial analysis; and William Adams, director of the firm’s Combat Ship program. Over more than three years, beginning in January 2013, Defendants overstated revenues and earnings before interest and tax or EBIT at Austal USA which was building ships for the United States Navy. Specifically, Defendants used artificially low estimates at completion when building Navy ships. Reducing the estimates at completion permitted Defendants to inflate revenue and EBIT. This resulted in overstated revenue and EBIT in the filings that were available to U.S. investors. And, it falsely inflated the stock price. The scheme was implemented by instructing the responsible personnel to reduce the estimated costs. Defendants also sought to conceal the fraud by lying to AUSA’s auditors. Reducing the estimates at completion permitted the firm to inflate revenue and EBIT. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25684 (March 31, 2023).
Cloud risk practices: The Monetary Authority of Singapore hosted the inaugural Financial Sector Cloud Resilience Forum for Asia Pacific financial regulators and Cloud Service Providers to discuss public cloud risk management practices for the sector (here).