This Week In Securities Litigation (Week of April 17, 2022)
The Commission’s climate proposals are drawing a lot of attention on Capitol Hill. There is a growing list of Republican Senators who are reportedly opposed to the proposals. Those proposals, for which the agency is now collecting comments, are proving quite controversial, a fact that should not be a surprise to anyone despite the fact that the draft rules largely focus on disclosing the expertise available to the company and its overall approach on the issues.
Also controversial is the stake Elon Musk owns in Twitter and where all of that may go. Mr. Musk is discussing a take-over. No doubt everyone remembers not to long ago when Mr. Musk offered investors comments on a possible takeover of Tesla. Those comments, and the surrounding controversy, ended with Mr. Musk executing a consent decree with the Commission.
Be careful, be safe this week
SEC Enforcement – Filed and settled actions
Last week the Commission filed 8 civil injunctive actions and no administrative actions, exclusive of 12j, tag-a-long and other similar proceeding.
Offering fraud: SEC v/ Elliot, Civil Action No. 25369 (D. Mass.) is a previously filed action in which the agency settled with Defendant Damon Elliot, a U.K. citizen, based on its allegations that he and others, who also settled, operated a Ponzi scheme. The complaint alleged that the investors were solicited through the use of claims that the funds would be used to engage in “spread trading” or “spread bet trading.’ In 2019 and 2020 when investors tried to redeem their interests Mr. Elliot and others lied, falsely claiming that investor funds were safely held in trading accounts for their benefit. In fact, Defendant Elliot had used much of the funds for personal purposes. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Eliott entered into a partial settlement in September 2021. Subsequently, the Court entered final judgments on financial remedies against Defendant Elliot and others, including the certain relief Defendants, that totaled $13.1 million See Lit. Rel. No. 25369 (April 15, 2022).
Microcap fraud: SEC v. Bauer, Civil Action No. 1:22-cv-3089 (S.D.N.Y. Filed April 14, 2022) is an action which names as defendants: Ronald Bauer, a U.K. resident who essentially ran the operations at issue in this case beginning after his settlement with the Commission in another action in 2005; Craig James Auringer, a Canadian citizen who ran many of the schemes in this case; Alon Friedlander, a German citizen who identified a number of the mineral interests involved in the case; Massimiliano Lundie, a dual citizen of Italy and Chili who served as a figurehead for a several of the issuers; Daniel Mark Ferris, a U.K. citizen who at one point ran his own operation; Petar Mihaylov, believed to be a citizen of Bulgaria who was involved in another SEC enforcement action; David Sidoo, also a Canadian citizen who once worked as a broker in Vancouver; and Adam Kambeitz, also a Canadian citizen who at times arranged materially false schemes. Over a period beginning in about 2006, and continuing until at least 2020, Defendants formed various rings and on a serial basis ran pump-and-dump schemes involving a variety of issuers. Overall ,the schemes raised over $145 million. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17((a)(1) & (3) and Exchange Act Section 10(b). The case is pending. The Manhattan U.S. Attorney’s Office has filed parallel criminal charges against Defendants Bauer, Auringer, Ferris and Mihaylov. See Lit. Rel. No. 25366 (April 14, 2022).
Offering fraud: SEC v. Benja Inc., Civil Action No. 20-cv-908238 (N.D. Ca.) is a previously filed case which names as defendants the company and Andrew Chapin, formerly the CEO of the firm. Over a two-year period, beginning in 2018, the CEO and founder of the company solicited investors employing false claims that the firm was a successful and popular consumer clothing on-line retailer. In fact, the contrasts investors were shown were forged. Mr. Chapmin resolved the matter, consenting to the entry of a final judgment that included permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). The judgment also contains an officer/director bar and orders the payment of $2,635,000 in disgorgement and $184,692 in prejudgment interest. The payments are deemed satisfied by Mr. Chapin’s guilty plea in the related criminal action in which he was ordered to serve 36 months in prison and pay $8,069,900 in restitution to the victims of his fraudulent scheme. See Lit. Rel. No. 25365 (April 14, 2022).
Insider trading: SEC v. Loman, Civil Action No. 19-cv-06187 (C.D. Cal.) is a previously filed action which alleged that Defendant Mark Loman, formerly the comptroller of OSI Systems, Inc., used inside information he obtained from his employer to trade. Specifically, Mr. Loman learned in advance of an earnings announcement that the California based security, electronics and healthcare manufacturing company would fall short of expectations on revenue for the last quarter of 2015. In advance of the firm’s earnings announcement for the period Defendant traded shares of the firm. Following the announcement, the share price dropped about 35%. Mr. Loman netted more than $100,000. To resolve the action Defendant consented to the entry of a permanent injunction based on Exchange Act Section 10(b). He also agreed to pay a penalty of $482,050. In addition, Mr. Loman settled the Commission’s parallel administrative proceeding based on Rule 102(e). In the parallel criminal case a jury found Mr. Loman guilty of four counts of securities fraud and four counts of insider trading. Mr. Lowman was sentenced to serve 35 months in prison and ordered to pay a $600,000 fine. See Lit. Rel. No. 25364 (April 14, 2022).
Offering frauds: SEC v. Devito, Civil Action No. 0:22-cv-60733 (S.D.Fla. Filed April 13, 2022) names as defendants Joseph Devito and Dean Esposito. Each Defendant has previously been barred from association with a broker-dealer by the Commission. Over a four year period, beginning in 2016, Defendants, through Property Income Investors LLC, raised over $9 million from about 156 investors in a series of offerings in 11 companies controlled by Property Entities. The purpose of the offerings was t raise money for the purchase of turnkey multifamily properties located in Florida that would be redone. Investors were to receive payments from the rents charged. In soliciting investors there was no disclosure of the regulatory history of either defendant. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Section 10(b), 15(a)(1) and 15(b)(6)(i). The case is pending. See Lit. Rel. No. 25363 (April 14, 2022).
Offering fraud: SEC v. Yang, Civil Action No. 22-cv-00450 (April 13, 2022) is an action which names as defendant Kay X. Yang and her firm, Xapphire LLC. Defendant is the founder and owner of AK Equity and Xapphire Fund. During the offering, which began in 2017, about $16.5 million was raised over a four year period. Investors were sold interests in two companies Ms. Yang controlled. During the solicitations Defendant made misrepresentations regarding: 1) how the offering proceeds would be used; 2) the potential returns for investors; and 3) her foreign exchange trading history. Defendant’s fraudulent scheme has now collapsed. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 25362 (April 13, 2022).
Unregistered broker: SEC v. Global Investment Strategy UK Ltd., Civil Action No. 1:20-cv-10838 (S.D.N.Y.) is a previously filed action which named as defendants the firm and John Gunn. Over a four year period, beginning in late December 2020, the firm cleared and provided settlement services to hundreds of U.S. customers for trades primarily between U.S. customers/ The complaint alleged violations of Exchange Act Section 15(a). To resolve the matter, Defendants each consented to the entry of a final judgment of permanent injunction based on Exchange Act Section 15(a). The firm will pay a civil penalty in the amount of $1 million. Mr. Gunn was directed to pay a penalty in the amount of $100,000. The firm has been barred from the securities business and from participating in any penny stock offering. Mr. Gunn was barred from the securities business for a period of 12 months and from participating in any penny stock offering. See Lit. Rel. No. 25360 (April 11, 2022).
Offering fraud: SEC v. Minuskin, Civil Action No. 22CV0483 (S.D. Cal. Filed April 8, 2022) is an action which names as defendants: Julie Minuskin, CEO of Retire Happy LLC; Dennis Diricco, CFO of Golden Genesis; Thomas Casey, CEO of Golden Genesis, Inc. and a Defendant in a prior Commission enforcement action he settled; Golden Genesis, Inc., ostensibly a business involving plasma; and Joshua Stroll, employed at Retire Happy. Over a seven-year period, beginning in early 2012, Defendants DiRicco and Casey raised about $15 million from about 300 investors, all of whom were clients of Retire Happy. That company to provide investors with financial education and strategies on how to leverage retirement accounts. In fact, the company did not have sufficient funds to make the kind of payments promised. Likewise, the UCC-1 Financing Statement that was promised on all of Golden Genesis’ assets was never filed. In fact, before recommending Golden Genesis as an investments to its clients there was no due diligence and the officers of the firm failed to disclose their conflicts. The complaint alleges violations of Securities Act Section 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending as to all Defendants except Mr. DiRicco who consented to the entry of a permanent inunction based on Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and also a from participating in any penny stock offering. See Lit. Rel. No. 25359 (April 11, 2022).
Manipulation: SEC v. Salandra, Civil Action No. 1:22-cv-01405 (N.D. Ga. Filed April 11, 2022) is an action which names as defendant Anthony Salandra, a former day trader. The complaint alleges that over a three-year period, beginning in the fall of 2017, Mr. Salandra participated in a fraudulent scheme to manipulate the market for certain securities by spreading false rumors. In doing so, he traded around the rumors in 92 instances, earning $132,560 in ill-gotten gains. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25358 (April 11, 2022).
Unregistered broker: SEC v. Alexander, Civil Action No. 0:22-cv-060700 (S.D. Fla. Filed April 11, 2022) is an action which names as defendant Eric Alexander, the CFO for a period of Global Capital LLC. Over a four-year period, beginning in early 2014, Defendant prepared false financial statements for Global that were used as part of a nationwide offering of unregistered securities. Ultimately the offering raised over $322 from over 3,600 investors based on promises of high investor returns. In reality large portions of the investor money was misused. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending; See also SEC v. Merkelson, Civil Action No. 0:22-cv-60702 (S.D.Fla. Filed April 11, 2022)(action against Scott Merkelson, Director of Business Development for Global during the period; based on essentially same facts and alleged violations as above; case is pending). See Lit. Rel. No. 25357 (April 11, 2022).
Offering fraud: SEC v. Herman, Civil Action No. 7:ss-cv-00027 (E.D. Ky. Fled April 7, 2022) is an action which names as defendants: Justin Herman, V.P. of Island Capital Inc.; Anthony Baker, CEO of Island Capital; Ian Horn, an attorney who wrote opinion letters; and Island Capital. Over a 2-3 month period, beginning in April 2017, Defendants were involved in a scheme to enable Defendants Herman and Island Capital to obtain unrestricted shares of NxGen, Inc., inflate the share price and then dump the stock. This was done by concealing the firm’s status as a shell company, securing false Rule 144 letters, engaging in manipulative trading and selling all of Mr Herman’s shares through coordinated trading The scheme yielded a profit for Mr. Herman of .over $810,000 and about $353,800 for Island Capital. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. See Lit. Rel. No. 25361 (April 12, 2022).
Class Actions Based & Accounting Violations
Accounting violation allegations have long been an important feature of securities class actions. Over the last five years the number of these actions filed each year has generally increased. For example, in 2017 there were 58 securities class actions filed which alleged accounting filings. The next year the number increased to 64 and in 2020 to 70. Last year, however, the number dropped to 38, a fall of 34%, according to a new report published by Cornerstone Research titled Accounting Class Action Filings and Settlement, 2021 Year in Review, released April 13, 2022 (here).
Advisory: The Financial Crimes Enforcement Network, or FinCEN, issued an advisory on Kleptocracy and Foreign Public Corruption. dated April 14, 2022 (here). The notice urged financial institutions to focus on detecting proceedings involving foreign public corruption which is a priority for the U.S. as part of its ongoing efforts to halt such corruption.
Agreement: The Monetary Authority of Singapore announced an agreement under which Australia and MAS will deepen collaboration on FinTech. The Bridge they are building involving the two programs, first announced in June 2021, is focused on building an “overarching framework for digital economy cooperation” to deepen collaboration between the FinTech ecosystems of both countries, according to the April 13, 2022 announcement (here).,