This Week In Securities Litigation (Week of April 24, 2024)
The Commission continues to consider a host of rule-writing proposals as Chair Gensler’s Congressional testimony (see below) reminds us. Those include hot button topics such as climate, but not crypto. When the climate proposals emerge, there will no doubt be challenges to the authority of the agency to then write such proposals, perhaps the the reason release containing them spent a substantial amount of time tracing their history back decades.
In contrast, the issue with crypto is not any proposed regulation but the lack of any action in the area except increasing numbers of SEC enforcement actions. Since the run-up to the next election has begun, there is little likelihood that any legislation will emerge from Congress in the crypto area. As trends from last year’s enforcement actions demonstrate however, it is very likely that there will be increasing numbers of Commission enforcement actions centered on crypto securities.
Be careful; be safe this week.
SEC
Remarks: Chair Gensler addressed the Financial Stability Oversight Council on April 21, 2023 (here). The focus of his remarks was the guidance on non-bank determinations which Mr. Gensler supported.
Testimony: SEC Chair Gary Gensler testified before the U.S. House of Representatives Committee on Financial Services on April 18, 2023 (here). His testimony touched on a series of topics including leadership in the capital markets, efficiency and competition, private funds, integrity and disclosure, artificial intelligence and crypto assets. The last of those topics generated perhaps the most commentary, although Congressman Bill Huizenda (R -M), Chairman of the Oversight and Investigations Subcommittee on Financial Services chastised Mr. Gensler for his failure to produce documents on the pending climate initiatives (here).
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. Charles Winn LLC, Civil Action No. 2:23-cv-02998 (C.D. Ca. Filed April 20, 2023) is an action which names as defendants: Charles Winn, a company that is of concern to a number of state regulators; Aaron David Scott-Britten, Aaron Scott, Aaron David K. Britten and Ohran Emmanue Stewart – collectively the “Charles Winn senior managers” — and Casey Alexander, senior sales manager, and Charlie Jake Smith, record managing member. Defendants, according to the complaint, engaged in a fraudulent investment scheme centered on fine wine. Marketing materials were created which told investors that Charles Winn would buy investment grade wines for investors that would later be sold at a profit to be shared with investors. The materials also told investors their money would only be used to buy wine and store it, the return should be 10 to 45% and the company would not receive any compensation or profit until after the wine was sold. The statements were false. Indeed, investors were not even told that sales representatives received an up-front commission of 5% to 15% from investor funds. In addition, only about 43% of the investor funds went to purchase and store the wine. The balance of the funds were expended on a variety of non-wine uses which including payments to the sales representatives, workers and back office functions at the company. Eventually the scheme, which raised about $8.5 million through the unregistered offering from 121 investors, collapsed. The complaint alleges violations of Securities Act Sections 17(a)(each subsection), and Exchange Act Sections 10(b) and 15(a)(1). The case is in litigation.
Valuation: SEC v. Premium Point Investments LP, Civil Action No. 1:18-cv-04145 (S.D.N.Y.) is a previously filed action in which final judgments were entered against Amin Majidi and Ashish Dole. The former was a portfolio manager for a private fund advised by Premium Point; the latter was a trader for that firm. The final judgements contained injunctions based on Exchange Act Section 10(b), Securities Act Sections 17(a)(1) & (3) and Advisers Act Sections 206(1), 206(2) and 206(4) as well as aiding and abetting. The underlying scheme was based on a secret deal where in exchange for sending trades to a broker dealer, Premium Point received inflated broker quotes for mortgage-backed securities as well as the use of “imputed” mid-point valuations which were applied in a manner that further inflated the value of the securities. See Lit. Rel. No. 25698 (April 20, 2023).
Disclosure/false statements: In the Matter of Betterment LLC, Adm. Proc File No. 3-21373 (April 18, 2023) is a proceeding which names as respondent the registered investment adviser. The Order alleges that the adviser misled clients over a three-year period, beginning in March 2016, by misstating and omitting material facts when discussing what it called an automated tax-loss harvesting service or TLH. The service supposedly scanned client accounts and found tax deductions. In fact, during the period Respondent changed the frequency of the scans without disclosing this fact and did not inform clients about material errors with the program. In addition, the firm did not provide advance notice of material changes made to the advisory contract. During the period the firm also had inadequate compliance procedures. An estimated 25,000 clients lost approximately $4 million in potential tax benefits because of the wrongful acts. The Order alleges violations of Advisers Act Sections 204 and 206(2). To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. The advisory also agreed to pay a penalty of $9 million. A fair fund will be created under SOX Section 308(a).
Crypto offering fraud: SEC v. Blakstad, Civil Action No. 1:20-cv-00169 (S.D.N.Y.) is a previously filed action in which a final judgment was entered against Donald Blakstad and his controlled firms, Energy Sources International Corporation or ESI, supposedly a crypto mining operation, Midcontinental Petroleum, Inc. or MPI, and Xact Holdings Corporation. Investors were told the funds raised would be used to develop the business of the firms in the oil and gas sector. It was not. To the contrary the funds were diverted to the personal use of Mr. Blakstad. He consented to the entry of a final judgment which prohibits future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It also imposes and officer/director bar and requires the payment of disgorgement and prejudgment by him. Each entity also consented to the entry of similar permanent injunctions with MPI paying over $700,000 in disgorgement and prejudgment interest, ESI over $110,000 and Xact over $830,000. See Lit. Rel. No. 25697 (April 18, 2023).
Insider trading: SEC v. Blakstad, Civil Action No. 1:19-cv-06387 (S.D.N.Y.) is a previously filed action which named as defendants Donald Blakstad, Robert Maron and Martha Patricia Bustos, a former accountant at Illumina, Inc. Defendant Blakstad is self-employed; the other two Defendants are friends of Mr. Blakstad. The complaint alleged that Defendant Bustos illegally tipped Defendant Blakstad about four Illumina quarterly performance announcements. Mr. Blakstad then tipped, among others, Robert Maron, who traded through an account owned by his friend, Joubin Torkan. The trades resulted in $900,000 in unlawful profits for Mr. Torkan and $113.833 for Mr. Jorkan. Defendants Blakstad and Bustos were both charged in a parallel criminal case brought by the U.S. Attorney’s Office for the Southern District of New York. Subsequently, Defendant Bakstad was convicted at trial and sentenced to serve 36 months in prison, three years of supervised release and ordered to pay $4,518,103 in forfeiture, $669,000 as restitution and $700 as an assessment. In the Commission’s action the Court entered final judgments against Donald Blakstad. Earlier the Court entered final judgments against Mr. Maron and Ms. Bustos. See Lit. Rel. No. 25696 (April 18, 2023).
Illicit trading: SEC v. Engler, Civil Action No. 1:20-cv-01625 (E.D.N.Y.) is a previously filed action which named as defendants Jonah Engler and Barbara Desiderio, among others. The complaint alleged that the two defendants and others engaged in an illicit trading scheme involving over 360 retail customer accounts at brokerage firm Global Arena Capital Corp. That firm was controlled by Defendant Engler. The scheme resulted in over $4 million in net losses for the customers as the brokerage was going out of business. It also generated over $2.4 million in unlawful markups, markdowns, and commissions for the firm. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Court entered final judgments against the two Defendants based on the Sections cited in the complaint. Previously, the Court entered partial judgments based on which the agency issued an order barring the two Defendants from the securities business and participating in any penny stock offering. See Lit. Rel. No. 25693 (April 17, 2023).
Unregistered crypto platform: SEC v. Bittrex, Inc., Civil Action No. 2:23-cv-00580 (W. D. Was. Filed April 17, 2023) is an action which names as defendants: Bittrex, a firm founded in 2014 in Seattle, Washington that has served as a crypto trading platform but is winding down as of April 2023; Bittrex Global GMBH, a Liechtenstein firm that launched a crypto asset trading platform that supposedly prohibits U.S. customers; and William Shihara, resident of Richmond Washington who has been a member of the board of directors of Bittrex. Since 2014 Defendant Bittrex has acted as a crypto asset platform. In that role the firm buys, sells and trades crypto assets for U.S. and other customers. The firm has thus acted as a broker and an exchange, charging customers for its services despite the fact that it has never registered with the Commission in any capacity. During its tenure the firm has urged issuers of crypto assets to “scrub” their language to avoid scrutiny by the Commission. The complaint alleges violations of Exchange Act Sections 5, 15(a) and 17A(b). The case is in litigation. See Lit. Rel. No. 25694 (April 17, 2023).
Unregistered broker/adviser: SEC v. Moon, Civil Action No. 0:23 (S.D. Fla. Filed April 17, 2023) is an action which names as defendant Marcus Moon, a former holder of certain licenses relating to products like annuities but not to deal in securities. Over a period of about two years, beginning in May 2020, Defendant Moon held himself out as a financial professional working through his firm, Increase Financial Strategies LLC. He repeatedly offered advisory and brokerage services to largely African-American investors of the Christian Faith. Eventually Defendant Moon convinced a group of investors to open accounts with registered brokers and let him use them to trade. That trading resulted in about $31,800 in losses for the clients and about $3,000 in fees for him. The complaint alleges violations of Exchange Act Section 15(a), 17(a)(2) &(3), Securities Act Sections 17(a)(2) & (3) and Advisers Act Section 206(2). The case is in litigation. See Lit. Rel. No. 25695 (April 18, 2023).
Singapore
Release: The Monetary Authority of Singapore or MAS announced on April 20, 2023 the launch of its Finance for Net Zero (FiNZ) Action Plan at the opening of the Sustainable and Green Finance Institute of National University of Singapore. The Plan discusses strategies to mobilize finance to catalyze Asia’s net zero transition and decarbonization activities in Singapore and the Region (here).
U.K
Remarks: David Geale, Director of Retail Banking, FCA delivered remarks at the London Institute of Banking & Finance mortgage conference discussing the FCA’s views on green mortgages (here), April 19, 2023. Mr. Geale noted that green mortgages have a growing role to play in decarbonizing housing stock by aiding borrowers to achieve greater energy effacing.