This Week In Securities Litigation (Week of April 26, 2021)
New Chairman Gary Gensler began building a staff for his office. Mr. Gensler also appointed Paul Weiss partner Alex Oh as Director of the Division of Enforcement.
Chairman Gensler now faces the daunting challenges presented by a host of weighty issues on the Commission’s agenda. One little recognized difficulty is the PACOB, the SOX created accounting board. Suit was filed alleging wrongful termination and violations of the D.C. Human Rights Act by dismissed Chief Risk Officer Sue Lee against the Board and its Chairman, William Duhnke. It alleges discriminatory conduct by Mr. Dahnke in terminating Ms. Lee who is of Chinese national origin. Lee v. PCAOB. Civil Action No. 1:21-cv-01006 (D.D.C. Filed April 12, 2021).
In the wake of the suit, members of the former oversight board of the PCAOB urged Chairman Gensler to reform the accounting board, according to an article published by Thomson Reuters on April 21, 2021, written by Soyoung Ho. The former advisory board was disbanded by then SEC Chairman Jay Clayton. He also appointed Mr. Dahnke, a former Republican Congressional staff member and each of other current board members. Ms. Lee is affiliated with the Democratic Party.
Be careful, be safe this week
Whistleblowers: The agency awarded $3.2 million to a whistleblower last week, according to an April 23, 2021 press release. The person provided subject matter expertise and information to the Commission. An award of $100,000 was to a second person for significant information and ongoing assistance.
Webcast: The New York and San Francisco Regional Offices of the agency will co-host a webcast exploring the experiences of tech entrepreneurs of color when capital raising. The program will be held on April 27, 2021 from 4 to 5:30 p.m. ET.
Remarks: Commissioner Elad L. Roismam delivered remarks titled An Honest Conversation about ESG Regulation, raising certain questions regarding that type of regulation (here).
Fully paid lending: The staff issued a no-action letter regarding broker-dealer customer protection under Exchange Act Rule 15c3-3 on April 16, 2021. The letter states that the staff will not recommend an enforcement action regarding certain lending practices for six months to permit broker-dealers to come into full compliance with the Rule.
ESG: The Division of Examinations issued a Risk Alert, Review of ESG Investing, April 9, 2021 (here). The Alert highlights observations by the Division based on inspections involving advisers implementing ESG investing programs.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 3 civil injunctive actions and no administrative proceedings, exclusive of tag-along and other similar proceedings.
Offering fraud: SEC v. Jones, Civil Action No. 4:21-cv-00267 (W.D. Mo. April 22, 2021) is an action which names as a defendant attorney Corbyn W. Jones. The complaint alleges that over a period of about one year, beginning in February 2019, Mr. Jones raised over $650,000 from investors that was to be used by his firm for operating expenses. In fact, portions of the investor cash were diverted to his personal use. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendant resolved the action, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, he consented to the entry of an officer and director bar and agreed to pay disgorgement of $82,733, prejudgment interest of $3,950 and a penalty of $50,000. See Lit. Rel. No. 25079 (April 22, 2021).
Misappropriation: SEC v. Burroughs, Civil Action No. 3:19-cv-01913 (D. Conn.) is a previously filed action against Lester Burroughs. The complaint alleged a fraudulent scheme in which Defendant, an investment adviser, sold fictitious financial products to investors and misappropriated the proceeds. In the parallel criminal action Mr. Burroughs pleaded guilty to one count of wire fraud and was sentenced to serve 33 months in prison. In the Commission’s action the Court entered a final judgment by consent that imposes a permanent injunction based on Advisers Act Sections 206(1) & (2). It also directs Mr. Burroughs to pay disgorgement of $560,000 which is deemed satisfied by the criminal restitution order. The Commission previously barred Defendant from the securities business. See Lit. Rel. No. 25078 (April 21, 2021).
Binary options: SEC v. Spot Tech House, Ltd., Civil Action No. 2:21-cv-00632 (D. Nev. Filed April 16, 2021). The action names as defendants the company, Malhaz Pinhas Patarkazishville and Ran Amiran. Each of the Defendants is based in Israel. Over a five-year period, beginning in 2012, Defendants sold binary options to investors. The scheme was structured so that on one side of each trade was a “partner” of the firm, a person recruited by the company. The payout terms were structured to favor the partner. Investors were not aware of these terms. As a result of the structure, investors lost most of the time. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b) and 20(a). The case is pending. See Lit. Rel. No. 25073 (April 19, 2021).
Offering fraud: SEC v. Cheng, Civil Action No. 1:21-cv-3456 (S.D.N.Y. Filed April 20, 2021) names as a defendant Sheng-Wen Cheng. The complaint alleges that over a period of about one year, beginning in August 2017, Defendant raised about $404,000 from at least 5 investors who purchased shares in two controlled entities. Investors were told that Defendant had received an investment of $30 million from a single investor and that Defendant had previously created a successful startup firm. The funds were to be used to create a blockchain-based Peer-to-Peer lending market platform. In fact, much of the investor cash was misappropriated. The complaint alleges violation of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal action was filed by the Manhattan U.S. Attorney’s Office. See Lit. Rel. No. 25076 (April 2, 2021).
Unauthorized trading: SEC v. Dang, Civil Action No. 3:20-cv-01353 (D. Conn.) is a previously filed action which named as a defendant Hai Khoa Dang, an unregistered investment adviser. The complaint alleges that Defendant Hai Khoa Dang had complete control over the investment accounts of a couple. He used that control to largely deplete their portfolio by engaging in risky trading rather than the conservative program with a $250,000 reserve he promised. The risky and unauthorized trading in which Defendant engaged caused the account value to drop by over $2 million and largely wiped out the investments of the couple. The Court entered a final judgment, enjoining Defendant from future violations of Advisers Act Sections 206(1) & (2) and directing him to pay $7,249 in disgorgement and prejudgment interest and a $2.2 million civil penalty. See Lit. Rel. No. 25074 (April 20, 2021).
Manipulation: SEC v. Tobin, Civil Action No. 1:18-cv-12451 (D. Mass.) is a previously filed action which names as defendants Morrie Tobin and two public companies, Environmental Packaging Technologies Holdings, Inc. and CURE Pharmaceutical Holding Corporation. Also named as defendants were attorneys Milan Patel and Mathew Ledvine. The complaint alleges a pump-and-dump market manipulation in which the identity of Mr. Tobin and his ownership of the shares involved was concealed by the other Defendants who deposited the stock of the two firms in accounts of nominees at offshore entities. Promoters were then paid to manipulate the shares. Defendants Tobin, Patel and Ledvina resolved the charges, consenting to the entry of final judgments enjoining them from future violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Section 10(b). Defendants also consented to the entry of penny stock bars. See Lit. Rel. No. 25072 (April 19, 2021).
Remarks: Karen Chester, Deputy Chair, Australian Securities & Futures Commission, delivered remarks on April 22, 2021 to the Australian Institutional Investor Roundtable. Her remarks focused on a regulatory update regarding the recent work of the Commission (here).
Remarks: Tim Lui, Chairman, Securities and Futures Commission, delivered remarks at the National Security Education Day on April 15, 2021titled Safeguarding Financial Stability. The Chairman’s remarks built on the idea that financial security is an integral component of national Security (here).
Report: The Monetary Authority of Singapore published its Monetary Policy Statement for April on April 14, 2021 (here).