This Week In Securities Litigation (Week of August 14, 2023)
This Week In Securities Litigation (Week of August 14, 2023)
The Commission filed a series of new cases largely, but not exclusively, in its traditional areas. They included, offering frauds, books and records and a breach of duty claims. An FCPA case was also filed along with an unregistered broker/trading platform tied to crypto assets and a touting charge, also tied to crypto assets.
Have a great and safe week – and stay cool.
Whistleblowers: The Commission awarded over $104 million to seven whistleblowers, according to an August 4, 2023 release.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 5 civil injunctive actions and 11 administrative proceedings, excluding 12j, tag-along proceedings and those presenting a conflict for the author.
FCPA: In the Matter of Grupo Aval Acciones Y Valores S.A., Adm. Proc Fie No. 3-21559 (August 10, 2023) is a proceeding which names as respondents: the company, one of the largest commercial banking groups in Colombia; and Corporation Financiera Colombiana, S.A., Grupo’s merchant banking subsidiary. The proceeding arose from bribes paid in connection with the largest road construction project in the history of Columbia. The order alleges violations of Exchange Act Sections 30A, 13(b)(2)(a) and 13(b)(2)(b). To resolve the proceedings Financiera Colombiana consented to the entry of a cease-and-desist order based on each of the Sections cited in the Order. Grupo consented to the entry of a permanent injunction based on the books-and-records Sections cited in the Order. In addition, Grupo will pay disgorgement of $32,139.73 and prejudgment interest of $8,129,558. Financiera Colombiana also entered into a deferred prosecution agreement with the Department of Justice. U.S. v. Corporacion Financiera Colombiana S.A. (to be filed in D. Md.).
Crypto asset unregistered platform-broker: SEC v. Bittrex, Inc., Civil Action No. 23-Civ-580 (W.D. Wash.) is a previously filed action which named as defendants: the firm, a crypto asset trading platform; Bittrex Global GMBH, a Liechtenstein firm that purports to run a trading platform that excludes U.S. persons; and William H. Shihara, the CEO of Bittrex and a member of the board of directors. The firm and its CEO settled with the Commission, according to an August 10, 2023 release. Defendants Bittrex and Shihara consented to the entry of permanent injunctions based on Exchange Act Sections 5, 15(a) and 17A. Defendant Bittrex Global consented to the entry of a permanent injunction based on Exchange Act Section 5. In addition, the two entities will pay, on a joint and several basis, disgorgement of $14.4 million, prejudgment interest of $4 million and a civil penalty of $5.6 million (August 10, 2023).
Offering fraud: SEC v. Stickforth, Civil Action No. 1:23-cv-02000 (D. Colo.) is a previously filed action which named as defendants Chad Stickforth, the former managing director of RSF Capital LP. The complaint alleges that over a five-year period beginning in 2016 Defendant raised about $5.4 million from 20 investors who were told that their funds would be used to trade futures contracts and commodity interests as wel as options. In fact, only a small portion of the investor cash was invested – much of it was misappropriated or used to make Ponzi like payments. Defendant resolved the claims by consenting to the entry of permanent injunctions based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1 )and 206(2). An officer/director bar was also imposed. Defendant will pay disgorgement, prejudgment interest and a penalty of $1,546,197. See Lit. Rel. No. 25806 (August 8, 2023)
Records: In the Matter of Wedbush Securities Inc., Adm. Proc. File No. 3-21550 (August 8, 2023). The Order begins with the basic record keeping requirements at issue, Exchange Act Section 17(a)(1) and Advisers Act Section 204. Under these Sections the Commission has issued rules requiring broker-dealers and investment advisers to make and keep records that are necessary for the protection of investors under the circumstances here. Rules adopted under Section 17(a)(1), for example, require broker-dealers to preserve certain key records. The Advisers Act has similar provisions and Rules. Wedbush maintained policies and procedures that were designed to ensure the retention of business-related records required to be maintained by the Commission’s rules. The system did not, however, require follow-up. It also did not cover personal devices which employees were permitted to use. The staff investigation uncovered what the Order calls “pervasive off-channel communications at all seniority levels” of the firm. To resolve the matter Wedbush is implanting certain remedial matters. Under the terms of the settlement the firm is required to retain a Compliance Consultant and implement other remedial steps as well as adopt the recommendations of the Compliance Consultant. The Order alleges violations of Exchange Act Section 17(a) and Advisers Act Section 204. Respondent admitted to the violations and consented to the entry of a cease-and-desist order based on Exchange Act Section 17(a) and Rule 17a-4 and Advisers Act Section 204 and Rule 204-2. The firm was also censured and will pay a penalty of $10 million. The ten other firms were charged for similar violations; each settled on terms similar to those illustrated above and are listed here.
Touting: SEC v. Sun, Civil Action No. 1:23-cv-02433 (S.D.N.Y.) is a previously filed action which named as defendants: Justin Sun, Tran Foundation Ltd., BitTorrent Foundation Ltd, Rainberry Inc., Austin Muhone and Deandre Cortez Way. The complaint alleged that defendants engaged in a touting scheme tied to crypto assets. Defendant Austin Mahone settled with the Commission, consenting to the entry of a permanent injunction based on Section 17(b) of the Securities Act. Mr. Mahone is also subject to a three year conduct based injunction precluding touting for pay. In addition, he will pay disgorgement of $7,507, prejudgment interest of $682 and a penalty of $37,535.
Offering fraud: SEC v. Slaga, Civil Action No. 8:23-cv-01425 (C.D. Cal. Filed August 7, 2023) is an action which names as defendants: Christopher Slaga, the president and owner of the entity defendants and who has been convicted on federal wire fraud charge charges and sentenced to serve 48 months in prison; Q4 Capital Group, LLC, supposedly the manager of certain investment funds; J4 DCapital Advisors LLC, also the manager of a fund; and Hayden Greene, who solicited investors. The complaint centers on a scheme that began in 2018 and continued for about 4 years, raising approximately $3.5 million from 17 investors. Defendant Slaga solicited investors by claiming that their funds would generate profits by being invested in his proprietary computer based quantitative and statistical algorithms. In fact, much of the investor money was misappropriated by Mr. Slaga. He attempted to conceal his fraud by furnishing investors with falsified documents. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b) and 15(a). Mr. Greene settled with the Commission, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to monetary relief not detailed in the release. The case is in litigation. See Lit. Rel. No. 25804 (C.D. Cal. Filed August 7, 2023). The case is in litigation.
SPAC: SEC v. Ulrich Kranz, Civil Action No. 23-cv-06332 (C.D. Ca. Filed August 4, 3023).
Named as defendants in the action are: Ulrich Kranz, a special advisor to the Executive Chairman of Canoo Inc. who resigned in April 2021 and Paul Balciunas, a v.p. and CFO of Canno until his resignation in March 2021. At the center of the case is Canoo Inc., a firm that designs and produced EVs whose share have been registered with the Commission under Exchange Act Section 12(b) and trades under the thicker GOEV. Over a period of several months, beginning August 2020, the financial projections Canoo furnished investors and others for 2021showed that the firm would have revenue of $120 million and $250 million for 2022. The revenue resulted from providing engineering services to other companies. At the time Defendants Kratz and Balcciunas had information showing significant projects on which the projections were based were not likely to develop. At the end of March 2021 Canoo, which had just raised substantial sums from the public, announced that it would “deemphasize the engineering services line and removed the revenue from its public filings. The next day the firm’s stock price dropped about 21%. Previously, Mr. Kranz had entered into an agreement with two Canoo investors. Under the terms of the agreement, he would receive up to $1 million in compensation for his work at Canoo. In October 2020 Mr. Kranz received over $900,000 from the two individuals. The sum was not disclosed as compensation as required. The complaint alleges violations of Securities Act Section 17(a)(3) and Exchange Act Sections 13(a) and 14(a).
To resolve the action Mr. Kranz agreed to be enjoined from future violations of Securities Act Section 17(a)(3) and Exchange Act Section 14(a) and from aiding and abetting violations of Section 13(a). He also consented to the entry of a three-year officer/director bar and agreed to pay a penalty of $125,000. Mr. Balcciunas consented to the entry of a permanent injunction based on Exchange Act Section 14(a), to the entry of a two-year officer/director bar and agreed to pay disgorgement and prejudgment interest of $7,500 and a penalty of $50,000. Canoo agreed to pay a penalty of $1,500.
Breach of duty: SEC v. Sisu Capital, LLC, Civil Action No. 3:23-cv-03855 (N.D. Cal. Filed August 1, 2023) is an action which names as defendants, the firm, an investment adviser registered in Ohio from 2015 through the end of 2021 and California until the state revoked his registration; Timothy Overturf, CEO of Sisu; and Nansueli Overturef, a registered representative. Over a period of four years, beginning in 2017, the firm and Timothy Overturf breached their fiduciary duty by permitting Timothy’s father, Defendant Hansuei to give investment advice to clients despite the fact that he had been suspended for various periods by the state of California, engaging in unsuitable and unauthorized trading with client assets, and permitted over $2 million in portfolio management fees, performance-based fees and commissions to be withdrawn from client accounts contrary to instructions. Timothy also received hundreds of thousands of dollars in owner draws and loans from the firm. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2). The case is in litigation. See Lit. Rel. No. 25807 (August 10, 2023).
Investment advice: The Federal Financial Supervisory Authority, or BaFin, announced it is deploying a mystery shopper to test the investment advice being given by professionals, according to a release dated August 9, 2023 (here).
Block trading: The Securities and Futures Commission of Hong Kong announced it reached a consensus with CSRC on introducing block trading under stock connect, in a release dated August 11, 2023 (here).