This Week In Securities Litigation (Week of August 16, 2021)
The Commission approved a NASDAQ proposal last week that was designed to “champion inclusive growth and prosperity . . .” by adding certain diversity requirements to its listing standards. The initial proposal would have required firms listed on Nasdaq Global Select Market and Nasdaq Global Market to have two diverse directors within four years or five years, depending on the listing. Prior to approval by the Commission certain modifications were made for small issuers.
The proposal, build on sold research regarding the benefits of diversity, only managed to garner three votes at the Commission table. Commissioner Peirce opposed the proposal as outside the scope of the federal securities laws. Commissioner Elad Roisman agreed with its goal, but opposed the actual proposal. The original proposal is discussed here.
Be careful, be safe this week
Whistleblowers: The Commission awarded nearly $6 million to two whistleblowers who furnished helpful information regarding two enforcement actions, according to an August 10, 2021 announcement.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 6 civil injunctive actions and 5 administrative proceedings, exclusive of tag-along and other similar proceedings.
Insider trading: In the Matter of Zorayr Mikael Manukyan-Zakaryan, Adm. Proc. File No. 3-20457 (August 10, 2021) is an action which ultimately involved trading in the stock of AveXs, Inc. prior to an April 9, 2018 announcement that the firm had agreed to be acquired by Novartis AG. Respondent was Senior Director, Biostatistics for Pfizer, Inc. AveXis initially was in discussions about a potential deal with Novartis and Pfizer. During discussions Respondent was asked to participate in the transaction by reviewing certain research. During that work he learned of the discussions. The Pfizer transaction was not completed. After that, however ,the AveXis – Novartis deal was consummated. Prior to the deal announcement Respondent traded in the shares of AveXis, reaping over $20,000 in trading profits. The Order alleges violations of Exchange Act Section 10(b). To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. He also agreed to pay a penalty in the amount of $40,997.26.
Offering fraud: SEC v. Egbon, Civil Action No. 2:21-cv-935 (D. Wis. Filed August 10, 2021) is an action which names as defendant Blessing K. Egbon, the founder of Exit 7C, Inc.’s predecessor, a firm that claimed to provide ethanol-based fuel to gas stations. Over a four year period, beginning in 2016, Defendant raised about $6.47 million from selling securities in the firm to 14 investors. Those investors were furnished with false financial information. Defendant misappropriated the funds after the transactions. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The action is pending. See Lit. Rel. No. 25163 (E.D. Wis. Filed August 10, 2021).
False financial statements: In the Matter of Gary S. Klein, Adm. Proc. File No. 3-2456 (August 9, 2021) is an action which names as Respondent the former CFO of Sequential Brands Group, Inc. In 2016 and 2017 the firm’s good will was more than likely impaired. GAAP requires that good will be tested periodically and when impaired written down. When the company took a write down in mid-2015 the stock price sharply dropped. Thus, when the same impairment test used in 2016 and 2017and suggested impairment, the write downs were not taken. As CFO Respondent was obligated to make the assessment take the appropriate action. Controls were also not properly implemented. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. He also agreed to pay a penalty of $20,000.
False statements: SEC v. Amah, Civil Action No. 7:21-cv-06694 (S.D.N.Y. Filed August 9, 2021) is an action which names as defendant, Evarist Amah, an investment adviser who served as CEO of ECA Capital. Over a three-year period, beginning in 2016, Defendant solicited members of his faith for investments using misleading statements about his performance. Ultimately, he served as adviser to a group of eight investors. Within months he lost 97% of their funds, although he concealed this fact. In addition, he favored select investors by comingling their investments with others for a subgroup of investors while having ECA pay the expenses for the subgroup but not for others. None of these arrangements were disclosed. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(2), 206(2) and 206(4). The action is pending. See Lit. Rel. No. 25162 (August 9, 2021).
Pay-to-play: SEC v. Webb, Civil Action No. 17-8685 (N.D. Ill.). This previously filed case involved David Webb who is the named defendant. He was at the time of the transactions, the Mayor of the City of Markham, Illinois. In connection with a 2012 municipal bond offering designed to fund city capital projects, Mr. Webb engaged in a pay-to-play scheme. The mayor approached a contractor involved in the city capital projects and solicited a bribe. In return Mr. Webb agreed to steer a multi-million construction project to the contractor. The project would be funded from the offering proceeds of the municipal bond offering. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the action Mr. Webb consented to the entry of a permanent injunction based on the Sections cited in the complaint in late 2017. This week the Court entered the final judgment after determining monetary remedies. The Court entered permanent injunctions based on the Sections cited in the complaint. The mayor was also barred from participating in further municipal bond offerings. In addition, Mr. Webb was directed to pay disgorgement of $85,000 and prejudgment interest of $32,849.35. Those amounts were deemed satisfied by the restitution order entered in the parallel criminal case. See Lit. Rel. No. 25160 (August 9, 2021).
Insider trading: SEC v. Barr, Civil Action No. 21-cv-11831 (E.D. Mich. Filed August 6, 2021) is an action which names as defendant Leonard R. Barr. Defendant was a “unit” controller for a national pizza chain. Over a four-year period, beginning in 2016, he repeatedly obtained inside information about the firm and used it to trade. The transactions yielded ill-gotten gains of over $34,000. The complaint alleges violations of Exchange Act Section 10(b). The action is pending. See Lit. Rel. No. 25159 (August 6, 2021).
Microcap manipulation: SEC v. Carrillo, Civil Action No. 1:21-cv-11272 (D.Mass. Filed August 4, 2021) is an action which names as defendants Luis Jimenez Carrillo, Amar Bahadoorsingh, Justin Roger Wall and Jamie Samuel Wilson. The case centers on a series of schemes implemented primarily by Defendant Carrillo, and at time assisted by the other defendants, between 2013 and 2019. The schemes involved trading in the securities of various microcap issuers. Defendant Carrillo’s control over the issuers’ securities permitted him, with assistance from the others at time, to sell the stock without registering it with the Commission or disclosing his control. The schemes were typically similar for each firm. Over the period in excess of $75 million was raised. The complaint alleges violations of each subsection of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 13(d). The case is pending. See Lit. Rel. No. 25161 (August 9, 2021).
Crypto: In the Matter of Blockchain Credit Partners, Adm. Proc. File No. 3-20453 (August 6, 2021). The action names as Respondents the firm, also known as DeFi Money Market or DMM which owned DMG tokens when they were created and obtained the proceeds from sales; Gregory Keough, a founder of DMM and owner of 50% of Blockchain Credit Partners; and Derek Acree, also a founder of Blockchain Partners and 50% owner of Blockchain Credit. Over a period of about one year, beginning in early 2020, Messrs. Keough and Acree, along with Blockchain Credit, operated DeFi Money Market. DMM offered investors 6.2% interest on digital assets. The funds were to come from what were called “real world assets” otherwise known as car loans. Two types of digital assets were available, the mToken and the DMG token. The former paid 5.25% interest. The latter were marked as “governance tokens.” Those tokens gave purchasers certain voting rights, a share of excess profits and the ability to profit from DMG resales in the secondary market. Overall, in excess of $17million in mTokens were sold and $13.9 million in DMG tokens. The DMM business was built by programmers who created the architecture underlying the smart contracts and tokens. They also identified assets that could generate interest for mTokens and surplus profits for the DMG token holders. The mTokens were securities, according to the Order. In fact, they were notes offered and sold as investment contracts. Purchasers were led to believe that the profits they would receive would come from the efforts of Respondents from managing DMM. That included the auto loans which were purchased. While those assets were acquired, they remained in a separate entity – ownership was not transferred. The DMG tokens were also securities. They were offered and sold as investment contracts. The reasonable expectation of profits came from the claim that DMG would use the proceeds to operate and develop the business and then share the profits with investors. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the matter, Respondents agreed to certain undertakings. Those included an agreement to assist mToken holders with redemption. In addition, Respondents Keough and Acree will refrain for five years from directly or indirectly participating in an offering of a digital asset security, excluding any personal transactions. Respondent DMM will also refrain from participating in any offering of digital assets. Respondents consented to the entry of cease-and-desist orders based on the Sections cited in the Order. In addition, Messrs. Keough and Acree will be prohibited for five years from serving as an officer or director of any issuer. Respondents will also pay disgorgement of $12,849,354, and prejudgment interest of $258,052. Respondents Keough and Acree will each pay a penalty of $125,000.
Microcap manipulation: SEC v. Sharp, Civil Action No. 1:21-cv-11276 (D. Mass. Filed August 5, 2021) is an action which named as defendants Frederick Sharp, Zhiying Yvonne Gasarch, Courtney Kellen, Mike Veldhuis, Paul Sexton, Jackson Friesen, William Kaitz, Avtar Dhillon and Graham Taylor. The action centers on group of foreign and domestic actors lead by Mr. Sharp who engaged in penny stock manipulations. Mr. Sharp lead the group of Defendants who are issuer control persons who wanted to dump their stock. Overall, the group participated in a series of manipulations. The series of manipulations fleeced investors of millions of dollars. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 15(b) and each subsection of 17(a) and Exchange Act Sections 10(b), 13(d) and 20(a). The case is pending. See also Lit. Rel. No. 25164 (August 12, 2021). The U.S. Attorney’s Office filed a parallel action.
Conference: The regulator held its Second Virtual Exchange on Ransomware on August 10, 2021. It featured representatives from a variety of financial and other firms as well as third-party providers and agency representatives involved in an on-going discussion of ransomware (here).
Financial fraud: U.S. v. Hastings, No. 1:20-cr-00534 (S.D.N.Y. Plea August 13, 2021) is an action in which Jeffrey Hastings, the former CEO and CBO of SAExploration Holdings, Inc., a publicly traded seismic data company based in Texas, pleaded guilty to charges tied to his role in a fraudulent scheme to inflate the reported revenue of the firm by millions of dollars. Mr. Hastings pleaded guilty to conspiracy to commit securities fraud and wire fraud. The scheme centered on making it appear that Alaskan Seismic Ventures LLC was an independent and reliable source of tens of millions of dollars of revenue. Mr. Hastings and another executive tried to create a way for the company to take advantage of certain tax credits offered by Alaska to seismic data library companies to offset the cost of exploring for oil and gas in the state. As part of the plan ASV was made to appear to be an independent data library firm that licensed data to third parties. In fact, it was not. Shell companies were established to look like customers. Ultimately the company recorded about $12 million in payables to Global Equipment. About $5.8 million of the credits were run through the shell companies and based through ASV to the firm – what was called a round trip. Sentencing is scheduled for November 15, 2020.
Financial fraud: U.S. v. Randolph, No. 1:21-cr-00118 (N.D. Ga. Sentencing August 6, 2021) is an action in which Richard Randolph, formerly the CEO of Randolph Acquisitions, Inc., was sentenced to serve six years and six months in prison, followed by three years of supervised released and directed to pay $1,602,200 to his victims. He previously pleaded guilty to securities fraud. The action was based on Mr. Randolph’s actions in 2017 in connection with the merger of Gallagher Management Group into Randolph Acquisition and the sale of shares to multiple investors. In connection with the audit of the firms he gave false information to the audit firm that resulted in a false property value of $10.5 million for certain real estate. He also furnished incorrect valuations for two buildings and provided false bank statement to the auditors. See also SEC v. Randolph, Civil Action No. 1:21-cv-01321 (N.D. Ga.).
Reporting: The Securities and Futures Commission issued consultation conclusions regarding OTC transaction reporting, August 10, 2021 (here).