This Week In Securities Litigation (Week of August 23, 2021)
Is this the period of emerging themes? Consider the following:
Insider trading: The Commission claims that trading while in possession of inside information about one company in the shares of another may constitute insider trading. See SEC v. Panuwat below
SPACs: A class action securities suit claims a SPAC holding only securities must register under the Investment Company Act. See Assad v. Pershing Square, Civil Action No. 1:21-cv-06907 (S.D.N.Y)
Bitcoin: The Commission now imposes a disgorgement obligation payable in Bitcoin in an enforcement action. See SEC v. Brown, below.
Be careful, be safe this week
Security-based swap entities: The Commission and the European Central Bank executed an MOU regarding security-based swaps on August 16, 2020. The arrangement calls for the regulators to cooperate and exchange information in connection with the oversite and enforcement of certain security-based swap dealers and major security-based swap participants that are registered with the SEC and supervised by the ECB (here).
Data enhancement: The Commission announced on August 19, 2021, that for the first time Application Programing Interfaces or APIs will be available on its Edgar system. The interfaces permits the aggregation of financial statement data making corporate disclosures “quicker” and “easier” for developers and third-party services to use, according to the release (here).
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 12 civil injunctive actions and 2 administrative proceedings, exclusive of tag-along and other similar proceedings.
Offering fraud: SEC v. Medsis International, Inc. Civil Action No. 1:21-cv-11356 (D. Mass. Filed August 19, 2021) is an action which names as defendants: the company, a financial and software firm; Joshua Cabrera, the founder and CEO of the company; and Paul Hess, a former investment adviser. Over a five-year period, beginning in 2015, Defendants raised over $12.9 million dollars from about 160 investors who purchased shares in the firm. A series of misrepresentations were made to facilitate the sales. Those included false claims regarding a key business partner, a supposed important government contract, an alleged deal with a Brazilian insurance firm, prospective revenues and other matters. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See also Lit. Rel. No. 25176 (August 19, 2021).
Microcap fraud: SEC v. Lawler, Civil Action No. 1:19-cv-04025 (E.D.N.Y.) is a previously filed action which named as defendants attorney William Lawler and Microcap agent Natalie Bannister. The complaint claimed that attorney Lawler prepared false attorney letters to facilitate the transfer of two microcap issuers. Ms. Bannister participated in the transfer transactions. Each defendant consented to the entry of final injunctions prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and, as to Mr. Lawler, Exchange Act Section 9(a). Each Defendant is also barred from participating in any penny stock offerings. In addition, Mr. Lawler is ordered to pay $386,790 in disgorgement, prejudgment interest and penalties. Ms. Bannister was ordered to pay $21,781 in disgorgement, prejudgment interest and penalties. Mr. Lawler also consented to the entry of an order, in a related administrative proceeding, precluding him from appearing or practicing before the Commission as an attorney. See Lit. Rel. No. 25175 (August 19, 2021).
Crypto: SEC v. Brown, Civil Action No. 1:21-cv-04791 (S.D.N.Y.) is a previously filed action centered on the BitConnect lending program promoted over a period of several months at the end of 2017. The complaint alleged defendants sold unregistered securities. Here the Court entered a judgment against Michael Nobel and a final judgement against Joshua Jeppesen. Each is tied to their involvement with the BitConnect lending program. Defendants Nobel and Jeppesen each consented to the entry of judgments based on Securities Act Sections 5(a), 5(c) and Exchange Act Section 15(a). Each Defendant also agreed to be precluded from participating in any offering of securities. The judgment as to Mr. Jeppesen also directed him to pay disgorgement in the amount of $3,039,485 and prejudgment interest, additional disgorgement in the amount of 190 Bitcoin and a $150,000 penalty. The judgment as to Mr. Nobel directs him to pay disgorgement, prejudgment interest and a civil penalty in an amount to be determined at a later date on motion by the Commission. The final judgment as to Relief Defendant Laura Mascola orders her to pay $576,358 in disgorgement and prejudgment interest. See Lit. Rel. No. 2521 (August 19, 2021).
Insider trading: SEC v. Jun, Civil Action No. 2:21-cv-1108 (W.D. Wash. Filed August 18, 2021) is an action which names as defendants: Sung Mo Jun, at one time a software engineer at Netflix; Joon Mo Jun, brother of Sung Mo June; Junwoo Chon, close friend of Sung Mo Jun; Ayden Lee, from early 2016 to February 2021, a software engineer at Netflix; and Jae Hyeon Bae, a software engineer at the firm from 2012 through 2015 and from July 2017 through July 2019. The action centers on trading in advance of quarterly earnings releases at Netflix by various defendants during different time periods which collectively netted about $3.1 million in illicit trading profits. Defendant Sung Mo June was at the center of an insider trading ring during his tenure at Netflix. In 2016 and 2017 he used his access to inside information to tip his brother, Joon Mo Jun and his close friend, Junwoo Chon. After leaving Nexflix, Mr. June continued to obtain inside information about the company from another insider, defendant Ayden Lee, a friend. The trading continued. In February 2018 Defendant Jae Hyeon Bae returned to Netflix. Again the trading continued, this time through the use of a messaging app by Sung Mo Jun, Joon Jun, Chon and Bae. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Western District of Washington filed a criminal information against Sung Mo Jun, Joon Jun and Lee.
Insider trading: SEC v. Grevas, Civil Action No. 1:21-cv-04390 (N.D. Ill. Filed August 18, 2021) is an action which names as a defendant, Denise Grevas who is not employed but is an active stock trader married to the human resource manager of Lunbeck’s North American subsidiary. The action centers on the announcement by H. Lundbeck that it will acquire Akler BioPharmaceuricals, Inc. on September 16, 2019. Ms. Grevas purchased shares of Akler prior to the deal announcement while in possession of inside information misappropriated from her spouse who served on the deal team. She sold her shares after the deal announcement, reaping a profit of $190,434. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The U.S. Attorney’s Office for the Norther District of Illinois filed parallel criminal charges. See Lit. Rel. No. 25174 (August 18, 2021).
Offering fraud: SEC v. Fusion Analytics Investment Partners, Inc., Civil Action No. 0:21-cv-61721 (S.D. Fla. Filed August 17, 2021) is an action which names as defendants: the firm, a registered investment adviser; Fusion Analytics Holdings, LLC, a registered broker-dealer; and Michael Conte, the CEO of each entity defendant. Over a six-year period, beginning in 2010, Defendants raised about $1.4 million from the sale of promissory notes to 10 individuals who are retail and advisory clients. Clients were not advised at the time of purchase about the declining financial condition of the entity defendants. When the notes could not be paid, they were renegotiated and reissued. Subsequently, part of the principal and interest on the notes was repaid. A balance of $246,000 remains. Defendants have failed to repay that balance. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The complaint is pending. See Lit. Rel. No. 25173 (August 17, 2021).
False statements: SEC v. Hall, Civil Action No. 3:21-cv-0157 (N.D. Oh Filed August 17, 2021) is an action which names as defendants Arthur Hall, the CEO of defendant Rising Biosciences, Inc., a seller of health products. Over a period of several months, beginning in April 2020, Defendants sold products advertised through various outlets that purportedly tied to COVID-19 and which Defendants claimed were approved by either the CDC or the EPA. The claims were false. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25172 (August 17, 2021).
Reg SHO: In the Matter of Muchinson Ltd., Adm. File No. 3-20463 (August 17, 2021) is a proceeding which names as respondents: the firm, an Ontario Canada company that serves as adviser to Hedge Fund and which is controlled by respondent Marc Bistricer: and Paul Zogala, the trader at Muchinson. Over a period of about one and a half years, beginning in January 2016, Respondents caused Hedge Fund to place numerous “long” sales with its brokers, supposedly creating a net long position. Its actual orders, however, should have been marked short – the Hedge Fund was not deemed to own the stock being sold and thus did not have a long position. The orders were thus mismarked, violating Reg. SHO. Respondents also caused Hedge Fund to violate that Rule because the executing brokers neither borrowed nor located shares available for borrowing prior to effecting those sales. Respondents also caused Hedge Hund to purchase securities for its own account without being a registered dealer. The disgorgement ordered here is consistent with equitable principles and does not exceed Respondent’s net profits from the violations here, according to the Order. Merchinson also agreed to certain undertakings. The Order alleges violations of Rules 200(g) and 203(b)(1) of Regulation SHO and Section 15(a)(1) of the Exchange Act. To resolve the proceedings Respondents consented to the entry of a cease-and-desist orders based on the Rules cited in the Order. In addition, Respondent Merchinson will comply with its undertakings and pay a penalty of $800,000. A fair fund will be established. Respondent Bistricer will pay a penalty in the amount of $75,000 and Respondent Zogak will pay $25,000. Those two amounts may be paid to the Treasury, although the Commission may direct otherwise.
Insider trading: SEC v. Panuwat, Civil Action No. 4:21-cv-06322 (N.D. Cal. Filed August 17, 2021). Defendant Matthew Panuwat was employed at pharmaceutical firm Medivation, a mid-cap oncology-focused biopharmaceutical firm. He was an expert in the biopharmaceutical industry with undergraduate and graduate degrees in biology and the pharmaceutical area. He also worked in the securities industry an associated person at a San Francisco investment bank and broker-dealer. In 2016 Mr. Panuwat was the Senior Director of Business Development at the firm. He reported to the CFO. His role was essentially to find and pursue opportunities to expand the firm’s drug products and development pipeline, primarily through acquisitions and licensing. Possessing confidential non-public information was part of the job for Mr. Panuwat. When he assumed his position Mr. Panuwat was required to sign the insider trading policy. In April 2016 Medivation became an acquisition target. The company engaged investment banks to advise on strategic options in view of the recent sale of a French pharmaceutical company. The Senior Director reviewed various presentations and materials the bankers discussed with peer companies regarding his employer. He was also aware that large cap biopharmaceutical companies with commercial-state drugs were interested in acquiring firms in the oncology-focused mid-cap area. As the search advanced, Mr. Panuwat was involved in the discussions with various bidders. He also suggested that the bankers consider certain firms. By early August 2016 Mr. Panuwat learned that his employer was going to be acquired at a significant premium to the then current stock price. By mid-August the bankers had sent him a summary of bids by potential acquirers. At least five potential bidders were considering all cash offers. Shortly after this, Mr. Panuwat attended a board meeting where letters were authorized to solicit final bids from interested firms. On Thursday, August 18, 2016, he was included in a group of executives that were told the CEO of Big Parma, a large pharmaceutical company, would call to finalize a bid. Minutes after receiving the email Mr. Panuwat logged onto his computer. He knew that the information about his firm being acquired was material. He also thought it would impact shares of Incyte, another mid-cap pharmaceutical firm. Accordingly, he purchased 578 Incyte call options with strike prices that ranged from $80 to $85. Incyte’s price was at about $76 to $77 per share. The options would expire on September 16, 2016. While Mr. Panuwat did not expect any announcement before the expiration date regarding Incyte, he did expect that the deal announcement for the transaction involving his employer would be announced before September 16th and would increase the price. Two days later the Medivation-Large Pharma deal was announced on a Sunday. The price was $81.50 per share, a significant premium. The next day Mr. Panuwat purchased additional Incyte options prior to the market open. Incyte’s price jumped 8%. The executive had profits of $10,086. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25170 (August 17, 2021).
Cyber security: In the Matter of Pearson plc, Adm. Proc. File No. 3-20462 is an action which names the firm, a publisher of educational materials, as respondent. The firm, whose shares are traded on the London Stock Exchange, suffered a cyber intrusion in 2018 that impacted several million rows of student data. In July 2019 the firm furnished the Commission a risk factor disclosure statement that implied the company faced a hypothetical risk. Later the same month the firm sent a breach notification to impacted customers that also made misstatements about the nature of the breach. The Order alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Section 13(a). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, the firm agreed to pay a penalty of $1 million.
Unregistered dealer- scalping: SEC v. GPL Ventures LLC, Civil Action No. 1:21-cv-06814 (S.D.N.Y. Filed August 13, 2021) is an action which names as defendants: the firm and GPL Management LLC which buys and sells securities; Alexander Dillon and Cosmin Panait who co-own the firms; Hempamericana Inc., a public issuer that claims to be in the hemp business; Salvador Rosillo, the hemp firm’s CEO; Seaside Advisors, LLC, a firm that claims to do PR; and Lawrence Adams who owns the PR firm. Since 2017 the GPL defendants have been acting as unregistered dealers in violation of Exchange Act Section 15(a). They have also engaged in scalping by acquiring shares of stock for their own benefit prior to recommending or touting that stock without disclosing their ownership. This activity centered on the shares of HempAmerican from 2017 through 2019. Mr. Rosillo and HempAmericana also filed false Reg. A offering materials. The complaint alleges violations of Securities Act Sections17(a) and 17(a)(1) & (3) and Exchange Act Sections 10(b) and 15(a). The case is pending.
Offering fraud: SEC v. Ruiz, Civil Action No. 1:21-cv-0622 (S.D.N.Y. Filed August 13, 2021) is an action which names as defendants Martin A. Ruiz, the president of defendant Carter Bain Wealth Management LLC, a registered investment adviser; and Ram Fund, LP, controlled by Defendant Ruiz. Defendant Ruiz raised about $10.6 million from investors, many of whom were advisory clients, claiming their investment would be put into commercial real estate loans. In fact, much of the investor capital was misappropriated. The complaint alleges violations of each subdivision of Securities Act Section 17(a), Exchange Act Sections 10(b) and 20(a), and Advisers Act Sections 206(1) and 206(2). The case is pending.
Manipulation: SEC v. Tajyar, Civil Action No. 2:21-cv-06557 (C.D. CA. Filed August 13, 2021) is an action which names as defendants: Ahmad Hareis Tajyar, a securities law recidivist who previously pleaded guilty in a criminal securities case and settled a Commission enforcement action; and Eric Leo Marsoubian. Over a period of several months, beginning in February 2017, defendants sold shares of a firm named Atlas Technology International, Inc, formerly a baking firm but renamed to support a claim that it markets touch screens. Defendant manipulated the share price of the company, controlled by Defendant Tajyar, by marking the close, matched orders and wash sales. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(1) and (2) and 10(b). The case is pending. See Lit. Rel. No. 25167 (August 13, 2021).
Offering fraud: SEC v. The Movie Studio, Inc., Civil Action No. 0:21-cv-61686 (S.D. Fla. Filed August 13, 2021) is an action which names as defendants the company, a public firm, and its CEO, Gordon Venters. Over a five-year period, beginning in August 2016, Defendants issued a series of materially false and misleading statements to promote the firm. About $1.2 million was raised. Defendants then used the funds to pay for various items such as commissions to sales agents and for personal expenses. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25166 (August 13, 2021).
Offering fraud: SEC v. MJ Capital Funding, LLC, Civil Action No. 0:21-cv-61644 (S.D. Fla. Filed August 9, 2021) names as defendants the firm, which claims to provide cash advances; MJ Taxes and More, Inc.: and Johanna M. Garcia who controls both entity defendants. Since 2020 Defendants have solicited investors to put their money into firms that supposedly made small business loans. The returns were to be 120% for a six month investment. In fact, the money was not used as promised. About $70.9 million to $128.8 million was raised from over 2,150 investors. To date investors have been paid by soliciting additional funds from other investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 20(a). The action is pending. See Lit. Rel. No. 25168 (August 13, 2021).
Misappropriation/false statements: SEC v. Battery Private, Inc., Civil Action No. 2:21-cv-04577 (E.D.N.Y. Filed August 13, 2021) is an action which names as defendants the firm, an investment adviser, and Jeffrey Slothower, a registered broker and the CEO of the firm. Over a two-year period, beginning in 2016, Defendant Slothower misappropriated $1.18 million from an advisory client and her spouse. Subsequently, beginning in April 2018, Defendant Slothower made misrepresentations in connection with the private sales of penny stock firms. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. See Lit. Rel. No. 25171 (August 17, 2021).
Investment fraud: U.S. v. Singh, No. 1:20-cr-59 (E.D.Va. Sentencing August 20, 2021) is an action in which Manish Singh pleaded guilty to wire fraud and identity theft in connection with defrauding a couple out of about $1.26 million. Defendant promised the couple to invest their funds in the manufacture of fabric in India. Instead, he diverted most of the money to personal use. The Court sentenced him to serve 40 months in prison.
Event: The Monetary Authority of Singapore announced that the FinTech Festival 2021 will take place on November 8 through 12 with a key focus on Web 3.0 (here).