This Week In Securities Litigation (Week of August 28, 2023)
This Week In Securities Litigation (Week of August 28, 2023)
Summer is heading for its traditional close at Labor Day as many have either returned to school or are finalizing their plans. The Commission, however, remained busy at work publishing new rules for private funds and a series of cases lead by two offering fraud actions, five centered on violations of Form NT, and two tied to crypto assets.
Have a great and safe week.
Private funds: The Commission adopted new rues and amendments under the Advisors Act last week. The provisions require that registered private fund advisers provide investors with: quarterly statements detailing information regarding performance, fees and expenses; obtain an annual audit of each fund; and obtain a fairness or valuation opinion in connection an adviser-led secondary transaction. The new provisions also require that all private fund advisers prohibit: certain activities deemed to be contrary to the public interest; and certain types of preferential treatment that have a material negative effect on other investors and that give preferential treatment unless disclosed to current and prospective investors (here).
Whistleblowers: The Commission awarded a whistleblower over $18 million, according to an August 25, 2023 release.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 5 civil injunctive actions and 6 administrative proceedings, excluding 12j, tag-along proceedings and those presenting a conflict for the author.
FCPA: In the Matter of 3M Company, Adm. Proc. File No. 3-21581 (August 25, 2023) is an action which names as respondent the global manufacturer of products and services. Over a four-year period, beginning in 2014, the China subsidiary of the firm arranged for Chinese health care officials employed by its state-owned entity customers to attend overseas conferences, educational events and make health care facility visits under the guise of the marketing and outreach efforts of the subsidiary. Funds were transferred to a complicit China-based travel agency and were used to help pay for the Tourism Activities. The expenses were falsely recorded in the books and records of the subsidiary which were consolidated into those of the parent entity. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm also agreed to pay disgorgement of $3,538,897, prejudgment interest of $1,042,721 and a penalty of $2 million.
Insider trading: SEC v. Costa, Civil Action No. 23-cv-2451 (August 23, 2023) is an action which names as defendant Romero Cabral Da Costa Neto, a Brazilian attorney who was employed at an international law firm with an office in Washington, D.C. beginning in September 2022. During his term of employmentMr. Costa repeatedly accessed material non-pubic information from the firm and used it to trade securities. For example, in March two biopharmaceutical companies – CTI BioPharma Corp. and Swedish Orphan Biovitrum AB –began discussions regarding a merger. The law firm represented CTI. Ultimately a deal was struck and announced on May 10, 2023. The day before the announcement Defendant Costa purchased 10,400 shares. Following the announcement, the share price increased over 80%. Mr. Cost had profits of over $42,000. Mr. Costa traded in the shares of several other entities following the same pattern. The complaint alleges violations of Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25815 (August 24, 2023).
Crypto assets: SEC v. Desalvo, Civil Action No.23-cv-8092 (D. N.J. Filed August 23, 2023) is an action which names as defendant John Desalvo, a former Lieutenant in the New Jersey Department of Corrections and the owner of a parking lot sealcoating company. In November 2021 Defendant launched the Blazar Token through an IPO, raising over $600,000 from 222 investors in a matter of months. The Blazar token was supposedly registered with the SEC, available through payroll deductions, guaranteed to earn extraordinary investment returns and would eventually replace state pension systems. The token traded on PancakeSwap. When Defendant sold about 41 billon tokens the scheme collapsed, creating significant investor losses. An earlier scheme, referred to as “E*Trade Investment Group” run primarily on Facebook for several days in early February 2021, garnering about $95,000 from 17 investors. Investors were eventually told that Mr. Desalvo lost their funds in the market. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. The U.S. Attorney’s Office for the District of New Jersey filed a parallel criminal action. See Lit. Rel. No. 25814 (August 23, 2023).
Form NT: In the Matter of Black Spade Acquisition Co., Adm. Proc. Fie No. 3-21572 (August 22, 2025) is one of five related cases centered on violations of Exchange Act Rule 12b-25. That rule requires an issuer of a security registered under Exchange Act Section 12 to timey file Form 12b-25 “Notification of Late Filing” or Form NT and to provide in reasonable detail an explanation for the late filing. Black Spade is a Cayman Island corporation based in Hong Kong which is a special purpose acquisition company. Here, in August 2022 the firm filed a Form 12b-25 without disclosing in sufficient detail the predicate for the request or that it anticipated significant changes in operating results for the second quarter of FY 2022. Shortly after filing Form 12b-25, the firm filed a Form 8-K making the disclosures. The firm was ordered to cease-and-desist from future violations of Exchange Act Section 13(a) and Rule 12b-25. It was ordered to pay a penalty of $35,000. Four other firms were charged with similar violations. Each case was resolved on similar terms (here).
Crypto assets: In the Matter of Titan Global Capital Management USA LLC, Adm. Proc. File No. 3-21569 (August 21, 2023) is a proceeding which names as respondent the registered investment adviser. As of October 2022, the adviser offered seven investment strategies, one of which was the Titan Crypto strategy initially launched the prior year. Beginning in June 2021 the advisor elected to comply with the Marketing Rule adopted in December 2020. The adviser failed, however, to adopt implementing policies and procedure. The adviser subsequently made misleading representations in written marketing materials regarding the performance of Titan Crypto, “Annualized” performance results for Titan Crypto were advertised that were as high as 2,700% without stating that the return was based on a purely hypothetical account or revealing that the return was based on the assumption that returns from the first three weeks would continue for a full year. The firm’s website also contained conflicting disclosures regarding its wrap fee and how Titan Crypto assets were custodied. The firm included what is typically called a “hedge” clauses in advisory agreements – the clause created the false impression that clients had waived non-waivable causes of action against Titan provided by federal and state law. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the cited Sections. It also agreed to pay disgorgement of $192,454, prejudgment interest of $7,598 and a penalty of $850,000. A Fair Fund was created.
Insider trading: SEC v. Catenacci, Civil Action No. 1:21-cv-06718 (N.D. Ill.) is a previously filed action which names as defendant Daniel V.T. Catenacci, a medical doctor. The complaint alleged that Defendant engaged in insider trading in the securities of biotechnology company Five Prime Therapeutics, Inc. in advance of its November 10, 2020 announcement that it had achieved positive drug trial results for its flagship cancer drug Bemanituzumab. Following the announcement the share price increased over 300%. Defendant had purchased 8,743 shares. He had trading profits of $134,142. To resolve the matter Defendant consented to the entry of a final judgment of permanently injunction based on Exchange Act Section 10(b). Defendant will also pay a penalty of $50,000. The U.S. Attorney’s Office for the Northern District of Illinois filed parallel criminal charges. See Lit. Rel. No. 25813 (August 21, 2023).
Offering fraud: SEC v. Waters, Civil Action No. 2:23-CV-06799 (C.D. Cal. Filed August 18, 2023) is an action which names as defendant Andrew W. Waters, an Australian citizen who now lives in Indonesia and is chairman of ECom Products Group Corporation or EPGC whose shares are traded over-the-counter. Over a three-year period, beginning in 2019, Defendant induced over 20 investors to purchase EPGC common stock from him and caused 12 investors to accept shares of the company in return for shares of another firm he owned. The transactions were based on a series of false statements regarding the value of the assets, their claimed affiliation with a well-known fashion magazine, certain so-called “free zone trading licenses” and a proprietary data base as well as their supposed annual revenue. The claims were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25812 (August 18, 2023).
Offering fraud: SEC v. Crews, Civil Action No. 1:23-cv-03658 (N.D. Ga. Filed August 17, 2023) names as defendant Keith Crews who controls Four Square Biz LLC and Stem Biotech LLC. Over a three-year period, beginning in October 2019, Defendant raised at least $800,000 from about 200 investors. Many were solicited through relationships in African-American and church communities to acquire “Stemy Coin.” As part of the solicitations to acquire the coin, potential investors were told that it was backed by stem cell technology and other assets, that Stem Biotech had existing operations and stem cell products and that Stem Biotech had existing partnerships with entities involved in the stem cell industry. The claims were false. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25811 (August 18, 2023).
Consultation: The Securities and Futures Commission of Hong Kong concluded a consultation on risk management guidelines for futures dealing activities and published its conclusions, according to a notice published August 25, 2023 (here).
Consultation: The Monetary Authority of Singapore announced the publication of a consultation paper focused on enhancing pre and post transaction safeguards for retail clients on August 24, 2023 (here).