This Week In Securities Litigation (Week of August 29, 2022)
Have we seen this movie before? On Friday China agreed to permit the PCAOB to conduct SOX inspections of work papers for China based issuers. This means the parties hope that promise of SOX made over two decades ago will finally be realized. The agreement was reached in the wake of threat to delist China based issuers, a result no party wants. Perhaps; we will all hope this time the promise is fulfilled.
Be careful, be safe this week
Whistleblowers: The Commission made two changes to the program. Under one it expanded the circumstances for which an award can be made. Under the second the Commission can consider the size of the award in making it but can only increase the size, not diminish it. The announcement was made on August 26, 2022.
Compensation: The agency adopted pay vs. performance disclosure rules first proposed in 2015, according to a release dated August 25, 2022 (here). The amendments require registrants to provide a table disclosing specific executive compensation and financial performance measures for their five most recently completed fiscal years (here).
SEC Enforcement – Litigated Actions
Microcap fraud: SEC v. Spartan Securities Group, Ltd. Civil Action No. 8:19-cvv-00448 (M.D. Fla.) is a previously filed action which named as defendants Spartan Securities Group, a transfer agent, Island Capital Management LLC and two of its principals, Carl E. Dilley and Mich Eldred. Following a three-week trial, a jury returned verdicts against each Defendant for violating Exchange Act Section 10(b). Defendants were found to have made false representations to permit unregistered securities to trade in the public markets. Those statements included false representations that the shares were free trading which permitted the legends to be removed. The actions were part of a shell creation scheme involving 19 firms. The Court ordered permanent injunctive relief against Island Stock Transfer and five-year injunctions against Defendants Dilley and Eldred. A a penny stock bar was also imposed on Spartan while a 10 year penny stock bar was ordered as to Defendants Dilley and Eldred, In addition, a $250,000 penalty and $150,000 penalty as to, respectively, Spartan and Island. Capitol was ordered. That firm was also directed to pay disgorgement and prejudgment interest in the amount of $154,394.05. See Lit. Rel. No. 25486 (August 26, 20220.
Fraudulent fees: SEC v, Cooke, Civil Action No. 1:17-cv-02873 (N.D.Ga) is a previously filed action against broker Jonathan Dax Cooke. Defendant convinced hundreds of current and former federal employees to liquidate their Thrift Savings Plan and purchase variable annuities from him. Those annuities charged significantly higher fees to purchase, giving Defendant substantial commissions. After trial the court ruled against Defendant. A final judgment has been entered precluding future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and from aiding and abetting violations of the broker-dealer books and records requirements. Defendant was also ordered to pay disgorgement of $396,409 and a civil penalty of $103,591. See Lit. Rel. No. 25479 (August 19, 2022).
SEC Enforcement – Filed and settled actions
Last week the Commission filed 7 civil injunctive actions and 3 administrative actions, exclusive of 12j, default, tag-a-long and other similar proceedings.
Financial fraud: SEC v. Granite Construction, Inc., Civil Action No. 5:22-cv-0457 (N.D. Ca. Filed August 25, 2022) is an action which names as defendant the company, an infrastructure-construction firm based in Watsonville, California. Over a period of about 2 years, beginning in 2017 Dale Swanberg, group leader and senior vice president for the firm’s largest civil engineering projects, orchestrated a scheme to improperly defer the recording of additional costs that arose with significant projects to conceal the deteriorating revenue of the group. Specifically, the firm’s policies and procedures and internal accounting controls required the construction teams within the Heavy Civil Group to create a forecast for each project that accurately forecasted the total cost. The forecast was put into the general ledger that calculates revenues and the profit margin for the group. Mr. Swanberg’s scheme manipulated profit margins and deferred the recognition of expected cost increases. Thus, the firm overstated revenue by $62 million over several quarters of 2018 and 2019. Following disclosure of the scheme the stock price crashed. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm settled the matter, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, the firm agreed to pay a civil penalty of $12 million. See also SEC v. Swanberg, Civil Action No. 5:22-cv-00459 (N.D.Ca. Filed August 25, 2022 (same as above except does not include Exchange Act Section 13(b)(2)(B); case is pending); In the Matter of Jigisha Desa, Adm. Proc. File No. 3-21005 (August 25, 2022)(CFO of firm; based on facts above; alleged to have caused violations of SOX 304(a); resolved with a cease-and-desist order based on Section cited; Respondent reimbursed the firm over $176,000 in bonuses and cash equivalent for them); In the Matter of Laurel Krzeminski, Adm. Proc. File No. 3-21004 (August 25, 2022)(CFO of firm; based on facts above; resolved same as prior action above); In the Matter of James H. Roberts, Adm. Proc. File No, 3-21003 (August 25, 2022)(CEO of firm; based on facts detailed above; resolved with the entry of a cease-and-desist order as above; in addition, Respondent was ordered to reimburse the firm $629,000 per SOX 304(a); Respondent will also return 27,527 shares of stock).
Offering fraud: SEC v. Rege, Civil Action No. 21-cv-19313 (D.N.J) is a previously filed action that named as defendants Swapnil Rege and SwapStar Capital, LLC. The complaint alleged that Defendants solicited friends, neighbors and others to be investment advisory clients. Potential clients were guaranteed profitable returns. Investor funds were used, however, to pay others profits or return capital and in part misappropriated. Last week the Court entered a final judgment, permanently enjoining Defendants from future violations of Advisers Act Sections 206(1) and 206(2) and directed the payment of disgorgement in the amount of $207, 183 on a joint and several basis. A penalty of $207, 183 was also ordered. Defendant Rege was, in addition, enjoined from further violations of a 2019 order entered against him which barred association with an investment adviser. See Lit. Rel. No. 25482 (August 25, 2022).
Fraudulent sales: SEC v. Arkells, Civil Action NO. 2:22-cv-5991 (C.D. Cal. Filed August 24, 2022) is an action which names as defendant Nicolas Arkells, the former Chief of Strategy and Business Development of C3 International, Inc., a purposed medical cannabis firm. This action centered on the sale of shares to investors in a marijuana firm. The sales were made based on misrepresentations. The Commission previously filed a suit against the company and others claiming that at least 40 investors had been defrauded. Defendant is not a registered broker-dealer. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The complaint is pending. See Lit. Rel. No. 25481 (August 24, 2022).
Offering fraud: SEC v. Taronis Technologies, Inc., Civil Action No. 8:22-cv-01939 (M.D. Fla. Filed August 24, 2022) is an action which names as defendants: the firm; Taronis Fuels, Inc., David Mahoney, CEO of Taronis Tech; and Tyler Wilson, an attorney and Director of Taronis Tech. Over a period of about one year, beginning in January 2019, Taronis Tech, and over a period of several months, beginning in February 2020l, Taronis Fuels, and the CEO of both firms, Scott Mahoney, defrauded investors of both firms by making false statements. Taronis Fuels also falsified its quarterly financial statements for the second and third quarters of 2020. From about April 2020 to November 2020, Defendant Dan Mahoney and Tronis Fuels’ former general counsel and CFO, Tyler Wilson, falsified the financial records by creating fake orders. Later the same year $30 million was raised from investors by Taronis Fuels through the use of the false financial statements. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13b(2)(B) , 13b-5 and 20(a). Defendant Taronis Fuels resolved the matter, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. The firm also agreed to pay disgorgement in the amount of $4,867,023 and prejudgment interest of $231,877.50. Defendant Mahoney consented to a bifurcated settlement under which he is enjoined from future violations of the Sections cited in the complaint, will pay a penalty of $150,000 and be barred for five years from serving as a director and officer of a public company and participating in a penny stock offering. The Court will determine if he should pay disgorgement and prejudgment interest and reimburse Taronis Fuels under SOX Section 304(a). See Lit. Rel. No. 25484 (August 25, 2022).
Offering fraud: SEC v. Wilson, Civil Action No. 4:22-cv-00741 (N.D. Tx. Filed August 23, 2022) is an action which names as defendants John Wilson II and Aether Innovative Technology, Inc. Defendant Wilson is the CEO of the company. Over a period of about one year, beginning in August 2019, Defendants defrauded 15 investors out of $1.9 million. Representations regarding the amount invested by Defendant Wilson in the business, the development of hardware at the firm, and the existence of customer relationships were all false. Defendant Wilson also misappropriated about $122, 850 of investor funds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25483 (August 25, 2022).
Offering fraud: SEC v. Watson, Civil Action No. 220-cv-02147 (D. Colo. Filed August 22, 2022) is an action which names as defendants Robert Watson and WDC Holdings LLC. The latter is a real estate firm; the former is its founder. Over a two-year period, beginning in April 2017, Defendants raised about $49.5 million from at least 350 investors. Those investors were told that from 4 to 5% of the money invested in the real estate firm would come from Defendants. Having ”skin in the game” was important to investors because it created an incentive for Defendants to maximize profits. Defendants’ claims were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25480 (August 23, 2022).
Sham tender offer: SEC v. Simmons, Civil Action No. 1:22-cv-07081 (S.D.N.Y. Filed August 19, 2022) is an action which names Lee Simmons as defendant. Mr. Simmons claims to have positions with several firms. Beginning in November 2019, and continuing over he next four months, Mr. Simmons made false and misleading statements to the Commission and others as part of multiple attempts to manipulate the price of BlueLinx common stock and benefit from his purchase of its shares. Specifically, in early February Mr. Simmons purchase more than 900 out of the money BlueLinx call options with a strike price dramatically exceeding the price of common shares. Subsequently, he issued press releases claiming that Bluefin Acquisition, LLC, a firm formed 3 months earlier by Defendant, commenced a tender offer for 35% of the shares at a price over the recent market price. The acquisition would have cost about $80 million, After failing to sell his options on one day, the next Mr. Simmons did succeed in sell a portion of the position, raising $24, 000. The tender offer was a sham. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 14(e) and Advisers Act Section 207. The case is pending. See Lit. Rel. No, 25478 (August 19, 2022).
Paper: The Monetary Authority of Singapore published a paper on strengthening AML/CFT practices for external asset managers on August 24, 2022 (here).