This Week In Securities Litigation (Week of August 30, 2021)
The Commission published a request for comments with respect to the use of digital engagement practices or DEPs this week, discussed below. In a separate statement, issued on August 27, 202, Chair Gensler highlighted two key points of concern. One focuses on potential conflicts. The second centers on determining whether DEPs are making a recommendation or providing investment advice when data analytics use optimization functions which can lead to changes in investor behavior (here). Interesting points to consider at the beach over the labor day weekend coming up.
Be careful, be safe this week
SEC
Comments: The agency is seeking comments on broker-dealer and investment adviser digital engagement practices along with their related tools and methods. The focus of the request is to understand and assess the potential conflicts with respect to the use of new digital engagement practices or DEPs. These practices might encourage investors to trade more frequently, invest I different products or change investment strategy. The Commission is seeking a better understanding of the practices and the implications. The statement was published on August 27, 2021 (here).
Whistleblowers: Five whistleblowers, who provided information relating to three enforcement proceeding, were collectively awarded $2.6 million, according to a release dated August 27, 2021.
Appointment: Chair Gensler announced the addition of Barbara Roper to the senior staff. Ms. Roper has worked for 35 years at the CFA, according to an August 25, 2021 release (here).
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 5 civil injunctive actions and 2 administrative proceedings, exclusive of tag-along and other similar proceedings.
Muni bonds: In the Matter of Crews & Associates, Inc., Adm. Proc. File No. 3-20480 (August 26, 2021) is an action which names as a respondent the registered broker-dealer and municipal bond dealer. In late 2015 Respondent recommended that the County Commission of Ohio County, West Virginia lower its outstanding debt service expense through a tender offer for bonds issued in 2006. The firm had previously been retained by the County Commission with respect to an offer to pay bondholders a price higher than the current market price of its outstanding bonds, and high enough to encourage them to tender. With respect to the new proposal, the firm recommended they be priced above market. Crews did not disclose that it held an inventory of the bonds. Following the finalization of the deal terms, Crews purchased about $4.8 million more in bonds. Those were sold to an affiliate to tender back to the County Commission. There was no disclosure of the transaction. The Order alleges violations of Exchange Act Section 15B(c)(1). The firm undertook a series of remedial efforts. To resolve the matter, Crews consented to the entry of a cease-and-desist order based on the Section cited in the Order and a censure. The firm also agreed to pay disgorgement of $34,631, prejudgment interest of $9,441 and a penalty of $66,667. The disgorgement, consistent with equitable principles, does not exceed the Respondent’s net profits. See also In the Matter of Rush F. Harding III, Adm. Proc. File No. 3-20481 (August 26, 2021)(proceeding against founder and CEO of Crews at the time based on the facts detailed above; resolved with a consent to the entry of a cease-and-desist order based on Exchange Act Section 15B(c)(1) and a censure and payment of disgorgement of $36,524, and prejudgment interest of $9,957; he is also placed under heightened supervision for one year).
Financial fraud: SEC v. Lachwani, Civil Action No. 5:21-cv-06554 (N.D. Ca. Filed August 25, 2021) is an action which names as defendant Manish Lachwani, CEO of HeadSpin, Inc., a Silcon Valley start-up that focuses on software applications. Over a period of two years, Defendant falsely inflated the revenues of the company in an effort to make its capitalization exceed $1 billion. Mr. Lachwani achieved this by falsely inflating the value of numerous company deals in advance of two rounds of financing. In the fall of 2018, before its Series B fundraisings, HeadSpin was valued at about half a billion dollars. When Defendant sold his personal stock in May 2018 the valuation was up 50% to about $750,000. Less than six months later at the time of the Series C fund raise, the valuation had increased to about $1.1 billion. It entered so-called “unicorn” status. A number of false statements were made by Mr. Lachwani to facilitate the scheme. That scheme unraveled following an internal investigation. Defendant was forced to resign. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Northern District of California announced criminal charges against Mr. Lachwani. See also Lit. Rel. No. 25182 (August 25, 2021).
Offering fraud: SEC v. Jensen, Civil Action No. 2:21-cv-06817 (C.D. Ca. Filed August 24, 2021) is an action which names as defendants: Carl Jensen, a Canadian citizen who resides in Australia; and Stephen Gold, a British citizen who resides in California. Since 2015 Mr. Jensen has been soliciting investors for interests in a portfolio of what are called lucrative investments. Those include Chinese and Mexican bearer bonds. Mr. Jensen claims to have special expertise in the kind of bonds held. Investors are told that the investments would provide outsized returns. Those returns were supposed to be paid in short periods of time. They were not. Investors who inquired were given a series of excuses. At the same time the funds available were withdrawn for the benefit of Defendants. Overall, about $7 million was raised from at least 75 investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25183 (August 25, 2021).
Loss contingencies: In the Matter of Healthcare Services Group, Inc., Adm. Proc. File No. 3-20464 (August 24, 2021) is an action which names as respondents: the firm, a provider of housekeeping and other services for healthcare facilities; John Shea, CPA, the CFO of the firm; and Derya D. Warner, the firm’s controller. During 2014 and 2015 the firm was faced with large class actions initiated by its employees. The complaints centered on claims that the company violated the federal and state wage and hour laws with respect to employee compensation. Eventually, the claims were settled. However, Mr. Shea did not direct that loss contingencies be accrued for the suits. If the firm had made the appropriate accruals, it would have missed analysts’ consensus EPS estimates in many quarters. While Mr. Warner made journal entries during the closing processes, they lacked sufficient support. The firm also failed to maintain sufficient internal accounting controls. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The Commission considered the cooperation of the company in the resolution of this matter. To resolve the proceedings HCSG consented to the entry of a cease-and-desist order based on the Sections cited in the Order as did Mr. Shea. Mr. Warner consented to a similar order but based only on Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Mr. Shea is also denied the privilege of appearing and practicing before the Commission as an accountant with the right to request reinstatement after two years. The firm will pay a penalty of $6 million while Mr. Shea will pay $50,000 and Mr. Warner $10,000.
Misappropriation: SEC v. Boggs, Civil Action No. 19-5672 (N.D. Ill. Filed August 23, 2021) is an action which names as a defendant Marcus Boggs, an investment adviser/broker-dealer at a large Financial Institution based in New York. Mr. Boggs resided in the Chicago office. Mr. Boggs was well known in the community, participating in various philanthropic community events. He managed over $40 million for 70 clients. He frequently traveled internationally. Many of his accounts were discretionary. Others, such as those for Clients A, B and C, were not. Beginning in 2016 Defendant misappropriated funds from the accounts of those three clients. Although he did not have authority, Defendant took cash from the accounts. Over time he misappropriated a total of over $40 million. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending.
Investment fraud: SEC v. Mueller, Civil Action No. 5:21-cv-785 (W.D. Tx. Filed August 20, 2021) is an action which names as defendants: Robert Mueller, and attorney and unregistered investment adviser; Deeproot Funds LLC, also an investment adviser; and Policy Services Inc., an entity used to hold life insurance policies for related entities. Beginning in 2015, and continuing for the next six years, Defendants defrauded investment funds they advised out of almost $58 million that belonged to just under 300 investors. Defendants marketed the funds to, among others, retirees using a pitch that much of the investment money would be put into life insurance policies, a safe investment. Those investments were projected to return conservative payouts of either 5% or 7% over a period of time. Not disclosed until 2019, the life insurance policies were acquired indirectly through another entity. Defendants raised over $58 million for one fund and then comingled the money in deeproot and Policy Services bank accounts. They also spent less than $10 million to acquire the life insurance policies for the Funds. After 2017 no new policies were acquired. The vast majority of the money was used like a piggy bank by Mr. Mueller. Since 2015 neither the life insurance policies nor the capital investments generated sufficient cash flow to support operations. As a result, about $820,000 in Ponzi like payments were made. In addition, Defendant Mueller used about $1.5 million of the Funds’ assets to pay personal expenses. The complaint alleges violations of each subsection 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.
Offering fraud: SEC v. Woods, Civil Action No. 1:21-cv-03413 (N.D. Ga. Filed August 20, 2021) is an action which names as defendants: John Woods, controller of Southport, who holds several securities licenses and conceals his control over Southport; Livingston Group Asset Management Company, dba Southport, is a registered investment adviser; and Horizon Private Equity, III, LLC. For over a decade Mr. Woods has raised millions of dollars from over 400 investors which was invested in the Horizon Private Equity, III LLC fund. Investors were told that they would receive returns of 6-7%, guaranteed for two to three years. The investments were government bonds and similar instruments. Those investments were not sufficient to generate the payments investors were told they would receive. While Livingston Group has over $824,000,000 under management, there are insufficient funds to pay investors. The complaint alleges violations of each subsection 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. 25181 (August 25, 2021).
Singapore
MOU: The Monetary Authority of Singapore and the U.S. Department of Treasury finalized an MOU on cybersecurity cooperation. Treasury and MAS have had an exchange on the subject since 2018. The agreement strengthens the existing partnership, enhancing the cooperation between the two regulators. The enhanced arrangement was announced on August 23, 2021 (here).