This Week In Securities Litigation (Week of August 7, 2023)
This Week In Securities Litigation (Week of August 7, 2023)
As the summer moves forward with blazing days in some parts of the country, the Commission filed a series of cases. Those actions centered on crypto assets, offering frauds, net capital violations, insider trading, prohibited transactions and acting as an unregistered broker.
Have a great and safe week – and stay cool.
Whistleblowers: The Commission awarded over $104 million to seven whistleblowers, according to an August 4, 2023 release.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 7 civil injunctive actions and 1 administrative proceedings, excluding 12j, tag-along proceedings and those presenting a conflict for the author.
Crypto offering fraud: SEC v. Digital Licensing Inc., Civil Action No. 2:23-cv-0482 (D. Utah unsealed on August 3, 2023, filed on July 26, 2023) names as defendants 18 individuals and entities including Digital Licensing, Jason Anderson, Jacob Anderson and others. The complaint centers on a scheme tied to a DEBT Box, promoted by Defendant Digital Licensing. The box, marketed on YouTube, websites, social media and at live events promises investors that what are called “node software licenses” will allow them to “mine” at least eleven separate crypto assets which are, in turn, tied to actual assets. Profits supposedly come from gold mining, oil drilling, satellite scanning and other so-called “commodity projects.” The projects, depicted by a photo in the complaint, are a series of small color dots labeled with titles such as debt, grow, and NATG. According to the complaint the representations are false. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and each subsection of 17(a) along with Exchange Act Sections 10(b) and 15(a)(1). The Court granted a request for emergency relief.
Offering fraud: SEC v. Rocha, Civil Action No. 1:23-cv-11779 (D. Mass. Filed August 3, 2023) is an action which names as defendant Jose Rocha, a self styled investment adviser. Over a two year period, beginning in September 2020, Defendant raised at least $1 million from investors. Investors were furnished with a series of lies which include claims that their funds will be invested and earn 12% per month along with a claim that Defendant is an experienced investor. The claims are false. 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. In a parallel criminal investigation filed by the U.S. Attorney’s Office for the District of Massachusetts Mr. Rocha pleaded guilty to criminal securities fraud charges. See Lit. Rel. No. 25800 (August 3, 3023).
Net capital violations: SEC v. Ustocktrade LLC, Civil action No. 1:23-cv-6756 (S.D.N.Y. Filed August 2, 2023) is an action which names as defendants the company and Anthony Weersinghe. The company makes markets for the securities industry. Mr. Weeresinghe is the founder and CEO of the company. Ustocktrade Securities, Inc. was a broker dealer until it withdrew in 2022. It operated an alternative trading system and markets for college students and others to engage in day trading in exchange traded securities. The traders purchased and sold securities among the firm clients. The broker had a set net capital of $250,000. The firm withdrew its registration in October 2022. Defendants were responsible for maintaining the net capital of the broker. Over a twelve-month period in 2021 the broker was underfunded 11 times and violated the net capital requirements. The complaint alleges aiding and abetting violations of Exchange Act Section 15(c) and the related rules. Defendants Weeresinghe and UstockTrade LLC resolved the charged. Each Defendant consented o the entry of a permanent injunction based on the Section cited in the complaint. The firm agreed to pay a penalty of $75,000 while Mr. Weeresingle will pay $10,000. See Lit. Rel. No. 25799 (August 2, 2023).
Insider trading: SEC v. Nellore, Civil Action No. 25796 (August 2, 2023) is a previously foled action which names as defendant Janardhan Nellore, a former IT Administrator at Pao Alto Networks, Inc. The complaint alleges that Defendant was the center of an insider trading ring and used his contacts to secure inside information regarding earnings. He tipped four friends. To resolve the matter Defendant consented to the entry of a permanent injunction base on Securities Act Section 10(b) and agreed to pay disgorgement and prejudgment interest of $16,614. The complaint, filed in 2019, alleged that the group had over $7 million in trading profits. Previously, three others settled with the Commission. See Lit. Rel. No. 25796 (August 2, 2023).
Insider trading; SEC v. Holzer, Civil Action No. 1:23-cv-06753 (S.D.N.Y. Filed August 2, 2023) is an action which names as a defendant Chares Holzer, a managing member of Worth Capital Holdings LLC, a real estate focused family office. The action centers on insider trading in the shares of Dun & Bradstreet Corporation prior to the August 8, 2018 announcement that the firm would be acquired by an investor group. Before the deal announcement Defendant learned about it under an NDA executed with a member of the acquisition group. In violation of that agreement, he traded before the deal announcement in shares of the target, Dun & Bradstreet, through two off-shore vehicles. The result was profits of $382,217.73. The complaint alleges violations of Exchange Act Section 10(b). To resolve the action Defendant consented to the entry of a permanent injunction based on Exchange Act Section 10(b) and to the payment of a penalty of $1,173,926. Relief Defendants Maglione International LTD and Frontenac Investments LTD, the two offshore entities used to trade, also settled, agreeing to the entry of judgments directing that they pay disgorgement $331,389 and $59,920 respectively plus prejudgment interest and $84,032 for Maglione and $15,194 for Fontenac. See Lit. Rel. No. 25797 (August 2, 2023).
Prohibited transaction: In the Matter of Exchange Traded Managers Group, LLC., Adm. Proc. File No. 3-2152 (August 1, 2023) names as respondents; ETF Managers Group LLC (Adviser), an adviser to a family of registered exchange traded funds that are part of Exchange Traded Managers Trust; Exchange Traded Managers Group LLC (Parent) which controls Adviser and other subsidiaries including a registered broker dealer; and Samuel Masucci, the co-founder of Adviser and Parent. In the second half of 2019 Respondents needed millions of dollars for private litigation to avoid bankruptcy. The three Respondents used the contacts of Adviser’s client, ETFMG Alternative Harvest ETF (MJ), to negotiate $20 million in financing on favorable terms and to obtain free investment banking services to raise additional financing from Company A, MJ’s then custodian and securities lender. In return Respondent Masucci agreed to keep MJU’s securities lending business at Company A despite better offers regarding fee splits that could have provided large amounts of revenue for MJ. Respondent Masucci omitted this joint arrangement between Respondents, Company A and MJ in communications with MJ’s independent trustee who was told MJ had no other options besides Company A as a securities lender. The lending arrangement was a prohibited transaction. The Adviser and Respondent Masucci violated their fiduciary duty to MJ. In resolving the proceedings Respondents Masucci and ETF Managers entered into certain undertakings which include the redesignation of their duties. Respondents Masuci and ETF Managers were ordered to cease-and-desist from committing or causing any violations and any future violations of Advisers Act Sections 206(a) and 206(2). Respondent Mascucci is barred from the securities business and service as an officer or diretor of an advisory board with a right to apply for reenetry after three years. He will also pay a penalty of $400,000. ETF Managers Group and Traded Managers Group, jointly and severally will pay a penalty of $4 million.
Crypto fraud: SEC v. Schueler, Civil Action No. 1:23-cv-05749 (E.D.N.Y. Filed July 31, 2023) names as defendants: Richard Schueer, Hex, Pusechain and Pulsex. Mr. Schueer is a U.S. internet marketer residing in Finland who uses the entity defendants to conduct his operations. PulseChain and PulseX are security platforms created and maintained by Defendant Schueer, also known as Richard Heart. Through three fraudulent offerings Defendant Heart raised over $1 billion beginning in December 2019. In the first offering Mr. Heart offered and sold Hex tokens. Investors were promised high-yield “Blockchain Certificate of Deposit” on the Ethereum network. Investors were also offered a “staking” through which if they tied up their coins for a period they would be paid an an average annual return of 38% from the tokens give to them at the end. Over a period of about 11 months, beginning in November 2019, about 2.3 million ether or ETH was deposited by investors valued at $678 million. Investors turned over their ether in return for Hex tokens. Defendants essentially gained control of a large number of coins while creating the appearance of demand for Hex tokens. Beginning in July 2021, Mr. Schueer offered investors the opportunity to deposit their crypto assets for a promise to deliver PLS and PLSX tokens in the future. About $354 million was deposited in PLS tokens and $676 in Pulse X assets to its wallet address in return for the promise of future delivery of PLSX tokens. In fact, the tokens were securities under the teachings of the Supreme Court in Howey. Finally, Schueer and PulseChain misappropriated at least $12.1 million of PulseChain investor funds. Much of the investor money was used by Mr. Schueer/Heart for personal purchases. The complaint alleges violations of Securities Act Section 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Section 10(b) and Rule 10(b)-5-(a) and (c). The case is in litigation.
Offering fraud: SEC v. Tadrus, Civil Action No 1:23-cv-05708 (E.D.N.Y. July 28, 2023). Named as defendants in this action are: Mina Tadrus and Tadrus Capital LLC, respectively, a registered broker-dealer and the founder of Tadrus Capital. The Fund targeted members of the Egyptian Coptic Christian community. Beginning in September 2020 Defendants solicited and sold interests in the Tadrus Fund. It was supposed to be a pooled investment vehicle. Over the period at least 31 interests were sold to investors. The amounts varied from $20,000 to $345,000. Overall, about $5 million was raised. Investment accounts were held in the name of the firm. None were segregated. The sales pitch, in part, was detailed on the website for at least one version. It identified the firm as a “global quantitative alternative investment manager.” It also claimed that the firm “invest[ed] our clients’ capital in multiple quantitative investment strategies, including a fully systematic quantitative global macro investment program covered all asst classes.” The strategy was implemented “virtually 24/7” and used “stop losses” and short sales. Investors were told that their money would be pooled and invested in “the world’s first private high-yield and fixed income quantitative hedge fund.” It would use “artificial intelligence-based high-frequency trading models.” Investors were supposed to be paid 1.5% or 2.5% on the first of each month. This would give each investor a return of 18% or 30% per year. In fact, large portions of the money was used for the benefit of Defendants. 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 in litigation. See Lit. Rel. No. 25798 (August 2, 2023).
Unregistered broker: SEC v. Cathey, Civil Action No. 1:23-cv-22819 (S.D. Fla. Filed July 28, 2023) is an action which names as defendant Blake Cathey. The complaint alleges that beginning in July 2019, and continuing until September 2022, Defendant acted as an unregistered broker for four LLCs known as the Accanito Equity LLC’s. Proceeds of about $4,655,000 were raised from the sale of interests in the Accanito Equit LLC to 15 retail investors in five states. Defendant was paid commission of $760,729. Neither the offerings nor Defendant were registered with the Commission. The complaint alleges violations of Exchange Act Section 15(a)(1). To resolve the matter Defendant consented to the entry of a permanent injunction based on the Section cited in the complaint. Monetary relief is to be resolved at a later date. See, Lit. Rel. No. 25795 (July 31, 2023).
Steering Group: The Hong Kong Securities and Futures Commission announced the priorities of a cross-agency steering group to further strengthen Hong Kong sustainable finance ecosystem, in a release dated August 7, 2023 (here).
Consultation paper: The regulator published a consultation paper on a proposed frameword for Single Family Offices, in a release dated July 31, 2023 (here).