This Week In Securities Litigation (Week of August 9, 2021)
The Whistleblower Program became a matter of discussion among the Commissioners last week. Chair Gensler directed the staff to prepare potential revisions regarding two points adopted last fall. One concerned awards where an enforcement action was brought by another agency. The other centered on the ability of the Commission to lower an award. Whistleblower groups apparently favor possible amendments. Commissioners Pierce and Roisman, noting that the two provisions were the subject of pending litigation, were critical of the proposed amendments.
Be careful, be safe this week
Diversity: The Commission approved a proposed NASDAQ rule regarding the inclusion of diversity requirements for boards of directors incorporated into the listing standards on August 6, 2021. Commissioner Hester Peirce opposed approval. Commissioner Roisman agreed with the idea of diversity but not the specific proposal put forward by the Exchange.
Whistleblowers: The Commission awarded $3.5 million in two enforcement actions for whistleblowers, according to a press release dated August 6, 2021. Additional awards totaling over $4 million were made to 4 other whistleblowers, according to a release dated August 2, 2021.
SEC Enforcement – Litigated Actions
Manipulation: A Florida jury found against the SEC on all but one count of a multi-count complaint centered on charges that Spartan Securities Ltd. and others ran what was alleged to be a “shell creation” factory. The trial lasted for thirteen days. SEC v. Spartan Securities Group, LTD., Civil Action No. 19-civ-00448 (M.D. Fla. Feb. 20, 2019).
The complaint named as defendants: Spartan, a registered broker-dealer; Island Capital Management LLC, a registered transfer agent; and Carl Dilley; Micah Eldred; and David Lopez. Collectively the individual Defendants controlled the entity defendants.
The action centered on a five-year long shell creation scheme that traces to 2009. The Commission claimed that two groups were responsible for creating 19 shells. Those entities were shams, according to the complaint. The creation of the shell companies, coupled with claims that the shares were free trading, hinged on a series of misrepresentations. Those included false statements to FINRA on Form 211 applications, to DTC and to potential buyers.
The complaint alleged violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 10(b) and 15(c)(2). The jury found in favor of Defendants on all Counts except No. 6 which alleged false statements in violation of Exchange Act Section 10(b). There the jury found in favor of the Commission on that single count.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 3 civil injunctive actions and 6 administrative proceedings, exclusive of tag-along and other similar proceedings.
Crypto offerings: SEC v. Uulala, Inc., Civil Action No. 5:21-cv-01307 (C.D. Ca. Filed August 4, 2021) is an action against the firm and its co-founders, defendants Oscar Garcia and Matthew Loughran. Beginning in December 2017, and continuing for the next two years, Defendants raised over $9 million from over one thousand investors through a ICO using a coin called the Uulala. The tokens were sold as securities which were not registered. The white paper used to solicit investors contained claims about the technology underlying the coins, alleging it was patented and had proprietary micro-credit algorithms. The claims were false. Beginning in 2019 Defendants Uulala, Inc. and Garcia raised an additional $500,000 from four U.S. investors through the sale of its Convertible Notes. A slide deck was used to effect the sales that contained false financial information about the Uulala. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). Each Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, the coins will be disabled and the company will pay a penalty of $300,000 while Mr. Garcia will pay $192,768 and Mr. Loughran will pay $50,000. See Lit Rel. No. 25157 (August 4, 2021).
Perks: In the Matter of National Beverage Corp., Adm. Proc. File No. 3-2051 (August 4, 2021) is an action against the firm. The Order alleges that over a four-year period, beginning in 2016, the firm, which owned an aircraft with its management company, failed to properly disclose its use by the CEO of the company. The Order alleges violations of Exchange Act Sections 13(a) and 14(a) and the related rules. Respondent resolved the matter, consenting to the entry of a cease-and-desist order based on the Sections and Rules cited. Respondent also agreed to pay a penalty of $481,902.
Misappropriation: In the Matter of Wendan Bao, Adm. Proc. File No. 3-20452 (August 4, 2021) names as respondents Wendan Bao and ShuoGu, domestic partners who were later married, and Lendingcar Corp. and H7 Credit LLC. Each entity Respondent was controlled by the individual Respondents. Over a period of several months, beginning in November 2018, the individual Respondents raised about $450,000 from investors that was supposed to be transferred from De Yao Fund to H7 Credit and used to fund a floor plan for an auto dealer. Instead, much of the money was misappropriated. Each individual Respondent has undertaken as part of the settlement to refrain from being involved in the purchase and sale of securities. Respondents each consented to the entry of a cease-and-desist order based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). In addition, each individual Respondent is barred from the securities business but can apply for reentry under certain conditions. Respondents will jointly and severally pay disgorgement of $310,000 and prejudgment interest of $29,012.40 except for $103,000 of which payment is waived. A penalty is waived based on an affidavit of financial condition.
Undisclosed conflicts: In the Matter of USA Financial Securities Corporation, Adm. Proc. File No. 3-20449 (August 3, 2021) is an action which names as a Respondent the dual registered broker-dealer investment adviser. Since 2015 Respondent has used a cash sweep product for client accounts that paid the firm certain amounts. The arrangement was not disclosed and the firm did not have proper compliance procedures. Respondent will implement certain undertakings. The Order alleges violations of Adviser 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 Sections cited. The firm will also pay disgorgement of $162,918.49, prejudgment interest of $26,537.20 and a penalty of $60,000.
Conflicts: In the Matter of First Heartland Consultants, Inc., Adm. Proc. File No. 3-20448 (August 2, 2021) names as a respondent the registered investment adviser. Since January 2014 the firm has received revenue sharing payments from an unaffiliated clearing broker as a result of certain mutual fund investments by clients, additional revenue sharing payments from the funds and broker payments from mark-ups, none of which were disclosed. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). Respondent resolved the matter, agreeing to implement certain undertakings and consenting to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. In addition, Respondent will pay disgorgement of $45,941.1, prejudgment interest of $99,586.41 and a penalty of $200,000.
Financial fraud: SEC v. Live Ventures Inc., Civil Action No. 2:21-cv-1433 (D.Nev. Filed August 2, 2021) is an action which names as defendants the NASDAQ traded firm; Janone Inc., also a NASDAQ traded firm; John Isaac; Kingston Diversified holdings LLC; and Virland A. Johnson. The complaint is based on three fraud schemes. In the first Jon Isaacs boosted Live’s stock price by fraudulently backdating certain revenue to boost the period end numbers. The stock price was then inflated with false press releases. In the second Live falsely claimed to have acquired a subsidiary of Defendant JanOne Inc. Revenue was then recognized on a claimed bargain purchase price of over $3.7 million in the first quarter of FY 2018. That permitted Live to report positive net income rather than a loss. Finally, during the period 2016 through 2018 Live failed to accurately disclose Jon Issac’s total compensation and to maintain proper internal accounting controls. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13b-5. The case is pending. See Lit. Rel. No. 25155 (August 3, 2021). See Lit. Rel. No. 25255 (August 3, 2021).
Independence: In the Matter of Ernst & Young LLP, Adm. Proc. File No. 3-20447 (August 2, 2021) is an action in which the accounting firm and three of its partners, James G. Herring, Jr, James A. Young and Curt Fochtmann, are alleged to have engaged in improper professional conduct that is contrary to the independence rule. Specifically, in 2014 and 2015 EY and the individual Respondents secured information from the then CAO and controller regarding the process for selecting the outside audit firm for the issuer. In pursuit of the engagement for the issuer Respondents used that information thereby compromising the appearance of, and the independence of, the audit firm. In resolving this matter EY undertook a series of remedial acts regarding its policies and procedures in the area. To resolve the matter EY and Respondents Herring and Young each consented to the entry of ceases-and-desist orders based on Rule 2-02(b) of Regulation S-X, Sections 13(a) and 14(a) of the Exchange Act and related rules; Respondent Fochtmann consented to a similar order but only based on Rule 2-02(b) of Regulation S-X. EY was also censured and agreed to implement its undertakings. Each individual Respondent was denied the privilege of appearing and practicing before the Commission. Each individual can reapply after a the following periods: Mr. Herring, 3 years, Mr. Young 2 years and Mr. Fochtmann 1 year. EY will also pay a $10 million penalty while Messrs. Herring, Young and Fochtmann will each pay, respectively, a penalty in the amount of $50,000, $25,000 and $15,000. See also In the Matter of William G. Stiehl, CPA, Adm. Proc. File No. 3-20446 (August 2, 2021)(proceeding naming as respondent the CAO and controller of the issuer based on the conduct detailed above; resolved with a consent to the entry of a cease-and-desist order based on Exchange Act Sections 13(a) and 14(a) and the related rules and the entry of an order denying Respondent the privilege of appearing and practicing before the Commission as an accountant with the right to petition for readmission after two years. He will also pay a penalty of $51,000).
SEC v. Shustek , Civil Action No. 2:21-cv-01416 (D.Nev. Filed July 29, 2021) is an action which names as defendants Michael Shustek and Vestin Mortgage LLC. Mr. Shustek is the founder of Vestin Mortgage and a securities law recidivist having been found in a prior SEC enforcement action to have violated the antifraud provisions. Here Mr. Shustek took over $29 million from Vestin Mortgage and Vestin Mortgage II and channeled the funds into a REIT he controlled. Following a series of transactions Mr. Shustek obtained $10 million after misleading the investors involved. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The case is pending. See Lit. Rel. No. 25154 (August 2, 2021).
Financial fraud: U.S. v. Armbruster, No. 2:18-cr-00130 (E.D.Wis. Verdict August 2, 2021) is an action which names as a defendant Peter Armbruster, the former CFO of Roadrunner Transportation Systems Inc. The firm’s shares are traded on the NYSE. Defendant is alleged to have committed securities fraud, falsified the firm’s books and records and misled the auditors. A jury returned a verdict against Mr. Armbruster. He was found to have falsified the books and record of the firm that were filed with the Commission for the third quarter of 2016. The jury returned guilty verdicts one count of securities fraud, one count of misleading the auditors and two counts of falsifying the company books and records. Sentencing will be on October 29, 2021. See also SEC v. Armbruster, Civil Action No. 19-cv-481 (E.D. Wis.).
Naman Wakil, a Syrian national residing in Miami, was charged with violations of the Foreign Corrupt Practices Act. He appeared in Court on the charges last week in Miami. The charging papers state that beginning in September 2017, Mr. Waki, conspired with others to make bribe payments to officials of the Venezuela state-owned and controlled food company known as CASA and to officials at joint ventures between Petroleos de Venezuela S.A. or PDVSA and various foreign companies in the oil rich Orinoco belt of Venezuela. The bribes were paid to obtain at least $250 million in contracts to sell food to CASA and do business with the PDVSA joint ventures. Mr. Wakil is alleged to have laundered money related to the bribery scheme to and from bank accounts located in south Florida. He also purchased 10 apartment units in south Florida, a $3.5 million plane and a $1.5 million yacht. The indictment charges Defendant with conspiracy to violate the FCPA, to commit money laundering, international promotional money laundering and three counts of engaging in transactions involving criminally derived property. The case is pending. U.S. v. Wakil, No. 1:21-cr-20406 (S.D.Fla. Filed July 29, 2021).
President: Mark Branson became president of German markets regulator BaFin on August 2, 2021. Mr. Branson, born in the UK and also a Swiss citizen, is recognized as a financial markets expert. He previously served as the CEO of the Swiss Financial Market Supervisory Authority or FINMA. He began his career at Credit Suisse. His goal as President of BaFin is to transform the regulator into a world-class supervisory authority.
Paper: The Securities and Futures Commission published Research Paper No. 69 titled Half-Year Review of the Global and Local Securities Markets, August 6, 2021 (here).
Remarks: Ms. Loo Siew Yee, Assistant Managing Director, Monetary Authority of Singapore or MAS delivered remarks at the Wealth Management Institute Industry Forum on the Future of Anti-Money Laundering with Artificial Intelligence on August 5, 2021. Her remarks focused on strengthening information sharing and nurturing a data analytics savvy talent pool (here). Her remarks were delivered on August 5, 2021.