This Week In Securities Litigation (Week of Dec. 16, 2019)
A look forward – a look back:
As the world heads into the holidays a key question may be whether there will be any action on Capitol Hill regarding the pending bills that would impact the Commission. Those include at least two bills focused on Kokesh and the statute of limitations and a third offering a definition of insider trading. The Kokesh related bills would extend the statute of limitations, which is not really the question Enforcement needs address. The later would represent the first statutory definition of insider trading. Its impact is difficult to assess the legislation appears to try and codify current law.
Last week the Commission continued to focus on main street investors, filing a number of actions focused on those investors. The agency also resolved another FCPA action and an insider trading case.
SEC Enforcement – Filed and Settled Actions
The Commission filed 6 civil injunctive actions and 2 administrative proceedings last week, exclusive of 12j and tag-along actions.
Insider trading: SEC v. Davidson, Civil Action No. 5:19-cv-1153 (W.D. Ok. Filed Dec. 12, 2109) names as a defendant Oklahoma oil and gas executive John Kenneth Davidson. Mr. Davidson learned from a friend and neighbor on the board of Covidien PLC that his firm was to be involved in a merger with a medical device company. Contrary to the directive of his friend, Mr. Davidson traded in the securities of the company prior to the deal announcement. He also told friend, John Special, who traded prior to the deal announcement on June 15, 2014. Mr. Davidson had trading profits of $19,212 while Mr. Special had illicit gains of $1.182 million. The complaint against Mr. Davidson alleged violations of Exchange Act Section 10(b). To resolve the action Mr. Davidson consented to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to pay disgorgement in the amount of his trading profits, prejudgment interest of $3,812 and a penalty equal to the amount of his trading profits. See also SEC v. Special, Civil Action No. 5:19-cv-1152 (W.D. Ok. Filed Dec. 12, 2019)(insider trading action based on the facts detailed above; resolved with the entry by consent of an injunction and an order directing the payment of disgorgement of the trading profits of $1,182,472, prejudgment interest of $$231,782 and a penalty equal to the amount of his trading profits plus the prejudgment interest). See Lit. Rel. No. 24690 (Dec. 12, 2019).
Books, records, internal controls: In the Matter of Stonemor Partners, L.P., Adm. Proc. File No. 3-19616 (Dec. 12, 2019) names as Respondents the publicly traded master limited partnership and its managing member, Stonemore GP LLC. Beginning in the fourth quarter of 2015, and continuing through the second quarter of 2016, the General Partner identified certain issues relating to customer sales and short-term borrowings which jeopardized its financial results. Nevertheless, there was no discussion of these issues in the MD&A section of the 2015 annual report or in its first two quarterly reports for 2016. In addition, beginning in early 2014, and continuing through late 2016, Stonemor filed annual and quarterly reports that had significant GAAP issues resulting from a material internal control weakness. As a result, investors did not receive timely material information. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, Stonemor GP will pay a penalty of $250,000.
ICO offering fraud: SEC v. Eyal, Civil Action No. 1:19-cv-11325 (S.D.N.Y. Filed Dec. 11, 2019) names as defendants Eran Eyal, a dual citizen of South Africa and Israel residing in Brooklyn, and his firm, Uniteddata, Inc, d/b/a “Shopin.” Over a period of about eight months, beginning in August 2017, Defendants raised about $42.5 million in digital assets. Shopin supposedly planned to create a universal shopper profile that would track customer shopping histories at online retailers which would recommend purchases. The offering, conducted in typical two stage IPO fashion using a pre-sale and a sale, was based on a series of misrepresentations. Those included claims that two successful tests of Shopin’s approach had been conducted, a claim that the firm had on-going partnerships with well-known retailers, a representation that a prominent Silicon Valley blockchain entrepreneur advised the firm and a suggestion that a successful online company had invested in the firm. Shopin never created a functional platform. The proceeds from the offering were diverted to the personal use of Mr. Eyal. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending.
Offering fraud/real estate: SEC v. Palm Beach Atlantic Financial Group, LLC, Civil Action No. 9:19-cv-81652 (S.D. Fla. Filed Dec. 11, 2019) is an action which names as defendants the firm and William Smith, respectively, a manager and seller of real estate and the firm’s managing member. Over a three-year period, beginning in 2014, Defendant raised over $1 million from investors who were told that Palm Beach Atlantic was in the business of buying, remodeling and selling real estate. In fact, the funds raised were comingled with those from other ventures and used for a variety of purposes. Mr. Smith typically moved the funds through a number of accounts to support his various ventures. Defendants also falsely claimed to have a successful track record in the business. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the matter each defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. Defendants will also pay, on a joint and several basis, a penalty of $75,000. See Lit. Rel. No. 24689 (Dec. 11, 2019).
Policies and procedures: In the Matter of Kornitzer Capital Management, Inc., Adm. Proc. File No. 3-19615 (Dec. 10, 2019) is an action which names as Respondents the registered investment adviser and its majority owner, John Kornitzer. From approximately 2011 through late 2015 the adviser purchased securities of Company A and held concentrations that ranged from about 30% to as high as 89%. Those concentrations persisted despite directives of the board members from 2016 to 2018 to reduce it to about 10%. The concentrations were reduced in late 2018. Until 2016 the firm did not have policies and procedures in place on the question. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the matter each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm also agreed to the entry of a censure. The adviser will pay disgorgement of $4,979,448 of which $4,132,132 is deemed satisfied by prior payments made to the Retirement Fixed Fund and the Retirement Equity Fund and/or investors in those funds. Remaining is an additional $846,316 in disgorgement to be paid along with $80,679 in prejudgment interest. Respondents will also pay a penalty of $2,700,000. A fair fund was created.
Touting: SEC v. Friedlander, Civil Action No. 1:18-cv-00529 (D. Colo.) is an action which named as defendants: Jeffrey Friedlander who controls the two entity defendants and previously settled a fraud action with the Commission; and his controlled entities, Global Corporate Strategies LLC and Intiva Pharma LLC. The complaint alleges that Mr. Friedlander touted the stock of OWC Pharmaceutical Research Corp., a cannabis firm, while misrepresenting his interest in it and failing to disclose that he was being paid. His stock in OWC was owned through Global and Initva. Mr. Friedlander also sold OWC shares into the market. The complaint alleges violations of each subsection of Securities Act Section 17(a), Securities Act Section 17(b) and Exchange Act Section 10(b). Each Defendant settled with the Commission, agreeing to the entry of permanent injunctions based on the sections cited in the complaint, to the entry of penny stock bars and to and order requirement the payment of disgorgement in the amount of $2.1 million plus prejudgment interest for Defendants Friedlander and Global and $20,000 for Defendant Intiva. Mr. Friedlander also agreed to pay a $2 million penalty. See Lit. Rel. No. 24684 (Dec. 9, 2019).
Insider trading: SEC v. Collins, Civil Action No. 18-cv-7128 (S.D.N.Y.); see also U.S. v. Collins, No. 18 crim 567 (S.D.N.Y.). The action centered around the announcement by Australian Pharmaceutical Company Innate Immunotherapeutics, Ltd. after the close of trading on Monday, June 26, 2017 of negative drug trial results for the firm’s only actual pharmaceutical, according to the Commission’s complaint. The share price plunged 90%. Congressman Christopher Collins, a member of the firm’s board of directors who was briefed on the trial results, tipped his son and future father-in-law in advance of the public announcement. The Congressman, his son, Cameron, and his future father-in-law, Stephen Zarsky each resolved the charges, consenting to the entry of permanent injunctions based Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Collins is also barred from serving as an officer or director of a public company. Cameron Collins and Stephen Zarsky, who avoided losses by trading. agreed to pay disgorgement and prejudgment interest of $$634,249 and $159,880 respectively. Each man previously pleaded guilty in the parallel criminal case.
Financial fraud: SEC v. Grewal, Civil Action No. 18-cv-11778 (D. Mass.) is a previously filed action which names as a defendant Harpreet Grewal, the former CFO of Constant Contact, Inc. The Commission’s complaint alleged that Mr. Grewal concealed the firm’s slowing customer growth from investors while inflating its reported subscriber base. The Court entered a final judgment based on consent enjoining him from future violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a) and 13(b)(2)(A). The order also directed that Defendant pay disgorgement and prejudgment interest of $250,000 and a penalty of $100,000. See Lit. Rel. No. 24686 (Dec. 10, 2019).
False opinion: SEC v. Dalmy, Civil Action No. 19-cv-00745 (D. Colo.) is a previously filed action in which the Commission charged attorney Diane Dalmy, listed on the prohibited attorney’s list maintained by OTC markets which precludes use of her opinions in connection with the sale of securities, evaded exchange restrictions imposed on her by having a retired divorce lawyer, Michael Woodford, front for her without doing the requisite due diligence. The court entered a judgment by default which precludes her from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The judgment also orders her to pay disgorgement and prejudgment interest of $30,236 and a penalty of $86,718. Ms. Dalmy is required to provide a copy of the court papers to clients or potential clients seeking representation on matters involving the federal securities laws. The judgment against Mr. Woodford orders him to pay disgorgement and prejudgment interest of $29,762 but waives payment based on financial condition. See Lit. Rel. No. 24685 (Dec. 9, 2019).
Offering fraud/nanotechnology: SEC v. Nanotech Engineering, Inc., Civil Action No. 1:19-cv-03633 (D.D.C. Filed Dec. 5, 2019) names as defendants: The firm, supposedly a developer of revolutionary solar panels; Michael Sweaney, a convicted securities fraudster; David Sweaney, Michael’s cousin and the CFO; and Jeffery Gange, the COO. The complaint centers on the sale of private placement shares under a Reg. D notice, beginning about two years ago and which is on-going. During that period, Defendants have raised about $9.4 million from investors using a series of false representation. Those include the failure to disclose Michael Sweaney’s prior criminal conviction, a false claim that Defendants would receive little of the investor cash raised and a misrepresentation about commissions. Defendants used boiler room tactics and others employing that approach to solicit investors. Portions of the investor funds were diverted to the personal use of defendant. The complaint alleges an on-going fraud and violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Commission obtained an asset freeze on filing. See Lit. Rel. No. 24688 (Dec. 11, 2019).
Financial reporting: In the Matter of Jatindar Kapur, CPA, Adm. Proc. File No. 3-10613 (Dec. 5, 2019) is an action which names as a Respondent the Senior Vice President, Finance and Corporate Controller for Hertz Global Holdings, Inc. Over a two-year period, beginning in 2008, Hertz Holdings and its wholly owned subsidiary, the Hertz Corporation, materially overstated pretax income by $235 million because of accounting errors in a number of units that resulted in a 2015 restatement. The errors primarily tied to the accrual of expenses related to “wrecks,” the amortization periods for Hertz vehicle licenses and registrations and an allowance for uncollectible amounts offsetting potential recoveries from third parties for rental related damages. Mr. Kapur approved accounting changes in the areas that tied to the errors. The Order alleges violations of Securities Act Sections 17a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and 15(d). Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. He is also denied the privilege of appearing and practicing before the Commission as an accountant with a right to submit an application to again appear after two years. In addition, he was directed to pay disgorgement in the amount of $18,610.67, prejudgment interest of $3,997.64 and a penalty of $75,000.
SEC v. Telefronaktiebolaget LM Ericsson, Civil Action No. 1:19-cv-11214 (S.D.N.Y. Filed Dec. 6, 2019). Defendant is a multinational networking and telecommunications equipment and services company based in Sweden. During a six year period beginning in 2011, the firm paid bribes through third parties in Djibouiti, Saudi Arabia and China to secure profits of about $427 million. In Vietnam and Indonesia, the firm used subsidiaries and consultants to create slush funds of about $56 million. The ultimate payees are unknown but served only as intermediaries. In China subsidiaries made about $31.5 million in payments to sham service provides, contrary to firm policies. In Qatar Defendant made a payment of $450,000 through a subsidiary to a consulting company that was contrary to firm internal controls. The illicit payments were improperly characterized on the books and record of the financial statements as legitimate expenses and consolidated into those of the parent. The complaint alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter with the Commission the firm agreed to pay disgorgement and prejudgment interest of over $530 million.
In the parallel criminal case, the company entered into a deferred prosecution agreement. Its Egyptian subsidiary pleaded guilty to conspiracy to violate the anti-bribery provisions of the FCPA. The firm also agreed to retain an independent compliance monitor for three years. The company will pay a criminal penalty of $520 million.