This Week In Securities Litigation (Week of December 20, 2021)
In the week before Christmas the SEC continues to suffer from its mid-trial defeat in an insider trading case. Seldom does the agency experience such a defeat. That is not stopping the Commission from reforming what some view as corporate abuses – corporate stock buy backs and the way some use 10b-5-1 plans.
SEC
Proposed rules: The Commission issued proposed rules relating to security-based swaps this week. In a release dated December 15, 2021, the agency issued proposed rules to prevent fraud, manipulation, and deception in connection with security-based swaps, to preclude undue influence over the CCO and to preclude large holders of security-based swaps to disclose their position (here).
Proposed rules: The Commission proposed rules to undo the stress created by 2020 rule revisions related to certain money market funds (here).
Proposed rules: The agency issued proposed rules regarding corporate share repurchases of equity securities. The provisions would adopt new Form SR which would require the disclosure of certain basic information about shares repurchased (here).
Proposed rules: The Commission issued proposed rules to enhance the disclosure requirements regarding the use of Rule 10b-5-1 plans to prevent insider trading in a release dated December 15, 2021 (here).
Be careful, be safe this week and happy holidays to all
SEC Enforcement – Litigated Actions
Insider trading: SEC v. Clark, Civil Action No. 1:20-cv-01529 (E.D. Va.) named as defendants Christopher Clark, a mortgage banker, and William Wright, formerly a controller at CEB, Inc. Mr. Clark is the brother-in-law of Mr. Wright. The case centered on the acquisition of CEB, announced on January 5, 2017. Between November 2016 and early January 2017 CEB engaged in merger discussions. During the period leading up to the announcement, Mr. Clark engaged in very risky trading involving CEB options. Beginning about one month after the talks began, Defendant Clark, according to the complaint, started purchasing call options. He continued until about the time of the deal announcement. During the discussion period he also told his son to purchase CEB securities. The Commission called Mr. Clark’s trading “suspicious,” pointing to repeated contacts between the two men such as text messages and personal meetings. In addition, the agency offered evidence of what were called “extraordinary” efforts to raise the capital necessary to acquire the options. Those included borrowing $6,000, obtaining an additional $20,000 by maxing out a credit card and obtaining a loan backed by his car. The Commission also pointed to the less than forthcoming responses to investigative questionnaires circulated by market regulators. All of this, coupled with 15 transactions in CEB options which yielded over $243,000 in trading profits, constituted proof of insider trading, according to the Commission. Finally, to try and bolster its case, the agency pointed to the fact that beginning as early as 2008, and continuing through 2016, Mr. Clark traded in advance of 18 CEB quarterly announcements. The Court was not convinced. Prior to trial the Court denied the Commission’s motion for summary judgment, concluding that there were material facts in dispute. Following the presentation of the Commission’s case at trial, however, the Court was not convinced that the agency had met its burden of proof. The Court ordered the case dismissed. The Court did not write an opinion.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 2 civil injunctive actions and 2 administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.
Unregistered securities: In the Matter of Wedbush Securities, Inc., Adm. Proc. File No. 3-20679 (December 15, 2021) is an action which names as respondent the registered broker-dealer. Over a three-year period, beginning in January 2017, the firm repeatedly sold large blocks of low-priced securities for an offshore client despite the fact that the stock was unregistered and without conducting the due diligence required to secure a broker exemption under Section 4(a)(4) of the Securities Act. Wedbush also failed to file SARs for certain suspicious transactions relating to the same client. The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 17(a) and Rule 17a-8. In resolving the proceedings, Wedbush agreed to implement a series of undertakings. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections and Rule cited in the Order and to a censure. The firm also agreed to pay disgorgement of $173,508.40, prejudgment interest of $34,332.16 and a civil penalty of $1 million.
Accounting: SEC v. Sequential Brands Group, Inc., Civil Action No. 20-cv-10471 (S.D.N.Y.) is a previously filed action which names as defendant the firm. In late 2016 and in 2017 the firm failed to impair its goodwill in accord with its policies. Specifically, after passing its goodwill test, the firm conducted internal calculations showing that it would fail the first step of a two part process in view of its declining stock price. By the end of 2017 the firm impaired all of its good will, totaling $304 million. To resolve the matter the firm consented to the entry of permanent injunctions precluding future violations of Securities Act Section 17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B). Penalties were not imposed in view of the firm’s financial condition – it is in bankruptcy. See Lit. Rel. No. 25289 (December 15, 2021).
Ponzi scheme: SEC v. Fusion Hotel Management LLC, Civil Action No. 21CV2-2085 (S.D.Ca. Filed December 14, 2021). Named as defendants are Fusion Hotel Management; Fusion Hospitality; and Denny Bhakta. Defendant Bhakta, once an employee of an international hotel chain, owns both company defendants, neither of whom has ever been registered with the Commission. Over a four-year period, beginning in January 2016, Defendants raised over $15 million from more than 40 investors. The business was supposedly buying and selling blocks of hotel rooms at a profit. Defendants claimed to have expertise in this line of work and promised large returns. In fact, there was no business, it was a sham. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25288 (December 15, 2021).
Internal controls: In the Matter of WEX, Inc., Adm. Proc. File No. 3-20676 (December 13, 2021) is a proceeding which names as respondent, a NYSE listed firm with a 51% owned Brazilian subsidiary. In 2016 and 2017 the firm’s auditors found significant errors in its financial records that resulted from a lack of proper internal control at the subsidiary. Additional errors were also found for 2018. Overall, the errors total about $85.5 million. Most related to the overstatement of unbilled receivables. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm will also pay a penalty of $350,000.
Manipulation: SEC v. Lee, Civil Action No. 1:21-cv-11997 (D. Mass. Filed December 12, 2021) is an action which names as defendants: Jay Lee; Geoffrey Wall; and Benjamin Kirk. Each Defendant is a Canadian citizen; Mr. Kirk is a defendant in SEC v. Kirk, Civil Action No. 13-cv-1735 (S.D.N.H. Filed March 15, 2013). In this action Defendants manipulated 10 different penny stocks over a four year period, beginning in 2012. Generally, Defendants dumped large amounts of securities in coordination. They often coordinated control over all, or virtually all the shares of an issuer, arranged for misleading promotional campaigns, and reaped large profits by directing distributions into a secret sub-account. Facilitating the process was an entity called the Sharp Platform, a business which facilitates the manipulation of stocks by offering a variety of services such as encrypted networks and similar matter. Defendants reaped millions of dollars in illicit profits. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending.
FinCEN
Comments: The regulator issued a release on December 14, 2021, requesting comments modernization of U. S. AML/CFT Regulatory Regime (here).
Hong Kong
Release: The Securities and Futures Commission issued a release on December 16, 2021, announcing progress and a way forward to advance Hong Kong’s green and sustainable finance development (here).
Singapore
Consultation paper: The Monetary Authority of Singapore published a Consultation Paper on Introduction of Due Diligence Requirements of Corporate Financial Advisers, dated December 15, 2021 (here).
U.K.
Release: The Financial Conduct Authority issued a release on December 16, 2021 designed to assist consumers with their understanding of certain environmental disclosure requirements (here).