This Week In Securities Litigation (Week of December 4, 2023)

The Commission filed three new actions this week. One focused on the custody rule, a second centered on accounting for loss contingencies and a third manipulation.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 1 new civil injunctive action and 2 new administrative proceeding, excluding tag-along actions and those that present a conflict for the author.

Custody rule: In the Matter of Egan Capital Management, LLC, Adm. Proc. File No. 6491 (December 1, 2023) is a proceeding which names as respondent the registered investment adviser. The Order alleges violations of the custody rule in two respects. First, since 2018 Egan Capital has failed to comply with the custody rule for funds it advises. Second, for two other private real estate funds it also advises, the firm violated the custody rule. In resolving the matter, the advisor agreed to implement certain undertakings, including the retention of an independent compliance consultant who will conduct a review. The Order alleges violations of Advisers Act Section 206(4) and the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section and Rules cited in the Order and a censure. The firm will also pay a penalty of $50,000.

Loss contingency: In the Matter of Mallinckrodt PLC, Adm. Proc. File No. 3-21806 (November 30, 2023) is a proceeding which names as respondent the pharmaceutical firm. The company was informed by the Centers for Medicare and Medicaid Services that it had overcharged Medicaid for the flagship drug of the company. By January 2019, the amount of the overcharge had increased to over $500 million. The amount was not disclosed despite the fact that GAAP requires a public company to disclose material loss contingencies that are reasonably possible, and trends or uncertainties that are reasonably likely to affect future net sales. 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 a cease-and-desist order based on the Sections cited in the Order. It also agreed to pay a penalty in the amount of $40 million and implement certain undertakings.

Misappropriation—manipulation: SEC v. Larmore, Civil Action No. 2:23-cv-02470 (D. Az. Filed November 28, 2023) is an action which names as defendants: Mr. Larmore, co-founder and CEO of Defendant ArciTerra; ArciTerra Companies, LLC; ArciTerra Note Advisors II LLC; ArciTerra Note Advisors III LLC; ArciTerra Strategic Retail Advisors, LLC; and Cole Capital Funds, LLC. Over a period of years, beginning in 2006, Mr. Larmore managed a complex of entities involved in commercial real estate. Starting in 2006 Defendants Larmore engaged in a scheme under which he diverted millions of dollars from the Funds’ to Defendant ArciTerra Strategic Retail Advisors, LLC, also an entity controlled by Defendant Larmore. In 2023, after abdicating direct control over ArciTerra, Defendant Larmore began manipulating the share price of WeWork, Inc. stock. This began with a false press release regarding the firm. Two days prior to that press release Mr. Larmore purchased a large block of call options for the stock. If the share price increased Defendant Larmore would make substantial profits. Because Mr. Larmore mis-timed the press release, his options expired over an hour before WeWork stock price spiked from the manipulative conduct. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2) and Exchange Act Sections 10(b) and 14(e). The case is in litigation.

Insider trading: SEC v. Dupont, Civil Action No. 1:23-cv-05565 (S.D.N.Y.) is a previously filed action which named as defendants Joseph Dupont, previously a vice president of Alexion Pharmaceuticals, Inc., and Stanley Kaplan, a close friend. The complaint alleged that Defendant Dupont tipped his friend, Mr. Kaplan. Both men traded and profited in the stock of Alexion. Previously, Messrs. Dupont and Kaplan pleaded guilty to federal criminal charges for securities fraud in a parallel action. In the Commission’s action, each Defendant consented to the entry of permanent injunctions prohibiting future violations of Exchange Act Section 10(b) and 14(e). Each Defendant was also barred from serving as an officer or director. The court has entered the judgments. See Lit. Rel. No. 25903 (November 28, 2023).

Singapore

Remarks: Ravi Menon, Managing Director, Monetary Authority of Singapore or MAS, delivered remarks at the Launch of COP28 Singapore, titled Catalyzing Climate Solutions, November 30, 3023. The Director focused on his view that the world is running out of time to address climate change (here).