This Week In Securities Litigation (Week of Feb. 16, 2021)
The more things change, the more they sometimes seem to stay the same. Take obtaining a formal order of investigation. For much of time the Commission has been in existence the staff prepared a memo submitted to the Commission requesting that a formal order be issued. which it considered and then made a decision. A few years back that practice was changed, delegating authority to the staff. Then it was changed back. Now the Acting Chair had changed it back again to “empower” the Enforcement Division.
Then the Following this change the Acting Chair announced that the Commission would no longer consider contingent settlements – those dependent on the defendant obtaining waivers of certain statutory disqualifications that would flow from the proposed settlement. For years the Commission did not consider such settlements. Several years back the Commissioners had a very public dispute over the practice. For a period under the just departed Chairman they were considered. Now they are not. Two Commissioners disagreed.
Be careful, be safe this week
SEC Enforcement – Filed and Settled Actions
The Commission filed 5 new civil injunctive actions and no administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters.
False statements: SEC v. Arrayit Corp., Civil Action No. 5:21-cv-01053 (N.D. CA. Filed Feb. 11, 2021) is an action which names the biotechnology firm and its CEO, Rene Schena, as defendants. In March and April as the pandemic was unfolding, Defendants made a series of false and misleading statements regarding the development of testing by the company. The statements were followed by surges in the share price and trading volume of the stock. Previously, the company had released false statements regarding its compliance with the obligation to file periodic reports. The complaint alleges violations of Exchange Act Sections 10(b) and 13(a). The case is pending. See Lit. Rel. No. 25029 (Feb. 11, 2021).
False valuations: SEC v. Hu, Civil Action No. 1:20 -cv-05496 (S.D.N.Y.) is a previously filed action which named as defendants David Hu, the co-founder and chief investment officer of International Investment Group, a former registered investment adviser. The complaint alleged that beginning in October 2013 Defendant defrauded advisory clients. First, he grossly overvalued assets to inflate fees. Second, he sold $60 millions in fake assets to pay redemption requests of certain clients and forged a credit agreement. Last week the Court entered a permanent injunction based on consent which prohibits future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). Monetary relieve will be considered at a later date. Previously, the Commission revoked the registration statement of the adviser. See Lit. Rel. No. 25028 (Feb. 10, 2021).
False statements: SEC v. Goodman, Civil Action No. 21-cv-00365 (D. Minn. Filed Feb. 8, 2021) is an action which named as a defendant Isaiah Goodman. Becoming Financial, LLC, his firm, was a Minnesota registered investment adviser. Over a two-year period, beginning in the fall of 2018, the advisor informed clients that their funds would be invested in securities and mutual funds. The investments would be conservative. They would be made for the long term. Over the period Mr. Goodman and his firm raised about $2.25 million from at least 20 advisory clients. Rather than invest the funds as promised, Defendant misappropriate significant portions of the capital raised. Portions were also used to make Ponzi like payments to certain investors. To conceal their wrongful conduct, Defendants furnished investors with false account statements. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25026 (February 9, 2021)
Insider trading: SEC v. Ahn, Civil Action No. 1:21-cv-10203 (D. Mass. Filed Feb. 5, 2021). Mark Ahn, Defendant, was a member of the board of director of Abeona Therapeutics, Inc. In that role he helped the firm identify prospective business opportunities. He was subject to standard confidentiality provisions. In early 2017 Mr. Ahn became a consultant to the firm. His consulting agreement required that all material information he obtained from the firm be maintained as confidential. By May 2017 he was participating in weekly meetings at the firm, discussing business opportunities. One of the opportunities under consideration was publicly traded Dimension Therapeutics, Inc, a Massachusetts based pharmaceutical company. The next month Mr. Ahn’s firm made an offer. Dimensions was interested. Talks continued. After a second offer Mr. Ahn began purchasing Dimensions stock. The company also entertained other offers. The stock price increased. On August 17, 2017 Abeona submitted what it called the best and final offer. On August 25, 2017 Dimension announced that it had accepted an offer but not the one of Abeona but of another bidder. The firm’s share price spiked up, rising 162%. Several days later Mr. Ahn sold his shares for a profit of $48,874. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25024 (Feb. 5, 2021). The U.S. Attorney’s Office for the District of Massachusetts filed parallel criminal charges.
False statements: SEC v. Moleski, Civil Action No. 2:21-cv-01065 (C.D. CA. Filed February 5, 2021) is an action which names as defendants: Stephen Scott Moleski, David Michael and Erik C. Jones. A series of entities controlled by various Defendants were named as relief defendants. Over a two-year period, beginning in June 2018, the individual Defendants promoted and solicited investments in the private funds they controlled. In doing this Defendants made a series of misrepresentations. Those included false claims that: Investor funds would be put into high grade investments; the investment objective was “phenomenal returns. . .;” a full time “licensed” broker would monitor the investments daily; investors would achieve financial freedom; and “WE TREAT YOUR MONEY LIKE IT’S OUR OWN!” Defendants also solicited individuals to purchase securities. Two securities offerings were made. Over the course of the offerings Defendants collectively charged the investor over $400,000 in commissions. Yet no Defendant was a registered broker-dealer; the securities were not registered. The complaint alleges violations of Securities Act Section 5(a), 5(c) and 17(a), Exchange Act Sections 10(b) and 15(a)(1) and Advisers Act Sections 206(1), 206(2), and 206(4). The case is pending. See Lit. Rel. No. 25025 (February 5, 2021).
Offering fraud: SEC v. Parnas, Civil Action No. 1:21-cv-00995 (S.D.N.Y. Filed Feb. 4, 2021) is an action which names as defendants Lev Parnas and David Correia, the founders and officers of a firm known as Fraud Guarantee, supposedly a company that would aid those who were victimized in earlier frauds. Over a six year period, beginning in 2013, Defendants raised about $2 million. Investors were told that the funds would be used to defray the business expenses of the firm since it already had millions of dollars. In fact, Defendants misappropriated much of the money. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 25023 (Feb. 5, 2021). The U.S. Attorney’s Office for Manhattan filed a parallel criminal action.
Criminal cases
Misappropriation: U.S. v. Pitsironis, No. 21- MJ- 162 (E.D.N.Y. Unsealed Feb. 10, 2021) is an action in which Apostolos, a former registered investment adviser and broker, was charged with wire fraud. The charges were based on his conduct in 2009 when Defendant was working for an advisory. While there he had a married couple as clients from whom he misappropriated about $400,000 using a series of 22 wire transfers to an account he controlled. The case is pending.