This Week In Securities Litigation (Week of Feb. 3, 2020)

A look forward – a look back:

Proposed changes to the Volker rule, modified last fall by banking agencies and the SEC and CFTC, would permit banks to invest heavily in, or sponsor, venture capital funds according to some commentators. The changes, unveiled at the end of last week, are being cast as “common sense” modifications by the banking agencies. Some claim the proposals could weaken the rule and encourage the kind of risk taking it was intended to prevent. No doubt there will be more on the proposals.

The SEC released the agenda for its coming small business conference last week. In addition, the e CFTC announced new position limit regulations for certain agricultural products; SEC enforcement continued to focus on main street investors; and, Cornerstone Research released a Report announcing that the filing of new securities class actions reached yet another new high as the decade drew to a close.


Proposed disclosure amendments: The Commission approved proposed amendments to Regulation S-K. The proposals focus on updating and modernizing certain disclosure requirements. Key proposals center on Rule 303 and MD&A. The proposals were issued January 30, 2020 (here).

Proposals: Five federal financial regulatory agencies, including the SEC, proposed modifications to the Volker rule general prohibition on investing in or sponsoring hedge funds or private equity funds (Jan. 30, 2020)(here).

Small business: The Commission announced the agenda for the meeting of the Small Business Capital Formation Advisory Committee to be held on Tuesday, February 4, 2020 (here).

OCIE inspections: The SEC’s Office of Compliance Inspections and Examinations published a series of observations gleaned from hundreds of exams over a period of years. While OCIE’s charge is the inspection of registered investment entities, the observations of the exam staff offer important insights for all in this critical and constantly evolving area. The observations are set-forth in Cybersecurity and Resiliency Observations, Office of Compliance Inspections and Examinations (Jan. 27, 2020)(here). Topics covered include: Governance and risk management; access rights and controls; data loss prevention; mobile security; incident response and resiliency; vendor management; and training and awareness.

SEC Enforcement – Filed and Settled Actions

The Commission filed 2 civil injunctive actions and no administrative proceedings last week, exclusive of 12j and tag-along actions.

Misappropriation: SEC v. Matthes, Civil Action No. 2:20-cv-125 (E.D. Wis. Filed Jan. 28, 2020). Defendant Edward Matthews is a registered representative and investment adviser at a nationwide financial services firm. Over a period of about six years, beginning in 2013, Defendant misappropriated about $2.4 million from clients in two ways. First, he convinced a number of clients to invest in what was supposed to be a safe investment offered by a registered entity that would pay 4% per year. He had clients write checks to him for the investment that totaled about $1.4 million. In fact, he misappropriated the money. Second, he misappropriated another $1 million from brokerage clients through unauthorized withdrawals. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 201(1) and 206(2). The case is pending. See Lit. Rel. No. 24762 (Jan. 28, 2020).

Manipulation: SEC v. Aubel, Civil Action No. 16-cv-10670 (D. Mass.) is a previously filed action which named as defendants David Aubel and Robert Raffa who previously settled. The complaint alleged that Defendants concealed their interests in Green Energy Renewable Solutions, Inc.’s stock while it was being manipulated. Defendants previously pleaded guilty in a parallel criminal action. The Court entered a final judgement by consent as to Defendant Aubel. The judgement enjoins him from future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 13(d) and 16(a). He was also ordered to pay a penalty of $150,000 along with disgorgement of $242,553 which was deemed satisfied by the restitution order in the parallel criminal case. See Lit. Rel. No. 24725 (Jan. 27, 2020).

Offering fraud: SEC v. Carpoff, Civil Action No. 2:20-cv-00180 (E.D. Ca. Filed Jan. 24, 2020). Defendants Jeffrey and Paulette Carpoff, residents of California, controlled DC Solar Solutions, Inc. and DC Solar Distribution, Inc. The former was owned by Mr. Carpoff. The latter was owned by wife Paulette. Both firms filed for bankruptcy protection in 2019. The two firms operated together. DC Solar told investors that it designed, manufactured and leased renewable energy products to serve the needs of a diverse “off-grid” market place. Over a period of several years, investors were offered the opportunity to acquire an interest in DC Solar in the form of either an investment fund or a sale-lease back arrangement. Each required investors to purchase generators from DC Solutions while simultaneously leasing the units to DC Distribution. The units would then be leased to end-users. Profits were supposed to come from tax credits, depreciation on the generators and lease payments. The face value of the deals inked by investors exceeded $2.7 billion. Investor were not aware that most of the generators sold were never manufactured, that that most of the revenue payments they received came from cash invested by others or that Mr. Carpoff arranged for investors to receive false certificates, assuring them that all was well with their investments. Throughout the process the lack of legitimate revenue was concealed through repeated circular bank transfers involving the two firms. False financial statements were also furnished to prospective investors. And, Defendants misappropriated at least $140 million of the investor capital. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Eastern District of California filed a parallel criminal action. See Lit. Rel. No. 24724 (Jan. 24, 2020).


Position limits: The agency adopted new, speculative position limits for certain agricultural contracts that are subject to federal limits to conform to the requirements of the Dodd-Frank Act on January 30, 2020 (here).

Securities Class Actions

The number of securities class action filings set a new record, according to a recent report by Cornerstone Research titled Securities Class Action Filings, 2019 Year in Review (here). In 2019 428 securities class actions were filed in federal and state courts compared to the 420 initiated the year before. Core filings, defined as all such suits except those tied to M&A, also set a record at 268 compared to 238 suits filed the year before. While the number of M&A suits filed did not set a record, the 160 cases initiated represents the third largest number.

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