This Week In Securities Litigation (Week of February 12, 2024)
Last week the Commission filed a series of actions tied to the manner in which market professionals keep records. Those cases were resolved with admission to the underling charges and financial remedies. In addition, actions were filed based on an offering fraud and two financial fraud cases.
Be careful, be safe this week.
SEC
Amendments: On February 9, 2024, the Commission and the CFTC jointly adopted amendments to Form PF, the confidential reporting form filed by certain SEC registered investment advisers to private funds. The amendments enhance the reporting of hedge funds, giving greater insight into hedge funds’ operations and strategies. This assists in identifying trends and aids comparability.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 2 new civil injunctive action and 17 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Record keeping: In the Matter of Certain Broker-Dealer Practices, Adm. Proc. File No. 11270 (February 9, 2024) is a proceeding under which 16 firms agreed to pay over $81 million and admitted violations tied to record keeping. The firms engaged in longstanding practices of using unapproved communication methods known as off-channel communications. The market professionals involved admitted that from at least 2019 and 2020 their employees used personal text messages about business. The required records regarding the communications and advice given or proposed were not maintained or preserved. The Orders alleged, as appropriate, violations of Exchange Act Section 17(a) and Rule 17a-4 and Advisers Act Section 204 and Rule 204-2. In resolving the proceedings, Respondents consented to the entry of a cease-and-desist order based on the provisions cited, a censure and a financial penalty, along with admitting the facts in the Order. Respondents also agreed to implement certain procedures.
Offering fraud: SEC v. Woodbury, Civil Action No. 1:23-cv14255 (N.D. Ill.) is a previously filed action which named as defendants Arline Woodbury and Joyce Holverson. The complaint alleged that the two defendants acted as “downstream promoters for the CoinDeal scheme.” There the Commission alleged that Defendants claimed large returns were possible from the imminent sale of an anonymous blockchain technology.” Defendants in this action are alleged to have raised over $3 million from hundreds of investors based on false statements about the deal and the misuse of investor funds. Defendant Holverson defaulted. The Court on February 7,2024, entered judgment, permanently enjoining her from future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The Court also ordered that disgorgement in the amount of $ 164,308 and prejudgment interest of $25,778 be paid along with a civil penalty in the amount of $175,000. See Lit. Rel. No. 25939 (February 7, 2024).
Unregistered securities: In the Matter of TradeStation Crypto, Inc., Adm. Proc. File no. 3-21845 (February 7, 2024). TradeStation Crypto, Inc., is a Florida based firm that provides crypto asset-related financial produces and services. Beginning in late 2020 the firm offered and sold on its crypto asset accounts what was called Interest Feature. This product at one time had over 11,000 users who had paid a total of of $281 million. On June 30, 2022, the firm voluntarily ceased offering and selling Interest Feature. Using the feature investors tendered money in the form of crypto assets to TradeStation in exchange for a promise to pay back investors with interest. The company then took complete control of the investor assets and pooled them along with those of the company. The collective assets were deployed in revenue generating activities – investors had a potential passive source of income. The company had complete discretion over the investments and managed the risks. Stated differently, investors had a reasonable expectation that they would profit from the TradeSation revenue-generating activities. In sum, the activities constituted an investment contract, a security. Respondent cooperated and undertook remedial acts. The Order alleges violations of Securities Act Sections 5(a) and 5(c). To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and agreed to pay a penalty of $1.5 million.
Bribery: SEC v. Auerbach, Civil Action No. 1:19-cv-5631 (E.D.N.Y.) is a previously filed action. The complaint alleged that defendant Jeffrey Auerbach attempted to bribe a stockbroker to purchase certain securities out of a customer account without the knowledge or consent of that person. Defendant settled the matter, and the Court entered a final judgment, prohibiting Defendant from engaging in future violations of Exchange Act Section 10(b). The judgment also requires that Defendant pay disgorgement and prejudgment interest totalling $5,846 which is deemed satisfied by the entry of a restitution order in the parallel criminal action, U.S. v. Auerbach, No. 19 Cr. 607 (E.D.N.Y.). Penalties were not imposed in view of the conviction of defendant and sentence in the criminal case. See, Lit. Rel. No. 25938 (February 6, 2024).
Financial fraud: In the Matter of Cloopen Group Holding Ltd., Adm. Proc. File No. 3-21844 (February 6, 2024) is an action which names the firm as a respondent. Cloopen is a Cayman Island company, based in Beijing. Its ADRs were listed on the NYSE but are now quoted over-the-counter. Shortly after the firm’s shares were first quoted on the NYSE in February 2021, two senior managers at the firm discovered that revenue had been overstated for the second and third quarters of 2012. Following an internal investigation, it was determined that for the third quarter revenue was overstated by about $2.8 million or 6% of total revenue and $1.8 million for the second quarter of 2021 or 4%. The firm subsequently announced the findings. The price of its ADRs dropped 12.7 %. The Order instituting proceedings alleges violation of Exchange Act Section 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm cooperated with the Commission and took remedial steps which included forming an independent committee of the board of directors to investigate and terminating the senior managers involved. To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. A penalty was not imposed based on cooperation.
False financial records: SEC v. Soberal, Civil Action No. 1:23-cv-1585 (E.D. Cal.) is a previously filed action which named as defendants Jake Soberal and Irma Olguin, Jr., the former co-CEOs of startup Bitwise Industries, Inc. The underlying complaint alleged that the two Defendants made material misrepresentations regarding the firm’s cash position and historical financial position when raising about $70 million from investors in 2022. The action was settled, and the Court entered permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). A conduct-based injunctions were also entered. See Lit. Rel. No. 25937 (February 5, 2024).
ESMA
Initiative: The European Securities and Market Authority announced on February 7, 2024, that it is seeking new members for its Securities Markets Stakeholder group. The group “facilitates our consultation with stakeholders by providing technical advice on ESMA’s policies and activities and brings information on recent market developments . . .” to the attention of the regulatory (here).