This Week In Securities Litigation (Week of February 28, 2022)
As the world returns to a version of the 1950s Cold War and perhaps more with suggestions and threats of nuclear consequences, securities law and the economic recovery from the on-going but somewhat mitigating pandemic seem to pale. Things like the huge failure of DOJ to produce documents at the trial of former Goldman Sachs managing director Roger Ng or the latest spat of Tesla and Elon Musk with the SEC appear to lose significance. Nevertheless, all of those events and more will continue and require attention even as life and death battles are waged between a bully dictator and a determined small country and its citizens seeking to live their lives.
One timely headline is that Big Law is looking for a way to aid those battling on the front lines in the Ukraine. No doubt many of us would like to help with the exploding humanitarian crisis that is in the Ukraine battle against one of the world’s largest military organizations. As specific organizations or opportunity appear we will pass them along for everyone.
Be careful, be safe this week.
Proposed regulation: The Commission proposed a rule that will require more disclosure regarding short sales. Specifically, the proposal would require certain institutional investors to report data on short sales monthly, permitting the agency to aggregate the data and then disclose the information. New Rule 205 would also be added to Regulation SHO which would create an obligation to report on “buy to cover” transactions by broker-dealers. The comment period for Proposed Rule 10c-1, which concerns loaned securities, will also be extended (here).
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 3 civil injunctive actions and 4 administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.
Cherry picking: SEC v. Toroian, Civil Action No. 220-cv-715 (E.D. Pa. Filed February 25, 2022) is an action which names as defendants Marguerite Toroian and Bell Rock Capital, LLC. Ms. Toroian is the founder, CEO and CIO of the registered investment adviser. Over a period of four years, beginning in January 2011, she placed trades for clients by holding them after execution and observing pricing for the trade. The transactions were then allocated with those which were profitable going to the firm and others being distributed to clients. Overall, clients lost over $1 million. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. See Lit. Rel. No. 25335 (February 25, 2022).
Conflicts: In the Matter of Ameritas Advisory Services, LLC, Adm. Proc. File No. 3-20784 (February 25, 2022) is a proceeding which names the registered investment adviser as a respondent. At the time of the events here, beginning in 2014, the firm was part of a dual registered investment adviser broker-dealer. Then firm obtained certain revenue sharing payments as a result of the advisory clients’ investments in select mutual funds and money market fund that made such payments, obtained markups on clearing broker fees for advisory client transactions, and received an annual business development credits from the clearing broker. None of these arrangements were disclosed. As a result, clients did not obtain best execution. The advisory agreed to implement certain undertakings and make disgorgement along with prejudgment interest. The Order alleges violations of Advises Act Sections 206(2) and 206(4). To resolve the matter Respondent consented to the entry of a cease-and-desist order and a censure. The firm will also pay a penalty of $4,628,194 in addition to disgorgement of $3,334, 804 and prejudgment interest of $543,390.
Conflicts: SEC v. Hoffman, Civil Action No. 2:22-cv-00296 (D. Ariz.) is an action which names as defendant Arthur Hoffman, an investment adviser representative and a register broker-dealer representative of a large, national investment firm from 2016 to 2020. He was terminated by that firm. In 2016, while Mr. Hoffman was associated with a different broker-dealer, a customer alleged he churned her account. From May 2019 to December 2019 Mr. Hoffman recommended that eight of his investment adviser clients invest with a crypto trading firm known as Zima Global Ventures, LLC which is now defunct. During the period, and at the time of the client investments, Mr. Hoffman had substantial financial obligations to the firm and was furnished a $1.5 million loan at a below market interest rate to solicit investors for Zima. None of his dealings with that firm were disclosed. Substantial efforts were made to conceal the conflicts and arrangements with that firm by Mr. Hoffman. The clients invested over $640,000 in the Zima; Six of the clients lost over $610,000. Later the firm’s principals were arrested on criminal charges. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The complaint is pending. See Lit. Rel. No. 25224 (February 24, 2022).
Insider trading: SEC v. Havrilla, Civil Action No. 1:22-cv-01448 (S.D.N.Y. Filed February 22, 2022) is an action which names as defendant John-Michael Havrilla, formerly the Director of Investor Relations at PAVmed, Inc., a medical device company. Prior to April 9, 2020 when the firm announced earnings, Director Havrilla received a draft earnings release for the last quarter and full year of 2019. Shortly after receiving the release, Mr. Havrilla purchased 227,500 shares of PAVmed stock. After the earnings announcements the share price of the stock rose 13.6%. Mr. Havrilla had illicit profits of $80,115. The complaint alleges violations of Exchange Act Section 10(b). Defendant agreed to resolve the matter, consenting to the entry of a permanent injunction based on the Section cited in the complaint. He also agreed to pay a penalty in the amount of $160,230. See Lit. Rel. No. 25333 (February 22, 2022).
Financial fraud: In the Matter of Baxter International Inc., Adm. 3-20781 (February 22, 2022). Baxter is a healthcare company that generates most of its income outside the United States. Many of its subsidiaries are based in foreign countries. Those entities generate revenue in foreign currencies. The result was two difficulties impacting Baxter’s financial statements. First, beginning in 1995 and continuing through 2019, Baxter recorded the revenues from subsidiaries in their functional currencies. The method used to translate those currencies to U.S. dollars was not in accord with GAAP. Second, beginning in 2009, and continuing for the next ten years, the firm engaged in intra-company transactions for the purpose of generating foreign exchange accounting gains or to avoid losses. Those transactions caused the firm’s accounting statements to be materially misstated. In late 2019 Baxter conducted an internal investigation. At its conclusion the company announced it would have to restate its financial statements. As a result, the company reduced previously reported net income for 2017 through June 30, 2019 and retained earnings as of January 1, 2017 by $582 million, collectively. Part of that amount was attributable to the FX transactions. After the restatement the firm took remedial actions and provided substantial cooperation to the Commission. The Order alleges violations of Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a) and 13(b)(2). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, the company will pay a penalty of $18 million. See also In the Matter of Jeffrey Schaible, Adm. Proc. File No. 3-20782 (February 22, 2022)(proceeding naming as Respondent an employee in the Treasury Department of Baxter based on essentially the same facts as above; resolved with the entry of a cease-and-desist order based on the same Sections cited above; Respondent also agreed to pay disgorgement of $76,404, prejudgment interest of $12,955 and a penalty of $100,000); In the Matter of Scott Bohaboy, Adm. Proc. File No. 3-20783 (February 22, 2022)(Respondent was the Treasurer of the firm; the proceeding is based on the same facts and alleged violations as above; resolved with a cease-and-desist order based on the same sections as above and the payment of a penalty of $125,000).
Report: The Securities and Futures Commission announced the publication of its quarterly report for the final period of 2021 on February 24, 2022 (here).
Report: The Monetary Authority of Singapore issued its report on Consumer Price Developments in January 2022, on February 23, 2022 (here).