This Week In Securities Litigation (Week of February 6, 2023)
Cases filed last week focused on traditional areas. Those included controls, offering frauds and cherry picking. At the same time the agency raised questions regarding Regulation BI which may signal a new focus for the Enforcement Division.
Be careful, be safe this week
SEC Enforcement – Filed and settled actions
During the last week the Commission filed 3 new civil injunctive actions and 1 new administrative proceeding, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.
Offering fraud: SEC v. Jones, Civil Action No. 2:23-cv-0841 (C.D. Ca. Filed February 3, 2023) is an action which names as defendants Windsor Jones LLC and Anthony Collins, a sales representative of the firm. Defendants raised about $4 million from 12 investors in an offering. Those investors were told that Mr. Jones would purchase fine wine with their funds that would be resold for a good profit. Investors were not told that much of their money would be used for other matters, that a 30% to 50% markups would be added to the wine as well as an 8% to 10% commission. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). See Lit. Rel. No 25632 (February 3, 2023).
Controls: In the Matter of Activision Blizzard, Inc., Adm. Proc. File No. 3-21294 (February 3, 2023) is an action which names as Respondent one of the largest video game development and publishing companies. Beginning at least by 2018 and continuing to 2021 the firm failed to have proper controls in place. Specifically, during the period, the company did not have controls in place to ensure that information related to employee complaints of workplace misconduct would be communicated to the company disclosure personnel to permit timely assessment. In addition, from 2016 through 2021, the company included provisions in its separation agreements that required former employees to notify the firm if they were contacted by a government administrative agency in connection with a complaint or report. The latter violates Rule 24F-17(a) while the former is contrary to Rule 13a-15(a). To resolve the matter Activision consented to the entry of a cease-and-desist order based on each rule. The company will also pay a penalty of $35 million.
Manipulation: SEC v. Gogioere, Civil Action No. 1:18-cv-1530 (S.S. Ca.) is a previously filed action in which the Court entered a final judgment against Annetta Budhu. The underlying action was based on a manipulation and investment fraud involving the shares of Arias Intel Corp. Defendant profited by $5,000. The Court entered a judgment enjoining Defendant from future violations of Exchange Act Section 10(b) and imposing a penny stock bar. In addition, the judgment directs the payment of disgorgement in the amount of $5,000, prejudgment interest and a penalty in the same amount as the disgorgement. See Lit. Rel. No. 25631 (February 3, 2023).
Pyramid scheme: SEC v. McLane, Jr., Civil Action No. 2:20-cv-00122 (E.D. Ky.) is a previously filed action which alleged that defendants John McLane, Jr. and Paul Nash orchestrated a fraudulent pyramid scheme. Their firm was Mindset 24 Global, LLC. Each Defendant settled with the Commission. The Court entered permanent injunctions against each Defendant based on Securities Act Sections 5(a) and 17(a) and Exchange Act Section 10(b) as well as conduct injunctions. In addition, Defendant McLane agreed to pay disgorgement of $135,000, and prejudgment interest of $17,770. Mr. Nash was ordered to pay disgorgement of $173,600 plus prejudgment of $22,817. In addition, both Defendants were ordered to pay civil penalties of $60,000. See Lit. Rel. No. 25628 (February 1, 2023)
Cherry picking-scheme: SEC v. Susoeff, Civil Action No. 2:23-cv-173 (D. Nev. Filed February 1, 2023) is an action which names as defendants: Steven Susoeff and Steve Susoeff, LLC (also known as Meritage Financial, a registered investment adviser). Defendants, over a period of several months during the first half of 2021, operated a cherry-picking operation. During the period Defendant Susoeff had discretionary trading authority oner the accounts of the firm. Frequently he used that authority to execute what he called “block trades.” The block was assembled during the trading day and divided after hours among the pertinent accounts. At first, Mr. Susoeff tended to favor the account of his girlfriend and later another by cherry-picking profitable trades to those accounts. Later he followed the same process for his personal account. During the period, the executing broker repeatedly warned Mr. Susoeff against such tactics. Over the period the allocations resulted in about 89.9% of the dollars traded on behalf of the favored accounts being profitable and only 25.5% of the dollars traded on behalf of the disfavored accounts. Ultimately Defendant Susoeff received ill-gotten gains of about $54,232. All of the favored accounts received about $144,232 of the ill-gotten gains. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Sections 206(1) and 206(2). See Lit. Rel. No. 25629 (February 2, 2023).
Offering fraud: SEC v. Seong Yeol Lee, Civil Action No. 3:23-cv-00125 (D. Conn. Filed February 1, 2023). Defendant Lee is a Korean national who has resided in Stanford Connecticut since 2020. Defendant Amritrust Corporation, a firm with no business, is also a Defendant. That entity is now incorporated in Wyoming. Previously it was incorporated in Michigan and at one time, Georgia. Since early 2020 Defendant Lee has held executive positions with Amritrust. Heappointed his daughter, Alice Choi, to the board of directors. She had not experience for the position. The firm reported the appointment in a filing with the Commission. That filing also notes that the company has a corporate secretary. That person also lacked the experience required by the position. Amritrust eventually became a public company. Nevertheless, it typically failed to timely file the required documents with the Commission. Beginning in 2019, and continuing through late 2022, Amritrust received over $20 million from individuals in Korea who were recruited to invest in the company by Defendants and their affiliates. The stock records of the company reflect about 2,000 Korean shareholders. Witnesses in Korea estimate that the number of investors is closer to 4,000. Defendants recruited investors in Korea through information sessions, email, solicitations and word of mouth. According to one Witness, Defendants used another entity, Bespoke Korea, to assist with the recruiting efforts. Bespoke Korea had few employees. Amritrust has no employees and no operations. Yet investors in that firm were assured of guaranteed returns and furnished other misrepresentations. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. In a separate proceeding the Commission delisted Amritrust. See Lit. Rel. No. 25627 (February 1, 2023).
Alert: The regulator posted an alert warning about potential U.S. Commercial real estate investments by sanctioned Russian Elites, Oligarchs and proxies, on January 25, 2023 (here).
Securities Class Action Filings 2022
Cornerstone Research published its review of security class actions for 2022, illuminating key trends for the year (here). The number of actions filed each year is, perhaps, the most closely watched number. For 2022 the number of securities class actions declined slightly compared to the prior year. Last year 208 securities class actions were initiated, compared to the 218 in 2021. While the change is small, the more important metric is the 5% decline.
Similarly, the percentage of U.S. exchange listed companies named in a securities class action fell for the third straight year in 2022. Last year it fell to 3.1%, its lowest percentage since 2012. That decrease is mitigated, however, since there was a 21% increase in U.S. exchange listed firms at the beginning of 2022 relative to 2021. Many of the new issuers, however, were SPACs that had not announced a de-SPAC transaction.
Finally, the largest number of securities class actions were filed in the Second Circuit Court of Appeals in 2022. The same is true for 2021. In 2020, however, the Ninth Circuit edged out the Second Circuit by one filing – 77 for the former and 76 for the latter.
Draft opinion: The European Securities and Markets Authority issued its first onion on the draft European Sustainability Reporting Standards, according to a release dated January 26, 2023 (here)