This Week In Securities Litigation (Week of February 7, 2022)
The list of regulatory matters on the agenda for the Commission continues to grow each week. The list is long and references a number of important topics which range from 10b-5-1 plans to buy-backs and cybersecurity. This seems to flow from the often used approach of Chair Gensler to raise issues, perhaps mention a few points and then state that the has “asked staff” to look into it. If at some point all the matters staff is looking into come back the commissioners are going to be most busy. At the moment, however, many are watching the regulatory agenda and the enforcement actions filed and wondering just where the agency is going.
Be careful, be safe this week.
SEC
Report: The agency published the staff’s annual Report on Nationally Recognized Rating Organizations on January 31, 2022 (here).
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 3 civil injunctive actions and np administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.
Offering fraud: SEC v. Safeguard Metals LLC, Civil Action No. 22:22-cv-00693 (C.D. Ca. Filed February 1, 2022) is an action which names as defendants the company and its owner, Jeffrey Suntulan. Over a four year period, beginning in December 2017 Defendants targeted those near retirement age in an effort to convince them to transfer their savings to a self-directed Individual Retirement Account so that the money could be invested in their fraudulent scheme – buying gold and silver coins based on false statements. For example, investors were told they should transfer their assets to avoid the impact of the “Money Market Reform Act,” a statute designed to apply to money market funds in rare circumstances but which was portrayed as being a vehicle to snatch their investment funds. Investors were also told Safeguard had a London office and millions of dollars under management – both false claims. Overall, Defendants raised about $67 million from the sale of their coins to over 450 elderly, retail investors and kept about $25.5 million in markups on the price paid to acquire the coins. The complaint alleges violations of Exchange Act Section 10(b) and Advises Act Sections 206(1) and (2). The case is pending. See Lit. Rel. No. 25322 (February 2, 2022).
Financial fraud: SEC v. HeadSpin, Inc., Civil Action No. 5:22-cv-00576 (N.D. Cal. Filed January 28, 2022). Defendant HeadSpin, based in Palo Alto, gives customers hardware and software tools to test their mobile software applications across the world. Over a period of two-years its former CEO, Manish Lachwani, engaged in a fraudulent scheme which pushed its valuation to over $1 billion not by delivering a superior product or services, but through financial fraud. The $1 billion valuation was an illusion. To create that illusion the company and its CEO inflated the value of numerous customer deals. In addition, transactions under discussion with the potential customer were invoiced as if they were actually based on guaranteed future payments. This was done by creating false invoices. These fraudulent techniques propelled the company valuation upward. In the fall of 2018 HeadSpin and its CEO took additional steps. Prior to a Series B fundraising round, HeadSpin’s valuation was about half a billion dollars. One year later that valuation reached about $1.1 billion during a Series C round of financing, giving the start-up company “unicorn” status. The inflation was based on fabricated claims and stories spun to investors. Those investors executed long-term contracts valued at tens of millions of dollars per year. The investors were some of Silicon Valley’s biggest, high-profile companies. Following an internal investigation in 2020 by the board of directors, the fraud unraveled, the CEO was forced to resign and the billion dollar valuation collapsed. The company was valued at about $300,000. The company implemented a series of remedial acts. Those included: 1) An internal investigation conducted by the board; 2) repaying investors; 3) the retention of new senior management; and 4) the adoption of new policies and procedures to enhance transparency and facilitate accurate reporting. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The company resolved the matter, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. The Commission instituted a separate action against the former CEO, SEC v. Lachwani, Civil Action No. 3:21 Civ. 6554 (N.D. Cal.).
Fraudulent crowdfunding offering: SEC v. Shumake, Civil Action No. 2:21-cv-12193 (E.D. Mich.) is a previously filed action which named as defendants Robert Shumake, crowdfunding issuer 420 Real Estate, LLC, and its CEO Willard Jackson. The complaint alleges that Defendants conducted a fraudulent and unregistered crowdfunding offering through 420 Real Estate, a registered crowdfunding portal. Mr. Shumake, with assistance from Defendant Jackson, concealed his participation in the scheme to avoid disclosure of his criminal conviction. Defendants entered into a bifurcated settlement with the Commission. Each consented to the entry of permanent injunctions based on Securities Act Sections 5(a) and 17(a) and Exchange Act Section 10(b). Mr. Jackson also consented to the entry of an officer and director bar. Monetary relief will be considered at a different date. Previously, the Commission obtained final judgments against three other defendants. The litigation continues. See Lit. Rel. No. 25323 (February 2, 2022).
False research: SEC v. SeeThruEquity, Civil Action No. 1:18-cv-10374 (S.D.N.Y.) is a previously filed action. The complaint alleged that defendants Ajay Tendon and Amit Tandon engaged in a fraudulent research and scalping scheme. Specifically, Defendants were alleged to have published research reports, claiming that they were properly prepared, accurate reports objectively assessing the merits of small cap stocks. In fact they were largely bought and paid for. In addition, Mr. Tandonl. CEO of SeeThruEquity, often engaged in a scalping scheme in which he traded ahead of the firm’s recommendations. To resolve the matter the firm and the Tandons consented to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). Following the filing of a motion for additional remedies the Court imposed a penalty against Amit Tandon of $250,000; a penalty of $270,000 against Ajay Tandon; an injunction prohibiting the Tandons from promoting or deriving compensation from the promotion of any issuer security; and a 5 year penny stock and officer director bar as to each individual defendant. See Lit. Rel. No. 25321 (January 28, 2022).
Securities Class Actions
Cornerstone Research published its annual review of securities class actions filings last week, Securities Class Action Filings, 2021 Year in Review (here). The key metric in the report is the number of cases filed last year. In 2021 there were 218 securities class actions filed. That compares to 333 the year before. While the number of 2021 filings reflects a drop of 35% compared to the prior year, when the number of 2021 filings is compared to the average number of annual filings over the period of the Report, 2021, the 218 filings in comparable. The type of claims incorporated in the complaints filed, however, remained essentially the same in 2021 as those included in the prior two years. In 2021 the largest categories of claims were those involving misrepresentations in financial documents, false forward-looking statements, accounting violations and internal control weaknesses, in that order. In 2020 and 2019 those same categories of claims were also the largest each year in the same order. Finally, the Second and Ninth Circuits continue to be the favorites for filing securities class actions. Last year 72% of the complaints filed were brought in those two circuits.
FinCEN
Rules: The FDIC and FinCEN open registration for digital identity tech sprit on February 1, 2022 to help measure the effectiveness of digital identity proofing (Here).
Australia
Report: The Australia Securities and Investment Commission issued its quarterly report for October to December 2021 discussing its enforcement actions for the period as well as rule making and other activities, according to a February 3 release (here).