This Week In Securities Litigation (Week of January 10, 2022)
Last week Commissioner Elad Rossiman departed from the Commission. A new Commissioner has not been named. Even when someone is selected, given the huge backup of appointments awaiting confirmation in the Senate, it may be sometime before the agency is back to full strength.
Last week, the Commission filed two new civil enforcement actions. One centered on insider trading. The other was an unregistered crypto offering.
Be careful, be safe this week.
SEC
Whistleblowers: The Commission awarded $13 million to a whistleblower, according to a press release issued on January 6, 2021.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 2 civil injunctive actions and no administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.
Insider trading: SEC v. Schottenstein, Civil Action No. 1:22 -CV – 10023 (D. Mass. Filed January 6, 2022). This is an insider trading action which names as defendants: David Schottenstein, the founder of a designer sunglasses business and an investor in Sakal Fund and Sakal Capital. His cousin is Insider 1 and served on the board of DSW Inc. and Green Growth Brands Inc. Mr. Schottenstein’s his uncle, called Insider 2, is also the father of Insider 1. His family owns a business involved in the Rite Aid deal discussed below. Kris Bornovsky runs Skal Ventures LLC and was the manager and president of Sakal Capital. Ryan Shapiro founded two companies; Sakal Capital Management LLC; and Sakal U.S. Fund LLC. There was trading in advance of at least three corporate announcements: a) an August 2017 DSW earnings announcement; (b) a February 2018 announcement of a merger involving Rite Aid Corporation and Albertsons Companies; and (c) a December 2018 announcement of an acquisition of Aphria Inc. by Green Growth Brands. Mr. Schottenstein traded in advance of each announcement, obtaining profits of over $600,000. Mr. Bortnovsky made profits of $260,000 by trading in advance of the two merger announcements. He also traded in advance of one announcement in the Sakal Capital account he controlled, obtaining profits of over $3.4 million. Mr. Shapiro traded in advance of the Rite Aid announcement, obtaining profits of $121,000. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The U.S. Attorney’s Office for the District of Massachusetts filed parallel criminal charges against the three individual Defendants. The case is pending. See Lit. Rel. No. 25302 (January 6, 2022).
Unregistered crypto offering: SEC v. Crowd Machine, Inc., Civil Action No. 5:22-cv-00076 (N.D. Ca. Filed January 6, 2022) is an action which names as defendants the company, controlled by Defendant Craig Sproule. During the first quarter of 2018 Defendant Sproule and his firm, Metavine, Inc., a Relief Defendant which owns Crowd Machine, raised $33 million from hundreds of investors who participated in an initial coin offering of Crowd Machine Tokens or CMCTs. The offering proceeds were to be used to fund the development of a new technology called “global decentralized” peer-to-peer network or “Crowd Computer.” It would run “no-code” application-development software. The tokens were to be sold and the funds used to compensate those whose surplus processing power was used. Defendants also claimed they would market the new technology and create a community of token holders thereby increasing the value in the secondary market. Defendants also misrepresented how the proceeds of the offering would be used. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Relief Defendant Metavine Pty consented to the entry of an order directing it to pay, on a joint and several basis with Crowd Machine, disgorgement in an amount to be determined by the Court.
Offering fraud: SEC v. Kabra, Civil Action No. 1:18-cv-12058 (D. Mass.) names as a defendant Tanmaya Kabra and his firm. A final judgment was entered last week against Mr. Kabra. That judgment was based on an offering fraud scheme. There, Mr. Kabra repeatedly solicited investors to purchase interests in his firm, LaunchByte, which supposedly invested in startups that obtained significant returns. The claims were false – investor funds were misappropriated by defendant. Mr. Kabra and his company consented to the entry of a final judgments precluding future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Kabra was also ordered to pay disgorgement and prejudgment interest in the amount of $567,793 which was deemed satisfied by the restitution order entered in the parallel criminal action. In that action Mr. Kabra pleaded guilty to four counts of wire fraud and was sentenced to serve 21 months in prison followed by one year of supervised release. He was also ordered to pay restitution in the amount of $1,842,106 and a $15,000. See Lit. Rel. No. 25301 (January 6, 2022).
Offering fraud: SEC v. Craig, Civil Action No. 1:18-cv-04539 ((N.D. Ga.) is an action which named as defendants Russell Craig and OneStep Financial Services, LLC. The Court entered final judgements by consent against each Defendant last week. Those judgments preclude future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Craig was also ordered to pay a penalty of $390,094. Defendants were, in addition directed to pay, jointly and severally, $545, 991 in disgorgement and prejudgment interest of $85,184. The judgments were based on a complaint which alleged that over a three-year period, beginning in 2014, that Mr. Craig convinced at least six investors to put in $1.3 million in two separate real estate investment schemes by promising high returns. The claims were false, the funds were misappropriated. See Lit. Rel. No. 25300 (January 6, 2022).
Records: SEC v. Boveda Asset Management Inc., Civil Action No. 21-cv-05321 (N.D. Ga. Filed December 29, 2021) is an action which names as defendants the registered investment adviser and its owner, George Witherspoon, Jr. The complaint seeks the production of materials requested by the inspection staff of the agency which Defendants have failed to produce since 2014. The complaint alleges violations of Advisers Act Section 203A. The case is pending. See Lit. Rel. No. 25299 (January 4, 2022).
Offering fraud: SEC v. Shumake, Civil Action No. 21-cv-12193 (E.D. Mich.) is a previously filed action which has been partially settled. The complaint named as defendants Robert Shumake, Nocole Birch, former CEO of crowdfunding issuer Transatlantic Real Estate, LLC and its CEO Vincent Petrescu. The complaint claimed that Mr. Shumake, along with Defendant Birch, conducted a fraudulent crowdfunding offering through Transatlantic Real Estate, a cannabis company. The complaint also alleges that Messrs. Shumake and Birch raised over $1 million form retail investors through Transatlantic Real Estate while concealing Mr. Birch’s prior criminal conviction. The funds were diverted to the personal use of Defendants Shumake and Birch. Defendant Vincent Perescu is alleged to have ignored red flags about Mr. Shumake’s criminal history and participation in the offerings. Defendants Birch Petrescu and TruCrowd resolved the charges. Each consented to the entry of final judgements based on Section 4A(a)(5) of the Securities Act along with Rule 301(c)(2) thereunder. The judgments order the payment by Mr. Birch, Mr. Petrescu and TruCrowd, respectively, of $200,000, $9,700, and $97,500 along with prejudgment interest. An officer and director bar was ordered aginst against Mr. Birch. In addition, Mr. Birch is precluded from appearing and practicing before the Commission as an attorney and representing clients during investigations. Mr. Petrescu was suspended from practice before the Commission as an accountant with the right to apply for reentry after three years. See Lit. Rel. No. 25298 (January 3, 2022).
UK
Publication: The Financial Conduct Authority published changes to LIBOR as of year end 2021 (here).