This Week In Securities Litigation (Week of January 16, 2023)
Last week the Commission took the extraordinary step of filing a subpoena enforcement action against the law firm of Covington & Burling LLP. The agency is seeking the names of 300 firm clients whose files were illegally accessed by those associated with the Microsoft Hafnium cyberattack that is under investigation. The law firm has refused to furnish the information. SEC v. Covington & Burling LLP, No. 1:23-mc-00002 (D.D.C. Filed January 10, 2023). The case is pending.
The agency also filed a settled action which against fast food giant McDonald’s and its former CEO. The case centered on the reasons for the accuracy of the information included in two filings made with the Commission about the discharge of McDonald’s CEO as discussed below.
Whistleblowers: The Commission awarded over $5 million to a whistleblower, according to a January 13, 2023 release.
Be careful, be safe this week
SEC Enforcement – Filed and settled actions
During the last week the Commission filed 2 new civil injunctive actions and 1 administrative proceeding, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.
Misappropriation: SEC v. Hug, Civil Action No. 2:19-cv-16-16290 (D.N.J.) is a previously filed action which named as defendants Gerard Hug and Kurt Streams. Each Defendants is a former executive of SITO Mobile, Ltd., a mobile advertising firm based in New Jersey. In 2019 Defendant Streams fraudulently used company funds to pay at least $200,000 of personal living expenses. Similarly, Mr. Hug is alleged to have improperly charged the company credit card for $77,000 personal expenses and another $160,000 in expenses that had no apparent business purpose. Mr. Streams resolved the claims, consenting to the entry of a permanent injunction that prohibits future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and 14(a), as well as the related rules. Defendant will also be required to pay disgorgement of $48,796.00 and a penalty of $20,204.00. A two-year officer/director bar was also imposed. Subsequently, the Commission issued an administrative order barring Defendant Streams from appearing or practicing before the Commission as an accountant. Mr. Hug also settled, consenting to the entry of a permanent injunction based on Securities Act Section 17(a)(3) and Exchange Act Sections 13(b)(5) and 14(a). A $50,000 penalty was also imposed. See Lit. Rel. No. 25614 (January 13, 2023).
Affinity fraud: SEC v. Engel, Civil Action No. 2:23-cv-00213 (C.D. Cal. Filed January 12, 2023) is an action which names Yossi Engle as defendant. The scheme, executed by Defendant over a three-year period beginning in late 2018, had two facets. In the first Defendant focused on attracting members of the Orthodox community to purchase securities with claims that he would use the funds to purchase security camera equipment that would be installed. During the second phase he told potential investors that their funds would be used to acquire real estate in Israel. Both claims were false. Nevertheless, Defendant raised about $47 million from investors before his schemes collapsed. At that point he fled to Israel. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25613 (January 12, 2023).
Crypto – unregistered securities: SEC v. Genesis Global Capital, LLC, Civil Action No. 23-cv-287 (S.D.N.Y. Filed January 12, 2023) is an action which names as defendants: Genesis Global and Gemini Trust Company, LLC, respectively a second tier subsidiary of Digital Currency Group, Inc. and a limited liability company controlled by Camereon and Tyler Winklevoss through Winklevoss Capital Fund, LLC. The complaint centers on what was called the Gemini Earn program. Through that program investors entered into a three-party contract under which they provided crypto assets to Genesis with Gemini serving as agent. Genesis then pooled the crypto assets which were used primarily in an institutional lending program that generated interest and profits used to pay investors. The interests sold were not registered with the Commission. Currently, U.S. investors have suffered losses. In November 2022 Genesis unilaterally announced it would not permit its 340,000 investors to make withdrawals. Genesis holds about $900 million in investor assets. The complaint alleges violations of Securities Act Sections 5(a) and 5(c). The action is pending.
Fraudulent bonds: SEC v. Sugarman, Civil Action No. 19-cv-5998 (S.D.N.Y.) is a previously filed action which named as defendant Jason Sugarman. The complaint alleged a fraudulent bond scheme used to defraud ten pension funds out of $43 million tied to the issuance of limited recourse Native American tribal bonds in 2014 and 2015. The Court last week entered final judgment against Mr. Sugarman by consent. The order imposed permanent injunctions based on Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). It also ordered the payment of disgorgement in the amount of $7,157,232.19, prejudgment interest of $1,317.703.82 and a penalty of $1,789,308.05. In addition, defendant is barred from severing as an officer or director of a public company for 3 years. See Lit. Rel. No. 25611 (January 11, 2023).
False statements – termination: In the Matter of Stephen J. Easterbrook, Adm. Proc. File No. 3-21269 (January 9, 2023). Named as Respondents are Stephen Easterbrook, a former board member and CEO of McDonald’s Corporate and the company. When questions arose regarding Mr. Easterbrook’s conduct the company retained outside counsel to conduct an internal investigation. During the inquiry outside counsel interviewed Mr. Easterbrook. In that interview the CEO admitted he had violated firm policy by having a physical, personal relationship with a company employee once. While company standards precluded the kind of conduct the former CEO admitted, the Board exercised its discretion that the discharge was not for cause. That position permitted the former CEO to receive $47,534,341. Much of that sum was outstanding stock options and PSUs. The facts regarding Mr. Easterbrook’s termination were incorporated into a Form 8-K and a proxy, both filed with the agency. Subsequently, McDonald’s received an anonymous complaint alleging that another employee of the firm had also engaged in an inappropriate personal relationship with Mr. Easterbrook. A second investigation was launched. The evidence developed substantiated the claim. Suit was filed against the former CEO by the company. The complaint alleged a breach of fiduciary duty and fraud. The action was settled in December 2016. Under the terms of the settlement agreement Mr. Easterbrook repaid to the company the cash severance, prorated bonus, certain proceeds from the exercise of options and PRSUs and attorney fees. The company announced it would not have stated that the termination of Mr. Easterbrook had been on a “not for cause” basis had it known the truth. The Commission’s Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 14(a). To resolve the matter Mr. Easterbrook consented to the entry of a cease-and-desist order based on the Sections and Rules cited in the complaint. He also agreed to the entry of a director and officer bar for a period of five years and to the payment of disgorgement and prejudgment interest in the amount of $52,728,069, deemed satisfied by the payments made in McDonald’s Corporation v. Easterbrook, C.A. No 2020-0658 (Del. Ct. Ch). He will, in addition, pay a penalty of $400,000. McDonald’s also settled, consenting to the entry of a cease-and-desist order based on Exchange Act Section 14(a). The company acknowledged that no penalty was imposed based on its cooperation.
Alert: The Financial Crimes Enforcement Network issued an alert on Human Smuggling Along the Southwest Boarder of the U.S. on January 13, 2023 (here).
Release: The Monetary Authority of Singapore announced the revision of its Code of Corporate Governance. The revisions reflect independent director tenure limits and mandatory renumeration disclosure of Directors and CEOs. The release was issed on January 11, 2023 (here).