This Week In Securities Litigation (Week of January 2, 2023)
As 2022 drew to an end the Commission filed a variety of enforcement actions covering a variety of areas. The pattern is consistent with that of the second and third quarters last year. The actions filed include the requirements for transfer agents, insider trading, an offering fraud and the FCPA and other areas. The breath of the actions is a good reminder of the reach of SEC enforcement which has been on display in recent enforcement actions.
Be careful, be safe this week
SEC Enforcement – Filed and settled actions
During the last two weeks the Commission filed 10 new civil injunctive actions and 4 administrative proceedings, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.
Transfer agents: In the Matter of Peter Joseph Polinski Trust, Adm. Proc. File No. 3-1264 (December 27, 2022) names as respondent the registered transfer agent. The Order alleges that Respondent failed to comply with its obligation to submit an accurate Form TA-1. The Order alleges violations of Exchange Act Section 17A(c)(2) and Rules 17Ac2-1(c) and 17Ac2-2(a)(1). The proceeding will be set for hearing.
Transfer agents: In the Matter of Onwuka Afame, Adm. Proc. File No. 3-1263 (December 27, 2022) is a proceeding which names as Respondent the registered transfer agent. As a registered agent the firm is required to comply with certain obligations. Here Respondent failed to provide an accurate phone number on its registration form, to file a required annual report for 2022, to furnish records to the Commission as required and to permit the staff to conduct an inspection. The Order alleges violations of Form TA-2, Exchange Act Section 17(a)(1) and 17(b)(1). The matter will be set for hearing.
Offering fraud: SEC v. Medsis International, Inc., Civil Action No. 1:21-cvf-11356 (D. Mass.) is a previously filed action which named as defendants Paul Hess and Joshua Dax Cabrera. They are alleged to have fraudulently raised over $12.9 million from at least 150 U.S. and foreign investors by selling unregistered securities of Medsis. Multiple misrepresentations were made during the offering. Mr. Hess consented to the entry of a final judgment entered by the Court. It is based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The judgment also prohibits Mr. Hess from participating in any offering or sale of securities except for his personal account. It directs him to pay disgorgement of $527,000, prejudgment interest of $109,205 and a civil penalty of $207,183. See Lit. Rel. No. 25602 (December 22, 2022).
Misappropriation: SEC v. The Nutmeg Group, LLC, Civil Action No. 1:09-cv-01775 (N.D. Ill.) is a previously filed action which named as defendants Randall Goulding and David Goulding. Randall Goulding as charged with misappropriating client assets from the Nutmeg Group. The findings are based on those from a trial before the magistrate which were upheld on appeal. They conclude that Randall Goulding comingled firm and client assets and transferred millions of dollars in assets to himself. Injunctions were entered against him based on Advisers Act Sections 206(1), 206(2) and 206(4). Randall Goulding was ordered to pay over $1.8 million in disgorgement, prejudgment interest and civil penalties. Previously, the Commission denied him the privilege of appearing and practicing before the agency as an attorney. See Lit. Rel. No. 25601 (December 22, 2022).
Unregistered securities: SEC v. Knox, Civil Action No. 1:18-cv-12058 (D. Mass.) is a previously filed action which named as defendants Roger Knox and Michael Gastauer. The complaint claims that Defendant Knox and his controlled entity generated over $165 million from the sale of shares in at least 50 microcap companies made while concealing the ownership of those firms. Specifically, the complaint claims that the actual owners of the shares were concealed by Defendant Knox and that Defendant Gastauer aided the sales. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The proceedings were resolved. The Court entered a preliminary injunction and continued an asset freeze against Defendants Knox, Gastauer and the entities used in the scheme. In March and June the Court imposed injunctions against Defendant Gastauer and his entities, ordering them to pay over $30 million in disgorgement and penalties. In October the Court entered a final judgment against defendant Raymond Gastauer, ordering him to pay $3,920,144 in disgorgement and prejudgment interest. The final judgment entered as to Mr. Knox and his firm, Wintercap SA, held them jointly and severally liable for over $6 million in disgorgement and prejudgment interest. Those sums are deemed satisfied by payment of previously frozen assets in the amount of $891,235 and the orders of forfeiture in the Knox criminal case totally about $11 million. See Lit. Rel. No. 25600 (December 21, 2022).
Muni offerings – disclosure: In the Matter of PNC Capital Markets, LLC, Adm. Proc. File No. 3-21259 (December 21, 2022) is a proceeding which names the registered broker-dealer as Respondent. From March 2018 through November 2021 PNC, while serving as sole underwriter for 36 muni offerings that sold securities to market professionals without complying with Rule 15c2-12. That rule requires that the offering be for at least $100,000, involve 35 or more persons, and that the underwriters have a reasonable belief that each purchaser has the experience to evaluate the merits of the investment and not purchasing the securities for more than one account. During the period Respondent did not comply with the Rule. The Order alleges violations of Exchange Act Section 15B(c)(1), Rule 15c2-12 and MSRB Rule G-26. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the provisions cited and to a censure. The firm also agreed to pay disgorgement of $81,362 and prejudgment interest of $16,961 along with a penalty of $100,000.
Unregistered crypto offering: SEC v. Thor Technologies, Inc., Civil Action No. 3:22-cv-09043 (N.D. Cal. Filed December 21, 2022) is an act which names as defendants the firm and its co-founder, David Chin. The complaint centers on the sale of the Thor Token, an unregistered security, which yielded $2.6 million from 1,600 investors in the U.S. and other countries. Thor claimed it would use the funds to develop a software platform for “gig economy” companies and workers. The platform was never completed. The tokens were sold in an initial coin offering conducted between March and May 2018. The complaint alleges violations of Securities Act Sections 5(a) and 5(c). The case is pending. See also SEC v. Matthew Moravec, Civil Action No. 3:22-cv-09044 (N.D. Cal. Filed December 21, 2022)(Defendant is CTO of Thor; based on same facts as above; alleges violations of same Securities Act Sections; case is pending). See Lit. Rel. No. 25599 (December 21, 2022).
Unregistered dealer: SEC v. Keener, Civil Action No. 1:20-cv-21254 (S.D. Fla. Filed December 20, 2022) is an action which named as Defendant Justin W. Keener d/b/a JMJ Financial. Previously, the Court granted summary judgment in favor of the Commission, finding that Mr. Keener acted as an unregistered dealer. Defendant sold millions of shares of penny stocks obtained by converting debt securities or notes into shares of the company while failing to register as a dealer under Exchange Act Section 15(a). Defendant settled the action, agreeing to the entry of a permanent injunction based on the Section cited in the complaint and to pay disgorgement of $7,786,636, prejudgment interest of $1,425,266 and a penalty of $1,030,000. See Lit. Rel. No. 25598 (December 20, 2022).
Unregistered securities offering: SEC v. Oi2Go Media Technologies, Inc., Civil Action No. 6:22-cv-02367 (M.D. Fla. Filed December 20, 2022) is an action which names as defendants the company and its CEO, Michael Hernandez. The company and its CEO, Defendant Michael Hernandez, conducted Reg. A offering despite failing to meet the requirements for conducting such an offering. About $1,317,000 was raised from the public. The offering was facilitated by the use of false statements in promotional materials and TV commercials. In addition, Defendant Hernandez misappropriated over $450,000. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and Exchange Act Section 15(a). The case is pending. See Lit. Rel. No. 25597 (December 20, 2022).
Insider trading: SEC v. Pourhassan, Civil Action No. 223284 (D. Md. Filed December 20,22) names as defendants Nader Pourhassan and Kazem Kazempour, respectively the CEO and director of CytoDyn until late January 2022 when he was terminated, and the co-founder of Amarex Clinical Research, LLC, a contract research organization. Over a three-year period, beginning in 2018, Defendant Pourhassan caused CytoDyn to announce it had completed a Biologics License Application with the FDA, a key milestone for the company. While the application was filed, in fact it was missing key information. The FDA notified the company of this shortly after filing; the firm did not disclose this fact. Rather, Defendant Kazempour, retained to assist with the application, signed off on it. Defendant Pourhassan sold about $15.8 million of CytoDyn stock, netting profits of $4.76 million. Defendant Kazempour sold options for over $420,000, yielding profits of $340,000. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In a parallel action the Department of Justice filed criminal charges. The case is pending. See Lit. Rel. No. 25596 (December 20, 2022).
Manipulation: SEC v. Kistler, Civil Action No. 1:22-cv-10657 (S.D.N.Y. Filed December 16, 2022) is an action which names as defendants Brian K. Kistler and his firm New Opportunity Business Solutions, Inc. Defendant Kistler has long been involved in the penny stock area. Over a period of several months, beginning in February 2018, he engaged in a pattern of deceptive conduct with respect to the shares of Williamsville Sears Management, Inc., a penny stock. Mr. Kistler started with a series of false statements made to OTC Markets Group and FINRA. He also pumped the shares. As a result, Defendants collectively received $50,000 and $32,500 for their efforts but were unable to profit more. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Action Sections 9(a)(2) and 10(b). The case is pending. See Lit. Rel. No. 25594 (December 19, 2022).
Offering fraud – FTX: SEC v. Ellison, Civil Action No. 22-cv-10794 (S.D.N.Y. Filed December 21, 2022). This is the companion case to the one filed against Samuel Bankman-Fried centered on the collapse of FTX. It names as Defendants Caroline Ellison and Zixiao “Gary” Wang. Defendant Ellison was employed at Alameda, Mr. Bankman-Fried’s hedge fund, and Mr. Wang, a co-founder of FTX. The complaint recounts the collapse of FTX primarily as a result of the looting of investor assets for the benefit of Defendants and Mr. Bankman Fried as recounted in the complaint against him (here). The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b). The case is pending.
Offering fraud: SEC v. Fernandez, Civil Action No. 4:22-cv-04365 (S.D.Tx. Filed December 16, 2022). Defendant John Fernandez is the founder, manager and CEO of two entities also named as defendants – Avail Progression, LLC and Elite Generators, Inc. Mr. Fernandez is a self-taught trader who claims to have expertise in the foreign exchange market or Forex. Over a four-year period, beginning in early 2017, Mr. Fernandez raised over $4.3 million from about 175 investors. The transactions centered on the sale of securities in either Avail Progression or Elite Generators. Investors were induced to make the investments by the promise of guaranteed returns tied to trades in the forex markets. Typically, investors were required to execute a Promissory Note to purchase the securities of Avail Progression. That Note outlined the terms of the transaction. Specifically, it listed the date of the initial investment, the amount of monthly return, and the dates on which the returns would be paid. Despite having represented that the investor funds would be used to trade in the forex markets, Defendant did not use any of the funds raised during the Avail Progression offering to trade in the those markets. Rather, a portion of the funds were put in Defendant Fernandez’s Coinbase account. Other funds were used for his personal expenses. The sale of securities of issued by Elite Generators followed a similar pattern. In selling the securities of this firm Defendant Fernandez required investors to execute an Investment Contract. While the terms were similar to those of the Promissory Notes, they did not require any investment in the forex markets. Mr. Fernandez did tell potential investors that their funds would be invested in those markets, however. Ultimately, much of the money was used for personal expenses or to make Ponzi like payments. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25593 (December 16, 2022).
FCPA: In the Matter of Honeywell International, Inc., Adm. Proc. File No. 4368 (December 19, 2022) is an action which names the international manufacturing and technological firm as a Respondent. The years long scheme here has two key facets. First, through a wholly owned subsidiary, and in conjunction with an intermediary, Respondent offered up to $4 million to the Brazilian state-owned oil firm to secure a contract. Second, through another subsidiary, and with the assistance of another intermediary, the Company paid to secure he cooperation of a government official of Algerian. The Company books and records were not properly maintained, and it failed to have sufficient internal controls to deter the wrongful transaction. The Order alleges violations of Exchange Act Section 30A, 13(b)(2)(A) and 13(b)(2)(B). 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 firm will also pay disgorgement of $64,672,563 and prejudgment interest of $16,485,630. Respondent will get a credit of up to $38,712,216 for any disgorgement paid to the Controladoria-Geral de Uniao and the Ministerio Publico Federal reflected by evidence acceptable be to the Commission in a parallel proceeding. The Company also settled with the Department of Justice, entering into a deferred prosecution agreement and agreeing to pay over $78 million.
Report: The Securities and Futures Commission published its Takeovers Bulletin on December 29, 2022 (here).
Publication: The Monetary Authority of Singapore published its Consultation Paper on Revisions to Guidelines on Fair Dealing, on December 14, 2022 (here).
Report: The Financial Conduct Authority published a compilation of the “Highlights of the FCA’s Approach” in 2022 (here),