This Week In Securities Litigation (Week of January 24, 2022)
Enforcement continued to focus in traditional areas last week. The new actions initiated were based on insider trading claims and offering fraud type claims. Chair Gensler continued to discuss updating and modernizing various rules to improve efficiency.
Outside this country, regulators continued to explore new initiatives to bring efficiency to the markets as well as ESG elements. A report recently published in the UK also talked about the impact of competition in the banking markets while U.S. regulators are focused the impact of a lack of competition in the tech area.
Be careful, be safe this week.
Remarks: Chair Gensler delivered remarks titled “Dynamic Regulation for a Dynamic Society” before the Exchequer Club of Washington, D.C. on January 19, 2022 (here). His remarks focused on efficiency and modernizing the rules for the economy of today (here).
Whistleblowers: The Commission issued awards of over $45 million to five whistleblowers in three separate actions.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 4 civil injunctive action and 1 administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.
Binary options: SEC v. Montano, Civil Action No. 6:18-cv-01606 (M.D. Fla.) is a previously filed action in which the Court entered a final judgment by consent against Ronald Montano. The underlying scheme centered on luring investors to put money into a fraudulent binary option scheme. The Court imposed a permanent injunction against Defendant Montano, prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). A conduct-based injunction was also imposed. In addition, Defendant was ordered to pay disgorgement and prejudgment interest in the amount of $1 million and a penalty of $1.35 million. The Relief Defendants were ordered to pay $900,000, on a joint and several basis, of the disgorgement ordered to be paid by Defendant Montano. See Lit. Rel. No. 25321 (January 21, 2022).
Insider trading: SEC v. Forte, Civil Action No. 1:22-cv-10074 (D. Mass. Filed January 19, 2022). The case focuses on the merger of Linear Technology Corporation and Analog Devices, Inc., announced in July 2016. Named as defendants in the action are: David Forte, a former police officer whose brother was the information officer of Analog; John Younis, the owner of a building company; and Gregory Manning, a senior accountant for a public healthcare technology company. Linear, whose common stock was traded on NASDAQ, is a manufacturer of integrated circuits used for a variety of applications. Analog, whose stock is registered with the Commission under Exchange Act Section 12(b), is also the manufacturer of integrated circuits. Defendant David Forte misappropriated material nonpublic information about the Linear-Analog transaction prior to the announcement date from his brother, a former executive at Analog. Prior to the public announcement Defendant Forte is alleged to have told close friends John Youmis and Gregory Manning about the deal. Each defendants purchased shares. The two traders purchased over 30 Linear call options. On July 27, 2016, a news article reported rumors about the Linear-Analog deal. At the time the transaction was not public. Later that day the two firms issued a joint press release announcing the execution of a merger agreement. The next day the traders sold their securities. They realized profits of over $90,000. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the District of Massachusetts filed a parallel criminal action, charging the three men. See Lit. Rel. No. 25311 (January 19, 2022).
Prime bank fraud: SEC v. Baker, Civil Action No. 1:19 -cv-02565 (N.D. Ga.) is a previously filed action which named as defendants Peter Bake, Elizabeth Oharriz and their two firms – respectively, Prestige Global Trading, LLC and Diversified Consulting & Logistics, Inc. The complaint alleges that a prime bank scheme was used to defraud investors out of over $2 million. The Court previously granted the Commission’s motion for summary judgement as to Mr. Baker while reserving consideration as to the other Defendants. Last week the Court entered judgments as to each defendant, imposing injunctions based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). Defendants Banker and Oharriz were ordered to pay, respectively, penalties in the amount of $585,141 and $390,094. The two individual Defendants will also pay on, a joint and several basis, disgorgement of $798,464 and prejudgment interest of $124,574. See Lit. Rel. No. 25310 (January 19, 2022).
Microcap fraud: SEC v. Offill, Civil Action No. 3:22-cv-00121 (N.D. Tx. Filed January 19, 2022) is an action against Phillip W. Offill, Jr. and Justin W. Herman. Both men are convicted felons. Attorney Offill, now disbarred, served 96 months in prison and was enjoined by the Commission based on a pump-and-dump scheme. Mr. Herman has been convicted in a securities fraud action and is awaiting sentencing. The day Mr. Offill got out of prison this scheme began. Defendant Offill, acting under the name of Jim Jimerson, convinced the majority shareholder of microcap stock firm Mansfield-Martin Exploration Mining, Inc., to consolidate his stock and transfer it by using a series of fraudulent statements. Later Mr. Offill used the same approach to convince the transfer agent to move the stock. Defendant Herman participated. Defendant Offill had profits of about $386,000 while Mr. Herman had $935,000. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Sections 17(a)(1) & (3). The case is pending. See Lit. Rel. No. 25309 (January 19, 2022).
Crypto: SEC v. Garcia, Civil Action No. 1:22-cv-00118 (D. Colo. Filed January 18, 2020). The case centers on the theft of about $123,000 from investors who believed they were purchasing interests in a new crypto currency called “gold haws” tokens. Named in the complaint are: Defendant Paul Garcia and Relief Defendant Office Guru Franchise Group, Inc. Mr. Garcia is a 50% owner of Gold Hawgs Development Company, an entity formed in 2019 and located in Fort Collins, Colorado. Mr. Garcia, who controls the company, used it to conduct business unrelated to Gold Hawgs. The other company was owned by its CFO. An agent of that company solicited investors to purchase interests in the company. Over a period of a few months, beginning in August 2019, Mr. Garcia and Gold Hawgs raised about $400,000 from 16 investors. The gold hawg token was offered to investors as a new kind of crypto token. Investors were assured that the upside potential of purchasing the coins was significant based on to the business plan of the company. There was never any time to actually implement the business plan, however. Beginning almost immediately, and continuing through July 2020, Mr. Garcia misappropriated about $123,000 the investor funds. The money was taken from the Gold Hawgs’ bank account that is in the name of Office Guru. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3), Exchange Act Section 10(b) and disgorgement based on Section 6501 of the National Defense Authorization Act for Fiscal Year 2021, and equitable principles. The case is pending. See Lit. Rel. No. 25308 (January 18, 2022).
Offering fraud: In the Matter of Daniel J. Swinyar, Adm. Proc. File No. 34471 (January 18, 2022) names as respondent Mr. Swinyar, who owns and controls Green Hill Capital Management LLC, a Texas state registered advisory. The proceedings center on an offering fraud conducted by George Blankenbaker and this three firms, StarGrower Asset Management LLC, StarGrower Asset Management LLC and Blankenbaker Investments Fund 17 LLC. About $11.4 million was raised firm 109 investors. Over a period of about one year, beginning in October 2017, Mr. Swinyar acted as an unregistered broker on behalf of StarGrower Asset in connection with an unregistered offering of securities. Respondent was paid about $105,103 in transaction based compensation from StarGrower Assets from the sales. He is not a registered broker-dealer or associated with one. The Order alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(2) and 17(a)(3), Exchange Act Section 15(a)(1) and Advisers Act Section 206(2). Respondent resolved the matter, consenting to the entry of a cease-and-desist order based on the Sections cited, was barred from the securities business and participating in any penny stock offering. He will also pay disgorgement in the amount of $105,103 and prejudgment interest of $13,099. Respondent will also pay a penalty of $60,000.
Fraudulent interests: SEC v. Cottone, Civil Action No. 9:22-cv-80048 (S.D. Fla. Filed January 10, 2022) is an action which names as defendant Anthony M. Cottone, an unregistered investment adviser. The relief defendant is his group, Botanica Group Holdings, LLC. Over a period of a few months, beginning on March 23, 2017, Mr. Cottoner and his now defunct firm, raised about $2.76 million from 11 investors through the sale of preferred interests in a private fund based on materially false representations. Mr. Cotton also misused and misappropriated assets of the fund. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(a)(1), and Advisers Act Sections 206(1) and 206(4). The case is pending. See Lit. Rel. No. 25307 (January 14, 2022).
Initiative: The Australian Securities and Investment Commission has launched an initiative to assess the sufficiency and adequacy of corporate disclosure through a regtech approach. The regulator plans to work with five regulatory technology or regtech entities dealing with challenges presented by corporate disclosure. The initiative is the latest to explore the potential for regtech to help identify and assess poor market disclosure by listed firms, according to the January 21, 2022 release (here).
Initiative: The Monetary Authority of Singapore and the Association of Banks in Singapore are introducing new measures to bolster the security of digital banking. The initiative is a response to recent difficulties in the area, according to the January 19, 2022, release (https://www.mas.gov.sg/news/media-releases/2022/mas-and-abs-announce-measures-to-bolster-the-security-of-digital-banking).
Report: The Financial Conduct Authority has found growing evidence of competition in retail banking, according to a release published on January 20, 2021. The Report, an update to a Report first published in 2018, found that “there are signs large banks’ historic advantages . . . starting to weaken, driven by digital innovation and changing consumer behavior. The economic environment has also constrained banks’ financial returns” the Report notes (here).