This Week In Securities Litigation (Week of January 31, 2022)
Justice Breyer announced his intention to retire last week. That of course set off a wave of speculation over who would be nominated to seat on the High Court. President Biden; who has made campaign promise about the seat, is expected to announce his nominee by the end of next month.
The Commission reopened the comment period on the question of pay vs. performance last week It also proposed amendments to Regulation ATS regarding trading in government securities and cybersecurity. Those proposals had been mentioned previously by Chair Gensler. In addition, the agency announced proposed amendments to Form PF which is used to gather certain information regarding private funds. Collectively, these proposals garnered a host of comments from the various Commissioners as noted below.
Be careful, be safe this week.
Comments: The Commission reopened the comment period on the quest of for pay vs. performance and the rules proposed previously under the Dodd-Frank Act. The proposal was released on January 27, 2020 (here). Each Commissioner issued a statement on the proposal.
Proposed amendments: The agency proposed amendments to Regulation ATS. The proposals are designed to enhance cybersecurity for Alternative Trading Systems that deal in government securities. It was issued on January 26, 2022 (here). Commissioners Peirce (here) and Crenshaw (here) dissented.
Proposed rules: The Commission proposed amendments to Form PF, the confidential reporting form for certain SEC-registered investment adviser to private funds on January 26, 2022 (here). The amendments are designed to facilitate risk assessment by the Financial Stability Oversight Council (here). The proposals were issued on January 26, 2022. Each of the Commissioners issued a statement on the proposal.
Remarks: Chair Gary Gensler addressed the question of cybersecurity at Northwestern Pritzer School of Law’s Annual Securities Regulation Institute (January 24, 2022)(here). Mr. Gensler identified four areas keyed to cybersecurity where he has directed staff to assess what updates are necessary to supplement the applicable Commission rules – Reg SCI, regulated entities, data privacy under Reg S-P and service providers.
Whistleblowers: The Commission awarded over $40 million to four whistleblowers last week, according to a release dated January 21, 2022.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 1 civil injunctive action and 2 administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.
Offering fraud: SEC v. Bolton, Civil Action No. 3:22-cv-00055 (M.D. Tenn. Filed January 26, 2022). David Bolton, defendant, was previously a registered securities representative in Indiana. He is the owner of Millennia Shares, LLC, which had its principal place of business in Bowling Green, Kentucky. In October 2017, the state of Kentucky administratively dissolved the entity. Subsequently, Mr. Bolton established its principal place of business in Brentwood, Tennessee. In October 2020 the state dissolved that entity. Over a period of about one year, beginning in August 2018, Mr. Bolton sold interests in his firm, Millennia Shares. Potential investors were told in written memoranda and at meetings that the company would earn revenue by creating and launching an ETF, a popular, well known investment product. The memoranda furnished to potential investors listed typical items such as operating costs for the company and a salary of $7,000 or $10,000 per month for Mr. Bolton. Ten investors responded, purchasing shares in Mr. Bolton’s firm. Following the investments Mr. Bolton withdrew funds from the company. The withdrawals far exceeded the amounts to which he was entitled under the terms of the offering documents. In addition, he diverted funds furnished by investors for a second firm employee. After the company ceased operations, he emptied the bank accounts. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25318 (January 26, 2022).
Pyramid scheme: SEC v. CKB168, Civil Action No. 1:13-cv-5584 (E.D.N.Y.) is a previously filed action in which 16 persons were named as defendants, including Heidi Mao. Defendant was charged with participating in a world-wide pyramid scheme. Defendant Mao consented to the entry of permanent injunctions based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). Defendant was also ordered to pay disgorgement of $449,729 and a penalty of $335,000. See Lit. Rel. No. 25315 (January 25, 2022).
Offering fraud: SEC v. Gjonaj, Civil Action No. 21-civ-10199 (E.D. Mich.) is a previously filed action which names as defendant Viktor Gjonaj. Defendant is alleged to have engaged in an offering fraud focused on the Albanian-American community. Over a period of about three years, beginning in 2016, Defendant is alleged to have raised about $26.4 million from investors by falsely telling them that the funds would be used to purchase interests in real estate projects. In fact, much of the money was diverted to play the Michigan lottery. While at times some winnings from the lottery were used to pay investors, in the end Defendant owed investors about $19 million. Defendant entered into a bifurcated settlement. Previously, a final judgment based on Securities Act Section 17(a) and Exchange Act Section 10(b) was entered. Last week the Court imposed final judgments requiring the payment of disgorgement and prejudgment interest in the amount of $21,128,466. That amount was deemed satisfied by the restitution ordered in the parallel criminal case. There Mr. Gjonaj pleaded guilty and was sentenced to serve 53 months in prison followed by three years of supervised release. He was also directed to pay forfeiture and restitution. See Lit. Rel. No. 25313 (January 24, 2022).
Binary options: SEC v. Montano, Civil Action 6:18-cv-01606 (M.D. Fla.) is a previously filed action in which final judgments were entered against defendant Ronald Montano and Relief Defendants Romeo Montano, Elma Montano, Denise Montano and REM Florida Properties, LLC. The complaint alleged a scheme based on marketing binary options by Mr. Montano based on claims that investors would profit by the use of certain software. The software did not exist. Mr. Montano consented to the entry of a permanent injunction based on Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). He was also ordered to pay $1 million as combined disgorgement and prejudgment interest and a penalty of $1.35 million. The Relief Defendants are jointly and severally liable for the payment of $900,000 of the combined disgorgement and prejudgment interest amount. See Lit. Rel. No. 25312 (January 21, 2022).
Unregistered securities: In the Matter of Cody C. Biggs, Adm. Proc. File No. 3-20708 (January 21, 2022) names as respondent an insurance agent. Over a two-year period, beginning in 2016, Mr. Biggs solicited investors to purchase unregistered securities in offerings conducted by Resolute Capital LTD, LLC, a firm that has created investment vehicles. The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited. In addition, he is barred from the securities business and from participating in any penny stock offering. He will also pay disgorgement of $77,103, prejudgment interest of $9,762 and a penalty of $25,000.
Conflicts/unregistered securities: In the Matter of Benjamin D. Williams, Adm. Proc. File No. 3-2070 (January 21, 2022) is a proceeding which names as respondent Mr. Williams, the owner and operator of iSelf-Direct LLC, a firm that specializes in handling retirement matters, and Savant Advisor Group LLC, a Commission registered investment adviser. Over a period of two years, beginning in 2016, Respondent sold unregistered securities in oil and gas offerings sponsored by entities in which he had undisclosed financial interests. He also was paid an undisclosed 10% commission. The Order alleges violations of Securities Act Sections 5(a) and 5(c), Exchange Act Section 15(a) and Advisers Act Section 206(2). Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. He was also barred from the securities business. In addition, he will pay disgorgement of $86,181, prejudgment interest of $10,912 and a penalty of $50,000.
Offering fraud: SEC v. Pryor, Civil Action No. 2L20-cv-01782 (D. Az.) is a previously filed action in which defendant Gary Pryor consented to the entry of a final judgment. The judgment is based on a complaint that claimed beginning in 2013, and continuing for the next six years, Mr. Pryor, who had founded two private firms, raised at least $4.3 million from investors. Those investors were told that the company earned revenue from loan originations and that the firms had clients that included several nationally known firms. The claims were false. About $1.2 million of the investor funds was diverted to personal use. Mr. Pryor consented to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, he was ordered to pay disgorgement of $2,666,705 (a portion of which will be paid on a joint-and-several basis with Relief Defendant Rebecca Pryor), prejudgment interest of $753,137 and a penalty of $2,666705. The two firms involved were also directed to pay disgorgement, prejudgment interest and penalties. One will pay disgorgement of $1,564,534, prejudgment interest of $426,917 and a penalty of $975,230; the other disgorgement of $311,615, prejudgment interest of $52,388 and a penalty of $975,230. See Lit. Rel. No. 25317 (January 26, 2022).
Misappropriation: SEC v. Nino, Civil Action No. 0:22-cv-60162 (S.D.Fla. Filed January 21, 2022) is an action which names as defendant German Nino, a representative and investment adviser employed by a large Commission registered broker-dealer/ investment adviser. Beginning in May 2014, and continuing for the next six-years, Defendant misappropriated over $5.8 million entrusted to him by a client for investment. Defendant assured his client the funds would be invested. They were not. Rather, Mr. Nino expended the funds on personal pursuits while furnishing the client with false records and manipulating those of his employer to cover the trail of fraud. The complaint alleges violations of Exchange Act Section 10(b), each subsection of Securities Act Section 17(a) and Advisers Act Sections 206(1) and 206(2). The case is pending.
Manipulation – layering: SEC v. Milrud, Civil Action No. 2:15-cv-00237 (D.J. Filed January 13, 2022) is a previously filed action which names as defendant, Aleksandr Milrud, a Canadian citizen. He was charged with market manipulation by using a layering technique. Previously he pleaded guilty to parallel criminal charges for which he was sentenced to serve five year of probation and to forfeit $285,000, Mr. Milrud settled with the Commission. Based on consent, the Court entered a final judgment, imposing permanent injunctions based on Exchange Act Sections 9(a)(2) and 10(b). The judgment also orders Defendant to pay disgorgement which will be satisfied by the forfeiture order. See Lit. Rel. No. 25319 (January 26, 2022).
Proposed rule making: The regulator issued a Notice of Proposed Rulemaking that solicits public comment on a proposed program for sharing suspicious activity reports under Section 6212 of the Anti-Money Laundering Act of 2020. The program would permit a financial institution with a SAR reporting obligation to share that information with the institution’s foreign branches, subsidiaries and affiliates to help combat financial risk, according to a release dated January 24, 2922 (here).
Remarks: Tan Keng Heng, Executive Director, Monetary Authority of Singapore addressed the Investment Management Association of Singapore’s 8th Regulatory Forum, delivering remarks titled “Responding to Global Trends, Returning to Fundamentals” on January 28, 2022. The director discussed the current state and trends of the industry which is strong (here).