This Week In Securities Litigation (Week of January 4, 2021)

Jake Stillman who faithfully served the Commission for 55 years, passed away last week. Jake was a mainstay of the General Counsel’s office, briefing and arguing dozens of cases for the Agency. We will all miss you Jack.

Elad Roisman was named Acting Chairman on December 28, 2020 as the term of Jay Clayton drew to a close. The now former Chairman pursued an active legislative agenda to the end. Indeed, the Defense Appropriation bill finally became law after overriding a Presidential veto. Buried in the thousands of pages of legislation is a provision extending the statute of limitations for the Commission in the wake of two adverse rulings on the point by the Supreme Court.

The Commission filed a series of enforcement actions in the last two weeks of 2020. Those cases focused on crypto currency, offering frauds, unregistered brokers and similar matters. The output of cases differed somewhat from those brought since the middle of September when the Commission began bringing more corporate disclosure and financial cases, a point that will be discussed in more detail in future articles.

Legislation

Statute of limitations: The adverse rulings the Commission suffered in the Supreme Court’s decisions in Kokesh and Liu were legislatively overruled by a provision tucked int the recent National Defense Authorization Act. Section 6501 of the Investigations and Prosecution of Offenses for Violations of the Securities Laws modified Exchange Act Section 21(d) by providing that the agency can obtain disgorgement and reach back up to 10 years rather that the five permitted under current law. See e.g., Section 6501(a)(7)(Commission can obtain disgorgement); (a)(8)(extends statute of limitations to 10 years); (a)(8)(B)(can seek equitable remedies including in junction, bar, cease and desist order for up to 10 years).

SEC

Request for comment – Digital Assets: The Commission issued a statement requesting comment regarding the application of the Custody Rule to digital asset securities. In making the request on December 23, 2020 the agency essentially created a safe harbor from lability for broker-dealers holding the securities within certain limitations. The Commission is seeking to obtain factual information regarding the assets (here).

Proposed rule amendment – Rule 144: The agency issued proposed amendments to Rule 144 and Form 144 focused largely on market-adjustable securities. Specifically, the proposals would alter the holding period which under current practice would trace to the securities exchanged but now would be begin at conversion or exchange, according to the December 22, 2020 release. The amendments also require electronic filing of Form 144, eliminate the requirement to file the form with respect to sales by the issuing firm that are not subject to Exchange Act reporting, and harmonize the Form 144 filing deadline with that of Form 4 (here).

Rule adoption – IA Advertising: The Commission adopted amendments to the advertising requirements applicable to investment advisers. The new rule utilizes a principle based approach and is, according to a press release dated December – 2020, designed to update the rules in view of the market evolution of the business. The areas addressed include the definition of advertisement, the general prohibitions, testimonials and endorsements, third-party ratings, and certain performance information (here).

Whistleblowers: The agency made awards of over $1.6 million to a whistleblower.

BaFin & AMF substitute compliance: The Commission issued a Substitute Compliance Order for Germany (BaFin) and France (AMF) compliance with certain requirements tied to security-based swaps. Generally, each EU regulator can comply with the requirements related to those securities by adhering to their specific rules and regulations, according to the December 22, 2020 release (here).

MOU: The SEC and the Commissione Nazionale per le Societa e la Borsa (CONSOB) entered into a memorandum of understanding to consult, coordinate and share supervisory information and facilitate their respective cross-border examinations of regulated entities, announced December 22, 2020 (here).

Inspections – BI: The Division of Examinations Staff issued a statement regarding the up-coming inspections centered on Regulation Best Interest. Specifically, the statement identified certain areas that may be inspected including: An evaluation of policies and procedures; the evaluation of recommendations; the processes for recommendations to new customers regarding complex products; and oversight regarding Reg BI (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 15 civil injunctive actions and 8 administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters.

Unregistered broker: SEC v. Sears, Civil Action No. 8:20-cv-03114 (M.D.Fla. Filed Dec. 31, 2020) is an action which names as defendants Deandre P. Sears and Masears LLC d/b/a Picasso Group. Over a period of six years, beginning in 2014, Defendant Sears and his firm sold interest in EquiAlt Funds, the subject of an earlier Commission enforcement action. Over the period 145 retail investors in 25 states purchased interests. Defendants received $3.5 million in transaction based compensation. Overall they netted $2.15 million. Defendants were not registered with the Commission as brokers. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a)(1). To resolve the matter Defendants consented to the entry of permanent injunctions based on the Sections cited in the Complaint. Mr. Sears also agreed to an associational bar and a penny stock bar. The question of financial remedies will be considered by the Court at a later date. See Lit. Rel. No. 25002 (Dec. 31, 2020).

Offering fraud: SEC v. Bowser, Civil Action No. 2:20-cv-00918 (D.Ut Filed Dec. 30, 2020) is an action which names as defendants: William J. Bowser, the founder and president of Noah Corporation, a private company liquidated in Chapter 7; Christopher J. Ashby, a co-founder and president of Rockwell Debt Free Properties, Inc., which is in Chapter 7; Scott W. Beynon, a co-founder of Rockwell; and Jordan Nelson, a co-founder of Rockwell. The action centers on the sale of securities that were factional, tenant-in-common interests in Noah event centers. Those centers were unprofitable and sustained through investor funds. Overall, in 2017 and 2018 about 90 investors purchased $35.9 million through the sales. Those sales were made through the use of misrepresentations regarding the use that would be made of the sale proceeds. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). Defendant Bowser settled, consenting to the entry of a permanent injunction based on Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). In addition, he will pay disgorgement in the amount of $47,796, prejudgment interest of $6,402 and a penalty of $192,76. Each of the remaining Defendants also settled. Each consented to the entry of a permanent injunction based on Securities Act Section 17(a)(2) and (3) and Exchange Act Section 15(a). In addition, Defendant Beynon will pay disgorgement of $585,426, prejudgment interest of $46,729 and a penalty of $96,384. Defendant Nelson will pay disgorgement of $281,272, prejudgment interest of $22,451 and a penalty of $96,384. Defendant Ashby will pay disgorgement of $551,161, prejudgment interest of $43,994 and a penalty of $96,384. See Lit. Rel. No. 25003 (Dec. 31, 2020).

Insider trading: SEC v. Peltz, Civil Action No. 1:20-cv-06199 (E.D.N.Y. Filed Dec. 22, 2020) is an action which names as a defendant Jason Peltz, the creator of a music based mobile computing application. Prior to the publication of a new article noting that Ferro Corp. would be acquired, a member of the Ferro Board tipped Mr. Peltz about the pending deal. Mr. Peltz then purchased Ferro securities through the account of another and an offshore account. He also tipped five people. The seven accounts connected to r. Peltz had about $1 million in profits. About 2 weeks after the news article, one account transferred $99,000 to an entity partially owned by Defendant. The overseas entity transferred almost $1 million to a company controlled by the Board member. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24998 (Dec. 29, 2020). A parallel criminal case was filed by the U.S. Attorney’s Office for the Eastern District of New York.

Offering fraud: SEC v. Moss, Civil Action No. 4:20-cv-972 (E.D. Tx. Filed Dec. 23, 2020) is an action which names as defendants Ronnie Lee Moss, Jr., Genesis E&P, Inc., Royal Oil, LLC and Catalyst Operating, LLC. Over a four-year period, beginning in 2014 Defendants raised about $5.7 million from 95 investors through the sale of limited partnership interests. First, over a two year period about $3.8 million was raised from 67 investors who were cold called and then purchased eight oil and gas partnerships managed by Genesis. The offering documents contained false statements. Second, in the summer of 2015 nine investors acquired what were called bridge loans, generating about $400,000, much of which was misappropriated. Third from 2016 through 2018 about $1.5 million was raised from 16 investors who acquired five oil-and-gas partnerships managed by Catalyst. The claims made to investors claiming their capital would be doubled were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). Genesis resolved the claims as to it by consenting to the entry of a permanent injunction based on the antifraud sections cited in the complaint and agreeing to pay a civil penalty of $192,768. See Lit. Rel. No. 24995 (Dec. 23, 2020).

Manipulation: SEC v. Qin, Civil Action No. 1:20-cv-10849 (S.D.N.Y. Filed Dec. 22, 2020) is an action which names as defendants: Stefan Qin, Virgil Technologies LLC, Montgomery Technologies LLC, Virgil Quantitative Research, LLC, Virgil Capital LLC and VQR Partners LLC. Stefan Qin is a student who resides in Australia and controls the entity defendants. Defendant Qin engaged in a deceptive course of conduct, making materially false and misleading statements to investors and others. Those actions caused serious harm to the Virgil Sigma Fund LP and VQR Multistrategy Fund LP. The point of Mr. Qin’s scheme was to lure investors into two funds. Documentation furnished to investors regarding Sigma Fund claimed it held millions of dollars of digital assets at 39 platforms. The claim was fabricated. Although one fund was reputed to have substantial assets, investors were blocked from making withdrawals. Mr. Qin also asked friends to help him withdrew $1.7 million he claimed was owed to lenders in China. When the requested aid was refused, Mr. Qin admitting telling “white lies.” The complaint alleges violations of Securities Act 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24997 (Dec. 22, 2020).

Unregistered securities – digital tokens: In the Matter of Tierion, Inc., Adm. Proc. File No. 3-20188 (Dec. 23, 2020). The Order alleges that startup blockchain tech company Tierion sold unregistered securities in a token sale in July 2017. Promoters told investors that they would continue to develop the Tierion Network for the Tokens and additional future applications. Investors were also told that the Tokens could be used as a medium of exchange. The past history of the promoters in the blockchain industry was touted. The Order alleges violations of Securities Act Sections 5(a) and 5(c) as to the sale of the Tokens which raised $25 million from the sale of 350 million tokens. In resolving the case, the firm agreed to implement a series of undertakings which include disabling the network and repaying investors. Respondent also consented to the entry of a cease-and-desist order based on the Sections cited in the Order and agreed to pay a penalty of $250,000 which will be transferred to the Treasury.

Breach of duty-undisclosed conflicts: In the Matter of Pruco Securities, LLC, Adm. Proc. File No. 3-20190 (Dec. 23, 2020) is an action naming as respondent the dual registered investment adviser – broker-dealer. Beginning in January 2014 Respondent breached its fiduciary in connection with its wrap fee program. Specifically, the firm breached its duty by failing to have the proper procedures to monitor the program, by charging fees that were inconsistent with the program, by accepting 12b-1 fees without disclosure, by failing to disclose other fees, and by not securing best execution. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the matter the firm agreed to implement certain undertakings and consented to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. The firm will also pay disgorgement of $12,690,585, prejudgment interest of $3,061,786 and a penalty of $2.5 million. The disgorgement and prejudgment interest will be put in a fair fund.

Unregistered digital assets: SEC v. Ripple Labs, Inc., Civil Action No. 20 Civ.10832 (S.D.N.Y. Filed Dec. 22, 2020 is an action which named as defendants the firm, a subsidiary of which issues digital coins called XRPs, Bradley Garlinghouse, its COO, and Christian A. Larsen, its CEO. Since 2013 Defendants have been engaged in the offer and sale of digital securities known as XRPs. No registration statement has been in effect. Potential investors were not furnished with the type of information required to be disclosed by the securities laws. About $1.38 billion was raised. The complaint alleges violations of Securities Act Sections 5(a) and 5(c). The case is pending.

Misrepresentations – Muni bonds: In the Matter of First Midstate Inc., Adm. Proc. File No. 3-20187 (Dec. 22, 2020) names as Respondents the firm, a broker-dealer and municipal advisor, and Paul D. Brown, the president and COO of the company. Beginning in 2014, and continuing until 2018, the firm advertised on its website and in other places that it had an extensive customer base to which it marketed muni bonds. In fact, it did not. To the contrary, most of the bonds that the firm sold were to other broker-dealers. Investors also were required to pay higher prices and accept lower yields for the bonds. The Order alleges violations of Exchange Act Section 15(B)(c)(1) and MSRB Rules G-17 and G-21. To resolve the matter, the firm and Mr. Brown agreed to implement certain undertakings, consented to the entry of a cease-and-desist order based on the Section and rules cited in the Order and agreed to pay a penalty of $175,000, $55,333 of which will be transferred to the MSRB. Mr. Brown will also pay a penalty of $25,000.

Offering fraud: In the Matter of Mustafa Abdel Wadood, Adm. Proc. File No. 3-20186 (Dec. 22, 2020) is a proceeding which names as a Respondent the managing partner of Abraaj Group, and an executive with the affiliated entities that are part of the investment group and which are involved in this proceeding. Beginning in 2015, and continuing through 2018, Respondent took actions that assisted Abraaj Investment Management Ltd., the adviser to a number of the involved funds, to misappropriate assets from the funds. Respondent also assisted Abraaj Investment Management in misleading investors regarding the financial condition of a fund and the parent company in addition to misappropriating funds from another managed fund. Respondent previously pleaded guilty to violating the securities laws based on his actions with the Abraaj Group. The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). Respondent agreed to implement certain undertakings and consented to the entry of a cease-and-desist order based on the Sections cited in the Order. He also agreed to be barred from the securities business. A penalty was not imposed based on cooperation.

Unregistered broker: SEC v. Global Investment Strategy UK Ltd., Civil Action No. 1:20-cv-10838 (S.D.N.Y. Filed Dec. 22, 2020) is an action which names as defendants, the firm, a UK financial concern regulated by the FCA in its home country, and John W. Gunn, a UK citizen who founded GIS. The complaint alleges that over a four year period, beginning in 20915, GIS acted as a broker in the United States despite the fact that it was not registered in the United States. The firm bought, sold and cleared securities for customers in the U.S. The firm undertook these transactions for hundreds of customers. The attraction for customers was that they could purchase securities at 20 to 30 times the equity in their account, thereby increasing leverage significantly. The complaint alleges violations of Exchange Act Section 15(a). It is pending. See Lit. Rel. No. 24996 (Dec. 23, 2020).

Offering fraud: SEC v. Samel, Civil Action No. 1:20-cv-10769 (S.D.N.Y. Filed Dec. 21, 2020) is an action against a former consultant of registered investment adviser International Investment Group. The adviser has had its registration revoked and settled a fraud action with the Commission. Mr. Samuel aided that fraud by helping cover up a fake loan asset in 2015 by lying to the adviser’s auditors. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 24993 (Dec. 22, 2020).

Offering fraud: SEC v. Capsource, Inc., Civil Action No. 02303 (D.Nev. Filed Dec. 21, 2020) is an action which names as defendants, the firm, Stephen J. Byrne and Gregory P. Herlean. The firm facilitates real estate related lending; Mr. Byrne is the founder and owner of the firm; and Mr. Herlean is a member of the company executive committee and a 30% owner of the firm. Over a four-year period the company offered and sold over $151 million of securities in unregistered offerings. Portions of the funds were diverted to the largest client of the company which used them for its real estate projects, to prop up the company which was experiencing financial difficulties and to support a related drug rehabilitation project, all contrary to the representations made to investors. The complaint alleges violations of Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 24992 (Dec. 21, 2020); See also SEC v. Zipprich, Civil Action No. 2:20-cv-02308 (D.Nev. Filed Dec. 21, 2020)(action naming as defendants Michael Zipprich, America’s Rehab Campuses, LLC, and Arizona Rehab Campus, LLC; related action based on participation by rehab facility and its associates; alleging violations of same Securities Act Sections as above plus Exchange Act Section 20(a)). The case is pending.

Offering fraud: SEC v. Nerren, Civil Action No. 20-cv-965 (E.D.Tx. Filed Dec. 21, 2020) is an action in which over a two-year period beginning in 2015 Defendant raised about $1.4 million from 22 investors in two offerings. About one third of the funds was differed to uses other the real estate developments which were supposed to receive the funds were diverted to uses not disclosed to investors. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3). Defendant resolved the matter by consenting to the entry of a permanent injunction based on the Sections cited in the complaint and agreeing to pay a penalty of $37,500. See Lit. Rel. No. 24991 (Dec. 21, 2020).

Conflicts: In the Matter of Voya Financial Advisors, Inc., Adm. Proc. File No. 3-20183 (Dec. 21, 2020) is an action which names the registered investment adviser as a Respondent. Voya Financial breached its duty in three respects. First, over a five year period beginning in 2013 the firm failed to disclose it received 12b-1 fees on transactions involving certain shares. Second over the same the firm failed to disclose that it was paid certain fees from an unaffiliated clearing broker for transactions with some clients. Third, over a four year period beginning in 2013 the firm did not disclose that it caused certain advisory clients to pay higher fees in the form of upfront fees when buying certain illiquid products at times when the same products were available with commissions waived for advisory clients. The Order alleges violations of Advisors Act Sections 206(2) and 206(4). To resolve the proceedings Respondent agreed to implement a series of undertakings and consented to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. Voya will also pay disgorgement of $11,547,820, prejudgment interest of $2,371,335 and a penalty of $9 million. A fair fund will be created for all of the monetary amounts paid.

Mismarked positions: In the Matter of ITG Canada Corp. a/k/a Vortu ITG Capanda Corp., Adm. Proc. File No. 3-20182 (Dec. 21, 2020) names the Canadian registered broker as a Respondent. For example, during the period here the firm served as an intermediary in routing orders from Cormark Securities to the executing brokers. Many of the orders were mismarked in 2016 and 2017. During that period 200 orders marked as long were short since the underlying securities were not owned. Another 80 orders marked as long failed to deliver the securities. In fact, the orders were short under Regulation SHO. The Order alleges violations of Rules 200(g) and 203(b)(1) of Regulation SHO. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Rules and Regulation cited. The firm will also pay a penalty of $200,000 that may be distributed through a Fair Fund. See also In the Matter of Cormark Securities Inc., Adm. Proc. File No. 3-20181 (Dec. 21, 2020)(based on essentially the same facts with Cormak routing the mismarked orders; alleging violations of same Rules and Regulation; resolved with certain undertaking, a cease-and-desist order based on those Rules and the Regulation, and the payment of $800,000 penalty that may or may not be put in a Fair Fund).

Unregistered securities – Crypto offering: In the Matter of ShipChain, Inc., Adm. Proc. File No. 3-20185 (Dec. 21, 2020) is a proceeding which names the shipping and logistics firm as a Respondent. Over a period of months, beginning in late 2017, ShipChain sold over 145 million digital assets or SHIP tokens in an initial coin offering. Investors were told the funds would be used to develop a blockchain platform and jumpstart the ShipChain economy. The Order alleges violations of Securities Act Sections 5(a) and 5(c). To resolve the proceedings Respondent agreed to implement certain undertakings and consented to the entry of a cease and desist order based on the Sections cited in the Order. Respondent will also pay a penalty of $2,050,000. A Fair Fund will be created.

False statements: In the Matter of India Globalization Capital, Inc., Adm. Proc. File No. 3-20180 (Dec. 21, 2020) is a proceeding which names the public company as a Respondent along with its CEO and president, Ramachandra Mukunmda. In March 2018 the firm announced that its first cannabis-based product – Hyalolex, a formulation aimed at Alzheimer’s Disease relief, would be “on the shelves in April. . .” 2018. It was not and the firm had no reasonable experience to make this happen. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). Respondents resolved the proceedings with the firm agreeing to implement certain undertakings. The firm and its CEO each consented to the entry of a cease-and-desist order based on the Sections cited in the Order. They will also pay, respectively, penalties in the amount of $175,000 and $35,000. Those amounts will be transferred to the Treasury.

Cherry picking: SEC v. TH Wealth Management, LLC, Civil Action No. 24990 (N.D.Tx. Filed Dec. 18, 2020) is an action which names as defendants the registered investment adviser and Brian Hobbs, the owner of the advisory. Over a two year period, beginning in December 2016, Defendants traded options and used an omnibus account to disproportionally distribute the trades that were profitable the account of Mr. Hobbs while those that were less profitable tended to be transferred to clients. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 24990 (Dec. 21, 2020).

Manipulation: SEC v. Ross, Civil Action No. 1:20-cv-05140 (N.D.Ga. Filed Dec. 18, 2020) is an action against Barton Ross, a former day trader who generated false rumors in the market place in an effort to push up the stock price over a two year period beginning in February 2018. The practice is alleged to have generated almost $36,000 in unlawful profits for Defendant. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24989 (Dec. 18, 2020).

Financial fraud: SEC v. SAExploration Holdings, Inc., Civil Action No. 1:20-cv-08423 (S.D.N.Y.) is a previously filed action which named as a defendant the company, a Huston based Seismic data firm and others in connection with an accounting fraud that improperly inflated the revenue by about $100 million. The fraud was based largely on inflating revenue in connection with a customer. In addition, two executives were alleged to have misappropriated millions of dollars. The company consented to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). In resolving the case the agency acknowledged the remedial acts of the company following an investigation by a special committee of the board. Those acts included removing two former executives engaged in the fraud and timely providing the staff with facts developed during the investigation. The litigation as to the two executives continues. See Lit. Rel. No. 24988 (Dec. 18, 2020).

Unregistered broker: In the Matter of John G. Wright, Jr., Adm. Proc. File No. 3-20177 (Dec. 18, 2020) is a proceeding which names as a Respondent, Mr. Wright. He had participated in the issuance and sale of USA Exchange’s stock from 2015 to 2017 without being a registered broker dealer. He now operates a consulting firm. He settled the earlier action and was barred from the securities business and from participating in any penny stock offering. This proceeding alleges he violated the bar. It alleges violations of Exchange Act Sections 15(a)(1) and 15(b)(6)(B)(i). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and to the entry of a bar order which precludes him from the securities business. He will also pay a penalty of $125,000.

Criminal Cases

Manipulation: U.S. v. Taub, No. 2:18 cv-00079 (D.N.J.) is a previously filed action in which Defendant Joseph Taub pleaded guilty to securities fraud and conspiracy to defraud the U.S. The underlying conduct involved a scheme to manipulate the share price for a number of securities over a two year period beginning in 2014. To conduct the manipulation Mr. Taub used straw accounts, repeatedly used a series of contemporaneous transactions designed to influenced price and that were intended to move the market price. At times Mr. Taub used a run based manipulation – one where he took one side (buy or sell) and after entering orders and trades in a manner designed to influence the price, reversed his position. At other times he used an order based manipulation – one based on at times entering orders (and sometimes not) that gave other traders a false signal. Mr. Taub was ordered to serve 18 months in prison for the manipulations that netted him $17 million and defrauded the U.S. on tax liabilities. He was also ordered to forfeit $17.1 million and pay restitution of $394,424 to the IRS.

Hong Kong

Consultation: The Securities and Futures Commission announced the conclusion of a consultation on customer due diligence requirements for open-ended fund companies on December 23, 2020 (here).

Singapore

Capital Markets: The Monetary Authority of Singapore and the China Securities Regulatory Commission followed up on capital market developments of financial, operational, technological and cyber risks during the pandemic in a recent roundtable, according to a December 22, 2020 announcement (here).