This Week In Securities Litigation (Week of July 1, 2024)

The Supreme Court handed down two decisions which will have a significant impact in the months and years to come. In Loper Bright the Court ended Chevron deference, a doctrine that has had a significant impact on administrative law for decades. In Jarkesy the Court concluded that if the Commission seeks a monetary penalty in an administrative proceeding, respondent has a right to a trial by jury under the Seventh Amendment. This ruling effectively ends the use of such penalties in administrative proceedings.

Be careful, be safe this week.


Penalties: In SEC v. Jarkesy, No. 23-859 (Decided June 27, 2024) the Supreme Court rejected the Commission’s claim that it could impose monetary penalties in an administrative proceeding unless respondent has the right to demand and obtain a jury trial. The High Court concluded that if a monetary penalty is to be imposed in an action then the person charged has a the right to have a trial by jury under the Seventh Amendment to the Constitution. Accordingly, the agency cannot seek monetary penalties in its administrative proceedings, in view of the requirements of the Amendment. This ruling is likely to impact other administrative agencies that impose monetary penalties in administrative proceedings.

Deference: In Loper Bright Enterprises v. Laimondo, No. 22-451 (Decided June 28, 2024) the Supreme Court held that under the Administrative Procedure Act courts cannot defer to an agency interpretation of the law because the statute is unclear. In reaching this conclusion the court rejected the long standing holding of its decision in Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984) regarding deference to the agency ruling. The ruling in this case can be expected to have a significant impact in actions involving administrative agencies since it end what has long been called Chevron deference.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 2 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Fraudulent filings: SEC v., Inc., Civil Action No. 0:24-cv-81118 (June 26, 2024) is an action which names as defendants the firm and Aldo Piscitrello. Respectively, a penny stock firm and the firm’s founder and majority shareholder. The firm purports to provide an internet-based platform to match mortgage and loan providers with prospective borrowers. In 2019 the firm made filings with the Commission that reported revenue, all of which was fictitious. In a Form 8-K filing made in late November the firm purported to be “coming clean” by reporting the resignation of its auditors and noting that they believed revenue was overstated. The corrective disclosures have yet to be made, however. Over time the firm has also failed to file Forms 3 and 4 and Schedule 13D or G. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 16(aa). The case is pending. See Lit. Rel. 26038 (June 27, 2024).

Fraudulent concealment: SEC v. Sharp, Civil Action No. 1:21-cv-11278 (D.Mass.) is a previously filed action which named as defendant Frederick Sharp. Its current focus is on defendants Mike Veldhuis, Paul Sexton, Jackson Friesen, Zhiying Gasarch and Courtney Kelln. In the underlying case Defendant Sharp is purported to have been the masterminded of a complex scheme that began in 2011 and continued until 2019 in which others participated to conceal ownership and dump stock. Previously, the court entered a judgment by default against defendant Sharp that ordered certain relief and required Defendant to pay over $50 million in disgorgement, prejudgment and civil penalties. The court entered judgment by consent against Defendants Dhillon, Taylor and Kaitz. Partial judgements were entered in September 2023 against as to those three Defendants. Those judgments imposed injunctions and penny stock bars along with monetary relief to be determined at a later date. On September 27, 2023, after a ten day trial, a jury returned a verdict against Defendant Gasarch for violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b), 13(d) and Securities Act Sections 17(a)(1) and (3) as well as Sections 5(a) and 5(c) of the Securities Act as to Defendants Veldhuis, Sexton and Friesen. Penny stock bars were also imposed and a requirement to pay a civil penalty of $1,562.603 on a joint and several basis. The amount of disgorgement by Messrs. Sexton, Veldhuis and Friesen was capped. The judgment against Defendant Kelln permanently enjoins her from future violations of Securities Act Sections 5 and 17(a). The judgement also imposes a penny stock bar and an injunction against participating in the issuance, purchase, offer or sale of any security except for her account. She was directed to pay a penalty of $904,078 and holds her jointly and severally liable, along with Defendant Sharp, for disgorgement of $1,582,785. See Lit. Rel. No. 26-73 (June 26, 2024).

Private funds: SEC v. Lufkin Advisors, LLC, Civil Action No. 9:23-cv-81289 (S.D. Fla.) is a previously file action which names as defendants the advisory and Chauncey F. Lufkin, II, president of the firm who was charged in a prior SEC enforcement action. Here Defendants consented to the entry of a final judgment to resolve the action. The judgement that precludes violations of Advisers Act Sections 206(1), (2) & (4) and 207 and Rule 206(4)-8. Defendants also consented to the entry of an order imposing civil penalties of $425,000. The case alleged that Defendants engaged in a course of conduct for years that included the loss of control over certain crypto assets for over a year and others for various periods. Defendants consented to the entry of the permanent injunctions and an order requiring the payment of the penalty to resolve the proceedings. See Lit. Rel. No. 206036 (June 25, 2024).

Manipulation: SEC v. Brda, Civil Action No. 1:24-cv-04806 (S.D.N.Y. Filed June 2024) is an action alleging market manipulation by defendants John Brda and Georgios Palikaras, the former CEOs of Meta Materials Inc. The complaint alleged that each Defendant participated in a market manipulation scheme that raised $137.5 million from investors in an at-the-market offering scheme. It was conducted just prior to the merger of Mr. Bra’s firm, Torchlight Energy Resources Inc., with Mr. Palikaras’ Mita Materials Inc. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(a) as well as Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The action is in litigation. See also, Lit. Rel. No. 26035 (June 25, 2024); In the Matter of Meta Materials, Inc., Adm. Proc. File No. 3-21976 (June 25, 2024)(related action).

Manipulation: SEC v. McLellan, Civil Action No. 16 – cv-10874 (D. Mass.) is a previously file action which names as defendant Ross McLellan, a former executive at State Street Corporation. The scheme sought to add secret commissions to billions of dollars of securities trade performed for at least six clients of State Street’s transition management business. The final judgment, entered by the court on June 18, 2024, precludes future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26034 (June 20, 2024).


Digital risk: Jan Kiefer, BaFin Risk Management, explains risk management under the Digital Operations Resilience Act and its framework, in an article dated June 24, 2024 (here).


Asset recovery: The Monetary Authority of Singapore published it National Asset Recovery Strategy, in an article that is available as of June 26, 2024 (here).


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