This Week In Securities Litigation (Week of July 11, 2022)
It was busy last week. The Commission petitioned the Fifth Circuit Court of Appeals to rehear en banc a decision upholding a challenge to the validity of its ALJs. The crypto platform Voyager filed for Chapter 11 protection. And, another Theranos executive was convicted of fraud by a jury.
Be careful, be safe this week
SEC Enforcement – Filed and settled actions
Last week the Commission filed 5 civil injunctive actions and no administrative actions, exclusive of 12j, default, tag-a-long and other similar proceedings.
Insider trading: SEC v. Haywood, Civil Action No. 1:22-cv-01971 (July 7, 2022) is an action which names George Haywood as a defendant. During a telephone call on January 22, 2022, Mr. Haywood learned from the chairman of Neurotrope that the firm would conduct a direct offering of shares on the afternoon of the call. He was cautioned not to trade while on the call. Nevertheless, immediately after the call Mr. Haywood sold a block of shares; later the same day he tried to sell a second block but the trade did not execute prior to the announcement. The share price, as anticipated, dropped because of the dilutive impact of the stock sales. By selling over 100,000 shares of stock prior to the announcement, Defendant avoided losses of almost $180,000. The complaint alleges violations of Exchange Act Section 10(b). Defendant settled the Commission’s action, agreeing to the entry of a permanent injunction based on the Section cited in the complaint. He also agreed to the entry of an officer and director bar. A penalty will be assessed later. The U.S. Attorney’s Office for the District of Columbia filed parallel criminal changes. See Lit Rel. No. 25440 (July 7, 2022).
Insider trading: SEC v. Tavlin, Civil Action No. 0:22-cv-01723 (D. Minn. Filed July 6, 2022) is an action which names as defendants Doron Tavlin, Afshin Farahan and David Gantman. While working on the executive team of Mazor Robotics Ltd. Defendant Tavlin was involved in discussions regarding the potential acquisition of that firm by a Global Medical Electronics firm. In August 2018 Mr. Tavlin tipped his friend, Defendant Farahan, who later encouraged Defendant Farahan to buy Mazor securities and to invest money on Mr. Tavlin’s behalf. Following the deal announcement on September 20, 2018, the stock price rose about 10%. Defendants Farahan and Gantman realized profits of about $500,000. Mr. Farahan later gave Defendant Tavlin $25,000 as a kickback for the information. After the deal announcement the three defendants took steps to conceal their activity. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25439 (July 7, 2022).
Insider trading: SEC v. Sung Mo Jun, Civil Action No. 2:21-cv-01108 (W.D. Wash.) is a previously filed action centered on an insider trading ring. The complaint alleges that Defendant Sung Mo Jun, while employed at Netflix in 2016 and 2017, tipped his brother, Joon Mo Jun, and his close friend, Junwoo Chon, about the company subscriber growth rate; the information was used to trade by each recipient. After Sung Mo Jun left Netflix in 2017 he obtained confidential subscriber information from Ayden Lee, another insider. Sung Mo Jun then traded and tipped others in advance of earnings announces from 2017 to 2019. Sun Mo Jun, Joon Jun and Chron made about $3 million in illicit profits. Sung Mo Jun, Joon Jun, Chron and Lee consented to the entry of final judgments that resolved all claims and permanently enjoin each from violating Exchange Act Section 10(b). Sung Mo Jun also agreed to the entry of an officer and director bar. The Court previously entered a final judgment against Defendant Bae. In the parallel criminal action filed in the Western District of Washington, Sung Mo Jun, Joon Jun, Chron and Lee each pleaded guilty to related criminal charges. Sung Mo Jun was sentenced to 24 months in prison and ordered to forfeit $495,000. Joon Jun was sentenced to 13 months in prison and ordered to forfeit $1.11 million. Lee was sentenced to three years of probation. See Lit. Rel. No. 25438 (July 6, 2022)
Offering fraud – Ponzi scheme: SEC v. Kimbrough, Civil Action No. 4:22-cv-00558 (E.D. Tx. Filed July 1, 2022) is an action which names as defendants: Justin Kimbrough, the founder of Prosperity; Terry Nikopoulos, the founder of TKJ Investments and TJK Holdings; TKJ Investments Corp.; TJK Holdings Corp.; Preeminent Trade Group Inc.; The Elyte Group Corp.; and Prosperity Consultants, LLC. Over a period of several months, beginning in June 2020 Defendants Nikopoulos and Kimbrough raised at least $3 million from investors who purchased shares of either TKJ Investments or Preeminent. Typically, investors were solicited through the use of a series of false representations. The false statements included how the investor funds would be used and, for sales of Preeminent shares the claim that 100% of the investor money would be used to purchase Ayurvedic medical products for resale. Messrs. Nkiopoulos and Kimbrougnh retained about $1.75 million of the investor funds for themselves. Eventually additional funds could not be raised and the entities collapsed. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Sections 10(b) and 15(a)(1). The case is pending. See Lit. Rel. No. 25436 (July 1 2022).
Offering fraud: SEC v. Baker, Civil Action No. 3:22-cv-01415 (N.D. Tex. Filed June 30, 2022) is an action which names as defendants: William G. Baker, the owner and managing member of Cannon Operating Company LLC (“Cannon”) and North Texas Minerals (“NTX”) who has been convicted in Dallas on weapons and drug charges and sanctioned by the Ohio Division of Securities; Michael Bowen, COO of Cannon which has been sanctioned by the Commission for securities violations; Cannon, an oil and gas company that has been sanctioned by multiple state regulators; NTX, a Texas entity formed by defendant Baker that has never registered with the Commission; and Chol Kim a/k/a Brandon Kim, a former salesman of Cannon and NTX. Over a two-year period Defendants raised over $2.1 million from at least 140 investors in four offerings involving the sale of oil and gas interests. In the primary offering there were undisclosed commissions, the payment of improper expenses and the co-mingling of investor funds. In each of the other offerings the funds were comingled; and in one offering NTX sold interests it did not own. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and 17(a) and Exchange Act Section 10(b) and 15(a). The case is pending. See, Lit. Rel. No. 25433 (July 1, 2022).
Misappropriation: SEC v. Hollifield, Civil Action No. 25435 (N.D. Ga. Filed June 30, 2022) is an action which names as defendant Eric Hollifield, a registered representative and co-owner of registered investment adviser Hamilton Investment Counsel, LLC, located in Dacula, Georgia. During 2020 Defendant defrauded two advisory clients and one brokerage customer. In some instances, Mr. Hollifield solicited, advised or helped HIC clients invest in Century Warehouse, Inc. which he either controlled or had authority over without disclosing that fact. In other instances, he used various schemes to defraud the clients. Overall at least $1.7 million from 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. 25435 (July 1, 2022). The Commission previously settled with Hamilton Investment and its COO.
Risk assessment: The Financial Crimes Network, in conjunction with the banking regulators, issued a joint statement on risk assessment and due diligence in the context of assessing customer relationships on June 6, 2022 (here).
Swap facility: The Securities and Futures Commission of Hong Kong, along with the Bank of China and Hong Kong Monetary Authority announced on July 4, 2022 that they are developing a Swap Connect, a new mutual market access program.
Appointment: Ashley Alder, currently the CEO of the Securities and Futures Commission, Hong Kong, was appointed to the Chair of the Financial Conduct Authority, according to a July 7, 2022 announcement.