This Week In Securities Litigation (Week of July 12, 2021)
Recently, the Supreme Court handed down rulings in two private securities actions. First, the High Court agreed to hear Pivotal Software, Inc. v. Zhung Tran, No. 20-1541 (Certiorari granted July 2, 2021). The issue presented for consideration is: Whether the Reform Act’s [PSLRA] discovery-stay provision applies to a private action under the Securities Act in state or federal court or solely as a private action in federal court.
The case began in the California Superior Court which permitted discovery to proceed prior to any ruling on a motion to dismiss. See, e.g., In re Pivotal Software, Inc. Securities Litigation, Case No. CGC 1956750 (S.C. CA, County of San Francisco)(order entered March 4, 2021). Lower courts are split on this issue. A parallel federal action was dismissed prior to discovery. In re Pivotal Sec. Litg., 2020 WL 4193384 at *5 *8 (N.D. Cal.).
Second, the Court sent Goldman Sachs v. Arkansas Teacher Retirement System, No. 222 (Ruling dated June 21, 2021) back to the second circuit for further consideration. The Court held that a statement can be so generic and non-specific that it may not impact the price of the securities. Since the circuit court ruling on the question was not clear the matter was sent back for clarification.
Be careful, be safe this week
SEC Enforcement – Litigated Actions
Undisclosed conflicts: SEC v. Westport Capital Markets, LLC, Civil Action No. 3:17-cv-02064 (D. Conn. Verdict March 16, 2021) is an action which named as defendants the investment advisory firm and its owner, Christopher E. McClure. The complaint alleged a scheme in which Defendants repeatedly purchased securities that generated significant undisclosed compensation for Defendants. A jury returned a verdict in favor of the Commission on March 16, 2020, concluding that Defendants had violated Advisers Sections 206(1) and 207. On July 6, 2021, the Court entered judgment against defendants, jointly and severally, directing that they pay disgorgement in the amount of $632,954. In addition, the Court directed that the firm pay a penalty of $500,000. Mr. McClure was ordered to pay a penalty of $200,000. See Lit. Rel. No. 25138 July 7, 2021). Prior to the jury verdict the Court granted summary judgment in favor of the agency, finding Defendants had violated Advisers Act Sections 206(2) and 206(3). See Lit. Rel. No. 25138 (July 7, 2021).
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 2 civil injunctive actions and no administrative proceedings, exclusive of tag-along and other similar proceedings.
False statements: SEC v. Prallax Health Sciences, Inc., Civil Action No. 1:22-cv-05812 (S.D.N.Y. Filed July 7, 2021) is an action which names as defendants the firm, Paul R. Arena, its CEO, and Nathaniel T. Bradley, its CTO. In a period of approximately one month, beginning on March 11, 2020, the health care company issued a series of press releases to capitalize on the COVID pandemic. The releases claimed, for example, that the firm was developing a screening test that would be available shortly and had other medical equipment available such as ventilators. The firm’s CEO oversaw the preparation of the releases which were primarily penned by its CTO. In fact, the claims were false. The company was nearly bankrupt and did not have the FDA registrations required to support such products. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). Defendants resolved the matter by each consenting to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, the company, along with CEO Arena and CTO Bradley will pay penalties in the amount of $100,000, $45,000 and $40,000 respectively. Finally, Messrs. Arena and Bradley each consented to the entry of a penny stock bar for, respectively, five years and three years. See Lit. Rel. No. 25137 July 7, 2021).
Front running: SEC v. Wygovsky, Civil Action No. 1:21-cv-05730 (S.D.N.Y. Filed July 2 2021) is a case which names as defendant Sean Wygovsky, who held a position with Asset Manager A. Over a six year period, beginning in January 2015, Defendant engaged in a fraudulent front running scheme by trading in the same stocks as his employer on the same day but entering his orders ahead of those placed by the firm. Stated differently, Mr. Wygovsky engaged in a fraudulent front running scheme. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal charges.
Consultation Paper: The Securities and Futures Commission released a consultation paper on guidance and relief for litigation funding schemes on July 9, 2021. The paper provides definitional guidance, and certain relief from the equal treatment duty regarding settlements as well as from select disclosure obligations. Comments are invited (here).
Agreement: The Securities and Futures Commission of Hong Kong and Eight members of the Canadian Securities Administrators or CSA entered into an agreement regarding a framework for cooperation regarding financial technology, according to a release dated July 8, 2021 (here). The agreement represents the SFC’s continuing efforts to coordinate with other regulators and dedication to financial cooperation.
Agreement: The Monetary Authority of Singapore and Banque de France announced in a release dated July 8, 2021, the successful completion of a wholesale cross-border payment and settlement experiment using CBDC. The arrangement simulated cross-border transactions involving multiple CBDCs on a common network between Singapore and France (here).