This Week In Securities Litigation (Week of July 24, 2023)
This Week In Securities Litigation (Week of July 24, 2023)
Chair Gensler testified in support of the proposed budget of $2.364 billion to fund the agency at current levels, adjusted for inflation. The request received support from both parties in committee.
Last week the new cases filed focused largely on offering frauds as shown below.
Have a great and safe day.
Testimony: Chair Gensler testified last week before the Subcommittee on Financial Services of the U.S. Senate regarding the current proposed budget for the agency in the next government fiscal years, in remarks dated July 19, 2023 (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 6 civil injunctive actions and i administrative proceedings, excluding 12j, tag-along proceedings and those presenting a conflict for the author.
Ponzi scheme: SEC v. Christensen, Civil Action No. 3:23-cv-00959 (D. Or.) is a previously filed action which named as defendants Robert Christensen, Anthony Matic, Foresee, Inc., the Commission PDX, LLC, the Policy PDX, LLC and Innings 150, LLC. The complaint alleged that the two individual Defendants, along with the firms they controlled, raised funds for what was essentially a Ponzi scheme over a period of about four years, beginning in 2018. Defendants resolved the matter with each individual Defendant and their related entities consenting to the entry of permanent injunctions based on Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The judgments also contains conduct based injunctions. Defendants will, in addition, pay disgorgement and prejudgment interest of $5,374,482. The two individual Defendants will each pay a penalty of $200,000 and be subject to an officer/director bar. See Lit. Re. No, 25784 (July 20, 2023).
Offering fraud: In the Matter of Digital World Acquisition Corp., Adm. Proc. File No. 3-21534 (July 20, 2023) is a proceeding which centers on the relationship of Respondent Digital World, a SPAC, and Trump Media & Technology Group Corp., a firm founded by the former President. In late October 2021 Digital World announced an agreement to merge with Trump Media. The disclosure stipulated that neither Digital World nor any of its officers and directors had any prior discussions with the target companies prior to the proposed IPO. The statement was false. Dating back to February 2021 the person who became Digital World’s CEO and Chairman, and others, had extensive discussion with Trump Media. The SPAC also failed to disclose Individual A, who eventually created the deal for the two firms, had a conflict of interest that had not been disclosed – he would pay the $1 million break-up fee if the deal was not concluded. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the matter Respondent has undertaken to amend certain filings made with the Commission. The firm also consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm will pay a penalty of $18 million.
Ponzi and pyramid scheme: SEC v. Dalius, Civil Action No. 2:18-cv-08497 (C.D. Cal.) is a previously filed action that centered on a Ponzi and pyramid scheme. Defendant Eric Evans served as the top executive of the firm at the center of the scheme. It sold “cashback memberships.” Those supposedly entitled holders to receive 20% cash back on their retail shopping purchases each month if they paid a $125 fee every 28 days and submitted their shopping receipts. The profits supposedly came from monetizing the point-of-sale receipt data submitted by members. In fact, Defendants were operating a Ponzi and pyramid scheme. Mr. Evans is the last defendant. He consented to the entry of a final judgment that requires him to pay disgorgement of $175,000, prejudgment interest of $52,129 and a penalty of $111,614. See Lit. Rel. No. 25783 (July 20, 2023).
Offering fraud: SEC v. Weinstein, Civil Action No. 3:23-cv-03848 (D. N.J. Filed July 19, 2023) is an action which names as defendants: Eliyahu Weinstein who has two prior felony convictions, Aryeh Bromberg, Joel Wittels, Richard Curry, Christopher Anderson and Alaa Mohamed Hatab. The case centers on a Ponzi like scheme created by Defendant Weinstein and implemented by the five co-defendants. The scheme began in November 2012 with Defendants Weinstein, Bromberg and Wittels and their Investment Vehicle. Early the next year Defendants Anderson and Curry formed an investment group to raise capital for the scheme. Over time the group convinced investors to put money into the scheme and keep it there. Eventually Defendants were able to convince over 150 investors to put at least $38 million into the deal. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation.
Free riding: SEC v. Evans, Civil Action No. 7:23-cv-00446 (W.D. Va. Filed July 19, 2023) is an action which names as defendant Chad Evans. Over a period of months, beginning in July 2020, Defendant placed multiple trades through five brokerage houses in which he had opened a new account, and made bogus transfers of cash from accounts that had insufficient assets to pay for the transaction. To implement the free riding scheme he made false deposits of over $280,000 and placed trades of nearly $1 million. The brokers involved had losses of about $11,768. Defendant Evans also suffered loses. The complaint alleges violations of Exchange Act Section 10(b). Defendant resolved the matter, consenting to the entry of a permanent injunction based on the Section cited in the complaint. The judgment will also preclude Defendant from opening any brokerage account without first providing the firm with a copy of the SEC’s complaint and final judgment in this case. Defendant will pay a penalty of $10,000. See Lit. Rel. No. 25782 (July 19, 2023).
Offering fraud: SEC v. Legendary Partners, LLC, Civil Action No. 8:23-cv-01282 (C.D. Ca. Filed July 18, 2023). Named as defendants are the firm and Scott I. Snyder. The firm, now dissolved, had two bank accounts. Each was signed by its president – Mr. Snyder. He was also subject to a cease-and-desist order issued by the California Business, Consumer Services and Housing Agency. Over about a three-year period, beginning in April 2018, Defendants conducted a nationwide offering that targeted mostly elderly investors. The idea was to solicit investors to acquire interests in a start-up company that promised to use the investor funds to refurbish damaged and exotic luxury vehicles. Those would, of course, be sold when ready to make a profit for all. The scheme was implemented through cold calls made by a man who called himself “Bill Miller” — Mr. Snyder — and used false statements to convince the largely elderly investors to put their money into the refurbishment scheme. Unlike many offering fraud schemes, the one used here by “Bill Miller” and his company, had a second facet. This variation focused on investors who intended to put their funds into one of two ventures. One was a movie production company. The other was a pharmaceutical company named Biosynetics. Mr. Snyder knew that the investment choices made by this group of investors differed from the one he offered. Rather than convince each investor that refurbishing damaged and exotic luxury vehicles was a better choice, he “tricked” them in the words of the complaint, into putting their funds into his scheme. Stated differently, the investors did not understand that in fact their money had been diverted from the intended investment to the one Mr. Snyder had created for others. No matter. All the choices ended the same: the money was misappropriated by “Bill Miller” or in reality Defendant Snyder. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendants resolved the matter. Each Defendant consented to the entry of a permanent injunction based on each of the Sections cited in the complaint. In addition, Mr. Snyder will be barred from offering or selling securities except for his own account. A director and officer bar will also be imposed. The final judgment will require Mr. Snyder to pay $42,636 in disgorgement, $9,956 in prejudgment interest and a $50,000 penalty. See Lit. Rel. No. 25781 (July 18, 2023).
Microcap fraud: SEC v. Anglim, Civil Action No. 1:23-cv-11598 (D. Mass. Filed July 127, 2023) is an action which names as defendant James Anglim, who worked as a market maker at different firms. Beginning in late 2016, and continuing until early 2022, he engaged in multiple schemes. Those schemes centered on recruiting control persons with large blocs of microcap stock, concealing their identity, and then selling the shares to the public in disregard of their disclosure obligations. Through these schemes Defendant engaged in at least $53.85 million of trading in the securities of five different companies. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 9(a)(1) and 10(b). To resolve the matter Defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, he agreed to pay disgorgement of $405,991, and prejudgment interest of $82,009. The court also imposed a penny stock bar. The Commission did not seek a penalty based on cooperation. See Lit. Rel. No. 25780 (July 17, 2023).
Misappropriation: SEC v. Morgenthau, Civil Action No. 1:23-cv-00022 (S.D.N.Y.) is a previously filed action which named as defendant, Cooper J. Morgenthau. The complaint alleged that Defendant, the former CFO of African Gold Acquisition Corp., a SPAC, orchestrated a scheme in which he misappropriated over $5 million from the company and investors in two SPACs he incorporated, beginning in 2021, and continuing into the next year. The Court entered judgement against Defendant on July 13, 2023, enjoining him from future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(b)-5. The Court also directed that Defendant pay disgorgement of $5,111,335 along with prejudgment interest of $221,237, all deemed satisfied by the amounts of restitution and forfeiture ordered in a parallel criminal case. See Lit. Rel. No. 25778 (July 14, 2023).
Offering fraud: SEC v. Celsius Network Ltd., Civil Action No. 1:23-cv-06005 (S.D.N.Y. Filed July 13, 2023) is an action which names the U.K. firm and its founder, Alexander Mashinsky, as defendants. Beginning in 2018 Defendants offered two investment opportunities. The first was based on the crypto asset security CEL. Supposedly the investment would earn returns for its investors. The second opportunity was through the Earn Interest Program. It offered returns as high as 17%, according to the representations made to potential investors. The representations were false. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The case is in litigation. See Lit. Rel. No. 25779 (July 14, 2023).
Risk Alert: Examinations published a Risk Alert on June 8, 2023 (here) focusing on additional areas of the Adviser Marketing Rule. Those will include testimonials and third-party ratings:
Disclosures – these should include the identification of the person giving the testimonial and their relationship, if any, to the advisory and if compensation is paid;
Oversight –if the adviser has a reasonable basis for believing the testimonials comply with the Marketing Rule will be a critical point;
Written agreements – if they have been entered into where required;
Ineligible persons compensated – if the adviser knew, or should have known, that ineligible persons such as “bad actors” have been compensated.
Critical facts for third-party providers – the focus will be on key details such as when the rating was done, the time period and, if applicable, the compensation involved;
Construction for, or predicate of, surveys – does the advisor have a reasonable basis for believing the survey or questionnaire is structured so that it is just as easy to be on one side as the other will be a critical question.
Finally, the Division will focus on if Form ADV meets not just the traditional requirements but also those recently amended or added. Overall, the new Alert provides advisors with additional key points of focus for a visit by Exams and also for evaluating the advisory.
Input on crypto: The European Securities and Markets Authority is seeing input on detailed rules for crypto markets, according to a release dated July 12, 2023 (here).
Remarks: Julia Leung, CEO of the Hong Kong Securities and Future Commission, delivered remarks titled “The future of sustainable finance and implications for business” at the recent HK Institute of CPAs (July 17, 2023)(here).
Report: The Monetary Authority of Singapore published a Sustainability Report 2022/2023 on July 5, 2023 (here).