This Week In Securities Litigation (Week of July 25, 2022)
The Commission filed its first insider trading case based on crypto assets last week. The case centered on trading in advance of announcement by a crypto trading platform of the listing of a new asset. SEC Chair Gensler and Enforcement Director Grewel testified before Congress last week, reviewing proposed budget requests for the coming fiscal year.
Making Be careful, be safe this week
Testimony: Gurbir Grewel, Director of the Division of Enforcement, testified before the House Subcommittee on Financial Services (July 22, 2022)(here). His prepared remarks focused on the budget requests for the coming fiscal year. There was also a series questions centered on ESG and environmental concerns.
Testimony: Chair Gary Gensler testified before the House Subcommittee on Financial Services and General House Appropriations Committee on July 17, 2022. His testimony reviewed the proposed budget for the next government fiscal year (here).
Whistleblowers: The Commission awarded more than $17 million to a whistleblower who assisted Enforcement in an action, according to a release dated July 19, 2022.
SEC Enforcement – Filed and settled actions
Last week the Commission filed 2 civil injunctive actions and 2 administrative actions, exclusive of 12j, default, tag-a-long and other similar proceedings.
Insider trading-crypto: Wahi, Civil Action No. 2:22-cv-01009 (W.D. Was. Filed July 21, 2022) is an action which names as defendants: Ishan Wahi, a citizen of India who was employed as a Manager in Coinbase’s Asset and Investing Products group; Nikhil Wahi, a citizen of India and the brother of Defendant Ishan Wahi, who was employed as a senior manager at Salesforce; and Sameer Ramani, a U.S. citizen who is believed to be in India. Ishan Wahi invoked the 5th Amendment in testimony while Nikhil Wahi did not appear. Mr. Ramani is a close friend of Defendant Wahi. Beginning in June 2021 and continuing through April 2022, Defendant Ishan Washi repeatedly tipped his brother and Defendant Ramani to pending announcements that Coinbase, a large crypto platform, was about to announce on its blog or through Twitter, the listing of another crypto asset. The communication of that information violated the internal policies and procedures of Coinbase. The communications sparked repeated trading prior to the announcements. The suspicious trading of Nikhil and Ramani drew the attention of the Director of Security Operations at Coinbase who launched an investigation. On May 11, 2022, the Director scheduled an interview with Ishan who then sent a screen shot of it to Ishan using a phone with a foreign number. By trading in advance of Coinbase announcements while in possession of material non-public information about the pending announcements brother and Defendant Ramani amassed insider trading profits of over $1.1 million. The night before he was scheduled to testify Defendant Nikhil Wahi flew to India. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. This is the Commission’s first insider trading case tied to crypto assets.
False statements: SEC v. Trovias, Civil Action No. 1:21-cv-05925 (S.D.N.Y) is a previously filed action against Greek national Apostolos. The complaint charged Mr. Trovias with engaging in a fraudulent scheme in which he told potential investors that he was selling insider trading tips obtained from the dark web. Specifically, he is alleged to have sold over 100 subscriptions to investors who were informed that they were obtaining pre-release earnings reports from public companies. Investors were also told that they were getting “order book” data. To resolve the charges Defendant consented to the entry of a final judgment based on Exchange Act Section 10(b). The judgment also precludes him from establishing any websites that engages in the offer for sale or purchase of publicly traded securities. In addition, Defendant was directed to pay disgorgement and prejudgment interest totally $6,702.49. That amount will be satisfied by the forfeiture order entered in the parallel criminal case. In that case Defendant pleaded guilty and was sentenced to time served. He was also ordered to forfeit $6,700. See Lit. Rel. No. 25447 (July 21, 2022).
Compliance: In the Matter of Health Insurance Innovations, Inc., Adm. Proc. File No. 3-20932 (July 20, 2022). Health Insurance Innovations is a technology platform, billing administrator and distributor of short-term and limited health insurance plans and related products. Over a three-year period, beginning in early 2017, the company and its CEO, Respondent Gavin Southwell, touted the high compliance standards of the firm. Consumers were told, for example, that the company had a 99.99% consumer satisfaction rating. Respondents also claimed that in 2016 the company had terminated a distributor because of repeated compliance issues. When Mr. Southwell joined the firm in 2016, he learned that Simple Health, a key operating unit, and others, were misrepresenting the facts regarding the compliance failure. He increased spending on compliance and took various steps in the area, but failed to properly assess the situation. Thus, throughout the period, the company continued to have tens of thousands of dissatisfied consumers. Numerous consumers complaints were made to company agents. And, while the company did terminate a distributor in 2016, in fact the firm was rehired. In 2018 the FTC filed an emergency action to shut down Simple Health for defrauding consumers. The filing was disclosed and the stock price dropped but the situation was never fully disclosed. In March 2019 Congress announced an investigation into the situation. The stock price dropped again. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a). To resolve the proceedings Respondents consented to the entry of cease-and-desist orders based on the Sections cited in the Order. In addition, the firm will pay an $11 million penalty while Mr. Southwell will pay a penalty of $750,000. A Fair Fund will be created.
False statements: In the Matter of Equitable Financial Life Insurance Company, Adm. Proc. File No. 3-20931 (July 18, 2022). Equitable is an insurance company. One of its products is a variable annuity called Equivest. It is marketed to investors as a retirement savings product. Each version has distinct terms and fees that are described in a prospectus. Typically, an investment is made followed by periodic payments. The company agrees that in return for the investments retirement payments will be made to the investor that correspond, at least in part, to the performance of subaccounts that invest in various underlying mutual funds. The version here was marketed to grade school and high school teachers. Since 2016 Equitable has presented its fees to investors in the form of a quarterly spreadsheets. Those spreadsheets show the various types of fees paid by the investors. Those include separate account expenses, portfolio operating expenses, administrative and transaction fees and planning expenses. The teacher-investors understood that the spreadsheets were complete – all the fees were listed. They were not; there were omissions. The fees omitted from the spreadsheets were typically some of the largest incurred in connection with the operation of the plan. Those listed, in contrast, tended to be small and often insubstantial. Investors did not discern from the spreadsheets that in fact the large fees were omitted while the small ones were included. The investors relied on the spreadsheets to be correct and complete. Stated differently, they relied on the insurance company to tell the truth. It did not. The Order alleges violations of Securities Act Sections 17(a)(2) and 17(a)(3). To resolve the matter the Company 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. In addition, Equitable will pay a penalty of $50,000. The funds will be placed in a Fair Fund.
Sham transaction: SEC v. Schoengood, Civil Action No. 2:21-cv-00979 (E.D.N.Y.) is a previously filed action which named as defendants Bruce Schoengood, Medifirst Solutions, Inc. and Joshua Tyrell. The complaint states that in February 2021 Defendant Schoengood entered into a shame transaction with Medifirst to exchange certain services for stock. The stock was issued to him in return for certain promotional services. While Defendant Schoengood received a substantial block of Medifirst stock, no services were delivered. Mr. Schoengood also lied to his brokerage firm about how he obtained the stock. Over 19 million shares of stock were sold for approximately $125,000. A final judgement was entered against Mr. Schoengood by consent, prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The judgment also contains a penny stock bar and directs the payment of $125,000 in disgorgement, prejudgment interest of $26.883.95 and a penalty of $100,000. See Lit. Rel. No. 25446 (July 18, 2022).
Offering fraud: SEC v. McAfee, Civil Action No. 1:20-cv-08281 (S.D.N.Y.) is a previously filed action which named as defendants John McAfee and Jimmy Watson. The complaint focused on an in initial coin offering conducted by Mr. McAfee with assistance from Defendant Watson. Mr. McAfee was alleged to have conducted an illegal coin offering and scalping scheme. Mr. Watson was also alleged to have aided in the promotion by, in part, negotiating deals with investors as to the ICO. In addition, the two men also participated in a pump-and-dump type manipulation. A final judgment was entered against Mr. Watson, prohibiting future violations of Securities Act Sections 17(a) & (b) and Exchange Act Section 10(b). This injunction was supplemented by a conduct based injunction. The judgment requires the payment of disgorgement in the amount of $316,401.48 and prejudgment interest of $59,533.38. The Commission filed a notice of death as to Mr. McAfee. See Lit. Rel. No. 25445 (July 15, 2022).
Report: The Hong Kong Securities and Futures Commission announced that its wealth management business remained resilient during 2021, according to a release issued on July 20, 2022 (here).
Remarks: Managing Director Ravi Menon delivered remarks at Annual Report 2021- 2022, held on July 19, 2022. His remarks focuses on the state of crypto and current economic events (July 19, 2022) (here).