This Week In Securities Litigation (Week of July 26, 2021)
The Commission’s regulatory authority was challenged again last week. This time the challenge was brought by Alpine Securities, a registered broker dealer that specializes in microcap stocks. A petition for certiorari was filed requesting that the High Court overturn rulings by the Second Circuit and the district court. Each ruling rejected the firm’s challenge to Commission’s authority to enforce provisions of the Bank Secrecy Act requiring that Suspicious Activity Reports be filed under certain circumstances. The challenge arose from a Commission complaint claiming that the broker either failed to file or did not properly fill out numerous SARs. Alpine Securities Corp. v. SEC, No. 21-82 (here).
Be careful, be safe this week
Whistleblowers: The Commission awarded nearly $3 million dollars to a Whistleblower who identified previously unknown conduct and assisted with the action, according to a July 21, 2021 release.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 5 civil injunctive actions and 3 administrative proceedings, exclusive of tag-along and other similar proceedings.
Manipulation: SEC v. Abujuder, Civil Action No. 1:21-cv-04110 (E.D.N.Y. Filed July 22, 2021) is an action which names as a defendant Charlie Abujudeh. Defendant controlled three microcap stocks he intended to manipulate. Initially he used a call room to try and manipulate the first; it failed. Subsequently, Defendant tried to retain a person who turned out to be a cooperating witness or CW that was working with the FBI. After taping numerous conversations relating to the planned manipulations the CW could not be hired. Defendant would not be deterred. He set up an email and web campaign and finally succeeded in manipulating the first stock, liquidating 2.5 million shares he owned and paying an insider with whom he had been coordinating $350,000. Similar schemes were used to manipulate the remaining stocks. Overall Defendant generated about $3.2 million on one stock and another $3.3 million on the third. The complaint alleges violations of Securities Act Sections 5(a) and (c), Section 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25147 (July 22, 2021).
Offering fraud: SEC v. Patel, Civil Action No. 3:21-cv-00994 (D.Conn. Filed July 21, 2021) is an action which names as a defendant Rahulkumar Patel. Beginning in February 2018 Defendant offered investors the opportunity to purchase membership units in a hotel venture. The offering was supposed to raise money to renovate the hotel. About $2.75 million was raised from 870 investors over a two year period. In fact, much of the investor cash was diverted to the personal use of Defendant. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25146 (July 21, 2021).
Offering fraud: SEC v. Suneet Singal, Civil Action No. 19-cv-11452 (S.D.N.Y.) is a previously filed action that names as defendants: Suneet Singal, First Capital Real Estate Investments, LLC, First Capital Real Estate Advisors LP and First Capital Real Estate Trust Inc. The complaint centered on claims that misrepresentations were made regarding the REIT’s ownership of 12 hotels in several Forms 8-K and that Defendant Singal acquired an interest in the BDC’s external adviser and caused it to make two $1.5 million loans to an entity that it controls. Those funds were diverted to personal use. To resolve the case each Defendant consented to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, the judgment as to Defendant Signal is based on Advisers Act Sections 206(1), 206(2) and Investment Company Act Sections 36(a) and 57(a). The judgments against First Capital, First Capital Real Estate Trust and First Real Estate Advisers are also based on Exchange Act Section 15(b). The Singal and First Capital Real Estate agreed to pay, on a joint and several basis, disgorgement in the amount of $3.2 million and prejudgment interest of $676,400. Singal also agreed to pay a penalty of $3.2 million and was barred for a period of 10 years from acting as an officer or director of a public company and from the securities business. See Lit. Rel. No. 25145 (July 21, 2021).
Financial reporting and disclosure: In the Matter of Tandy Leather Factory, Inc., Adm. Proc. File No. 3-20403 (July 21, 2021). Tandy is the world’s largest specialty leather firm. Also named as a Respondent is Shannon Greene, CPA, the firm’s CFO. Beginning in 2016 the firm failed to implement and maintain proper internal and disclosure controls. First, its inventory system failed to properly implement the firm’s FIFO inventory controls. When prices were changed, for example, it failed to maintain the historical costs for earlier purchases. This resulted from inadequate controls. Second, the firm also failed to properly implement its disclosure controls. Ultimately these failures resulted in a multi-year restatement. The firm did undertake remedial efforts. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings each Respondent 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 $200,000. Respondent Greene will pay a penalty of $25,000.
Unregistered broker: In the Matter of Miguel Holguin, Adm. Proc. File No. 3-20405 (July 21, 2021) is a proceeding centered on the sale of Treasury STRIPS and other notes by Respondent who is not a registered broker. For example, in May 2018 Respondent received $500,000 to invest in STRIPS. In September 2018 he received investor funds to purchase MTNs or medium term notes with a face value of about $10.5 billion. The Order alleges violations of Exchange Act Section 15(a). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. He is also barred from the security business but can reapply after 18 months. In addition, he is barred from serving as an officer or director and participating in any penny stock offering on similar terms.
Offering fraud: SEC v. Outdoor Capital Partners, LLC, Civil Action No. 2:21-cv-13813 (D.N.J. Filed July 19, 2021) is an action which names as defendants the firm and Samuel J. Macini, respectively, a venture capital and private equity firm that manages the Fund, and one of two managing directors of Outdoor Capital. In 2019 Defendants sold investors membership units in the Fund. Investors were told the amount of money raised by the Fund, the accounting professionals servicing it and Defendant Macini’s background. Each representation was false. Subsequently, in January 2021 the Fund sold short term high interest loan contracts to investors. The funds were to be used to buy a bicycle helmet inventory. In reality, the investor money was misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange
Act Section 10(b). The case is pending. See Lit. Rel. No. 25148 (July 22, 2021).
Offering frauds: SEC v. Govil, Civil Action No. 1:21-cv-06150 (S.D.N.Y. Filed July 19, 2021) names as a defendant Aron Govil, the controlling shareholder of two firms, Telidyne Inc. and Cemtrex Inc. The former is the developer of mobile phone applications, one of which was a money transfer app that supposedly had crypto capabilities. The other was represented to be a diversified industrial and technology company based on Long Island. The action is based on a fraud involving each firm. First, in 2019 and 2020, Mr. Govil, as the CEO of Telidyne, made a series of false statements in connection with an offering of the firm’s shares. For example, potential investors were told that the firm’s money transfer app had cryptocurrency and lending capabilities. Investors were also told that an app was under development to detect COVID-19. Both claims were false. Earlier, beginning in 2016, Mr. Govil used Cemtrex to conduct offerings of securities which raised about $2.5 million. The money was supposedly for general corporate purposes which included product development and acquisitions. In fact, significant portions of the investor funds were diverted to the personal use of Defendant Govil. Mr. Govil also engaged in scalping the shares of Cemtrex and trading on inside information about the company. To scalp the shares, Mr. Govil paid individuals to promote the stock and drive up the share price. As the price rose he secretly sold his shares. At times Defendant Govil had knowledge of forthcoming events and earnings for the firm. For example, in February 2018 Defendant traded in advance of a firm earning announcement, ultimately obtaining illegal profits of over $360,000. The sales were made thorough a series of nominee accounts. He also issued a press release denying that he sold any shares in the firm. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 16(a). Mr. Govil resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. He also agreed to the entry of an officer and director bar and a penny stock bar. In addition, Mr. Govil will pay disgorgement of $626,782, prejudgment interest of $76,693 and a penalty of $620,000. The judgment also authorizes the court to impose additional disgorgement and penalties if deemed appropriate.
Investment – controls: In the Matter of UBS Financial Services Inc., Adm. Proc. File No. 3-20401 (July 19, 2021) is an action which names as a respondent the dual registered broker-dealer investment adviser. These proceedings center on the failure of the firm to properly implement policies and procedures with respect to the VXX product as used in its discretionary Portfolio Management Program or PMP. Beginning in 2016 firm financial advisers put clients involved in the PMP program into the VXX. This product is typically built on short term futures products. Here the firm had policies and procedures in place to effectively prevent holding the VXX for long periods. Those policies and procedures did not, however, apply to the PMP program. When financial advisers put PMP clients into the VXX they failed to ensure that it was only held for the short term. Indeed, about 1,882 clients were involved with the product that was in hundreds of accounts. Those accounts held the product beyond the short term – many held the VXX for over a year. Accordingly, clients suffered losses. In resolving this matter, the firm took remedial steps. The Order alleges violations of Advisers Act Section 206(4) and Rule 206(4)-7. Respondent resolved the proceedings, consenting to the entry of a cease-and-desist order based on the Section and Rule cited in the Order and to a censure. The firm will also pay disgorgement of $96,344, prejudgment interest of $15,15,930 and a penalty of $8 million. A fair fund will be established.
Investment fraud: SEC v. Profit Connect Wealth Services Inc., Civil Action No. 2:21-cv-01298 (D. Nev. Filed July 8, 2021) is an action which names as defendants: the Las Vegas company which claims to place investor funds in various investments selected by a “supercomputer” using artificial intelligence; Joy Kovar, the president and a director of Profit Connect; and Brent Kovar, the president and treasurer of the firm and the son of Ms. Kovar. In 2010 the Commission obtained a permanent injunction, penny stock bar and officer and director bar against Mr. Kovar in a fraud action. SEC v. Sky Way Global LLC, Civil Action No. 09-cv-455 (M.D. Fla. March 13, 2009). Over a three-year period, beginning in May 2018, Defendants raised about $12 million from over 277 investors using Profit Center. Potential investors were told that their funds would be put into various types of investments. Those included securities, bitcoin and other cryptocurrencies selected by the Profit Center supercomputer using artificial intelligence. Investors were told that they would have a Wealth Builder Supercomputer Seat APR account. The investments were made through the firm’s website and targeted parents, grandparents, and family and friends that wanted to give the gift of success. Those investments were guaranteed to result in fixed income returns ranging from 20% to 30% per year. In fact, Profit Center was a fraud. Over 90% of the firm’s funds came not from investments but from investors. Most of the investor capital was diverted to the personal use of the people operating it, Ms. Kovar and her son. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a). The Commission requested an emergency freeze order. The case is pending.
Warning: The Federal Financial Supervisory Authority or BaFin, issued a caution about investing in SPACs. The warning notes that a number of European stock exchanges have recorded listings of the investment vehicles. SPACs are, however, investments that are “normally only available to financially strong risk capital providers,” the July 20, 2021 release states (here).
Survey: A survey taken by the Securities and Futures Commission of Hong Kong notes that the asset and wealth management business had strong growth in 2020. For example, the release notes that the year-on-year increase in AMU was significant, according to the July 23, 2021 release (here).
Report: The Monetary Authority of Singapore published a release detailing consumer price developments for June, 2021 on July 23, 2021 (here).