This Week In Securities Litigation (Week of July 27, 2020)

The Commission continued to adopt rule amendments that are presented as pro-investors but which many find controversial. The amendments to the proxy rules adopted this week are proving controversial in this regard.

Last week Enforcement continued with its retail investor focus. Actions were filed involving insider trading, misrepresentations, and muni bonds. In addition, cases based on an offering fraud and fraudulent valuation were initiated.


Rules: The Commission, in conjunction with the FDIC, issued a final rule on July 24, 2020, in accord with the Dodd-Frank Act, implementing provisions applicable to the orderly liquidation of covered broker dealers (here).

Rules: The Commission adopted Rule Amendments regarding Proxy Voting Advise on July 22, 2020 (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 2 civil injunctive actions and 5 administrative proceedings last week, excluding 12j and tag-along-proceedings.

Insider trading: In the Matter of Edmond Leung, Adm. Proc. File No. 3-19889 (July 21, 2020) is an action which names as Respondent, Mr. Leung, a manager at Sangamo Therapeutics, Inc. He was employed in the technology department during the period here. In early August 2016 he became aware of a delay of clinical trials at the firm for a particular drug. On August 3, 2016, just before the announcement, he sold 1,439 shares of Sangamo stock. The same day the firm announced a delay in the trials. The share price fell 33%. Mr. Leung avoided losses of $2,863. The next year Mr. Leung became aware of a transaction between Sangamo and another pharmaceutical firm. On the morning of May 10, 2017 he contacted his cousin, Joseph Zhang, and told him to purchase shares of the firm quickly. The cousin bought 16,900 shares hours before the firm announced the transaction. The next day the share price rose 60%. Mr. Zhang sold his shares, reaping $66,703 in profits. The Order alleges violations of Exchange Act Section 10(b). To resolve the matter, Mr. Leung consented to the entry of a cease and desist order based on the section cited in the Order. He also agreed to pay disgorgement of $2,963 along with prejudgment interest. In addition he will pay a penalty of $69,566. See also In the Matter of Joseph Zhang, Adm. Proc. File No. 3-19888 (July 21, 2020)(action against cousin; resolved with entry of a cease and desist order based on Exchange Act Section 10(b), the payment of disgorgement in the amount of $66,703, prejudgment interest of $5,573 and the payment of a penalty equal to the amount of the disgorgement. In each case the disgorgement is described as the illegal profits or losses avoided. In each case all of the money paid — disgorgement, prejudgment interest and penalties – was transferred to the U.S. Treasury “subject to” Exchange Act Section 21F(g)(3).

Misappropriation: SEC v. Carter, Civil Action No. 1:20-cv-02112 (D. Md. Filed July 20, 2020) is an action which names as a defendant Michael B. Carter, an investment adviser at a Financial Institution. Beginning in late 2007, and continuing through early 2019, Mr. Carter misappropriated about $6 million from brokerage customers and an elderly investment advisory client while serving as their financial advisor. The transactions were effected by falsifying internal forms for 60 unauthorized transfers from client accounts to his. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The case is pending. A parallel criminal action was filed by the U.S. Attorney for the District of Maryland.

Sham transaction: In the Matter of Carlos Renato Cano, Adm. Proc. File No. 3-19891 (July 22, 2020) is a proceeding which names as a Respondent, Mr. Cano who was employed at International Investment Group LLC, formerly a registered investment adviser. In 2007 the firm sold fake investments to conceal certain losses that resulted from its trade finance loan business. One investment facilitated by Mr. Cano resulted in a $6 million loss by an advised fund that invested. The investment was a sham and part of the cover-up of the loses. The Order alleges violations of Securities Act Section 17(a) and Advisers Act Sections 206(1) and 206(2). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. Mr. Cano is also barred from the securities business. He agreed to pay a penalty of $300,000 which will be deposited in a fair fund if it is established. If not, the funds will go to the Treasury subject to Exchange Act Section 21(g)(3). See also SEC v. Nu, below.

Muni bonds: In the Matter of John J. Marvin, Adm. Proc. File No. 3-19885 (July 20, 2020) is an action which names as a Respondent the former registered representative at a Major Broker. In 2015 and 2016 Respondent placed orders during retail order periods for new issue muni bonds with the firm’s syndicate desk for a customer. The customer was “flipping” new issue bonds. The rules require that those who participate in the offering fill in their zip codes on forms, a procedure designed to permit monitoring of transactions to ensure that the buyers are entitled to participate in the new issue. Respondent negligently submitted some orders with incorrect zip codes. The Order alleges violations of MSRB Rule G-17 (professionals have duty of fair conduct) and MSRB Rule G-11(k)(information to be submitted with order). Respondent is sanctioned. He is subject to certain limitations for 12 months regarding involvement with new issue muni securities. He is also required to pay disgorgement of $23,821, prejudgment interest of $4,145 and a penalty of $25,000. The funds will go to the Treasury in accord with Exchange Act Section 21F(g)(3); see also In the Matter of William S. Costas, Adm. Proc. File No. 3-19884 (July 20, 2020)(same as above and same remedies imposed with different monetary amounts).

Offering fraud: SEC v. YouPlus, Inc., Civil Action No. 5:20-cv-04855 (N.D. Ca. Filed July 20, 2020). Defendant YouPlus is based in California. Its founder and CEO, Shaukat Shamin, is also a defendant. The firm purports to have developed a machine-learning tool to interpret and deliver customer insights from videos on the internet for marketers and others. Over a period of six years Defendants raised about $17.5 million from approximately 50 investors. Most of the funds were, however, actually raised in 2018 and 2019 when Defendants secured about $11 million from 30 investors, including an investment fund. Those funds were raised using a series of misrepresentations and false documents. First, Defendants made misrepresentations in the 2018-2019 time period to investors. For example, in June 2018 Mr. Shamin told some investors that the firm expected 2018 revenues to exceed $8 million and $40 the next year. In connection with this claim, investors were furnished with a spreadsheet that depicted actual revenue through June 2018 of over $1.5 million. There is no basis for the projection, according to the complaint. In September 2018 other investors were told that the firm’s revenues for the first half of the year exceeded $1.1 million; projected revenue for the year would be about $7.8 million. Again, there was no basis for the projection, according to the complaint. Nevertheless, the Investment Committee of a venture fund that received the baseless information invested almost $2 million in 2018 and 2019. Later, financial models that were baseless induced other investors to put capital into the firm. Second, Defendants misrepresented the size of the firm’s customer base. For example, in an Investor and Shareholder Update, circulated in June 2019, there was a chart depicting the top ten investors in the company. Each had paid at least “hundreds of thousands of dollars,” according to the complaint. The chart was false. Mr. Shamin provided, in addition, a spreadsheet to at least two potential investors showing what was called a “customer pipeline” with nearly $1 million in monthly realized revenue. Over 150 purported firm investors, including a number of well-known Fortune 500 companies, were listed. In fact, most of the list was fictitious. Subsequently, certain investors were told that the company was pursuing a Series A fundraising round. The fund raising was supposedly going well. In fact, it was not. At the time YouPlus was running out of capital. This became apparent when counsel for the venture fund met with Mr. Shamin. During the meeting Defendant Shamin admitted to making misrepresentations regarding the historical financial condition of the company. The complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The case is pending. See Lit. Rel. No. 2485 (July 20, 2020).

False valuations: SEC v. Nu, Civil Action No. 1:20-cv-05496 (S.D.N.Y. Filed July 17, 2020). David Hu, defendant, is the managing partner of International Investment Group LLC. Until recently the firm was a Commission registered investment adviser. Mr. Hu also owned 50% of the firm. IIG worked with a group of three funds, one of which was the Trade Opportunities Fund or TOF, that focused on trade finance lending. Loans were extended to small and medium sized firms in emerging markets. The business was risky, typically mitigated by the fact that the loans were collateralized. Interests in the funds were usually marketed to qualified institutional investors. The memorandum used in connection with the solicitations touted the firm’s risk control strategies, credit review process and the evaluation process for borrowers. Despite the protective procedures, in 2007 when a $30 million loan to a South American coffee producer defaulted, Mr. Hu and his co-owner failed to take the proper steps. Rather than acknowledge the default and record it properly, it was concealed by substituting fake but supposedly performing loans and hiding the loss in TOF. Eventually that resulted in the material and fraudulent inflation of NAV, deceiving investors. Documentation was created to conceal the true facts; false confirmations were furnished to the auditors. Three years later a similar event occurred. In this instance a seafood producer defaulted on another $30 million loan. Again, substitute fake loans were put in place of the defaulted loan. Again, NAV was falsely inflated. That in turn resulted in the overcharging of fees, giving the firm revenue based on false statements. Insufficient cash was generated to meet obligations. By late 2013 another liquidity crisis ensued. The difficulty was temporarily solved by creating a collateralized loan obligation trust or CLO using some of the firm’s capital and the loans that had been created. Some of the cash flow from this entity was diverted to help solve cash flow problems with one of the managed funds. The transaction was disguised behind what appeared to be another group of investments, this time in Panamanian shell companies. The string of transactions concluded with the purchase of certain Argentina bonds that ultimately resulted in a $6 million loss for a retail fund. The Argentinian bonds were of questionable value and in default. Defendant, however, arranged to pay full price for the loans without telling the fund involved or his partner that the value was in dispute. Following the purchase Defendant arranged to become an adviser to certain retail funds. He then had those funds make a $6 million investment in the Argentine bonds that would pay off the Argentine borrower. Through a series of transactions, the $6 million investment made by the retail funds eventually moved to a different account with the retail fund ending up with a new but fake Argentine loan. The retail fund suffered a $6 million loss. The complaint alleges violations of Advisers Act Sections 206(1) and (2), Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The case is pending. Previously, IIC consented to the entry of a permanent injunction prohibiting future violations of each section cited above. The firm also consented to the entry of an order revoking its registration. SEC v. International Investment Group LLC, Civil Action No. 19 Civ. 10796 (S.D.N.Y. 2019). See also U.S. v. Hu (S.D.N.Y. Filed July 17, 2020)(parallel criminal case charging securities fraud, wire fraud and investment adviser fraud).

Criminal cases

Offering fraud: U.S. v. Ismail, No. 1:18-cr-00791 (S.D.N.Y. Arrest July 23, 2020) is an action which charged Naim Ismail with defrauding investors as well as the New York based subsidiary of an Afghanistan-based bank. Mr. Ismail is charged which having induced the bank and others to lend funds for real estate investments. In fact, Defendant did not invest the over $15 million he raised from investors. He is now facing charges of bank fraud, wire fraud affecting a financial institution and conspiracy to commit bank and wire fraud. The case is pending.


Statement: The Securities and Futures Commission published a Policy Statement regarding the new National Security Law. The regulator previously communicated the observations of the firms to the Hong Kong SAR Government and notes that the Financial Secretary set forth views in a blog published on July 19, 2020. The statement sets forth the view of the agency.


Report: The Monetary Authority of Singapore published a report on Consumer Price Developments in June 2020 on July 23, 2020 (here).


Report: The Serious Fraud Office furnished its Annual Report and Accounts 10`9-2020 to Parliament on July 21, 2020. The Report reviews the changes made in the office as well as it cases (here).

Video Program: “Securities Fraud, the Pandemic and Compliance: Protect Your OrganizationThe Many Faces of Securities Fraud,” August 6, 2020, 12:00 p.m. ET. Chair, Tom Gorman. Free registration, materials & CLE (here)