This Week In Securities Litigation (Week of July 31, 2023)
This Week In Securities Litigation (Week of July 31, 2023)
Last week the Commission filed a series of cases focused on two areas. One group of cases centered on offering fraud allegations. The actions in the other group each involved insider trading allegations.
Have a great and safe week – and stay cool.
Investment Advisers: The Commission proposed rule amendments focused on investment advisers who rely on the exemption from the prohibition on registration for smaller investment advisers, according to a July 26, 2023 release. Specifically, under the proposal an adviser relying on the exemption would be required to at all times have an operational interactive website through which the adviser provides services to more than one client. In addition, it eliminates the current de minimis exception (here).
Conflicts: The agency proposed new rules and amendments to address the question of conflicts of interest associated with the use of predictive data analytics by broker-dealers and investment advisers, according to a release dated July 26, 2023 (here). Essentially, the proposals require the adoption of appropriate rules and related record keeping.
Cybersecurity: The Commission adopted New Form 8-K Item 1.5 to address the question of standardizing the disclosures required regarding cybersecurity risk management, strategy, governance and material incidents. The form will require registrants to disclose any incident they determine to be material and describe the material aspects of it, according to the July 26, 2023 release (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 6 civil injunctive actions and no administrative proceedings, excluding 12j, tag-along proceedings and those presenting a conflict for the author.
Offering fraud: SEC v. Seaman, Civil Action No. 1:23-cv-22791 (S.D. Fla. Filed July 27, 2023) is an action which names as defendants Brent Seaman and several of his controlled entities. Over a three-year period, beginning in 2019, Defendants Seaman and Accanito Equity LLC (one of his entities) solicited investors to acquire interests in their funds based on claims of safety and guaranteed annual returns of 18% to 48%. The solicitations were focused on members of a Naples church that Mr. Seaman attended. About $35 million was raised from 60 investors. The claims were false. Portions of the investor cash was sent to related entities while other portions were misappropriated. The complaint alleges violations of Securities Act Section 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). All defendants resolved the claims, consenting to the entry of a bifurcated settlement and to the entry of permanent injunctions. Defendant Seaman also agreed to settle a follow-along administrative proceeding charging violations of Exchange Act Section 15(a). Mr. Seaman will be barred from serving as an officer or director of a public firm. In addition, Relief Defendant Jana Seaman agreed to pay disgorgement and interest of $757, 154 and Relief Defendant Valo Holdings Group will pay $668,240.
Insider trading: SEC v. Lewis, Civil Action No. 1:23-cv-06438 (Filed July 26, 2023). Named as defendants are: Joseph C. Lewis; Carolyn W. Carter, Mr. Carter’s romantic interest; Patrick J. O Connor, one of his private jet pilots; and Bryan L. Waugh, another private jet pilot who works for Mr. Lewis. The case centers on Mr. Lewis distributing inside information to each named defendant with the expectation that each person would trade and profit. Each did trade. The combined trading profits were $545,000. Mr. Lewis has served as a senior officer with The Fund for years. The Fund traded in biotechnology companies. The Officer has served as a senior official of the Fund since 2015. That Officer often entrusted inside information to Mr. Lewis. The Officer knew that the Fund had a substantial investment in Issuer A. He also learned that the Issuer would be raising capital through a PIPE offering. That type of transaction tends to raise the share price. Between July and October 2019 Mr. Lewis furnished inside information obtained from the Officer to Ms. Carter. Specifically, within three hours of a meeting with Mr. Lewis, Ms. Carter purchased over $700,000 of Issuer A’s common stock. Following the announcement about the capital raise the next day, the firm’s share price increased over 34%. Ms. Carter had profits of over $172,000. In September 2019, while staying aboard Mr. Lewis’ yacht, the Officer learned of positive results from a clinical trial related to a cancer drug being developed by Issuer B. The Officer also learned that the results might be presented at the end of October 2019 at a conference. The Officer told Mr. Lewis of the information. Subsequently, Mr. Lewis furnished the information to Ms. Carter and later to Defendants O’Connor and Waugh. Each traded. Collectively, they purchased over $3 million of Issuer B’s stock. Messrs. O’Connor and Waugh used the proceeds of a $500,000 loan extended by Mr. Lewis to execute the trades. The day of the announcement Issuer B’s share price increased over 16%. The three traders had profits of over $373,000. The complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney’s Office for the Southern District of New York announced the filing of parallel criminal charges.
Insider trading: SEC v. Dagar , Civil Action No. 1:23-cv-05564 (S.D.N.Y. Filed June 29, 2023). The complaint names as defendants Amit Dagar, an employee assigned by his firm to work for Pfizer, Inc. on a drug trial, and Atul Bhiwapurkar, an engineer who was a close friend of Mr. Dagar. The action centers on the results of a drug test being conducted by Pfizer, the results of which were announced on November 5, 2021. Mr. Dagar was a Senior Statistical Programming Lead at Pfizer. He was a member of the statistical team that compiled and organized data during Pfizer’s Paxlovid clinical trials. Mr. Dagar was “blinded” – the data to which he had access did not disclose if the patients received Paxlovid or a placebo. Prior to the press release of the results for the Paxlovid trial, Mr. Dagar learned of them – the test had been successful. Within hours Mr. Dagar purchased call options for Pfizer. He also tipped his friend, Mr. Bhiwapurkar about the success of the trial. Mr. Bhiwapurkar then traded the securities of Pfizer and tipped Friend A. Following the November 5, 2021 press release of the trial results, the share price of Pfizer stock rose almost 11%. Mr. Dagar, who purchased $8,380 in Pfizer call options, had a profit of $214,395. His friend Mr. Bhiwapurkar, who purchased 7,400 call options, had profits of $60,300. Friend A, who also traded, had a profit of about $29,770. The complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal proceedings. See Lit. Rel. No. 25787 (July 24, 2023).
Offering fraud: SEC v. ARO Equity, Civil Action No. 19-civ-10027 (D. Mass.) is a previously filed action which named as defendants Thomas Renison and Timothy Allcot. The complaint alleged that defendants used false statements to solicit funds for, and investments in, ARO Equity LLC, supposedly an investment adviser. About $6 million was raised from July 2015 through June 2018 from fifteen investors. The case was resolved, and the Court will enter final judgments precluding violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The injunction as to Mr. Renison is also based on Exchange Action Section 15(a). The injunctions, in addition, preclude Defendants from participating in the purchase or sale of any security except for their own account. The final judgments directed the payment of disgorgement and prejudgment interest, the amounts of which are deemed paid, by the forfeiture and restitution ordered in the parallel criminal case.
Offering fraud: SEC v. Weinstein, Civil Action No. 3:23-cv-03848 (D. N.J. Filed July 19, 2023) is an action which named as defendants: Eliyahnu Weinstein, Aryeh L. Bromberg; Joel Wittels; Richard M. Curry, Christopher Anderson and Alaa Mohamed Hattab. Eliyahnu Weinstein has two prior fraud convictions based on cases brought by the U.S. Attorney’s Office. Beginning in January 2022 Defendants formed Tryon Management Group LLC to raise capital to invest in Optimus Investments Inc. by purchasing short term notes. Defendants then marketed the notes using misrepresentations regarding the potential use of offering proceeds – supposedly for investments in medical supplies overseas. Ultimately about 150 investors were involved and $38 million was invested. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25786 (July 24, 2023).
Crypto offering fraud: SEC v. Elbanna, Civil Action No. 8:23-cv-01638 (M.D. Fla. Filed July 20, 2023) is an action which names as defendants: Alexander Ebanna; Digital World Exchange, LLC; BoostedPro, LLC; and D.W. Exchange, LLC. Over a three-year period, beginning in February 2018, Defendant Elbanna and three of the entities he founded – DWE, BoostePro and BRC – raised over $1 million through an unregistered offering of crypto assets to investors. Each enterprise was also involved with a crypto asset trading platform that proposed to match – and in one case did – buyers and sellers of crypto assets. Investors were led to believe that the value of there assets was tied to the related trading platform. Investors were also told that the investments were fully backed by gold, silver or bitcoin collateral. The same misrepresentations were used by Mr. Elbanna to fraudulently solicit investors to purchase equity shares in DWE LLC. He also misappropriated most of the assets. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Each Defendant consented to the entry of a bifurcated settlement based on the Sections cited in the complaint. The case is pending.
Cooperation: The UK and the Monetary Authority of Singapore or MAS, announced an agreement that will enhance their cooperation in sustainable finance and fintech, in a release dated July 27, 2023 (here).