This Week In Securities Litigation (Week of July 6, 2022)
The cheating on ethics exams at the center of the Commission’s action against EY rocked the industry, according to a number of news reports. The allegations at the center of the case trace the wrongdoing through the firm, raising significant questions regarding its culture.
The case against UBS last week is also noteworthy. It is the latest centered on complex financial products that are marketed to investors improperly. Specifically, the action is based on failing to have proper supervision and controls to ensure that when complex financial products are marketed to investors there is sufficient supervision of the process and education of the investors about the uses of the products. FINRA is also considering proposed rules in this area.
Be careful, be safe this week
SEC Enforcement – Filed and settled actions
Last week the Commission filed 5 civil injunctive actions and 11 administrative actions, exclusive of 12j, tag-a-long and other similar proceedings.
Transfer agents: The Commission instituted proceedings against seven transfers agents on June 30, 2022. The Orders allege that the agents failed to permit examination by the Commission staff of their books and records, that five failed to furnish statutorily required records, that four had deficient registration forms and that all failed to amend their registration forms when the information became inaccurate. The group members each also failed to file at least one annual report. Each of the seven are alleged to have violated the prohibition against transfer agents engaging in any activity as a transfer agent in violation of certain rules and regulations. The Orders alleged violations of Exchange Act Sections 17(b)(1), 17A(c)(2), 17A(d)(1) and the related rules. A public hearing will be held.
Compliance programs: In the Matter of Hamilton Investment Counsel, LLC, Adm. Proc. File No. 3-20920 (June 30, 2022) is a proceeding which names as respondents the firm, a registered investment adviser, and Jeffrey Kirkpatrick, CCO. Since at least December 2019 the firm has failed to implement its compliance program. The Order alleges violations of Advisers Act Section 204(4) and the related rule. Respondents resolved the proceedings by consenting to the entry of cease-and-desist orders based on the Section cited in the Order. Mr. Kirkpatrick is also precluded from serving in any supervisory role. He may apply to again act in such a role after 5 years. The firm was, in addition, censured and directed to pay a penalty of $150,000.
Misrepresentations: In the Matter of Corona Associates Capital Management LLC, Adm. Proc. File No. 3-20921 (June 30, 2022) is a proceeding which names as respondents: the firm, which provides services to Corona’s privately held funds; Jiulian Scircio, founder and managing member of Corona; and Govanni Sergio Scurci, founder and managing member of Corona. In its offering materials Corona has represented since at least 2013 that the funds under management have audited financial statements. I fact they do not. The Order alleges violations of Advisers Act Section 206(4). In resolving the matter Respondent Corona agreed to implement certain undertakings. Each Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order and to a censure. In addition, each will pay the following penalty: Corona, $50,000; Julian Scurci, $20,000; and John Scurci, $10,000.
Identity theft/offering fraud: SEC v. Nir, Civil Action No. 2:22-cv-04438 (C.D. Cal. Filed June 29, 2022) is an action which names as defendants two Israeli citizens, Shlomo Nir and Tzachi Rahamim. Over a two year period, beginning in 2019, Defendants assumed the identity of Individual A, a prominent financial educator among the Latinx and Spanish-speaking communities. Unbeknownst to Individual A, during the period Defendants encouraged investors in that community, using the identity of Individual A after altering his website, to liquidate their retirement accounts and purchase fixed income annuities. By March 2021 when Individual A obtained a preliminary injunction against Defendants in a private suit their company had received about $1.9 million in insurance broker commissions of which 52.5% was from investors who had sold securities to buy fixed indexed annuities. The complaint alleges violations of Securities Act Section 17(a)(1) and Exchange Act Section 10(b). Each Defendant settled, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. They also agreed to pay over $450,000 in disgorgement and penalties. See Lit. Rel. No. 2:22-cv-04438 (June 29, 2022).
Insider trading: SEC v. Moscatiello, Civil Action No. 1:22-cv-04323 (D. N.J. Filed June 29, 2022) is an action which names as defendant Daniel Moscatiello. The complaint centers on the announcement that Baring Private Equity Asica would acquire Virtusa Corporation, announce on September 1, 2020. Prior to that time Defendant Moscatiello misappropriated material, inside information from his domestic partner who had been working in the marketing department of Virtusa at the time. He purchased 250 short-term out-of-the-money Virtusa options. When the deal was announced the share price increased almost 25%. Defendant had profits of just under $90 thousand. The complaint alleges violations of Exchange Act Section 10(b). Defendant resolved the action, consenting to the entry of a permanent injunction based on the Section cited in the complaint. He also agreed to pay disgorgement of $890,904, prejudgment interest of $3,8789.74 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 25431 (June 29, 2022).
Complex products: In the Matter of UBS Financial Services, Inc., Adm. Proc. File No. 3-20912 (June 29, 2022).The proceeding names as respondent the dual registered investment adviser and broker-dealer. The action centers on a product known as Yield Enhancement Strategy or YES. The product, developed by the firm, consisted of an existing portfolio of debt or equity securities that served as collateral for the purchase and sale of a combination of options on the S&P 500. During periods of low volatility YES made modest returns; during volatile periods it could and did generate losses. YES was marketed for about a year, beginning in February 2016. About $2 billion in client funds were invested. At first there were small gains; later in late 2018 as volatility increased there was a 13% loss. The Order alleges that the firm gave its financial advisers inadequate training and insufficient supervision. The firm took remedial steps. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). UBS resolved the matter, consenting to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. It also agreed to pay disgorgement of $5.8 million plus prejudgment interest of $1.4 million. The firm will, in addition, pay a penalty of $17.4 million. A Fair Fund will be established.
Fraudulent trading scheme: SEC v. Empires Consulting Corp., Civil Action No. 1:22-cv-212995 (S.D. Fla. Filed June 30, 2022) is an action which names as defendants: the firm, an unregistered Florida company; Emerson Sousa Pries, the founder of the firm who now resides in Brazil; Flavio Mendes Goncalves; and Joshua David Nicholas, formerly a registered representative for a brief period who was suspended by the National Futures Association in 2020. Defendants lured investors to put money in their firm by claiming that exceptional profits of 1% per day could be made by their trading bot or the head trader. Investors were also told that the firm had filed papers with the SEC and that the head trader was licensed. In fact, the references given for the firm were to another firm with a similar name; the references for the head trader were to another person with a similar name; the claims about the bot and trading were false. Most of the investor money was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The case is pending. DOJ announced parallel criminal charges against the individuals; the CFTC filed parallel charges against each defendant.
Unethical conduct: In the Matter of Ernst & Young, LLP, Adm. Proc. File No. 3-20911 (June 28, 2022). Ernst & Young is one of the largest accounting, auditing and consulting firms in the world. As auditors of public companies, accountants and consultants, part of their obligation is to safeguard and help further the ethical underpinnings of their profession in the marketplace. Despite repeated tutorials on multiple occasions between 2017 and 2021, and for many years before, the professionals at the firm cheated on ethics exams by using and circulating answer keys. And, many audit professionals who knew of the lies and the unethical conduct failed to report it. The Order in this matter states: The “gatekeeping role depends on the integrity not only of the independent audit firm’s audit personnel, but of its management and its attorneys.” Yet despite widespread information at the firm about cheating, and confirmation of the unethical conduct by an internal investigation, the firm failed to correct a submission to the Commission stating that it “did not have any current issues with cheating.” The Order concludes that the firm willfully violated PCAOB Rule 3500T regarding ethical standards in the AICPA Code and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. In resolving the matter, the firm agreed to implement certain undertakings. Those include the retention of an Independent Consultant and a requirement to conduct a review of the firm’s policies and procedures. The firm consented to the entry of a cease-and-desist order based on PCAOB Rule 3500T and a censure. The firm will also pay a penalty of $100 million.
Insider trading: In the Matter of Sidney A. Spector, MD, PhD, File No,. 3-20910 (June 27, 2022). Sidney Spector is a neurologist licensed to practice in Arizona and Florida. He operates a medical consulting firm through a wholly owned entity. In 2019 he was employed as a medical consult at Solid Biosciences Inc. The consultancy focused on a clinical trial for a gene therapy to treat Duchenne muscular dystrophy, then under development by the company. During his consultancy, Dr. Spector learned that the trial was not successful through his position at Solid Biosciences. Rather than maintain the confidentiality of the information he acted on it. Specifically, Dr. Spector sold his Solid Biosciences shares from his brokerage account. The sale permitted him to avoid a loss of $28,142.33. He also persuaded a close relative to sell his shares, avoiding a loss of $2,351.89. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, he will pay disgorgement of $2,142.33, prejudgment interest of $2,381.44 and a penalty of $33,045.02.
Microcap manipulation: SEC v. Moynes, Civil Action No. 1:22-cv-1006 (D. Mass. Filed June 27, 2022) is an action which names as defendants: Bradley Moyes, a Canadian citizen and former investment adviser; and Digital Trade Corporation that has had several name changes. Over a four-year period, beginning in March 2014, Defendant Bradley Moyes orchestrated a scheme under which he sold shares of two microcap issuers to the public without disclosing that he controlled the issuers. Periodically he published newsletters about each firm. The key, however, was that the investing public did not know Mr. Moynes was dumping his shares as they purchased them. The scheme generated over $6 million in profits with about $1.5 million going to defendants. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a), and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25430 (June 27, 2022).
Insider trading: SEC v. Sheinfeld, Civil Action No. 25428 (M.D. Pa.) is a previously filed action which named as defendant Steven Sheinfeld who was previously employed by Rite Aid Corp. The complaint alleged that Defendant learned certain negative information regarding his employer and a proposed merger partner. Defendant liquidated $1million in firm stock. The complaint alleges violations of Exchange Act Section 10(b). To resolve the matter Defendant consented to the entry of a permanent injunction based on the Section cited in the complaint In addition, he will pay a penalty of $305,129. Lit Rel. No. 24428 (June 21, 2022).
FinCEN
Alert: The Financial Crimes Enforcement Network (“FinCEN”) and the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS) issued an alert on June 29, 2022. It cautioned financial institutions to be vigilant against efforts by individuals or entities trying to evade BIS export controls implemented in connection with the Russian Federation’s further invasion of Ukraine.
ESMA
Climate: The European Securities and Market Authority (“ESMA”) published the results of its call for evidence on ESG ratings. The release discusses the ratings providers, users and entities of the information in a release dated June 27, 2022 (here).
Hong Kong
Bulletin: The Securities and Futures Commission of Hong Kong issued its Takeovers Bulletin on June 27, 2022. It highlights certain criticisms of select rules, provides a reminder regarding certain document requirements and gives an update on the activities of the Takeovers Team (here).