This Week In Securities Litigation (Week of July 8, 2024)

During the holiday shortened first week of July, the Commission filed six new civil injunctive actions. Those focused largely on offering fraud actions – four of the six new cases are offering frauds. The two remaining new cases involved false statement and the sale of unregistered securities.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 6 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Offering fraud: SEC v. Parsons, Civil Action No. 3:24-cv-1682 (N.D. Tx. Filed July 2, 2024) is an action which names as defendant George Lewis Parsons II, the owner of Broadcast Your Vision, LLC, BCYV Franchise Group, LLC and Partech Brain Trust, LLC. Over a four-year period, beginning in April 2019, Defendant raised over $4.8 million from 17 investors. They were told that the funds would be invested in developing business software for markets and companies. Those representations were false. In fact, substantial portions of the investor funds were diverted to Defendant’s personal use. The scheme came to an end when criminal authorities seized Defendant’s accounts. See U.S. v. George Lewis Parsons II, Case No. 4:23-CR-175 (E.D. Tex. 2023). The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26042 (July 2, 2024).

Offering fraud: SEC v. Kralik, Civil Action No. 8:24-cv-01460 (C.D. CA. Filed July 2, 2024) is an action which names as defendants: John J. Karali V and JKV Capital, LLC. Beginning in 2017, and continuing until March 2024, Defendants, who engaged in real estate ventures, raised almost $17 million from investors who purchased interests. Investors were promised their capital would be preserved and there would be profits from flipping or renting residential real estate. Defendants then misappropriated portions of the investor funds for their personal use while other portions of the money was used to operate and build the real estate investments. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a). The case is in litigation.

False statements – compliance: SEC v. Silvergate Capital Corporation, Civil Action No. 24 Civ. 4987 (S.D.N.Y. Filed July 1, 2024) is an action which names as defendants: the firm, Alan Lane who served as the CEO of the firm for a period; Kathleen Frayer who served as compliance officer for a time; and Antonio Martino, also compliance officer for a period. Defendants misrepresented the operational and legal risks facing the Bank by misrepresenting the effectiveness of the Bank’s BSA/AML compliance programs. Specifically, the Bank claimed in filings with the Commission and other materials that the company had a program tailored to the heightened risks posed by its crypto asset customers. They also claimed that the compliance program had been tailored for the heightened risks the firm faced; the claims were false. To the contrary, the compliance program was inadequate – the firm had done little to test it. Indeed, the a key mechanism for Bank crypto asset customers to transfer funds among themselves had received little testing. The Bank also failed to detect nearly $9 billion in suspicious transfers by FTX, a crypto trading platform that imploded in 2022, and its related entities. Even following FTX’s failure and a bank run, Defendants continued to not monitor. Eventually, when faced with evidence of these matters piling up, Defendants announced in March that the firm would liquidate. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The Federal Reserve System and the California Department of Financial Protection and Innovations announced settlements.

Offering fraud: SEC v. Hedonova LLC, Civil Action No. 2:24-cv-05293 (C.D. Cal. Filed June 24, 2024) is an action which names as defendants: the firm and Hedonova Advisors LLC. Hedonova Fund claims to be a mutual fund for alternative investments. Since late 2021 the firm has raised about $12.5 million. Hedonova LLC registered with the Commission as an investment adviser in September 2022. It lists three individuals as control persons. Each declined to appear in the U.S. for testimony. The firm has also failed to produce documents to substantiate its claims to investors regarding its operations. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(4). The Commission has sought expedited discovery. The case is pending. See Lit. Rel. No. 26041 (July 2, 2024).

Offering fraud: SEC v. Kawuba, Civil Action No. 1:22-cv-11897 (D. Mass.) is a previously filed action which named as defendant Adrian J. Kawuba who is alleged to have raised about $2 million from investors. Those investors were told by Defendant that they would receive returns of 25% to as much as 50% in as little as a few days. In fact, the funds raised were used to pay investors from earlier schemes and diverted to personal use. Defendant was charged in a parallel criminal case and sentenced to serve 27 months in prison followed by 3 years of supervised release. He was also ordered to pay restitution of over $625,000, forfeiture of more than $2.2 million and a special assessment of $400 after pleading guilty to four counts of wire fraud. U.S. v. Kawuba, 23-cr-10012 (D. Mass.). In the SEC’s case Defendant consented to the entry of a final judgment that orders him to pay disgorgement of $312,693 plus prejudgment interest of $11,403.44 all of which is offset by the payments required in the parallel criminal case. See Lit. Rel. No. 26040 (July 1, 2024).

Unregistered securities/broker: SEC v. Consensys Software Inc., Civil Action No. 24-Civ. 4578 (E.D. N.Y. Filed June 28, 2024) is an action centered on the unregistered sale of securities by Defendant. Since 2016 Defendant has developed and operated a number of crypto asset related services under the brand MetaMask. The services offered are the brokering of transactions for retail customers and engaging in the offer and sale of securities. Since October 2020 Consensys has acted as an unregistered broker of crypto asset securities through MetaMask Swaps service. Since January 2023 the firm has engaged in the unregistered offer and sale of securities in the form of crypto asset staking programs, and served as an unregistered broker through the MetaMask Staking service. The firm has made over $250 million in fees for these services. Portions of the services weres implemented through MetaMask Swaps which serves as a kind of exchange. Since 2020 MetaMask Swaps has brokered over 36 million crypto asset transactions. At least 5 million of those transactions involved securities. The firm has also acted as an underwriter at key points in the transactions. Defendant, in addition, offers and sells securities in unregistered transactions through its “MetaMask Staking” platforms. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 15(a). The complaint is pending. See Lit. Rel. No. 26039 (July 1, 2024).


Release: Joe Longo, Chair of the Australian Securities and Futures Commission, published remarks declaring that a market must be clean, fair, orderly and transparent. Such a market is critical to an efficient economy. The release is dated July 3, 2024 (here).


Notice: Beginning July 1, 2024, the Dutch Authority for the Financial Markets or AFM will apply a position limit to the TTF-natural gas future traded at the Leipzig based European Energy Exchange. Since the contract has high liquidity it has been classified as significant commodity derivate under the directive on markets in financial instruments, according to the June 25, 2024 release (here).


Report: The European regulator published its 2023 Annual Report. It details key achievements of the authority in its first year of implementation of its five-year strategy, according to the June 14, 2024 release (here).


Report: The Monetary Authority of Singapore published its Sustainability Report 2023/2024 on July 4, 2024 (here).