This Week In Securities Litigation (Week of June 20, 2022)
The Commission continued to challenge the markets and investors this week. Despite the significant number of proposed new regulations announced this year, Chair Gensler offered the prospect for more reform. His recent remarks on market structure offer the promise of new proposals to refashion the manner in which markets work as part of a continued effort to facilitate trading by the small investor. While new rules have not been proposed, Mr. Gensler made it clear that proposes on a range of topics from tick size to payment for order flow are in the works — that is, coming soon.
Be careful, be safe this week
Remarks: SEC Chair Gary Gensler outlined a series of potential new rule writing projects being developed to address certain inequities tied to market structure that impact retail investors in recent remarks. See Chair Gary Gensler, “Market Structure and the Retail Investor,” remarks delivered before the Piper Sandler Global Exchange Conference, Washington, D.C. on June 8, 2022 (here). Mr. Gensler identified six key areas: 1) the minimum pricing increment or tick size; 2) national best bid and offer or NBBO; 3) execution quality; 4) best execution; 5) order quality; and 6) payment for order flow.
SEC Enforcement – Filed and settled actions
Last week the Commission filed 11 civil injunctive actions and 3 administrative actions, exclusive of 12j, tag-a-long and other similar proceedings.
Reg. BI, suitability: SEC v. Western International Securities, Inc., Civil Action No. 22:22-cv-04119 (C.D. Ca. Filed June 15, 2022) is an action which names as defendants: the firm, a registered broker dealer and Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham and Tomas Swan. Each individual defendant is a registered representative working at the firm which is a registered investment adviser and broker-dealer. Over a period of less than one year, beginning in July 2020, Defendants sold $13.3 million in L Bonds to retail investors. The bonds are a complex product that pays a significant rate of interest. In making those sales Defendants violated the care obligation of Regulation BI. The investors who purchased the bonds were not sophisticated and lacked an understanding of them. Nevertheless, the bonds were sold to those investors in violation of Reg. BI and its duty of care. The firm also had inadequate compliance procedures on the point. The complaint alleges violations of Reg. BI and Exchange Act Sections 20(a). The complaint is pending. This is the first case brought under Reg. BI.
Financial fraud: SEC v. Holland, Civil Action No. 1:22-cv-00590 (W.D.Tx. Filed June 16, 2022) is an action which names as defendant Anthony Holland, the Chief Administrative Officer and Secretary of the City of Johnson City Texas. Over a five-year period, beginning in 2015, Defendant misappropriated funds from the City, including over $100,000 in 2016. To conceal this fact, he began delaying the audit for the year end 2016. Eventually he falsified the financial statements and an audit report as part of the efforts to conceal his wrongful conduct. For example, the 2016 financial statements understated revenues by about 8%, understated the City’s total expenses by about 25% and overstated total debt by 5%. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. Mr. Holland was charged by the U.S. Attorney’s Office and pleaded guilty to one count of Theft from a State or Local Government; he admitted to stealing over $1 million from the City. See Lit. Rel. No. 25426 (June 16, 2022). See Lit. Rel. No. 25426 (June 16, 2022).
Unregistered offering/broker: SEC v. Day, Civil Action No. 2:22-cv-01771 (June 15, 2022) is an action which names as defendant insurance salesman and radio talk show host Hollis Day. Over a four-year period, beginning in 2016, Mr. Day raised about $8.7 million by selling high risky securities in unregistered oil and gas offerings to at least 45 retail investors. The interests were sponsored by Resolute Capital Partners LLC and Homebound Resources LLC. Initially, Defendant Day targeted his insurance clients. Later he targeted his radio listeners. The sales pitch told investors that they could avoid the volatility and risk of the stock market by investing in oil and gas interests. The securities were not registered; Mr. Day was not registered to sell securities. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). The complaint is pending. See Lit. Rel. No. 25424 (June 15, 2022).
Unregistered securities – broker: SEC v. Langemeier, Civil Action No. 3:22-cv-00269 (D. Nev. Filed June 15, 2022) is an action which names as defendant Loral L. Langemeier and Live Out Loud, Inc. as defendants. The firm advised clients on investments as did Ms. Langemeier. Neither is registered with the Commission. Over a two-year period, beginning in early 2016, Defendants furnished investment advice to small businesses and individuals. Ms. Langemeier convinced may clients to liquidate their conservative investments and reinvest in unregistered oil and gas interests which she recommended. What investors were not told is that she had a conflict – two companies paid her to recommend the oil and gas interests, Resolute Capital and Homebound Resources, LLC. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). The case is pending. See Lit. Rel. No. 25425 (June 15, 2022).
Prohibited short selling: In the Matter of Weiss Asset Management LP, Adm. Proc. File No. 3-20899 (June 14, 2922) is a proceeding which names as a respondent the registered investment adviser which has just under $8 billion under management. Between December 2020 and February 2021 Respondent bought offering shares from an underwriter or broker-dealer participating in a follow-on secondary public offering seven times. This violates Rule 105 which prohibits purchasing equity securities from an underwriter, broker or dealer participating in a public offering if that person sold short the security within a designated period. The Order alleges violations of Rule 105. Respondent cooperated with the investigation and consented to the entry of a cease-and-desist order based on the rule, agree to pay disgorgement of $6,508,792.81, prejudgment interest of $190,210. 84 and a penalty of $200,000.
Financial fraud: SEC v. Sewell, Civil Action No. 6:22-cv-06274 (W.D.N.Y. Filed June 14, 2022) is an action which names as defendant Everton Sewell, the Chief Financial officer of Rochester School District. In 2019 the District was suffering from a $25 million shortfall. A bond offering was planned. Defendant knew that the financial condition of the District was critical to the offering. To facilitate the offering Defendant falsified the financial records for the District to conceal the revenue decline. After the outside auditors discovered the extent of the shortfall the rating agency downgraded its rating. The complaint alleges violations of Securities Act Sections 17(a)(1) and (2) and Exchange Act Section 10(b). Defendant resolved the charges, consenting to the entry of permanent injunctions based on the Sections cited in the complaint and from participating in future municipal offerings. He also agreed to pay a $25,000 penalty. See also SEC v. City of Rochester, New York, Civil Action No. 6:22-cv-0673 (W.D.N.Y. Filed June 14, 2022)(Names as defendants: the City; Rosiland Brooks-Harris, the Director of Finance of the City; Capital Markets Advisors, LLC, a registered municipal advisor; Richard Ganei, EVP of CMA; and Richard Tortora, President and Principal of CMA; the action based on similar allegations to the one detailed above; the complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15B(c)(1) and, MSRB Rules G-42, 44 and 167; the case is pending).
Offering fraud: SEC v. Boron Capital, LLC, Civil Action No. 5-22CV0114 (N.D. Tx. Filed June 14, 2022) is an action which names as defendants: Boron; BC Holdings 2017, LLC; United BNB Fund 2018, LLC; and Blake Robert Templeton. Over an 11 year period, beginning in 2011 each of the named defendant entities was used by Defendant Templeton to defraud investors interested in acquiring interests in real estate. To market the interests Mr. Templeton and the entities employed a variety of misrepresentations. Overall the scheme raised over $18.7 million by using investor funds and at times making Ponzi type payments. The complaint alleges violations of Securities Act Section 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. The Court granted the Commission’s request for a temporary restraining and freeze order. See Lit. Rel. No. 25423 (June 15, 2022).
Insider trading: SEC v. Roda, Civil Action No. 22-cv-02317 (E.D. Pa. Filed June 13, 2022) is an action which names as defendant David Roda, a Director of Backend Architecture at Penn Interactive Ventures LLC, a subsidiary of gaming operator Penn National Gaming, Inc.; and Andrew Larkin, a friend of Mr. Roda. During the summer of 2021 Mr. Roda learned through his employment that Penn National was involved in confidential negotiations to acquire Score Media and Gaming, Inc. His supervisor explicitly warned him against trading on and sharing the information. Nevertheless, Mr. Roda purchased 500 short-dated, out of the -money SCR call options. He also tipped his friend, Defendant Larkin who traded. When the deal was announced on August 5, 2021, the stock price of SCR shot up about 80%. Mr. Roda had profits of about $560,762 while Defendant Larkin had profits of about $5,602. After the deal announcement the two men used an encrypted messaging app to discuss the profits. Mr. Roda noted in part that he had profits “if the SEC doesn’t come take it and put me in jail.” The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25422 (June 15, 2022).
Unregistered offering/ valuation: SEC v. Korb, Civil Action No. 2:22-cv-0431 (C.D. Cal. Filed June 13, 2022) is an action which names Mark Korb, the CFO of Petroteq Energy, Inc. Beginning in August 2014, and continuing through late 2021, Mr. Korb failed to properly disclose the difficult and precarious financial condition of the company. During the period of his tenure of CFO the Chairman misused assets and misappropriated funds by taking significant and unreported compensation, making undisclosed payments to his family. He also failed to properly value and conduct an impairment analysis on certain mineral rights. In addition, Defendant failed to inquire into and disclose transactions that benefitted the chairman and his family. If the proper inquiries would have been conducted, he would have been required to disclose over $3 million in transactions. The firm also had inadequate disclosure controls. The complaint alleges violations of Securities Act Section 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The complaint is pending. See also In the Matter of Petroteq Energy, Inc., Adm. Proc. File No. 3-20898 (June 13, 2022)(proceeding naming company and Aleksandr Blyumkin, the chairman; claims center on those detailed above; the Order alleges violations Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5); resolved with the company entering into a cease-and-desist order based on each Section cited except 13(b)(5); the firm will pay a penalty of $1 million; Mr. Blyumkin agreed to the entry of cease-and-desist order but based on all Sections cited; he will pay a penalty of $450,000). See Lit. Rel. No. 25419 (June 14, 2022).
Conflicts: In the Matter of Charles Schwab & Co. Inc., Adm. Proc. File No. 3-20897 (June 13, 2020). Respondents in the proceeding include the dual registered investment adviser and broker-dealer; Charles Schwab Investment Advisory, Inc, a registered advisory which is a subsidiary of Schwab Holdings, Inc., a subsidiary of The Charles Schwab Corporation; and Schwab Wealth Investment Advisory, Inc, an investment adviser formed for the firm’s Schwab Intelligent Portfolios or SIP product – a robo advisor. Over a three-year period, beginning in early 2015, certain adviser subsidiaries of The Charles Schwab corporation made false and misleading statements regarding its SIP product. The robo advisers were based on model portfolios that held between 6% and 29.4% of client assets in each case. The amount was preset so the affiliated bank would make at least a minimum amount of revenue from the spread on the cash by loaning the money. Investors were not charged a fee for the SIP service. The firm did not disclose the fact that under certain market conditions other assets such as equities outperform cash. Respondents were also alleged to have made false statements in their Form ADV filings regarding the conflict of interest in setting the cash allocations at levels that would generate a certain amount of revenue. For example, firm clients were told that the allocations were created through a “disciplined portfolio construction methodology.” In fact, they were set for business reasons. The difficulty was compounded by the fact that the firm launched an advertising campaign informing investors that the SIP program permitted them to keep more of their money than other advisers who charged a fee. Respondent cooperated with the Commission’s investigation. The firm also agreed to implement certain undertakings which included the retention of an independent consultant. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure. The firm will pay disgorgement of $45,907,541 and prejudgment interest of $5,629,320. The firm will pay a penalty of $135 million. A Fair Fund will be created.
Offering fraud: SEC v. Mooney, Civil Action No. 1:22-cv-02320 (N.D. Ga. Filed June 10, 2022) is an action which names as defendants three individuals who were investment adviser representatives at advisory Livingston Group Asset Management Company, d/b/a Southport Capital – Michael Mooney, Britt Wright and Penny Flippen. The firm is owned by John Woods who ran a massive Ponzi scheme that raised over $100 million from over 400 investors. Defendants in this case helped fuel the Woods Ponzi scheme by telling clients they could receive good returns. In making this sales pitch Defendants relied entirely on the representations of Mr. Woods. The complaint alleges violations of each subdivision of Securities Act Sections 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending.
Unregistered offering: SEC v. A.G. Morgan Financial Advisors LLC, Civil Action No. 34:22-cv-3421 (E.D.N.Y. Filed June 9, 2022) is an action which names as defendants: the registered investment adviser; Vincent Camarada, the sole owner of AG Morgan; and James McArethur, the firm’s chief compliance officer. In two instances – one from August to November 2017 and a second from December 2018 to July 2020 –Defendants solicited investors to purchase over $500 million of promissory notes issued by Complete Business Solutions Group, d/b/a Par Funding, a securities law recidivist. The solicitations were in violation of their fiduciary obligations to advisory clients since the advisor began borrowing money from Par in July 2017, creating an undisclosed conflict of interest. The complaint alleges violations of Securities Act Section 5 and Exchange Act Section 15(a)(1). The case is pending. See Lit. Rel. No. 25418 (June 10, 2022).
Alert: The Financial Crimes Enforcement Network issue an advisory on Elder Financial Exploitation or EFE on June 15, 2022. The regulator cautioned that EFE is on the rise and financial institutions should be alert to the trend as part of an effort to halt it (here).
Remarks: Chair Joseph Longo delivered remarks titled Reflections from the ASIC Chair, on June 4, 2022 (here). His remarks focused on the way in which regulation is transforming.
Publication: The Monetary Authority of Singapore announced a Joint Exercise by regulators the Banque de France and the Autorite de controle prudential et de resolution, carried out as a joint management exercised focused on cybersecurity on June 17, 2022 (here).
Update: The Financial Conduct Authority published an update to its work on market abuse and manipulation on June 17, 2022 (here).