This Week In Securities Litigation (Week of June 3, 2024)
Last week the Commission filed three actions. One was based on an intrusion, another an offering fraud and one an undisclosed conflict of interest.
Be careful, be safe this week.
SEC
Statement: Erik Gending, Director of the Division of Corporate Finance, issued a statement designed to clarify the use of Form 8-K Item 1.05 vs. Form 8-K Item 8.01 when reporting cybersecurity incidents on June 1, 2024 (forthcoming here).
Remarks: SEC Enforcement Director Gurbir S. Grewal recently addressed the question of Cooperation in remarks titled “The Five Principles of Effective Cooperation in SEC Investigations, May 23, 2024 (here). Following a preface in which the Director tried to assure everyone that self-reporting is worthwhile, Mr. Grewal detailed five principles for undertaking the task. They are: 1) The best cooperation starts early and well before the SEC gets involved, with self-policing. 2) Once you discover a possible violation, self-report without delay. 3) Don’t stop with the self-report. 4) Remedies. The type of cooperation that earns credit requires going above and beyond what’s legally required – more than simply complying with subpoenas without undue delay or gamesmanship. 5) Collaborate with Enforcement Staff early, often, and substantively.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 1 new civil injunctive action and 2 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Conflicts: In the Matter of Mass Ave Global Inc., Adm. Proc. File No. 3-21949 (May 29, 2024). Named as respondent in this proceeding is MassAve, a New York City based exempt reporting adviser since May 2021. Respondent was listed as being the adviser to sixteen private funds, including one with over $1.1 billion in regulatory assets under management. On March 2, 2023, the adviser announced a decision to wind down all sixteen funds and terminate them. MassAve continues to manage the wind down. As of May 6, 2024, it had about $93 million regulatory assets under management. The proceedings here center on a series of misleading statements and an undisclosed conflict of interest. The former involved statements about the holdings of the firm and its exposures as depicted in monthly tear sheets, summary portfolio snapshots and communications regarding the top ten largest positions of the firm. A number of the misleading communications resulted from modifications made by Winston Mubai Feng, the firm’s co-founder, CEO and majority owner. The modified statements were used by other MassAve employees for purposes of inclusion in Investor Communications. The information was not further reviewed by compliance employees prior to dissemination to investors. The latter is based on a conflict issue. It stems from the non-disclosure of a conflict of interest arising from the operation of a separate hedge fund in China by MassAve’s other co-founder about which Mr. Feng, and thus the firm, had knowledge. The dissemination of misleading information in investor communications resulted from not adopting and implementing policies and procedures reasonably designed to prevent inaccurate information in investor communications. The Order alleges violations of Advisers Act Sections 206(2) and 206(4), in addition to the pertinent rules. 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. In addition, Respondent will pay a penalty of $350,000. See also In the Matter of Winston Mubai Feng, Adm. Proc. File No. 35207 (May 29, 2024)(proceeding naming as respondent the founder of the firm based largely on similar facts; resolved with the entry of a cease-and-desist order based on the same Sections and his suspension from the securities business and serving as an officer/director with the right to reapply after 12 months. Respondent will also pay a penalty of $250,000).
Intrusion: In the Matter of Intercontinental Exchange Inc., Adm. Proc. File No. 3-21947 (May 22, 2024) is a proceeding which names as respondents the Exchange and 10 affiliates (listed here). The proceedings arise out of the failure of the Exchange to notify the Commission immediately as required by the applicable rules about a cyber intrusion incident that occurred on April 15, 2021 involving the exploitation of a “zero-day” vulnerability as one of Respondent’s virtual private networks contractors, networking deficiencies that allow authorized employees to access the Exchange’s network and indirectly its systems, remotely and securely. On April 16 Respondent identified malicious code associated with the threat actor that exploited the vulnerability on one of its VPN concentrators, reasonably determining that Respondents were subject to the intrusion. Days later the Exchange determined that the actor’s access was limited to the compromised VPN device. Then the Commission was notified. The Order alleges violations of Rules 1002(b)(1) and (2) of Regulation SCI. Respondent resolved the proceedings, consenting to the entry of the cease-and-desist order based on the cited Rules. In addition, Respondent will also pay a penalty of $10 million.
Offering fraud: SEC v. Mercado, Civil Action No. 3:24-cv-00514 (W.D.N.C. Filed May 30, 2024) is an action which names as defendants Frank Lynold Mercado and Tiger Wolf Capital, LLC. Defendant Mercado is the founder of Tiger Wolf, an investment adviser dissolved by the state of Florida in September 2022. Over a period of about four years, beginning in August 2019, Defendants lead investors to believe they were investing in funds managed and advised by them. Investors were also told that they were receiving a 50% return on their funds. Of the $1.4 million raised from investors, only about $121,000 was deposited into Tiger Wolf’s accounts. While a small portion of the investor money was traded, it generated only losses. About $1 million was ultimately deposited into the accounts of others. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). Each Defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. Each also agreed to pay an as yet amount of disgorgement, prejudgment interest and penalties. Mr. Mercado also agreed to the entry of an order barring him from serving as an officer or director. See Lit. Rel,. No. 206012 (May 30, 2024).
Australia
Remarks: ASIC Commissioner Sinone Constant delivered remarks to investment professional on May 30, 2024 at the AIRA Annual Conference, focusing on three key principles necessary for compliance (here).
Hong Kong
Meeting: Top executives of the Securities and Futures Commission of Hong Kong met in Dubai to extend market times with the Dubai Financial Services Authority, according to a release dated May 31, 2024 (here).
This Week In Securities Litigation (Week of June 3, 2024)
Last week the Commission filed three actions. One was based on an intrusion, another an offering fraud and one an undisclosed conflict of interest.
Be careful, be safe this week.
SEC
Statement: Erik Gending, Director of the Division of Corporate Finance, issued a statement designed to clarify the use of Form 8-K Item 1.05 vs. Form 8-K Item 8.01 when reporting cybersecurity incidents on June 1, 2024 (forthcoming here).
Remarks: SEC Enforcement Director Gurbir S. Grewal recently addressed the question of Cooperation in remarks titled “The Five Principles of Effective Cooperation in SEC Investigations, May 23, 2024 (here). Following a preface in which the Director tried to assure everyone that self-reporting is worthwhile, Mr. Grewal detailed five principles for undertaking the task. They are: 1) The best cooperation starts early and well before the SEC gets involved, with self-policing. 2) Once you discover a possible violation, self-report without delay. 3) Don’t stop with the self-report. 4) Remedies. The type of cooperation that earns credit requires going above and beyond what’s legally required – more than simply complying with subpoenas without undue delay or gamesmanship. 5) Collaborate with Enforcement Staff early, often, and substantively.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 1 new civil injunctive action and 2 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Conflicts: In the Matter of Mass Ave Global Inc., Adm. Proc. File No. 3-21949 (May 29, 2024). Named as respondent in this proceeding is MassAve, a New York City based exempt reporting adviser since May 2021. Respondent was listed as being the adviser to sixteen private funds, including one with over $1.1 billion in regulatory assets under management. On March 2, 2023, the adviser announced a decision to wind down all sixteen funds and terminate them. MassAve continues to manage the wind down. As of May 6, 2024, it had about $93 million regulatory assets under management. The proceedings here center on a series of misleading statements and an undisclosed conflict of interest. The former involved statements about the holdings of the firm and its exposures as depicted in monthly tear sheets, summary portfolio snapshots and communications regarding the top ten largest positions of the firm. A number of the misleading communications resulted from modifications made by Winston Mubai Feng, the firm’s co-founder, CEO and majority owner. The modified statements were used by other MassAve employees for purposes of inclusion in Investor Communications. The information was not further reviewed by compliance employees prior to dissemination to investors. The latter is based on a conflict issue. It stems from the non-disclosure of a conflict of interest arising from the operation of a separate hedge fund in China by MassAve’s other co-founder about which Mr. Feng, and thus the firm, had knowledge. The dissemination of misleading information in investor communications resulted from not adopting and implementing policies and procedures reasonably designed to prevent inaccurate information in investor communications. The Order alleges violations of Advisers Act Sections 206(2) and 206(4), in addition to the pertinent rules. 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. In addition, Respondent will pay a penalty of $350,000. See also In the Matter of Winston Mubai Feng, Adm. Proc. File No. 35207 (May 29, 2024)(proceeding naming as respondent the founder of the firm based largely on similar facts; resolved with the entry of a cease-and-desist order based on the same Sections and his suspension from the securities business and serving as an officer/director with the right to reapply after 12 months. Respondent will also pay a penalty of $250,000).
Intrusion: In the Matter of Intercontinental Exchange Inc., Adm. Proc. File No. 3-21947 (May 22, 2024) is a proceeding which names as respondents the Exchange and 10 affiliates (listed here). The proceedings arise out of the failure of the Exchange to notify the Commission immediately as required by the applicable rules about a cyber intrusion incident that occurred on April 15, 2021 involving the exploitation of a “zero-day” vulnerability as one of Respondent’s virtual private networks contractors, networking deficiencies that allow authorized employees to access the Exchange’s network and indirectly its systems, remotely and securely. On April 16 Respondent identified malicious code associated with the threat actor that exploited the vulnerability on one of its VPN concentrators, reasonably determining that Respondents were subject to the intrusion. Days later the Exchange determined that the actor’s access was limited to the compromised VPN device. Then the Commission was notified. The Order alleges violations of Rules 1002(b)(1) and (2) of Regulation SCI. Respondent resolved the proceedings, consenting to the entry of the cease-and-desist order based on the cited Rules. In addition, Respondent will also pay a penalty of $10 million.
Offering fraud: SEC v. Mercado, Civil Action No. 3:24-cv-00514 (W.D.N.C. Filed May 30, 2024) is an action which names as defendants Frank Lynold Mercado and Tiger Wolf Capital, LLC. Defendant Mercado is the founder of Tiger Wolf, an investment adviser dissolved by the state of Florida in September 2022. Over a period of about four years, beginning in August 2019, Defendants lead investors to believe they were investing in funds managed and advised by them. Investors were also told that they were receiving a 50% return on their funds. Of the $1.4 million raised from investors, only about $121,000 was deposited into Tiger Wolf’s accounts. While a small portion of the investor money was traded, it generated only losses. About $1 million was ultimately deposited into the accounts of others. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). Each Defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. Each also agreed to pay an as yet amount of disgorgement, prejudgment interest and penalties. Mr. Mercado also agreed to the entry of an order barring him from serving as an officer or director. See Lit. Rel,. No. 206012 (May 30, 2024).
Australia
Remarks: ASIC Commissioner Sinone Constant delivered remarks to investment professional on May 30, 2024 at the AIRA Annual Conference, focusing on three key principles necessary for compliance (here).
Hong Kong
Meeting: Top executives of the Securities and Futures Commission of Hong Kong met in Dubai to extend market times with the Dubai Financial Services Authority, according to a release dated May 31, 2024 (here).