This Week In Securities Litigation (Week of March 16, 2020)
Uncertainty. That is the word of the week, and unfortunately for the foreseeable future. A virus circling the globe has shuttered the Supreme Court to the public; Broadway theaters in New York; the Smithsonian Museums in Washington; and a dizzying array of public events. Markets, all of which detest uncertainty, are acting predictably – gyrating up, down, sideways and setting off circuit breakers.
The Commission implemented targeted relief for certain issuers to try and stem the regulatory burdens being generated as the virus crisis continues to unfold. The agency also adopted certain amendments regarding Variable annuities and variable life insurance contracts as part of its continuing efforts to ease regulatory obligations.
New actions focused on compliance, short sales and an offering fraud.
Enjoy the week.
Rules: The Commission on March 14, 2020 immediately implemented a CBOE Rule shifting its trading to a fully electronic trading platform in view of the decision by the exchange to temporarily suspend open outcry trading on its Chicago trading floor effective Monday March 16, 2020 in view of the potential threat from COVID – 19 (here).
Relief: Targeted action to assist funds, advisers and permit virtual board meetings and relief from certain filing procedures was implement by the agency on March 13, 2020 as the virus continues to disrupt virtually everything (here).
Rules: New Amendments were adopted to the disclosure provisions regarding variable annuities and variable life insurance contracts. The new provisions are designed to simplify critical disclosures (https://www.sec.gov/news/press-release/2020-62).
Staff guidance: The Commission staff published guidance to assist companies and other market participants with transitioning to teleworking, virtual meetings and other contingent matters on March 13, 2020 to address the impact of the coronavirus disease (here).
Amendments: Amendments were adopted to the definitions of Accelerated filer and large filer with a view toward reducing unnecessary burdens and compliance costs on March 12, 2020 (https://www.sec.gov/news/press-release/2020-58).
Postponed: The Commission postponed its previously announced conference on Municipal securities.
Remarks: Commissioner Elad L. Roisman delivered remarks at the Council of Institutional Investors Conference. His remarks, delivered on March 10, 2020, centered on the proposed amendments to rules governing the proxy process (here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 1 civil injunctive actions and 2 administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.
Compliance with procedures: In the Matter of Nay Ventures, LLC, Adm. Proc. File No. 3-19728 (March 12, 2020) is a proceeding which names as Respondents, the firm, Dayakar Puskoor and Prabhakar Reddy. The firm is an exempt Texas investment adviser; Defendants Puskoor and Reddy are, respectively, the majority owner minority owner of the adviser. The Order centers on not complying with the policies and procedures adopted by the firm which include a failure to: 1) establish the investment committee; 2) enforce capital calls as to any of the limited partners; 3) provide for certain services through Naya GP; and 4) take the necessary steps to ensure the audited financial statements were prepared. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). Respondents agreed to implement certain undertakings essentially regarding compliance. To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, the firm will pay a penalty of $40,000 while each individual respondent will pay $20,000.
Short sales: In the Matter of BMA Securities, LLC, Adm. Proc. File No. 3-19727 (March 12, 2020) is a proceeding which names the registered broker-dealer as a respondent. Over a one and one half year period, beginning in January 2015, the firm failed to properly close out allocated fail to deliver positions on short sales as required by Regulation SHO. The Order alleges violations of Rule 204 of Exchange Act Regulation SHO. To resolve the matter Respondent consented to the entry of a cease and desist order based on the provisions cited in the Order and to a censure. Respondent will also pay disgorgement of $48,489.23, prejudgment interest of $10,048.55 and a penalty of $275,000.
Manipulation: SEC v. PTG Capital Partners, Ltd., Civil Action No. 15-cv-04290 (S.D.N.Y.) is a previously filed action centered on a coordinated effort to simultaneously manipulate the shares of three firms by filing a false tender offer. Defendants Strategic Capital and Strategic Wealth each settled with the Commission, consenting to the entry of permanent injunctions precluding future violations of the federal securities laws. In addition, each firm agreed to pay disgorgement and prejudgment interest totaling $31,270 and penalties which total $1 million. The Commission previously settled with other defendants in the action. See Lit. rel. No. 24766 (March 11, 2020).
Manipulation: SEC v. Honig, Civil Action No. 08175 (S.D.N.Y.) is a previously filed action which named as defendants Barry Honig, Michael Brauser, John O’Rourke, John Stetson, Grander Holdings, Inc. ATG Capital LLC, Stetson Capital Investments Inc. and Contrarian Investments LLC. The Commission’s complaiJt alleged that the named defendants attempted to manipulate the shares of three issuers simultaneously. Previously, Mr. Honig entered into a partial settlement with the agency. The Defendants listed above each consented to the entry of final judgment which precludes future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(d). In addition, the judgments enjoin Defendants Brauser and Grander from violating Securities Act Sections 5(a) and (c) and Mr. O’Rourke and ATG from violating Exchange Act Sections 9(a)(1) and (2). The judgments also contain penny stock bars and conduct based injunctions as to Defendants Stetson, SCI and HSCI. The judgments as to Messrs. Brauser, O’Rourke and Stetson require each to pay disgorgement, prejudgment interest and penalties totaling, respectively, $1,175,176, $1,153,326 and $1,154,669. Monetary remedies as to HSCI will be determined at a later date on motion of the Commission. See Lit. Rel. No. 24765 (March 11, 2020).
Misappropriation: SEC v. Hafen, Civil Action No. 19-civ-8234 (S.D.N.Y.) is a previously filed action naming as a defendant E. Herbert Hafen, formerly an investment adviser at a large financial institution. The complaint alleged that Mr. Hafen defrauded his clients by having them withdraw their funds from the financial institution and deposit them in his bank account based on a representation regarding the manner in which the money would be invested. Rather than invest the funds Mr. Hafen misappropriated them. A final judgment was entered by consent against him based on Securities Act Section 10(b) and Adviser Act Sections 206(1) and 206(2). The Commission also entered an order barring Mr. Hafen from the securities business. The Manhattan U.S. Attorney’s Office filed parallel criminal charges. In that case Mr. Hafen pleaded guilty and was sentenced to serve 30 months in prison and was directed to pay restitution of $745,000 and to forfeit $808,750. See Lit. Rel. No. 24764 (March 11, 2020).
Offering fraud: SEC v. Kinetic Investment Group, LLC, Civil Action No. 8:20-cv-00394 (M.D. Fla. Filed Feb. 20, 2020). The Commission obtained a freeze order and other temporary relief on March 6, 2020. Defendants in the action are: Kinetic Group, a firm formed by Defendant Michael Williams. He is a managing member of the firm as well as of KCL Services LLC or Lendacy, and others. That firm, also controlled by Mr. Williams, supposedly furnishes lines of credit to accredited investors. Kinetic Group managed Kenetic Funds Yield or KFYield. Kinetic Funds used four investment strategies, implemented through its sub funds: Yield, gold, growth and inflation. The yield strategy is implemented by KFYield, a sub-fund. It represented about 98% of the assets for the group. Interests were marketed as private placements through the use of a Subscription Agreement rather than the more typical PPM. The Subscription Agreement provided in part that the memberships purchased were restricted securities. It also stated that there was a 1% management fee. A modified version of the Subscription Agreement, used beginning in 2015, contained a description of KFYield, its performance information, AUM and holdings available on Bloomberg. A computer system permitted viewers to access real time financial data on companies. The system gave the investment program apparent transparency. When marketing KFYield, Mr. Williams at times described Lendacy as a “real estate lending structure” designed to the meet credit demands of accredited investors. Investors were told that their funds would be placed in income producing U.S. listed financial products. Investors were also assured that their principal would be secure because KFYield hedged the portfolio with listed options. According to the marketing materials, 90% of the investments were covered by the hedges. Investors were assured that their funds were always available. The representations made to investors were false. Defendants also misappropriated portions of the investor money. Mr. Williams used investor funds to pay for a series of personal expenses and his other business ventures. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as Advisers Act Sections 206(1)(2) and (4). The complaint is pending. See Lit. Rel. No. 24767 (March 11, 2020).
New framework: The Australian Securities & Investment Commission announced a new regulatory framework for foreign financial service providers. It is designed to facilitate wholesale access for foreign investment opportunities, preserve market integrity and strengthen the ASIC’s supervision (March 10, 2020)(here).
Markets: The Monetary Authority of Singapore announced on March 13, 2020 that the Singapore Dollar money market and foreign exchange market are functioning normally despite the increased global volatility. The regulator has also left a higher level of liquidity in the banking system through its money market operation and Singapore dollar interest rates have eased in tandem with global rates. The nominal effective exchange rate of the Singapore Dollar has also eased in an orderly manner in line with weakening economic conditions.
Short selling: The Financial Conduct Authority entered an order temporarily prohibiting short selling in a list of certain securities on March 13, 2020 (here).