This Week In Securities Litigation (Week of March 21, 2022)
The Commission is now looking a hundreds of pages of new environmental disclosure requirements on a very short turn-around – 30 days. Chair Gensler is believed to favor new and enhanced environmental disclosure rules as does former Acting Director Lee who remains on the Commission but has announced her departure at the expiration of her term in June.
While a number of companies make environmental disclosures and are either looking at ESG standards or have adopted them, just how far the Commission wants to go with its proposals is unclear. On the other hand, regulators such as the Securities and Futures Commission of Hong Kong and the Monetary Authority of Singapore have moved far out in front of the SEC in advocating for such rules.
SEC Enforcement – Filed and settled actions
Last week the Commission filed 4 civil injunctive actions and 2 administrative actions, exclusive of 12j, tag-a-long and other similar proceedings
Financial fraud: In the Matter of Crosby Independent School District, Adm. Proc. File No. 11039 (Filed March 16, 2022) is an action which names the Huston Texas School district as a respondent. The case centers on a January 2018 bond offering. During the offering the District raised about $20 million selling bonds for fiscal year 2017. The audited financial statements were, however, false and misleading because they failed to include certain payroll and construction liabilities totaling about $11.7 million. When those liabilities were disclosed, the bonds were downgraded. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Respondent engaged in certain remedial acts which were considered by the Commission. To resolve the matter the District consented to the entry of a cease-and-desist order based on the Sections cited in the Order. See also SEC v. Merka, Civil Action No. 4:22-cv-00841 (S.D. Tx. Filed March 16, 2022)(action naming as Defendant the CFO of the district, Carla Merka based on same facts; settled with a consent to the entry of permanent injunctions based on the same provisions cited in the Order above, an order that Defendant not participate in municipal offerings and the payment of a $30,000 penalty); In the Matter of Shelby L. Lackey, CPA, Adm. Proc. File No. 3-20800 (March 16, 2022)(proceeding naming the audit partner from the outside audit firm for the District; alleges violations of Rule 102(e)(1)(iv)(B); settled with undertakings not to participate as engagement or review partner or manager on any offerings of municipal bonds until authorized by Commission; consented to the entry of an order denying the right to appear or practice before the Commission as an accountant.
Financial Fraud: SEC v. S-Ray Inc., Civil Action No. 3:22-cv-5150 (W.D. Wash. Filed March 15, 2022). Named as defendants in the action are the company and Stephen Alexander Baird. The company was founded in 2015 with the idea of developing ultrasound devices for use in dentistry. Defendant Stephen Baird founded the firm, raising about $6 million from approximately 180 individual investors, many of whom were dentists and/or employed in the industry. The start-up continued to raise money from investors. For example, by about 2018 the firm raised at least $2 million. Investors were given a prospectus and periodic updates on the firm in emails and discussions. While the company was able to continue raising funds, unfortunately it did not prosper. By April 2019 the company lost its last employee other than Mr. Baird. Nevertheless, fund raising continued. Potential investors were not told that the firm was actually failing; they were not told that there were no orders. To the contrary, investors were informed that in fact there were orders. More importantly, the investors were also not told that their funds were not being used to develop the company. Rather, the investor funds were going directly into Mr. Baird’s pocket for his personal use. The offerings continued through at least 2020. During that time S-Ray and Mr. Baird continued to tell potential investors that the firm would use the money for development. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25344 (March 15, 2022).
Offering fraud: SEC v. Malley, Civil Action No. 1:21-cv-00237 (S.D.N.Y.) is a previously filed action which names as defendants Eric Malley, a real estate broker, and his firm, MG Capital Management LP along with two related entities. The complaint alleges that Defendants raised over $58 million, beginning in 2014, from investors based on claims that they had previously operated two successful real estate funds – MG Capital Management Residential Funds III and IV – for over ten years. During that period the funds has outperformed the S&P Five Hundred Index potential investors were told. In fact, the two funds did not exist. A number of other false statements were also made by Defendants. To resolve the matter Mr. Malley and MG Capital consented to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, they agreed to pay disgorgement of $11,348,226, prejudgment interest f $816,423.41 (portions of which will be paid on a joint and several basis with Relief Defendants). The payments are deemed satisfied by those to be made in connection with Mr. Malley’s guilty plea in the related criminal case. There he was sentenced to serve 60 months in prison. In the criminal case he was ordered to pay $33,249,822.12 of restitution to the victims of the fraud and forfeit an additional $5,625,747.45 in ill-gotten gains. See Lit. Rel. No. 25343 (March 15, 2022).
Misappropriation: SEC v. Rivero, Civil Action No. 3:22-cv-01360 (D.N.J. Filed March 14, 20220) is an action which names as defendant Mario Rivero, a registered representative and investment adviser representative at Institution A from 2010 to 2020. He held similar positions at Institution B from September 2020 through June 2021. From July 2018 to November 2020 Defendant convinced at least five clients from Institution A to transfer their investments first to their banks and later to entities with whom he was affiliated. Clients were told the purpose of the transfers was to facilitate him making investments for them. In reality, Defendant misappropriated about $680,000 of investor funds. The complaint alleges violations of Securities Act Sections 17(a)(1) and (2), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The U.S. Attorney’s Office for the District of N.J. filed a parallel criminal action. See Lit. Rel. No. 1360 (March 14, 2022).
Manipulation: SEC v. Biller, Civil Action No. 1:22-cv-01406 (E.D.N.Y. Filed March 14, 2022) is an action which names as defendants: Francis Biller, a Canadian citizen who has been barred from the securities business by a Canadian regulator and pleaded guilty to criminal securities fraud charges; Raymond Dove, a Canadian citizen living in Japan; Chester Alvarez, a U.S. citizen living in Columbia; Troy Gran-Brooks, a Canadian citizen living in Columbia; and Justin Plaizier, a Dutch citizen living in Columbia. Over a two-year period, beginning in January 2016, Defendants operated a boiler room from Columbia. The manipulation involved the shares of about 18 issuers. The control persons of those issuers were concealed while Defendants engaged in certain promotions, and at times manipulative trading, to artificially inflate the share prices of the stocks of the various firms involved. During phone calls potential investors were told that the callers were from various financial advisory firms which were fictitious and then provided with false information about the stocks to induce unsuspecting investors to purchase the securities. The promotions and manipulative trading caused the share price of each issuer to be fraudulently inflated. Overall, about $58 million was made by Defendants. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 9(a)(2). The case is pending. See Lit. Rel. No. 25348 (March 17, 2022).
ESMA
Statement – Ukraine: The European Securities and Markets Authority announced on March 14, 2022, that it is coordinating with National Competent Authority and is closely monitoring the impact of the Ukraine crisis on financial markets. The regulator states that it is prepared to use its relevant tools to ensure the orderly functioning of markets, financial stability and investor protection.
SINGAPORE
Agreement: The Monetary Authority or MAS and CDP, an international non-profit that operates one of the world’s leading environmental disclosure systems for companies and sub-national governments announced an MOU to promote sustainability disclosures and access to quality ESG data across the financial sector and real economy on March 18, 2022.