This Week In Securities Litigation (Week of March 30, 2020)
Those who had the opportunity to work with him or just know him, morn his loss. While many in corporate America will join, there are some who may not. Regardless, everyone should be able to agree that Stanley Sporkin was a dedicated public servant during his tenure at the Commission and in other parts of the government the likes of which we may not see again.
As the COVID -19 pandemic continues, the Commission and other regulators are repeatedly stepping – up to provide targeted relief to those in need. While there is no end in site at the moment, there is no doubt it will come to a conclusion. Whenever that occurs, and whatever the world looks like then, preparation will be key. That will begin by properly conducting business now to the extent possible and with careful preparation. Now is the time to begin.
SEC Enforcement, with a warning the co-directors of the Division of Enforcement cautioned against the misuse of inside information. The agency also filed an insider trading action. Be safe; be healthy.
In Memory: Ret. Fed. Judge Stanley Sporkin, former Director of the Division of Enforcement, passed away on Tuesday, March 23, 2020. He served as the Director of the SEC’s Enforcement Division its early days in 1970s, as the General Counsel of the CIA during the Iran-Contra incident and as a distinguished jurist on the federal district court bench for years. To say he will be missed is not nearly sufficient. While many are called irreplaceable, few actually are. Stanley was and is. Rest well.
Relief – COVID – 19: Additional temporary regulatory relief and assistance was extended to market participants impacted by the virus on March 26, 2020 by the Commission. Specifically, certain temporary relief was extended relating to Form ID, to Regulation A, for crowdfunding and for those obligated to file annual updates to Form MA for municipal advisors (here).
Relief – COVID – 19: The Commission extended certain conditional exemptions from the reporting and proxy delivery requirements for issuers, funds and investment advisers impacted by the COVID – 19 virus. The Division of Corporation Finance issued related disclosure and other guidance on March 25, 2020 (here).
COVID – 19: The Commission Provided Temporary Additional Flexibility to Registered Investment Companies re COVID – 19 on March 23, 2020 (here)
Statement: The Co-Directors of the Division of Enforcement, Stephanie Avakian and Steven Pekin, issued a statement regarding the handing of material non-public information (here).
Whistleblowers: The Commission awarded over $570,000 to two whistleblowers who were instrumental in bringing charges that halted on-going, wrongful conduct.
SEC Enforcement – Filed and Settled Actions
The Commission filed 7 civil injunctive actions and no administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.
Offering fraud: SEC v. Root, Civil Action No. 24783 (Mach 26, 2020) is an action which names as a defendant Adam Root, one of the founding partners of unregistered investment adviser Tricent Capital, LLC. Over a period of about one year, beginning in early 2016, Mr. Root is alleged to have misled potential investors when soliciting investments for the firm. The inaccurate statements concerned the nature of certain investments that had to be “committed to others,” the number of start – up entities for which there were investments and the other uses of capital. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3). To resolve the action Mr. Root consented to the entry of a permanent injunction based on the sections cited in the complaint and the entry of a 10 year officer and director bar. He also agreed to pay a penalty of $10,000. See Lit. Rel. No. 24783 (March 26, 2020).
Insider trading: SEC v. Mahan, Civil Action No. 1:20-cv-00487 (M.D. Pa. Filed March 26, 2020) is an action which names Rite Aid employee David M. Mahan as a defendant. The case centers on the proposed acquisition of Walgreens Boots Alliance, Inc. by Rite Aid which was scheduled to close by January 27, 2017. One day before a news article was published which stated the deal likely would not be approved by the FTC, Mr. Mahan sold all of his shares and employee options. When the article appeared the next day, the stock price dropped 13%. Mr. Mahan avoided a potential loss of over $87,000. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the matter Mr. Mahan consented to the entry of a permanent injunction based on the sections cited in the complaint. He also agreed to pay disgorgement of $87,277, prejudgment interest of $12,107 and a penalty of $87,277. See Lit. Rel. No. 24782 (March 26, 2020).
Offering fraud: SEC v. Findley, Civil Action No. 3:20 – cv- 00397 (D. Conn. Filed March 25, 2020) is an action which names as defendants Bernard Findley and Halitron, Inc. Mr. Findley is the Chairman and CEO of Halitron, an issuer which claims to be an “equity holding company” but has no apparent business. Over a two year period Defendants engaged in a scheme that enabled them to raise funds from investors through the sale of debt. In 2016 Halitron claimed to have about $300,000 in revenue. By the next year that amount decreased to zero. Nevertheless, Mr. Findley published over the period a series of press releases discussing an about to be completed audit of the firm, a stock repurchase program and other financial transactions. Each was false. Yet Defendants were able to induce investors to purchase debt in return for the opportunity to acquire discounted shares. The funds raised benefitted Mr. Findley, not the investors. The complaint, which is pending, alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 24781 (March 25, 2020).
Bared broker: SEC v. Hunter, Civil Action No. 3:20-cv-00391 (D. Conn. Filed March 24, 2020) is an action against Donald Hunter, a former registered broker who was barred from the brokerage business by FINRA in 2012. Following that action Mr. Hunter established a firm named Your Angel Finance, a private fund. He solicited investors claiming that the fund would acquire shares of start-ups with the investment capital. In fact, Mr. Hunter acquired the shares of a drug research firm and was actually selling them to shareholders without disclosing that fact. He also did not disclose the fact that he had been barred by FINRA for defrauding his brokerage clients. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), 206(3) and 206(4). The case is pending. See Lit. Rel. No. 24780 (March 25, 2020).
Unregistered dealer: SEC v. Keener, Civil Action No. 20-cv-21254 (S.D. Fla. Filed March 24, 2020) is an action which names as a defendant Justin Keener. Over a three year period, beginning in January 2015, Mr. Keene repeatedly purchased convertible notes from microcap issuers, converted the notes at a discount to market and then sold the shares into the market. By repeatedly engaging in this conduct, and maintaining a stable of about 20 employees, Mr. Keener was able to generate over $21.5 million in profits. The complaint alleges violations of Exchange Act Section 15(a) since he was not a registered dealer as required. The case is pending. See Lit. Rel. No. 24779 (March 24, 2020).
Offering fraud: SEC v. Lahr, Civil Action No. 5:20 (E.D. Pa. Filed March 24, 2020) is an action which names as defendants Todd Lahr and Thomas Megas. Defendant Lahr is an attorney licensed to practice in Pennsylvania. He was also a Commission registered investment adviser for several years and is the founder of THL Holdings, LLC and co-founder of Merran Global Holdings, Inc. both private Nevada firms. Defendant Megas, a British National resident in Switzerland, is the co-founder of Ferran. In early 2012 Mr. Lahr began soliciting investors to purchase interests in THL Holdings. Those solicited are primarily clients from his law practice and friends. Potential investors were told that THL had indirect mining interests in Canada and New Guinea. Over a two-year period about $1.4 million was raise from 20 investors in THL Holdings. Those investor were assured that their funds would be invested in the company. Nevertheless, a large portion was misappropriated. In 2015 Defendants began implementing a plan for the sale of Ferran shares. Part of the plan was to use portions of the offering proceeds to repay some of the THL Holdings investors. About $140,000 was raised from four investors, one of which had purchased shares in THL Holdings. The investors were assured their funds would be utilized in connection the same foreign mining interest discussed with the THL Holdings share purchasers. Again, portions of the offering proceeds were misappropriated. The complaint, which is pending, alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) and Exchange Act Section 10(b). See also Lit. Rel. No. 24778 (March 24, 2020).
Offering fraud: SEC v. Tarver, Civil Action No. 5:20-cv-00056 (N.D. Tx. Filed March 10, 2020). Named as defendants in the action are Joe Leland Tarver, Rock and Roll Cycles, LLC and Cycle for Life, Inc. Mr. Tarver is the managing member of each entity. Over a three-year period, beginning in July 2014, Mr. Tarver raised just under $500,000 from 18 investors who purchased promissory notes from one of the entity defendants. Those notes carried interest rates that ranged from 6% to 9%. Investors were told that the funds would be used to manufacture custom tricycles for disabled children and adults. Interest on the notes would be paid from the profits. When the promised interest was not paid, some investors filed suit. Nevertheless, the note sales continued. There were no profits to pay investors. The complaint, which is pending, alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 2477 (March 23, 2020).
Insider trading: SEC v. Kendricks, Civil Action No. 2:18-cv-04739 (E.D. Pa.) is a previously filed action which named as a defendant professional football player Mychal Kendricks and his friend Hamed Ettu. The complaint alleged that on August 29, 2018 Defendants received inside information from a co-defendant, an analyst at an investment bank, about several pending mergers. Mr. Kendricks traded profitably on the basis of the information, securing about $1.2 million in illegal profits. Mr. Ettu had about $93,000 in trading profits. The Court entered final judgments, based on consent, enjoining each Defendant from future violations of Exchange Act Sections 10(b) and 14(e). Mr. Kendricks was directed to pay disgorgement of $1,188,075 while Mr. Ettu will pay $73,244 (adjusted for $20,000 paid to a co-defendant). The amounts ordered were deemed paid by the forfeiture ordered in the parallel criminal case in which both men pleaded guilty. Mr. Kendricks has not been sentenced. Mr. Ettu was sentenced to probation for a term of 3 years, including 9 months of home detention. See Lit. Rel. No. 24776 (March 23, 2020).
Best interest: The Australian Securities and Investment Commission concluded that Anthony Hilsley failed to furnish advice to a client that was in his best interest. At the time Mr. Hilsley was a registered representative of RI Advice Group Pty Ltd. More recently he has been affiliated with Fiducian Financial Services Pty Ltd. In rendering the advice Mr. Hilsley did not identify or make sufficient inquiries into his client’s personal circumstances or properly consider his investment objectives and needs. In some instances the representative also failed to consider existing products when rendering advice. Accordingly, the Commission banned him from the business for a period of four years.
COVOD-19: The Monetary Authority of Singapore issued an advisory to all financial institutions telling them to implement safe distancing measures in all aspects of their business operations, particularly those involving customers. The statement is part of a national effort to reduce the risk of further local transmission of the virus.
Banks: The Financial Conduct Authority issued a statement noting that banks and building societies should keep branches and contact centers open where possible “as they are deemed essential for civil and commercial functions.”