This Week In Securities Litigation (Week of May 11, 2020)

The Commission is continuing its efforts to update the regulatory structure. Last week it directed market regulators to submit new national market plans. The long term goal is to modernize market structure. Enforcement filed settled proceedings involving Bloomberg Tradebook centered on claims that the broker misled its buy side clients regarding the manner in which trades were executed. In addition, the agency filed an action based on adviser advertising and an offering fraud case.

Stay safe, stay healthy.


National market plans: An order was issued to FINRA and the equity exchanges on May 6, 2020 by the Commission directing that each submit a new National Market System plan. The goal is to modernize the governance structure (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 3 civil injunctive action and 2 administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.

Offering fraud: SEC v. Elliott, Civil Action No. 1:20-cv-10860 (D. Mass. Filed May 6, 2020) is an action which names as a defendant Damon Elliott, a citizen of the U.K. and a resident of France, and Piptastic Ltd., a London based trading and investment firm at which Mr. Elliott was a director. Beginning in January 2016, and continuing through May 2019, Mr. Elliott solicited investors to engage in spread trading or spreadbet trading, a type of speculative trade priced off another financial instrument. Investors were assured the transactions were safe and profitable. Mr. Elliott also claimed to be an expert in the transactions. About $9 million was raised from investors. The funds were misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24813 (May 6, 2020).

Misstatements: In the Matter of Bloomberg Tradebook LLC, Adm. Proc. File No. 3019785 (May 6, 2029). Tradebook is a registered broker-dealer based in New York city. It is a subsidiary of Bloomberg LP. Customer orders were traditionally executed in one of two ways. First, the order could be routed to the firm’s Alternative Trading System or ATS. Second, the system cited in the firm’s marketing materials could be used – the so-called Smart Order Router. That system supposedly determined the best execution venue by considering factors such as price and liquidity. In 2010 the firm became concerned about its profit margins. In some instance the margins were low while in others the firm lost money. This spawned a third method of execution for buy side clients that became known internally as the Low Cost Router or LCR. Under this method the order could be sent to a broker with whom the firm had entered into a partner agreement. For one partner the firm provided routing instructions for each order. For others Tradebook permitted the partners to select the routing. Tradebook’s practice of allowing partners to make routing decisions for certain customer orders was inconsistent with its representations to customer. Generally, when a partner received a Tradebook customer order as part of the LCR arrangement it would report back the execution information. During some periods, however, the information was not reported back – Respondent did not know where the order was sent or executed. Those facts were not disclosed to the client. In those instances Tradebook reported back the venue it had intended for execution without admitting it did not actually know if the information was correct as to the actual venue of execution. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceedings, Respondent consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. The firm also agreed to pay a penalty of $5 million. The Commission considered the cooperation of the firm in agreeing to accept its offer of settlement.

Offering fraud: SEC v. Bershan, Civil Action No. 24812 (S.D.N.Y.) is a previously filed action which named as defendants Lisa Breshan, Barry Schwartz and Joe Margulies. Defendants falsely claimed that Starship Snack Corporation was about to introduce a new caffeinated snack. Investors would receive shares of a national soft drink firm after the product’s introduction and the acquisition of Starship Snack by the national firm. The claims were false; the funds were misappropriated. Defendants Bershan and Schwartz pleaded guilty in the parallel criminal action. Mr. Marguilies was convicted after trial. Each consented to the entry of a final judgment in the Commission’s case. Those judgments prohibit Defendants Bershan and Margulies from engaging in future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Schwartz is prohibited from violating Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Section 10(b). The three defendants are also directed to each pay disgorgement of $2,257,531 and prejudgment interest of $68,215.60 to be offset by an amount equal to the restitution order entered in the parallel criminal cases. See Lit. Rel. No. 24812 (May 5, 2020).

Securitization/false statements: SEC v. Can Capital, Inc., Civil Action No. 1:20-cv-03463 (S.D.N.Y. Filed May 4, 2020) is an action which names the firm as a defendant. Can Capital provides alternative financing for small and mid-size businesses. In 2014 the firm raised $191 million from investors who acquired interests in a securitization of Can Capital business loans. Investors were told that if the loans became delinquent those loans would be replaced. What they were not told is that frequently the company allowed the delinquent borrower “grace” time to make up the payments. Over time the pool had a huge delinquency rate because of this undisclosed process. Eventually this resulted in an event of default. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3). Defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. See Lit. Rel. No. 24811 (May 5, 2020).

Insider trading: SEC v. Hong, Civil Action No. 2:20-cv-04080 (C.D. Ca. Filed May 4, 2020) is an action which names as defendants Zhuobin Hong and Caizia Jiang, husband and wife. The action centers on the acquisition through a tender offer by Nichi-Iko Pharmaceutical Co. Ltd. of Sargent Pharmaceuticals, Inc. in July 2016. Prior to the announcement Defendants learned about the transaction from a friend who was the Chairman of a competing but loosing bidder. Defendants traded through accounts of friends in Hong Kong and told others who also traded. Over all about 1.17 million shares of Sargent stock were purchased at a cost of $16.8 million. Following the announcement, the shares were liquidated at a profit of $8.5 million. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is pending. See Lit. Rel. No. 24810 (May 5, 2020).

Advertising: In the Matter of Wendy Liberman Kirkland, Adm. Proc. File No. 3-19782 (May 1, 2020). Respondent Kirkland is an investment adviser who founded Universal Financial Independence, Inc., a firm created to sell books and subscriptions. She was joined in marketing the trading system by Respondents Duane Davis, the founder of Investment Software Systems, Inc. and a managing member of Gold Key Investing LLC, and Stephen Schmidt, the founder of TradeWins Publishing Corp. Each individual and entity was named as a Respondent. Ms. Kirkland is the creator of a trading system built on two competing indicators linked to the price movement of certain NYSE stocks. The coordinated movement of the indicators supposedly signaled a time-limited “squeeze” regarding the underlying stock’s price movement. That indicated an opportunity to purchase either call or put options on the stock. Messrs. Schmidt and Davis entered into marketing arrangements through their respective firms with Ms. Kirkland. Under the arrangements Ms. Kirkland would serve as the investment adviser while Messrs. Davis and Schmidt would, respectively, manage the trade signal services and provide the platform through which subscriptions were sold. Marketing materials highlighted the profitability of Ms. Kirkland’s strategies, noting, for example, that the system had a “win-rate” of 83% for the strategy yielding annual returns of 910%, a claim supposedly based on actual transactions. Investors were also led to believe that Ms. Kirkland used the system which could, for a fee, be sent directly to a broker for execution. Effusive testimonials from clients reconfirmed the validity of the approach. Millions of dollars poured into brokerage accounts over a four-year period, beginning in 2015, from investors looking to replicate the claim that $6,000 could become almost $2 million in a few months. In fact, the results cited were not based on actual trades. Investors complained to Respondents that the claimed results could not be replicated. The marketing continued, nevertheless. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). To resolve the matter Ms. Kirkland consented to the entry of a cease and desist order based on the sections cited in the Order while each other Respondent consented to the entry of an order based only of the Exchange Act section. Ms. Kirkland is also barred from the securities business. Each Respondent will also pay a penalty of $40,000.

Criminal Cases

Offering fraud: U.S. v. Elm, No. 1:16 -cr-0356 (S.D.N.Y. Plea on May 4, 2020) is an action in which Ahmad Naqvi, the CEO of Elm Tree Investment Advisors LLC, pleaded guilty to securities fraud related to multiple investment funds. Beginning in June 2013, and continuing for over a year, Mr. Naqvi solicited investors to acquire interests in funds which would be used to secure interests in pre-IPO tech firms such as Twitter, Alibaba, Uber and Square. About $18 million was raised from over 50 investors. The money was comingled into a fund and, in part, invested but no profits were made. Defendant misappropriated portions of the funds. Later as additional capital was acquired from other investors it was used Ponzi style to repay earlier investors. Sentencing is scheduled for June 29, 2020.


Initiative re COVID-19: The Financial Conduct Authority announced on May 7, 2020 the Financial Services Regulatory Initiatives Forum Grid. It is designed to assist firms stretched by the impact of the pandemic. The Grid is composed of the Bank of England, Prudential Regulation Authority, FCA, Payment Systems Regulator and Competition and Markets Authority with HM Treasury attending as an observer member. The Grid outlines a planned timetable for major initiatives and cancels or delays others to ease the burden on financial services firms during the crisis (here).

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