This Week In Securities Litigation (Week of May 15, 2023)
The Commission filed a series of actions last week. Those cases focused on offering frauds, manipulation and a breach of fiduciary tied to the investments recommended to an advisory investor despite the failure of the market professional to head the dictates recommendation of the prospectus. Chair Gensler delivered remarks commenting on a number of subjects which included the treasury markets and transparency.
Be careful; be safe this week.
Remarks: Chair Gensler delivered remarks titled “The Next Century of Progress” before the International Swaps and Derivatives Association Annual Meeting, Washington, D.C. (May 10, 2023). The Chair’s remarks covered subjects which include the Treasury Markets, clearinghouses, dealers, platforms and transparency (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 6 civil injunctive actions and 1 administrative proceeding, excluding 12j and tag-along proceedings as well as those presenting conflicts for the author (which are counted in the totals).
Offering fraud: SEC v. GA Investors, Civil Action No. 1:23-cv-011050 (D. Mass. Filed May 11, 2023) is an action which names the firm and four John Does as defendants. The complaint alleges that unknown investors are soliciting investments world-wide through website GA Investors. The website in part impersonates a number of entities. It promises investors returns of up to 61.9% in 24 hours. Investors were directed to purchase crypto assets from a separate trading entity and deposit the purchase price at the firm’s wallet address. While some investors have obtained a small portion of their money back, most have not. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25721 (May 11, 2023).
Misappropriation: SEC v. Lawrence, Jr., Civil Action No. 23-cv-0550 (E.D. Wash.) is a previously filed action which named as defendant Charles T. Lawrence, Jr. The underlying complaint alleges that Defendant engaged in a scheme in which he misappropriated at least $4.8 million from 11 investors in at least three states. The complaint alleged that Defendant told investors they were guaranteed against loss and could obtain returns of 25% to as much as 100%. The money raised from those investors was misappropriated. The complaint, filed on May 1, 2023, alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Last week the Court entered a TRO at the request of the Commission precluding future violations of the provisions cited in the complaint. The case is pending. See Lit. Rel. No,. 25720 (May 11, 2023).
Cherry picking: SEC v. RRBB Asset Management, LLC, Civil Action No. 2:20-cv-12523 (D.N.J.) is a previously filed action which named as defendants the firm, a registered investment company, and its president and co-owner, Carl S. Schwartz. The Court entered a final judgment against each Defendant precluding future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2) as well as 206(4). The judgment also directs that Mr. Schwartz pay disgorgement of $50,000, prejudgment interest of $13,754.13 and a penalty of $100,000. The company was dismissed from the action since it has ceased to exist and has withdrawn its registration with the Commission as an investment adviser. The underlying complaint alleged a cherry-picking scheme by Defendants. See Lit. Rel. No, 25719 (May 11, 2023).
Manipulation: SEC v. IRB Brasil Ressegurous S.A., Civil Action No. 1:23-cv-03905 (S.D. N.Y. Filed May 9, 2023) is an action which names as defendant the Brazilian insurance firm. The complaint alleges that following a decline in the firm’s stock price in 2020 former firm executive vice president of finance and investor relations fabricated and spread a story to analysts and others that Berkshire Hathaway Inc. invested in the stock of the company. The stock price rose; the story was false. Following an internal investigation the company self-reported, took remedial steps and cooperated with the Commission. To resolve the matter the company consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). No penalty was imposed in view of the significant cooperation of the company. Suit was filed earlier by the agency against the employee involved. See Lit. Rel. No. 25718 (May 10, 2023).
Offering fraud: SEC v. Thomas, Civil Action No. 3:23-cv-00459 (M.D. Tenn. Filed May, 2023) is an action which names as defendants Clayton. R. Thomas and Personalized Healthcare Solution, LLC, respectively, the founder of Personalized Healthcare and a purported healthcare entity. Over a period of months, beginning in February 2019, Defendant Thomas convinced one investor to execute 17 promissory notes based on claims about the TM-Flow System which was supposed to be placed in certain medical offices to generate returns. Mr. Thomas made a series of misrepresentations to the investor about the device while misappropriating a portion of the investor money. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25717 (May 10, 2023).
Offering fraud: SEC v. DeGregorio, Civil Action No. 22-civ-1102 (E.D.N.Y.) is a previously filed action which names as defendants Joseph DeGregorio, a former New Jersey broker. The Court previously entered a final judgment against Defendant which prohibits future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Commission’s complaint alleged an offering fraud in which just under $1 million was solicited from one 80 year old investor and about $250,000 from three additional elderly investors for various fictitious investments. On May 5, 2023, the Court directed the payment of disgorgement and prejudgment interest in the amount of $1,084,500. Payment is deemed satisfied by the restitution and forfeiture ordered in the parallel criminal case, U.S. v. DeGregorio, 22 Cr. 030 (E.D.N.Y.). See Lit. Rel. No. 25714 (May 9, 2023).
Misappropriation: SEC v. Burrell, Civil Action No. 1:21-cv-9422 (S.D.N.Y.) is a previously filed action which names as defendants Joshua Burrell and Activated Capital, LLC. The complaint alleged that investors had been solicited to invest in Opportunity Zones, a community development program established by the Tax Cuts and Jobs Act of 2017. While about $6.3 million had been raised, Defendant Burrell misappropriated significant portions of the investor funds. The judgments entered by the Court enjoined Defendants from violating Securities Act Sections 17(a) and Exchange Act Section 10(b). In addition, Mr. Burrell was ordered to pay disgorgement and prejudgment interest of $100,155.42 which is deemed satisfied by the restitution ordered in the parallel criminal case. The Commission informed the Court that it did not intend to seek monetary remedies as to the firm. See Lit. Rel. No. 258709 (May 5, 2023).
False statements: SEC v. Swanson, Civil Action No. 3:20-cv-00666 (D. Conn.) is a previously filed action which named as defendant the former CEO and General Counsel of Sonic Cavitation, Inc., a firm involved with liquid purification technology. Over a period of about three years, beginning in late October 2012, the complaint alleges that Defendant made multiple false claims, exaggerating the interest level of Sonic’s potential business partners and the capabilities of its technology while minimizing the risks. Previously, the Court entered partial judgments by consent, enjoined future violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and imposed an officer/director bar. On May 3, 2023, the Court ordered the payment of disgorgement in the amount of $677,753, prejudgment interest in an amount to be determined and a penalty of $250,000. See Lit. Rel. No. 25711 (May 5, 2023).
Cherry picking scheme: SEC v. Werthe, Civil Action No. 23-cv-00815 (S.D. Ca. Filed May 4, 2023) is an action which names as defendant Mathew J. Werthe, an investment adviser doing business under the name of HSR Wealth Management, a sole proprietorship that he owned. Over a period of about one year, beginning May 2021, Defendant placed trades for clients in blocks. This permitted him to allocate profitable trades at the end of the day to his account and unprofitable trades to client accounts. In support of this scheme Defendant also made false statements. Defendant obtained over $500,000 for his account while clients suffered losses. The California Department of Financial Protection and innovation and the Broker involved repeatedly reached out to Defendant during the period. The scheme only stopped when the Broker refused to further participate. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is in litigation. See Lit. Rel. No. 25710 (May 5, 2023).
Fiduciary duty: In the Matter of Classic Asset Management LLC, Adm. Proc. File No. 3-21403 May 4, 2023) is a proceeding which names as respondents the firm, a registered investment adviser, and partial Owner of the firm. The Order centers on the acquisition of leveraged exchange traded funds for extended periods. Respondents purchased and held the Funds for clients, frequently for extended periods. Those acts were inconsistent with the prospectus for the Funds which stated that the products have unique risks and were designed to be held for no longer than a single day. Despite the warning Respondents failed to appropriately monitor the investments. Thus, they failed to evaluate if the investments were in the best interests of the clients or handled in accord with the dictates of the prospectus. The firm also failed to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act. Respondents did undertake remedial efforts. To resolve the matter Respondents consented to the entry of a cease-and-desist orders based on Advisers Act Section 206(2) and a censure. In addition, the injunctions as to the firm were based on Section 206(4) and Rule 206(4)-7. The firm will pay disgorgement of $81,824, prejudgment interest of $13,404 and a civil penalty of $100,000. Mr. Schmitz will pay disgorgement of $523,086, prejudgment interest of $115,027 and a penalty of $100,000.
Offering fraud: SEC v. Hill, Civil Action No. 6:23-cv-00321 (W.D. Tx. Filed May 3, 2023) is an action which names as defendants: Roy Hill who has no securities licenses; Eric Shelly, a dentist; and two entities, Clean Energy Technology Association, Inc. and Freedom Impact Consulting, LLC. Since late 2019 Defendants have raised at least $155 million from over 500 investors across the country. Defendants claim that the funds will be used to buy, lease and deploy certain carbon capture technology in connection with certain oil and gas wells and that investors will typically earn 10% quarterly returns as a result of contracts with Exxon Mobil Corporation and other major oil and gas producers. The claims are false. The complaint alleges violations of Securities Act Sections 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25712 (May 8, 2023).
Offering fraud: SEC v. McLean, Civil Action No. 2:23-cv-02333 (E.D.N.Y. Filed March 27, 2023) names as defendants Wayne McLean and Joan Powell, siblings. Over a seven-year period, beginning in 2012, Defendants participated in a fraudulent scheme created and launched by Robert Nils-Jonas Karlsson through his entity, Eastern Metal Securities or EMS. The scheme was based on selling shares in what was called a “Pre Funded Reversed Pension Plan” that Mr. Karlsson claimed to be the world’s first online investment of this type. The website asserted that the plan was run by award-winning economists and other professionals from South Africa and Switzerland. In fact, the shares were worthless. In a related criminal case Mr. Karlson pleaded guilty to securities fraud and was sentenced to serve 15 years in prison. He was also enjoined in a Commission action. U.S. v. v. Karlsson, 19-cr-340 (N.D. Call.). The Court in the Commission’s case directed that Defendant pay restitution in the amount of $8,491,369.33 and ordered to forfeiture in the amount of $16,263,820 as well as certain properties. SEC v. Karlsson, Civil Action No. 20-cv-4615 (E.D.N.Y.). The order imposing disgorgement and prejudgment interest is deemed satisfied by the restitution and forfeiture orders entered in the criminal case. This action alleged violations of Securities Act Sections 17(a)(1) & (3) Exchange Act Section 10(b). A bifurcated settlement has been entered into in this action. Defendants consented to the entry of permanent injunctions based on the Sections cited in the complaint and the entry of an officer/director bar. See Lit. Rel. No. 25713 (May 9, 2023).
Report: The Financial Crimes Enforcement Network published its “Year 2022 in Review” on April 25, 2023. The publication reviews the work performed by the agency over the past year (here).
Report: The Australian Securities and Investment Commission issued a report detailing 35 actions it has taken in response to its greenwashing surveillance activities from July 1, 2022 to March 2023, according to a May 10, 2023 release (here).
Findings: The European Securities and Market Authority has concluded that there is a high degree of concentration in natural gas derivatives markets. This creates potential risks for financial stability the regulator noted in a March 12, 2023 release (here).