This Week In Securities Litigation (Week of May 24, 2021)

A new – or almost new – insider trading bill passed in the House of Representatives and was sent to the Senate for consideration last week. The legislation bans insider trading as well as tipping. The bill initially passed in the House in 2019 but died in the Senate. This time it is expected to pass in the Senate.

The incredibly prolific Marc Steinberg has a new book coming out shortly. It is titled Rethinking Securities Law. The new book considers the shortcomings of the current statutes and recommends possible solutions. The book is in pre-order now on Amazon (here).

Be careful, be safe this week


Whistleblowers: The Commission made several awards last week; one for over $28 million tied to an agency enforcement action and a related matter being conducted by another agency; a second made in four separate segments to different whistleblowers totalling over $31 million; a third of $3.6 million to a person who furnished information that resulted in the opening of a new investigation; and a forth award composed of two separate awards to different individuals totaling $22 million.

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 4 civil injunctive actions and 1 administrative proceeding, exclusive of tag-along and other similar proceedings.

Offering fraud: SEC v. LFS Funding Ltd. Partnership, Civil Action No. 2:21-cv-4211 (C.D. CA. Filed May 20, 2021) is an action which names as defendants the partnership, Stephen Thompson, Steven Comisar, Dale Engelhardt and Ross Erskine. The action centers on an offering fraud conduced over a one year period beginning in May 2018. It raised over $618,000 from about 14 investors through the use of false offering documents, undisclosed fees and skimming. The investor capital was supposed to be used for the development of two Podiatry Clinics. Instead, it went to pay substantial undisclosed fees. The offering materials also concealed the fact that Defendant Stephen Thompson, who had prior state securities laws violations, was in fact the actual control person. The fees went to those conducting the solicitations, Defendants Comisar, Engelhardt and Erskine, each of whom had a criminal record or a record of regulatory discipline. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). Defendants LPS Funding and Stephen Thompson agreed to settle, consenting to the entry of judgments that permanently enjoin each from violating the charged provisions. The judgment against Mr. Thompson also contains a conduct-based injunction. See Lit. Rel. No. 25093 (May 20, 2021).

Order execution: SEC v. BTIG, Inc., Civil Action No. 21 Civ 4521 (S.D.N.Y. Filed May 19, 2021) is an action which names as a defendant, a registered broker-dealer. During the period of late December 2016 through the first half of 2017 the firm mismarked over 90 transactions in violation of Regulation SHO which requires brokers to mark orders as long, short, or short exempt. The regulation also generally prohibits broker-dealers from either accepting a short sale order or effecting one for its own account unless the broker has borrowed the security, entered into an arrangement to borrow it or has a good faith belief it can be obtained. The transactions involved in the six-month period here had a value of over $250 million. The customer benefitted by not having to take the steps to comply with the Regulation. The firm had profits of about $1.6 million from the transactions. The complaint alleges violations of Regulation SHO Rules 200(g) and 203(b)(1). The case is pending. See Lit. Rel. No. 25092 (May 20, 2021).

Offering fraud: SEC v. The Premier Healthcare Solution, LLC, Civil Action No. 2:21-cv-11460 (D.N.J. Filed May 19, 2021) names as defendants the firm and Josiah David, a man with an extensive criminal and regulatory history who changed his name. Beginning in 2017 Defendants sold membership interests in Premier. The sales pitch excluded the long and sordid history of Mr. David, a consultant to the board. The pitch also misrepresented the nature of the interests being marketed, the financing the firm claimed it had with the bank and the key points of the business model. About $3.9 million was raised from approximately 131 investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25094 (May 21, 2021).

Disclosure: In the Matter of S&P Dow Jones Indices LLC, Adm. Proc. File No. 3-20310 (May 17, 2021) is a proceeding which names the firm as a Respondent. The Order centers on the events of February 5, 2018 when the CBOE Volatility Index or VIX spiked 115%, an unprecedented jump. Respondent publishes an index that measures the return from a rolling long position for VIX futures contracts called the S&P 500 VIX Short-Term Futures Index ER – the Index. That Index is licensed to others. Despite the unprecedented volatility on February 5, 2018 the Index was static during certain intervals between about 4 PM until just after 5 PM. While it should have calculated the pertinent values and reflected the volatility, it did not because of an Auto Hold. That process, which essentially freezes the values, comes into play when certain thresholds are breached. If there is a repetition, the freeze continues. Yet the index is the primary input for the calculation of XIV’s indicative or economic value. It impacts products such as the Credit Suisse VelocityShares Daily Inverse VIX Short term ETNs which rely on it for updates. The Auto Hold resulted in static Index values being published that were not based on the real time process of certain VIX futures contract. Thus, during the closing hour of 4-5 p.m. investors did not know that they had been purchasing and/or holding a product that had an economic value that was substantially less than what XIV’s calculation agent had publicly reported and were at risk of being accelerated by its issuer. The next day the Credit Suisse index exercised its right to accelerate XIV. The Order alleges violations of Securities Act Section 17(a)(3). Respondent implemented certain remedial steps. The firm also consented to the entry of a cease-and-desist order based on the Section cited in the Order. Respondent will pay a penalty of $9 million.

Unregistered broker: SEC v. Gagaza, Civil Action No. 0:21-civ-61030 (S.D. Fla. Filed May 17, 2021) is an action which names as a defendant Roy Gagaza, the owner of a registered investment advisory firm in California. The complaint alleges that he was one of the top sales agents of 1 Global securities with over $1.8 million in sales. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). The case is pending. For additional information about 1 Global see (here). See Lit. Rel. No. 25091 (May 17, 2021).

Offering fraud: SEC v. Sperry, Civil Action No. 2:20-cv-01337 (W.D. Wash.) is a previously filed action in which the Court entered partial summary judgment in favor of the Commission. The complaint alleged an offering fraud based on misleading statements furnished to investors. Defendants Kirk Sperry and Sperry and Sons Capital Investments LLC agreed to settle. Accordingly, each consented to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). The Court will consider monetary relief at a later date. See Lit. Rel. No. 25090 (May 17, 2021).


Agreement: The Monetary Authority of Singapore announced the renewal of a bilateral swap arrangement between Japan and Singapore (here).

Remarks: Ravi Mennon, Managing Director, MAS, delivered the opening remarks at the Climate Impact X Announcement Event (May 20, 2021). His remarks focused on the upward trajectory of carbon emissions and the necessary future steps (here).

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