This Week In Securities Litigation (Week of May 26, 2020)

The Commission will return to a holiday shortened week during which segments of the country will continue to emerge from the pandemic shutdown. The agency continued to modernize its rules last week, approving new regulations regarding select acquisition/disposition transactions. The regulator also moved forward, announcing a municipal securities conference for mid-June.

The Commission’s enforcement program continued to expand its focus from offering fraud cases into those involving COVID-19. A number of preliminary investigations have been opened related to the virus. One group of inquiries centers on company claims about products related to the pandemic. Another is tied to the funds being made available under the recent virus-related legislation.

Stay safe, stay healthy.


Muni securities: The Commission announced on May 22, 2020, a virtual conference on municipal securities. The event will be held on June 16, 2020. The discussion will focus on secondary market disclosure practices (here).

M&A: The agency adopted rules designed to improve disclosure concerning the acquisition and disposition of businesses on May 21, 2020 (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 civil injunctive action and 3 administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.

Offering fraud: SEC v. Montgomery, Civil Action No. 5:20-cv-99598 (W.D. Tcx. May 18, 2020) is an action which names as defendants Paul Montgomery, Jr., Michael Fisher and James Willingham. Over a period of about two-and-one half years, beginning in June 2016, Defendants solicited investors to purchase limited partnership interests in oil and gas projects. Investors were told the funds would be used to drill new wells and rework existing ones. They were also promised a return of 32%. Investors were not told that a court injunction over the property effectively precluded work for drilling or reworking the wells. They also were not told that much of the money raised – about $2.7 million from 15 investors – was spend on solicitation commissions. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24821 (May 18, 2020).

Ethics: In the Matter of John Donovan, CPA, Adm. Proc. File No. 3-19805 (May 18, 2020) is an action against a former big four audit partner alleging ethical violations. Specifically, in 2018 the former engagement partner shared answers to three and received answers to seven questions on training exams administered by the firm with junior members of his engagement team. PCAOB and AICPA rules require that members act with integrity with respect to the rendering of professional services. The Order alleges violations of PCAOB Rule 3500T. To resolve the matter, Respondent consented to the entry of a cease and desist order based on the Rule cited and to the entry of an order denying him the privilege of appearing and practicing before the Commission as an accountant with a right to apply to resume practice after one year. See also In the Matter of Michael Bellach, CPA, Adm. Proc. File No. 3-19804 (May 18, 2020)(same except the reapplication cannot be filed for two years); In the Matter of Timothy Daly, CPA, Adm. Proc. File No. 3-19803 (May 18, 2020)(same except reapplication is after three years).


COVID-19: The regulator issued an advisory waring investors about unique risks associated with investment decisions during the pandemic with regard to exchange-traded products and exchange traded funds or mutual funds that invest in stocks, bonds or other asset classes. The advisory essentially warns main street investors to focus on understanding the mechanics of the products before investing (here).


COVID-19: The regulator issued an advisory to alert financial institutions to rising medical scams related to the pandemic (here).


Remarks: James Shipton, Chair, Australian Securities and Investment Commission delivered remarks to the Financial Services Institute regarding the its regulatory priorities on May 21, 2020 (here).

Hong Kong

Compliance: The Securities and Futures Commission of Hong Kong fined Convoy Asset Management Ltd. $6.4 million and reprimanded the firm for certain regulatory failures. Specifically, the firm failed to conduct adequate due diligence before recommending certain bonds. In addition, the firm did not have an effective compliance system, adequate documentation, a copy of its written advice and effective internal controls

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