This Week In Securities Litigation (Week of May 30, 2022)
As we emerge from the holiday weekend, climate and ESG continue to be key topics. Last week the agency filed an enforcement action against a major bank centered on what some call greenwash claims.
The Commission also filed additional proposed rules focused on ESG. The proposals seek to add definition to ESG principles by seeking further definition from investment advisers and investment companies. Whether this process will yield clarity of the principles on which ESG is built remains to be seen.
Be careful, be safe this week
Proposed rules: The Commission issued proposed rules to enhance disclosures by certain investment advisers and investment companies about ESG investment priorities, according to a release dated May 25, 2022 (here). The proposals are designed to require advisers to broadly categorize the type of ESG strategies being used.
Proposed rules: The agency also issued proposed rule changes to prevent the use of misleading or deceptive fund names on May 26, 2022. The purpose of the “Name Rule” is to require that where the name suggests a certain kind of investing at least 80% of the funds be invested in accord with that suggestion (here).
SEC Enforcement – Filed and settled actions
Last week the Commission filed 3 civil injunctive actions and 1 administrative actions, exclusive of 12j, tag-a-long and other similar proceeding as well as those where the author’s firm has conflicts (three actions).
Insider trading: SEC v. Glassner, Civil Action No. 1:22-cv-04254 (S.D.N.Y. Filed May 24, 2022) is an action which names as defendant Frank Glassner, a business consultant. Defendant provided executive compensation advice to Kadnon Holdings, Inc. On September 8, 2021, that firm was acquired by Sanofi S.A., a global biopharmaceutical firm. Defendant first learned about the proposed transaction in late July 2021 from an executive at the company. Defendant and the executive had executed a confidentiality agreement which governed such disclosures. Nevertheless, Defendant Glassner revived his dormant brokerage account after the call and began purchasing stock and options of the company. As Mr. Glassner continued to work for the firm on the deal he also purchased stock and options. When the deal was announced the share price increased by 71% giving Defendant illicit profits of $405,000. The case is pending. See Lit. Rel. No. 25398 (May 24, 2022).
False statements: In the Matter of Tradezero America, Inc., Adm. Proc. File No. 3-20870 (May 24, 2022) is a proceeding which names as respondents Tradezero, a registered broker dealer, and Daniel Pipitone, a co-founder of the firm and a registered representative. In late January, during extraordinary trading volume, the firm’s clearing broker instructed all of its introducing brokers to halt trading in certain stocks. Respondents refused to comply until the last 10 minutes of trading. Later, when there was discussion of the halt Respondents made false statements about their actions, suggesting that they never halted trading. The Order alleges violations of Securities Act Section 17(a). Each Respondent consented to the entry of a cease-and-desist order which requires compliance with certain undertakings. The firm will also pay a penalty of $100,000 while Mr. Pipitone will pay $25,000. The undertakings require, among other things, the retention of a consultant with regard to the proper implementation of certain policies and procedures.
Offering fraud: SEC v. Charlebois, Civil Action No. 3:22-cv-00223 (W.D.N.C. Filed May 19, 2022). Defendants in this case are: Wynn A. D. Charbebois, supposedly a self-employed investor and consultant, and WC Private LLC, the holding company for Defendant Charbebois’ investments. For years Defendant Charbebois has successfully pitched potential investors with essentially the same story. Supposedly, he had provided consulting services for a number of companies. Each of those companies compensated him with stock options, according to the story. Investors in some instances were shown a list of companies. Since Defendant Charbebois was about to exercise the options, he decided to permit the investor to participate he claimed. The potential returns would be significant. Typically, a short time after investors turn over their capital, a series of questions are posed about how much profit would be paid and when the discussed returns would materialize. Mr. Charbebois usually deflected the questions with responses that at times offered a reason for a delay. In some instances, Defendant Charbebois fabricated documents to show the investors. The result was always the same – deflect; and investors waited for years. In fact, there were no stock options. The list of firms displayed to some investors were all private companies. No options had been issued to Mr. Charbebois. The investments did not exist. Nevertheless, since 2005 the scheme continued. In the last year it appears that the scheme unraveled. Five civil cases were initiated by investors against Mr. Charbebois. Demand letters were served alleging $1.345 million in investor losses. The Commission added to the growing list of suits by filing its case. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25397 (May 19, 2022).
Offering fraud: SEC v. Middlebrooks, Civil Action No. 2:22-cv-11073 (D. Mich. Filed May 18, 2022) is an action which names as defendants: Andrew Middlebrooks and EIA All Weather alpha Fund 1 Partners, LLC. Beginning in mid- 2017 Defendant raised about $39 million from over 100 investors for a private fund Mr. Middlebrooks manages. In soliciting investors, Defendants misstated its performance and told investors that the fund had outside auditors and had been audited. In addition, bout $9 million was used to make Ponzi like payments while another $470,000 was misappropriated by Defendants. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). Disgorgement is sought under Section 6501 of the National Defense Authorization Act for Fiscal 2021. The case is pending. See Lit. Rel. No. 25399 (May 25, 2022).
Proposal: The Australian Securities and Investment Commission has issued a proposal under which its prior order precluding the sale of binary options to retail investors would continue. The release is dated May 26, 2022.
Remarks: Ashley Alder, Chair, Securities and Futures Commission of Hong Kong, delivered remarks at the PRI China Conference titled Investing for Net Zero and SDGs on May 27, 2022 (here).
Initiative: The Monetary Authority of Singapore launched 2022 Global FinTech Hackcelerator on Web 3.0 and Green Finance. This is the seventh edition of the initiative. The theme is accelerating a greener digital future. The focus is to leverage the potential of FinTech in accelerating the development of Web 3.0 and green finance in Singapore and the region, according to the May 27, 2022 release (here).