This Week In Securities Litigation (Week of May 4, 2020)
Business is opening in some jurisdictions. Other states may follow shortly. Yet many companies have adopted a wait and see attitude. The impact of the openings will undoubtedly be carefully monitored and debated.
Regulators such as the Commission, continue to announce meetings discussing the impact of the pandemic. The Commission has two meetings coming up shortly which focus on the impact of the virus.
Enforcement is also focusing on COVID – 19. Last week the Division filed an action against a firm claiming to have a large supply of masks and a pipeline to the manufactures, none of which was true. The Commission also continued its small investor focus, brining actions centered on offering frauds, cherry picking claims and false statements used to solicit investors.
Stay safe, stay healthy.
Meeting: The Small Business Capital Formation Advisory Committee will meet on May 8, 2020 to discuss COVID-19, according to an April 28, 2020 announcement (here).
Meeting: The Investor Advisory Committee will hold a public meeting on May 4, 2020, according to an April 27, 2020 announcement, to discuss shareholder engagement/virtual shareholder meetings in view of COVID-19 (here).
Whistleblowers: The Commission awarded over $18 million to a whistleblower who furnished significant information that prompted an examination yielding an important enforcement action, according to an April 28, 2020 release.
SEC Enforcement – Filed and Settled Actions
The Commission filed 4 civil injunctive action and 3 administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.
Unregistered securities: In the Matter of American Bondholders Foundation, LLC, Adm. Proc. File No,. 3-19780 (April 30, 2020) is an action which names as Respondents the firm and its founder, Jonna Bianco. Beginning in 2001 Defendants acquired thousands of defaulted Chinese Bonds. The idea was to lobby the pertinent governmental entities in an effort to collect. Beginning in 2015 interests in the fund were sold to investors to help finance the operation. Respondents raised over $3.6 million from at least 180 investors. The shares sold were not registered. The Order alleges violations of Securities Act Sections 5(a) and 5(c). To resolve the proceedings Respondents each consented to the entry of a cease and desist order. Each Respondent will pay a penalty of $65,000.
Insider trading: In the Matter of Wei Duan, Adm. Proc. File No. 3-19778 (April 30, 2020) is an action which names Mr. Duan as a Respondent. He is a resident of China and the Vice President of Corporate Development at Momo, Inc. whose ADRs are traded on NASDAQ Global Select Market. Mr. Duan was on the acquisition team for the firm prior to its announcement in February 2018 of a deal to purchase Tantan Limited. Two weeks before the deal announcement he sold 450 out of the money short puts in a U.S. brokerage account. After the deal close the share price for the firm’s securities increased 17%. Respondent had a profit of $60,005.70. The Order alleges violations of Exchange Act Section 10(b). To resolve the matter Respondent consented to the entry of a cease and desist order based on the section cited in the Order. In addition, he agreed to disgorge his trading profits, pay prejudgment interest of $6,548.27 and a penalty equal to the amount of the disgorgement.
False statements: In the Matter of Everest Capital LLC, Adm. Proc. File No. 3-19777 (April 30, 2020) is a proceeding which names as Respondents the firm, a former registered investment adviser, and its owner, Marko Dimitrijevic. In the offering memorandum to investors soliciting interest in the fund managed by the firm, investors were told the firm followed an active, disciplined investment strategy driven by research. Respondents previously indicated they had learned from earlier significant loses from taking concentrated positions in securities tied to a single geographic location in Russia. Yet from September 2014 through mid-January 2015 they took heavy, concentrated positions in the Swiss franc exchange rate. In addition, reports to investors understated the position and the risk controls discussed in the offering documents did not exist. When the market moved against the firm’s position the losses wiped out the fund. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. Everest will pay disgorgement of $2 million and prejudgment interest of $458,226.42 and both Respondents will pay a penalty of $750,000. A fair fund was established.
Cherry picking: SEC v. Kellen, Civil Action No. 2:20-cv-03861 (C.D. CA. Filed April 28, 2020) is an action which names as a defendant Donald Kellen, an investment adviser representative. Over a three year period, beginning in 2011, Mr. Kellen, who served 40 clients at the advisory, cherry picked the clients using an omnibus account. He delayed allocating the trades to determine the profitability and then allocated the successful trades to his personal accounts and others to clients. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 10(b). The case is pending. See Lit. Rel. No. 24808 (April 28, 2020).
False statements: SEC v. Praxsyn Corporation, Civil Action No. 9:20 -cv- 80706 (S.D. Fla. Filed April 28, 2020). Praxsyn’s shares are quoted on OTC Link – previously known as the Pink Sheets. The Nevada firm has offices in West Palm Beach. It claims to be a specialty finance company that provides cash flow solutions and medical receivables financing for healthcare provides. Its CEO is Defendant Frank Brady. In late February 2020 the company issued a press release sent to the Globe News Wire titled “Praxsyn Joining the Global Fight To Stop The Spread” of COVID -19. The release claimed that the firm was negotiating the sale of millions of masks meeting the NIOSH N95 mask standard. The masks were capable of protecting users from COVID-19, according to the company. Praxsyn, it went on to state, was “currently evaluating multiple orders and vetting various suppliers in order to guarantee a supply chain that can deliver millions of masks on a timely schedule.” Mr. Brady noted in a quote contained in the release that the firm was looking at foreign suppliers. At the time of the release Praxsyn did not have any orders to sell masks. It did not have any agreement to acquire any masks. Its documents did contain two undated letters to foreign firms making inquiries about obtaining masks. A company director had exchanged emails with two other foreign firms about the possibility. A second press release was issued several days later. The release, titled “Update: Praxsyn’s Coronavirus Mask Demand,” was distributed through the same news outlet employed for the first release. This release stated that the firm “has a large number of N95 masks, capable of protecting wearers from inhaling viruses, including the COVID-19 Coronavirus available for order.” Praxsyn claimed in the release that it used its worldwide network to create a “direct pipeline” from the manufacturers and suppliers to bring the masks to market at the “fairest” prices. Mr. Brady stated in the release that the company was accepting orders for a minimum of 100,000 masks. At the time of the second press release the firm did not own any masks. It did not have a contract to acquire any masks. There is no evidence of any pipeline. The firm did, however, make efforts over the next four weeks to locate a supplier. It was not successful. Finally, on March 31, after receiving inquiries from regulators, Praxsyn was forced to issue a third press release. This release admitted the firm never had any masks to sell. During the period the firm’s stock price and trading volume increased significantly. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24807 (April 28, 2020).
Offering fraud: SEC v. Batchelor, Civil Action No. 3:20-cv-02871 (N.D. CA. Filed April 27, 2020) is an action which names as defendants William Batchelor and John Zukoski, respectively, the CEO and at one point the director of finance of Tri-Valley Learning Corporation which operated a public charter school. The action centers on a municipal bond offering for the school in which $25.54 million in bonds were sold to the public. The Limited Offering Memorandum furnished to investors failed to disclose the serious financial condition of the firm. Specifically, the memo failed to disclose that the firm had serious cash flow issues, owed vendors substantial sums of money, had a high interest loan that was delinquent, opened a new line of credit that was fully drawn down within 2 months and had received millions of dollars from one of Mr. Batchelor’s non-profit firms in order to make payroll and for other operating expenses. Other portions of the materials were also inaccurate. After the bonds were sold, they could not be serviced. The complaint alleges violations of Securities Act Section 17(a). Each Defendant settled, consenting to the entry of a permanent injunction based on Securities Act Section 17(a)(3). Mr. Batchelor agreed to pay a penalty of $20,000 while Mr. Zukoski will pay $15,000. See Lit. Rel. No. 24806 (April 27, 2020).
Reg. SHO/AML: In the Matter of Biltmore International Corporation, Adm. Proc. File No.. 3-19768 (April 24, 2020) is a proceeding which names as a Respondent the registered broker dealer. From November 2016 through October 2017 Respondent engaged in two violations. First, most of the firm’s business came from facilitating order flow from other brokers. In connection with that work the firm routinely shorted shares. The broker failed to comply with its duties under Regulation SHO, Rule 203(b) to locate securities to cover. This occurred in connection with several thousand transactions. Second, the firm failed to have AML policies and procedures as required. The Order alleges violations of Rule 203(b)(1), Regulation SHO and Rule 17a-8 thereunder. To resolve the proceedings Respondents consented to the entry of a cease and desist order based on the provisions cited in the Order and to a censure. Respondent also agreed to pay a penalty in the amount of $125,000.
Offering fraud – crypto: SEC v. Dropil Inc., Civil Action No. 8:20-cv-00793 (C.D. CA. Filed April 23, 2020). Jeremy McAlpine, Zachary Matar, and Patrick O’Hara, each a co-founder of Dropil, are named as defendants along with their firm. In late 2017 Defendants launched an initial offering for DROPs, the firm’s token, on Dropil’s website. The White Paper used to promote the offering appeared the following January. The White Paper claimed that DROPs could be acquired using a variety of digital assets. The Paper also claimed that Dropil’s “primary service” was a carefully curated and tested set of automated trading bots created by the firm. All transactions by the firm were in the Dex system which required the use of DROP tokens. Investors who wanted to combine the benefits of algorithm trading and holding coins would do well to invest, the White Paper claimed. Investor funds would be pooled, allowing maximum diversification – a large advantage for all traders. The stable returns from the coins would provide good returns, according to the Paper. The offering was marketed not just through the White Paper but also on the firm website and social media. At the conclusion of the initial month long phase of the offering in early March 2018, the firm had about 2,472 investors who purchased 629,561 DROPs in 3,451 transactions. There were no qualifications for investors. After the initial offering, Defendants continued to market and sell DROPs. Over a period of several months Dropil obtained digital assets worth at least $683,747 from those sales. About $390,387 were in digital assets transferred to the founders’ personal accounts at the digital asset trading platform Coinbase. The offering was based on a series of false statements. First, the post offering press release detailing the results was incorrect. It falsely claimed that the firm had sold over 1 billion DROPs. Later there were claims of 50,000. That representation was also incorrect. Second, a key point of the sales centered on trading by the bots. While supposedly Dex was engaged in ongoing, profitable trading, in fact it functioned for only a brief period. Third, while investors were supposed to profit from Dex’s trading and the investments, in fact that was not true. There were no trading profits; any payments came from other sources. Fourth, Defendants misused investor funds. Dropil was supposed to fund capital expenses and pay its founders through DROPs it retained. In fact, of the nearly $1.9 million raised in the ICO, about $1.3 million was transferred to the personal digital asset holdings of the firm’s three co-founders. Finally, Defendants made efforts to conceal their activities by, for example, fabricating documents in response to staff subpoenas. The complaint alleges violations of Exchange Act Section 10(b), and Securities Act Sections 17(a), 5(a)and 5(c). The case is pending. See Lit. Rel. No. 24804 (April 24, 2020).
Offering fraud: SEC v. Aequitas Management, LLC, Civil Action No. 3:16-cv-00438 (D. Ore.) is a previously filed action which named as defendants the firm, CEO Robert Jesenik, EVP Brian Oliver and CFO Scott Gillis. The complaint alleged that the firm, with the knowledge of Messrs. Jesenik and Oliver, defrauded over 1,500 investors who were falsely lead to believe that they were investing in a company involved with health care, education and transportation when in fact it was virtually a Ponzi scheme. Mr. Gillis helped conceal the fraud. To resolve the matter the entity defendant and each individual consented to the entry of a permanent injunction based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The Aequitas entities are in receivership. They will pay $453,000,000 in disgorgement and $87,048,072 in prejudgment interest to be deemed satisfied by the amount collected by the receiver. Mr. Jesenik will pay $759,502 in disgorgement, $181,304 in prejudgment interest and a penalty of $625,000. Mr. Oliver will pay $190,502 in disgorgement with $45,426 in prejudgment interest and Mr. Gillis will pay a $300,000 penalty. Mr. Oliver was also charged criminally and pleaded guilty but has not been sentenced. See Lit. Rel. No. 24805 (April 24, 2000).
MOU: The Securities and Futures Commission executed an MOU with the Competition Commission. The memorandum is designed to provide a mechanism for the two regulators to assist each other and share information (here).
COVID – 19: The Monetary Authority of Singapore, the Association of Banks in Singapore and the Finance houses Association of Singapore announced on September 30, 2020, a second package of measures to support individuals facing financial difficulties due to the COVID -19 pandemic. The package extends the scope of relieve and allows individuals to continue having access to affordable basic banking services (here).