This Week In Securities Litigation (Week of November 1, 2021)
Government regulators will focus on cases involving crypto, gatekeepers, and individuals moving forward, according to comments made at a recent program. These statements largely echo those made by the Commission’s new Enforcement Directors.
If the reported comments reflect the focus going forward it will be a significant shift for the Commission. In recent years the largest categories of cases brought by the agency have been offering frauds actions, matters centered on investment advisers and at times those involving microcap fraud and perhaps issuers and their disclosures. While a few cases have periodically been initiated involving crypto, overall those cases are a small part of those case load.
SEC
Remarks: Commissioner Hester M. Peirce delivered remarks before the Fordham Journal of Corporate and Financial Law Conference titled “Here to Stay: Wrestling with the Future of the Quickly Maturing SPAC Market,” on October 22, 2021 (here).
Examinations: The Division of Examinations published “Observations from Examinations in Registered Investment Company Initiatives,” October 26, 2021 (here)
Remarks: Chair Gensler addressed the Financial Stability Oversight Committee on October 21, 2021 (here).
Remarks: Chair Gensler delivered remarks at DC Fintech Week, on October 21, 2021 (here).
Whistleblowers: The agency awarded over $2 million to a whistleblower who provided information that led to a successful related action by DOJ.
Be careful, be safe this week
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.
Advisory fraud: SEC v. Welsh, Civil Action No. 21 Civ. 19387 (October 28, 2021) is an action which names as defendant Kenneth Welsh, an employee at a financial institution that is a broker-dealer and investment adviser. Over a period of about five years Defendant used over 100 Automated Clearing House or ACH transactions to take money from client accounts for his personal benefit. He also drew numerous checks on client accounts to secure their funds. Defendant, in addition, frequently sold client funds shortly before the money transfers. The complaint alleges violations of Securities Act Sections 17(a)(1) and (2), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The case is pending.
Failure to file Form LCM: In the Matter of Lexion Capital Management LP, Adm. Proc. File No. 3-10635 (October 28, 2021) is a proceeding which names as a respondent the registered investment adviser. The Order alleges that the firm failed to deliver to clients Form LCM (Part 3 of Form ADV) as required by June 30, 2020 for existing clients and by July 30, 2020 for new clients. The Order alleges violations of Advisers Act Section 204 and Rules 204-1 and 204-5. To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. The firm will also pay a penalty of $10,000.
Financial fraud: SEC v. Akazoo S.A., Civil Action No. 1:20-cv-08101 (S.D.N.Y.) is a previously filed action in which the defendant claimed to be a successful music streaming services that had been created from a merger of Akazoo and Modern Media Acquisition Corporation, a SPAC, in 2019. Following the merger the company, whose shares were traded on Nasdaq, continued to mislead investors regarding its financial success. While Akazoo claimed to have significant revenues, in fact they were negligible. Its most significant source of revenue was the sale of stock to investors for $54.8 million. Following a short seller report that exposed the firm’s fraud, the board directed an internal investigation, conducted in April 2020. The company has now agreed to the entry of a Final Judgment under which it is liable for disgorgement of $38.8 million which represents the net profits gained. The Commission’s investigation is on-going. The judgment was entered on October 27, 2021.
Advisory fraud: SEC v. Rege, Civil Action No. 3:21-cv-19313 (D.N.J. Filed October 26, 2021) is an action which names as defendants Swapnil Rege, barred as an investment adviser in 2019, and his firm, Swapstar Capital, LLC. Beginning in 2017, and continuing through the Commission’s investigation and entry of sanctions, Defendants raised over $10 million from advisory clients. Those investors were promised returns that ranged from 40 to 60% annually. Rather than invest the funds, however, Defendants used much of the money to repay other clients. The complaint alleges violations of Advisers Act Sections 203(f), 206(1), 206(2), and 3209(d). The action is pending. See Lit. Rel. No. 25249 (October 27, 2021).
Scalping: SEC v. Gallagher, Civil Action No. 1:21-cv-08739 (S.D.N.Y. Filed October 26, 2021) is an action which names as defendant Steven Gallagher. Defendant controls a twitter account, Alexander Delage 655321. Beginning in late 2019 Mr. Gallagher used his twitter account to engage in a scalping scheme – one in which a holder of securities recommends them to others without disclosing that he planned to sell. Here Mr. Gallagher repeatedly recommended shares of microcap stocks he owned through the use of his twitter account and then sold the shares. By engaging in this practice with respect to at least 60 issuers reaping at least $3.39 million is illicit profits. During the period Defendant received repeated warnings from his broker about engaging in such conduct. Nevertheless, Mr. Gallagher persisted. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. See Lit. Rel. No. 25248 (October 26, 2021).
Offering fraud: SEC v. Vick, Civil Action No. 1:21-cv-02870 (D. Colo. Filed October 25, 2021) is a case which names as defendant Ann Vick. She is the owner of AMV Investments LLC and the operator of a chain of restaurants in Colorado. Despite a background that centers on food service rather than investments, Ms. Vick was able to raise substantial sums of money which was put into AMV, a pooled investment vehicle. Specifically, in a period of months, beginning in August 2018, she raised at least $3.2 million from over two dozen investors. The sales pitch was straight forward: Ms. Vik promised investors monthly interest payments ranging from 5-10% or 60-120% annually. The profits were to come from options trading. Yet from about December 2019 through early 2020 the trading results were abysmal. Ms. Vick’s trading generated losses. She added to the investor losses by misappropriating hundreds of thousands of dollars of investor money. Since there were no trading profits to pay investors the promised returns, she began paying investors with funds raised from other investors – Ponzi type payments. Despite the losses, Ms. Vick was able to raise another $1.3 million from new investors over a several month period, beginning in May 2020. Again he sales pitch was straight forward: Potential investors were told that her options trading was extremely profitable. No mention was made of earlier losses; no mention was made of the stolen funds. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the case Ms. Vick consented to the entry of permanent injunctions based on the Sections cited in the complaint. She also agreed to pay disgorgement of $570,150, prejudgment interest of $27,929 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 25246 (October 26, 2021).
Advisory fraud: SEC v. Boggs, Civil Action No. 19-CV-5672(N.D.Ill.) is a previously filed action which named as defendant Marcus Boggs, formerly employed at a broker-dealer and investment advisor. The complaint alleged that from 2016 to 2018 Defendant liquidated funds of clients and in over 200 instances transferred them to his credit card account. To resolve the matter, Mr. Boggs agreed to the entry of a final judgment which imposed permanent injunctions based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(1) and 206(2). The judgment also requires him to pay disgorgement in the amount of $1,719,493 and prejudgment interest of $195,458. Those amounts will be satisfied by the order in the parallel criminal case which directs that Mr. Boggs pay restitution of $3,085,256. See U.S. v. Boggs, No. 19-cr-659 (N.D. Ill.). See also Lit. Rel. No. 25245 (October 25, 2021).
FinCEN:
Renewal of real estate orders: The regulator announced the renewal of real estate geographic targeting orders for 12 metropolitan areas on October 29, 2021 (here).
Australia
Update: The Australian Securities & Investment Commission issued its quarterly update report for 3Q21 on October 27, 2021 (here).
ESMA
Social media: The European Securities and Markets Authority issued a release on investment recommendations made on social media platforms on October 28, 2021 (here).
Singapore
Proposals: The Monetary Authority of Singapore’s Cyber Security Advisor Panel issued Proposals regarding the strengthening of security in IT Supply Chains, Online Banking and Blockchain on October 29, 2021 (here).
U.K.
Statement on climate: The Financial Conduct Authority released a joint statement by the FCA, PRA, TPR and FRC on the publication of Climate Change Reports, October 28, 2021 (here).