This Week In Securities Litigation (Week of November 15, 2021)
At the Commission the topic of the day continues to be crypto and digital currency. If Chair Gensler is correct that legislation is necessary to address the questions raised by digital assets then the reach of the agency in this area will continue to be limited to actions such as those based on failing to register securities or on fraud.
Last week may be an example. The Commission instituted proceedings against American CryptoFed DAO LLC which had filed a Section 10 registration statement. The agency suspended trading based on claims that the filing was fraudulent. A Section 12(j) order was entered. In the Matter of American CryptoFed DAO, LLC, Adm. Proc. File No. 3-20650 (November 10, 2021). Other countries such as Singapore, are taking a different approach as noted below.
SEC
Appointments: The Commission appointed a new Chairperson and three new members to the board of the PCAOB. Erica Williams will become Chair. She will be joined by Christiana Ho, Kara Stein and Anthony Thompson. Duane DeParte will remain on the Board.
Whistleblowers: The Commission awarded over $15 million to two whistleblowers, according to a November 10, 2021, announcement.
Be careful, be safe this week
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 2 civil injunctive actions and 1 administrative proceeding, exclusive of Section 12(j), tag-along and other similar proceedings.
SEC v. Gamdy, Civil Action No. 4:21-cv-03672 (S.D.Tx. Filed November 9, 2021). The action names as defendants: Robert Gandy, a securities law recidivist and the founder of Defendant Silverback Promotions, LLC; Clarence Fitchett, the founder of Defendant CF3 Enterprises, LLC; Kathy Givens-Gandy, the wife of Defendant Gandy; and Billy Chang, a Texas licensed Pharmacist. The action centers on two schemes involving penny stocks issuers Quantum Medical Transport, Inc. and Macau Capital Investments, Inc. The schemes were implemented in 2017 and 2018. The first centered on the use and abuse of Securities Act Section 3(a)(10). That section permits a firm to issue unrestricted shares to pay for a bona fide debt if the payment is approved at a fairness hearing by a court. This Section was used to defraud investors. The scheme began with the creation of fictitious debt for Quantum and Macau Capital. Debt of those firms was then sold to third parties. CF3 subsequently filed lawsuits in a Florida court on the debts. The court eventually approved the proposed settlements based on the issuance of shares issued by Quantum and Macau Capital. The transfer agent issued the shares based on the fraudulent judgments. The shares had a value of $7 million. The second scheme centered on creating fraudulent, convertible promissory notes. Here Defendants Gandy and Fitchett fabricated the notes for Quantum and Macau Capital that were at the center of the scheme. Defendants Chang and Givens-Gandy then sold the notes to third parties who exercised the option in each note to obtain the shares. Those shares were sold into the market. The sale of the notes generated about $100,000. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25260 (November 9, 2021).
Disclosure: In the Matter of United States Commodity Funds LLC, Adm. Proc. File No. 3-20648 (November 8, 2021) is a proceeding which names as respondents the firm, a CFTC registered commodity pool operator which provides services to eight SEC registered funds, and United States Oil Fund, LP, a CFTC registered pool that is also registered with the SEC –conducts a continuous offering of common shares that can be purchased on NYSE Arca, Inc. In April 2020 the oil markets were in turmoil. On April 20, 2020, as the COVID pandemic unfolded, the near-month oil futures contract went negative – it breached zero and settled negative at –$37.63 for the first time. At the same time USO, an exchange traded product that seeks to track changes in its net asset value with the spot price of crude oil, received record investor cash inflows. The firm filed a Form 8-K noting it was about to exhaust its inventory of shares; then it filed an S-3 registration statement. The next day the firm filed a second Form 8-K noting it exhausted its shares. Two days later the FCM for the firm told the firm that it would inhibit investment in new USO shares through the FCM since that would increase its risk profile, a determination called the New Creation Limit. By prohibiting this new investment, USP as an ETP could only invest the proceeds not in new shares as usual but in US treasuries or cash equivalents or let them remain in cash. This created the risk of a tracking error between USO’s investment objective and its NAV when the suspension of New Creation was lifted. While USO made a number of additional filings, and was the subject of an inspection, the New Creation Limit and its impact was never fully disclosed. The Order alleges violations of Securities Act Section 17(a)(3). Respondent resolved the proceedings, consenting to the entry of a cease-and-desist order based on the Section cited in the Order. In addition, the firm agreed to pay a penalty of $2.5 million which is off set up to any amount paid in resolving a parallel CFTC action up to $1.250 million. See also In the Matter of United States Commodity Funds LLC, CFTC Docket No. 22-06 (November 8, 2021)(resolved with a cease-and-desist order and the imposition of a penalty of $2.5 million ).
Insider trading: SEC v. Dikshit, Civil Action, Civil Action No. 1:21-cv-09289 (S.D.N.Y. Filed November 11, 2021) is an action which names as defendant Puneet Dikshit, a partner in a New York City based Consulting Firm where he served as the lead for the firm’s North American Unsecured Lending and Digital Payments Services Lines. This action centers on the acquisition of GreenSky, Inc., a publicly traded finance firm, by Major NYC Bank that closed and was announced on September 15, 2021. Prior to that time Defendant served as the lead partner on Consulting Firm’s engagement by Major NY Bank with respect to the deal. In mid-September 2021 Defendant purchased out-of-the-money call options referencing GSKY that were set to expire on September 17, 2021. The firm’s share price increased about 53%. Mr. Dikshit sold his holdings, yielding a profit of about $450,000. The complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal action. The cases are pending.
FinCEN
Notice: The regulator announced that it brought together in a virtual meeting on November 9, 2021, members of the financial industry and law enforcement to discuss the FinCEN analysis of suspicious activity reports or SARs with a transnational hub in Alabama, Florida, Georgia, Mississippi and South Carolina. The discussion included an analysis of recent SAR filings (here).
Australia
Remarks: Commissioner Sean Hughes, Australia Securities and Investment Commission, delivered remarks at the National Whistleblowing Symposium, November 11, 2021. The Commissioner’s remarks reviewed the three year old program while focusing on what he called a compliance gap (here).
Singapore
Announcement: The Monetary Authority of Singapore announced the world’s first digital trade financing pilot. The pilot used the Infocomm Media Development Authority TradeTrust framework to facilitate the transfer of electronic records between jurisdictions that have adopted the United Nations Commission on International Trade Law. Those involved included MAS, the financial Services Regulatory Authority of Adu Dhabi Global Markets, DBS Bank Emirat NBD and Standard Charter. The announcement was published on November 11, 2021 (here)