This Week In Securities Litigation (Week of November 21, 2022)

In the wake of the FTX bankruptcy there is of course the typical recriminations and second-guessing. More importantly, there are also calls for new regulation in the crypto space. This tune has played before. Draft legislation has been introduced in Congress. SEC Chair Gensler has called for legislation but now does not anticipate any – at least that was his position just before the FTX crash. Whether FTX will be sufficient to generate actual legislation in the crypto space is unclear. If there is it may be much harder to “get off the grid” which was the original notion on which crypto was based.

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 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.

Unregistered broker: SEC v. GEL Direct Trust GEL Direct LLC, Civil Action No. 1:22-cv- 09803 (S.D.N.Y. Filed November 17, 2022) is an action which names as defendants: the firm; Jeffrey Galvani; and Stuart Jeffery. The individual defendants control Defendant GEL, the managing trustee of a number of customer accounts. Over a three-year period, beginning in June 2019 over 19,000 trades were executed for penny stocks involving 300 billion shares for over 400 investors on behalf of about 60 customers. The trades generated over $1.2 billion for GEL’s customers. That firm received over $12.4 million in compensation. Defendants are not registered broker-dealer. The complaint alleges violations of Exchange Act Sections 15(a) and 20(a). The case is pending. See Lit. Rel. No. 25579 (November 17, 2022).

Insider trading: SEC v. Holzer, Civil Action No. 22 Civ. 08342 (S.D.N.Y.) is a previously filed action which names as defendant Charles Holzer, manager of a family office; SEC v. Moraes, Civil Action No. 22 Civ. 08343 (S.D.N.Y.) is a previously filed action which names as defendant Ferrando Motta Moraes, the COO of the family office. The two actions allege that each Defendant traded on inside information in the securities of Dun & Bradstreet Corporation prior to the announcement that the firm would be acquired by a private investor. Defendants obtained the information through the execution of an NDA with a member of the investor group. Previously, each Defendant settled. Each Defendant consented to the entry of a permanent injunction based on Exchange Act Section 10(b) and the entry of an officer/director bar. Defendant Holzer also agreed to pay disgorgement of $91,509 plus prejudgment interest of $14,217.67 and a penalty of $763,509. Mr. Moraes agreed to pay disgorgement of $8,842 plus prejudgment interest of $1,647 and a penalty of $646. See Lit. Rel. No 25578 (November 16, 2022).

Offering fraud: SEC v. Kawuba, Civil Action No. 1:22-cv-11897 (D. Mass. Filed November 10, 2022) is an action which names as defendant Adrian J. Kawuba, a citizen of Uganda who now resides in Massachusetts. Over a four-year period Defendant solicited about $1.9 million from a core group of 20 investors. The investments were supposed to pay returns of up to 50% in a short period. As the scheme progressed much of the money was repaid to the core investors. Nevertheless, Defendant continued to solicit investors, raising smaller sums. Much of the money was spend on the personal expenses of Defendant. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). A temporary restraining and freeze order has been entered. The U.S. Attorney’s Office for the District of Massachusetts has announced parallel criminal charges. The case is pending. See Lit. Rel. No. 25577 (Nov. 14, 2022).

Conflicts: In the Matter of S&P Global Ratings, Adm. Proceeding File No. 3-21240 (November 14, 2022). Respondent is an NRSRO based in New York City. In August 2017 Respondent had not rated any transactions for the issuer since 2015. The client requested that the firm rate certain senior tranches of RMBS. Initially, Respondent informed the client that the RMBS transaction met the minimum credit enhancement floor under the applicable criteria to be assigned a “AAA” rating. Later Respondent notified the client that there had been a calculation error – the tranches being considered were actually 10 basis points under the minimum for the AAA rating criteria. A few days later Respondent informed the client that after further analysis and discussion it had reached a different conclusion – the tranches did meet the minimum requirements to secure the AAA rating. The issuer repeatedly expressed disappointment with the process. During the communications between Respondent’s staff and that of the issuer, the latter threatened Respondent with a lawsuit. As Respondent’s employees re-evaluated the transaction over a five-day period in early August 2017 there were multiple discussions and emails along with meeting requests and telephone calls. There was an effort to pressure S&P analytical employees to find a way to rate the transaction AAA. All of the communications between the S&P commercial and analytical employees during the period were chaperoned by staff from the S&P compliance department. Nevertheless, some emails reflected sales and marketing considerations. Those included the fact that a quick decision was required if the transaction was to move forward with S&P. Exclusion of the firm would impact its future business. S&Ps analytical employees worked late the evening prior to a preliminary meeting of the rating committee. The group was considering a unique structural item as urged by the issuer. The analytical group concluded that the rating should be AAA based in part on an economic outlook that extended past the end point of the one prepared at the beginning for the transaction. The Order concludes that as “a result of the content, urgent nature, high volume, and compressed timing of the communications between the S&P commercial employees and the S&P analytical team . . .” the S&P commercial employees became “participants” in the rating process for the RMBS transaction being influenced by sales and marketing considerations. This violates Rule 17g-5(c)(8). In resolving the proceedings Respondent agreed to implement certain undertakings. Respondent consented to the entry of a cease-and-desist order based on Rules 17g-5(c)(8)(i) and 17g-5(c)(8)(ii) under Exchange Act Section 21F(g)(3). The firm agreed to pay a penalty of $2.5 million.

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