This Week In Securities Litigation (Week of November 23, 2020)

Last week as everyone celebrated the Thanksgiving holiday, the Commission continued to schedule meetings regarding proposed rule revisions. The rules to be considered involve select offerings tied to compensation.

The Enforcement Division filed two new actions in advance of the holiday.

Be safe and healthy this week


Proposed rules: The Commission proposed on November 24, 2020 to modify Rule 701 and Form S-8 regarding compensatory securities offerings in view of the evolving market. Specifically, the proposal seeks to exempt transactions over $10 million, revise the disclosures and raise two of the three caps. There are also proposals related to Form S-8 and to simplify counting and fee payments (here).

Proposed rules: The agency proposed to adopt certain temporary rules to facilitate participation for “platform workers” in compensation offerings under Rule 701 and Form S-8, on November 24, 2020 (here). The proposal would permit issuers to provide equity compensation to certain platform workers who provide services available through the issuer’s technology based platform or system.

Statement: Commissioners Hester M. Peirce and Elad L. Roisman filed statements on November 24, 2020 suggesting an additional expansion of the revisions in view of the development of the gig economy (here). The statement was issued on November 24, 2020.

Statement: Commissioners Allison Herren Lee and Caroline A. Crenshaw issued a statement regarding the modifications to Rule 701 and Form S-8 in view of the gig economy. Essentially, they argued that the data used to support the amendments is much broader than what was used in connection with the modifications (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 2 civil injunctive actions and no administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters.

Conflicts/misrepresentations: SEC v. Rumbaugh, Civil Action No. 5:19-cv-01517 (CD Cal.) is a previously filed action which named as defendants Craig Rumbaugh and his two controlled entities, one of which is a state registered investment adviser. The action centers on the recommendation of the adviser to clients that they invest in a firm which supposedly would place the money in short term, high interest notes. In fact, the eight clients who put in over $3 million later learned that the entity was a Ponzi scheme. In addition, Defendants received over $140,000 in concealed commissions. Defendants also made misrepresentations regarding the claimed investments. To resolve the action each Defendant consented to the entry of a permanent injunction based on Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Sections 10(b) and 15(a) and Advisers Act Sections 206(1) and 206(2). Defendants also agreed to pay, on a joint and several basis, disgorgement in the amount of $676, 000, prejudgment interest of $137,808 and a penalty of $192,768. In a related administrative proceeding Mr. Rumbaugh consented to the entry of an order which bars him from the brokerage business. See Lit. Rel. No. 24969 (Nov. 24, 2020).

Offering fraud: SEC v. Benja Inc., Civil Action No. 3:20-cv-8328 (N.D. Cal. Filed Nov. 23 2020) is an action which names as defendants the firm, supposedly an on-line marketer, and its CEO Andrew J. Chapin. Defendants raised several million dollars from investors and banks by representing that Benja had contracts with major vendors such as Nike, Patagonia and Franatics, all of which helped make the firm profitable. In reality the firm had no contracts and was not profitable. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The complaint is pending. See Lit. Rel. No. 24968 (Nov. 23, 2020).

Insider trading: SEC v. Sullivan, Civil Action No. 2:20-cv-811 (W.D. Pa. Filed Nov. 20, 2020) is an action which names as a defendant Michael Sullivan, an employee at a publicly traded sporting goods store chain. In two instances when Mr. Sullivan was subject to blackout periods, he engaged in insider trading, purchasing options in advance of an earnings announcement. The first instance was in advance of the announcement for the second financial quarter of 2018. Defendant purchased 100 put options. Following the announcement of results the share price declined 9%. Mr. Sullivan had profits of $11,500. The second centered on the results for the third quarter of 2019. In advance of the announcement of the results Mr. Sullivan purchased 132 call options. In this instance the share price increased over 18%. Mr. Sullivan had trading profits of over $26,000. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24967 (Nov. 23, 2020).

Offering fraud: SEC v. Winston Reed Investments, LLC, Civil Action No. 1:20-cv-38 (W.D.N.C.) is a previously filed action which named as defendants Mark N. Pyatt and his firm, Winston Reed Investments. Defendants raised millions of dollars by representing to investors that they would employ the funds in a sophisticated strategy employing futures contracts. In fact, most of the funds were misappropriated. To resolve the matter each Defendant consented to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). Defendants also agreed to pay, on a joint and several basis, disgorgement of $255,850 subject to offset by the amount paid as restitution in a parallel criminal against Mr. Pyatt. In the criminal case Mr. Pyatt pleaded guilty to one count of wire fraud and was sentenced to serve 37 months in prison followed by three years of supervised release. See Lit. Rel. No. 24966 (Nov. 20, 2020).

Hong Kong

Consultation: The Securities and Futures Commission concluded a consultation on changes to the REIT Code, according to an announcement made on November 27, 2020 (here). The changes are designed to permit the Hong Kong REIT market to facilitate long term growth while enduring investor protection.


Remarks: Ravi Menon, Managing Director of the Monetary Authority of Singapore, delivered remarks titled “growing Timber” at the MAS-IBF Webinar on November 26, 2020 (here). His remarks focused on job opportunities and readiness in the coming market.

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