This Week In Securities Litigation (Week of November 29, 2021)
As the holidays unfold, and the thoughts of many turn to gatherings of family and friends, the Commission and other regulators and law enforcement agencies continued to focus on existing trends. A number of actions discussed in announcements, for example, involved existing cases as depicted below. Other initiatives centered on environmental concerns and crypto, topics of continuing interest among law enforcement officials and regulators, suggesting that the coming new year may represent an extension of existing trends.
Guidance: The Commission staff issued accounting guidance on “spring loaded” executive compensation awards to on Monday, November 29, 20921 (here). The awards are typically issued when a company grants stock options or other awards shortly before announcing market-moving information. The awards are discussed in staff Accounting Bulletin No. 120.
Whistleblowers: The agency announced awards totaling $10.4 million to several whistleblowers on November 22, 2021.
Be careful, be safe this week
SEC Enforcement – Litigated Actions
Pay-to-play: SEC v. Paulsen, Civil Action No. 18-cv-6718 (S.D.N.Y.) is a previously filed action in which John Paulson, the former managing and fixed income director at a registered broker-dealer was charged with aiding and abetting a pay-to-play scheme involving the New York State Common requirement. Following a virtual bench trial, Mr. Paulson was found liable for aiding and abetting violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In a final judgment he was directed to pay a penalty of $100,000. Previously, the Commission obtained final judgments against three others. See Lit. Rel. No. 25267 (November 23, 2021).
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 2 civil injunctive actions and 3 administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.
Sham business: SEC v. Kuhnash, Civil Action No. 19-cv-00028 (S.D. Ind. ) is a previously filed action against two former executives of Lucent Polymers, Inc. – Jason Jimerson and Kevin Kulnash. The complaint alleged that defendants engaged in a scheme to conceal the core business model of the firm because it was a sham in connection with a 2013 business transaction. In a parallel criminal action, filed by the U.S. Attorney’s Office for the Southern District of Indiana, Mr. Kihnash pleaded guilty to two counts of securities fraud and one count of money laundering. He was sentenced to serve 36 months in prison followed by one year of supervised release, and directed to pay a $10,000 fine. Mr. Jimerson pleaded guilty to the same three charges and, in addition, one count of making a false statement. He was sentenced to serve 24 months in prison followed by two years of supervised release and was also ordered to pay a fine of $10,000. In the Commission’s action, the Court entered final judgments by consent as to each person, based on Securities Act Section 17(a) and Exchange Act Section 10(b). Each Defendant is, in addition, precluded from serving as an officer or director of a public company. Mr. Kuhnash was also directed to pay disgorgement of $1,354,498 and prejudgment interest of $422,319. Mr. Jimerson was ordered to pay disgorgement of $648,498 along with prejudgment interest of $182,724. See Lit. Rel. 25273 (November 24, 2021).
Mismanagement: In the Mater of Upright Financial Corp., Adm. Proc. File No. 3-20664 (November 24, 2021) names as respondents the registered investment company and David Yow Shang Chiueh, the firm’s founder and COO. Over a three-year period the firm and its portfolio manager made investments in the fund that were inconsistent with its classification as a diversified investment company and its disclosed policies. It also miscalculated NAV for June 30, 2020 and in some instances overstated NAV. The firm has agreed to implement a number of undertakings, including the retention of an independent compliance consultant. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a)(1), 13(a)(3), 20(a) and 34(b), and Advisers Act and Rules 206(4)-7 and 206(4)-8. To resolve the proceedings Respondents consented to the entry of cease-and-desist orders based on the Sections and Rules cited in the Order and to censures. The firm also agreed to pay disgorgement of $390,704.92 along with prejudgment interest of $36.505. Respondents will pay, in addition, a penalty, on a joint and several basis, of $90,000.
Offering fraud: SEC v. Griffithe, Civil Action No. 8:20-cv-00124 (C.D. Cal.) is a previously filed action in which Defendants Guy Scott Griffithe and Robert W. Russell settled with the Commission. The underlying complaint was based on an offering fraud. It alleged that Defendant Griffithe used a company he controlled to sell investors purported interests in an entity owned by Defendant Russell. Investors were told their funds would be used to operate the Russell owned entity. Instead, the money was misappropriated by Defendant Grffthe. Defendants agreed to bifurcated settlements. The Court resolved the monetary issues last week. Mr. Griffithe was directed to pay disgorgement in the amount of $2,882,539, prejudgment interest of $336,194 and a penalty of $2,882,539. Defendant Russell was ordered to pay $275,153 in disgorgement, $44,190 in prejudgment interest and $378,888 as a civil penalty. The judgment also precludes Mr. Griffithe from participating in the offer or sale of securities or serving as an officer or director. The Court dismissed the action as to two other defendants based on a stipulation of the parties. See Lit. Rel. No. 25272 (November 24, 2021).
Misappropriation: SEC v. Molo, Civil Action No. 21-cv-6286 (N.D. Ill. Filed November 23, 2021) is an action against Robert Molo, an employee of Financial Institution. Over a period of about two years, beginning in 2019, Defendant Molo misappropriated $250,000 and $300,000, respectively from two advisory clients and, in addition, $250,000 from a brokerage firm customer. Each client was a senior citizen. The money was misappropriated by convincing each client that the funds would be placed in tax-free bonds. The bonds did not exist. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1) and 206(2). The action is pending. The U.S. Attorney’s Office for the Northern District of Illinois filed parallel criminal charges. See Lit. Rel. No. 25270 (November 23, 2021).
Insider trading: SEC v. Feingold, Civil Action No. 20-civ-01881 (S.D.N.Y.) is a previously filed action which names as a defendant, Dov Malnik, an Israeli citizen, and others. The complaint alleged that Mr. Malnick generated millions of dollars in illegal trading profits based on inside information obtained from London based investment bankers who were previously charged by the agency. To resolve the action, Mr. Malnick, consented to the entry of permanent injunctions based on Exchange Act Sections 10(b) and 14(e). He also agreed to pay a penalty of $2,828,699. In a parallel criminal action, Defendant pleaded guilty to one count of securities fraud. He was sentenced to serve 30 months in prison. See Lit. Rel. No. 25269 (November 23, 2021).
Disclosure-perks: In the Matter of ProPertro Holdings Corp., Adm. Proc. File No. 3-20661 (November 22, 2021) is a proceeding which names as respondents the NYSE listed firm and Dale Redman, its co-founder and CEO. Over a two-year period, beginning in January 2017, Respondent Redman failed to provide sufficient information to the firm, and ProPertro failed to fully disclose certain perks received by the founder and former CEO. Specifically, the firm did not in its definitive proxy statement and annual reports properly disclose: 1) about $252,896 in travel charges tied to the use of the firm aircraft; 2) the personal use of company credit cards totaling $127,698 and 3) a pledge of firm stock made in violation of company policy. The firm took remedial efforts which were considered by the Commission. The Order alleges violations of Securities Act Section 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(a), 13(b)(2)(B), and 14(a), along with the related rules. To resolve the proceedings the firm consented to the entry of a cease-and-desist order based on each Exchange Act Section cited in the order while Mr. Redman consented to the entry of a similar order but one based on each Securities Act and Exchange Act Section cited. In addition, Mr. Redman will pay a penalty in the ammo und of $195,046.
MNPI: In the Matter of Mio Partners, Inc., Adm. Proc. File No. 3-20656 (November 19, 2021) is a proceeding which names as respondent the registered investment adviser, a subsidiary of a nationally known Consulting Firm. The Order alleges that Respondent failed to establish and maintain written policies and procedures regarding the handling of material non-public information. Here Respondent had members of the Consulting Firm on the investment committee of its board of directors. As members of that board committee they received MNPI while overseeing and monitoring Respondents investment decisions. The Order alleges violations of Advisers Act Sections 204A and 2-6(4) and Rule 206(4)-7. To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Sections and Rule cited in the Order. In addition, the adviser will pay a penalty of $18,000,000.
Manipulation: SEC v. O’Brien, Civil Action No. 1:21-cv-09575 (S.D.N.Y. Filed November 18, 2021) is an action which names as a defendant James O’Brien, a self-employed, self-described trader. Over a four-year period Defendant and his wife engaged in a manipulative trading scheme using multiple accounts to trade a number of stocks in a manipulative manner which netted him just under $10 million in profits. Specifically, Defendant O’Brien would trade two or more stocks in different accounts at different brokerage firms to manipulate the price. For example, certain accounts were designated as “helpers.” Those accounts were used to manipulate the price of a stock down before the trading actually took place. Once the price decreased, trading was initiated in other accounts to push the price up. By employing this approach in about 18,000 coordinated trading events, Defendant was able to make about $9.6 million that ultimately netted about $5.8 million. While a number of brokerage firms cautioned Defendant, Defendant avoided difficulty by moving the accounts and then continuing the scheme. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 9(a)(2), 10(b) and Rule 10b-5(a) and (c). The case is pending. See Lit. Rel. No. 25266 (November 19, 2021).
Meeting: The Department of Justice and the Federal Trade Commission announced a November 29, 2021 meeting involving the DOJ Antitrust Division and the FTC at the G7 Digital and Technology Track, hosted by the UK Competition and Markets Authority. The meeting “offered a unique opportunity for international competition agencies to discuss common areas of interest and opportunities for potential collaboration on issues such as large digital platforms, app stores, online marketplaces, digital advertising, mobile ecosystems, cloud computing and algorithms,” according to the release.
Notice: The regulator issued a Notice to “call attention to an upward trend in environmental crimes and associated illicit financial activity. FinCEN is highlighting this trend because of: (1) its strong association with corruption and transnational criminal organizations . . . (2) a need to enhance reporting and analysis of related illicit financial flows . . . and (3) environmental crimes’ contribution to the climate crisis . . .” The notice was issued on November 18, 2021.
Initiative: The Monetary Authority of Singapore announced a “new skills Maps” launched by the IBF and MAS to enhance the capabilities of family office professionals, in a release dated November 29, 2021 (Here).
Remarks: Ravi Menon, Managing Director of MAS, delivered the keynote address at the Singapore-China (Chongqing) Financial Summit on November 23, 2021. His remarks discussed how Singapore and Chongqing could work together to mobilize green financing investments (here).