This Week In Securities Litigation (Week of November 7, 2022)
The Commission continued to file new cases in a variety of areas. The areas addressed this week include; insider trading, offering fraud, financial fraud, and crypto actions. The agency also proposed a series of new rulers for funds and the oversight of investment advisers tied to outside servies while adopting new rules regarding proxy voting disclosures.
Be careful, be safe this week
Proposed rules – funds: The Commission proposed enhancements to the framework for open ended funds on November 2, 2022. Specifically, the proposals are designed to enhance the liquidity of funds (here).
Rules: The Commission adopted changes to the rules regarding proxy voting disclosures by registered investment funds. The rules, announced on November 2, 2022, are designed to enhance the transparency of fund and institutional investment manager proxy voting records (here).
Whistleblowers: The agency announced that over $10 million has been awarded to a whistleblower, according to a release dated October 31, 2022.
Proposed rules: The Commission proposed new oversight requirements for certain services outsourced by investment advisers in a release dated October 26, 2022 (here).
SEC Enforcement – Filed and settled actions
Last week the Commission filed 6 civil injunctive actions and 1 administrative proceedings, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.
Insider trading: In the Matter of Michael E. Mueller, Adm. Proc. File No. 3-2134 (November 4, 2022). This action centers on the acquisition of Laynette Christensen Company by Granite Construction Inc. in a deal announced on February 14, 2018. Prior to that time Respondent was told by his close friend, Andre Dabbaghian, that her employer, Granite Construction, had identified Layne as an acquisition target. Respondent then traded in shares of the firm and had trading profits of over $38,000 following the deal announcement. The Order alleges violations of Exchange Act Section 10(b). To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. Respondent also agreed to pay disgorgement of $38,075.32, prejudgment interest of $8,003.38 and a civil penalty of $52,118.87.
Offering fraud: SEC v. Costello, Civil Action No. 2:22-cv-01388 (W.D. Wash.) is a previously filed action which names as defendant Justin Costello and others. Mr. Costello is alleged to have engaged in a microcap stock promotion scheme that generated just under $800,000 in trading profits for him and others over a period of about 3 years, beginning in 2019. This case is one of a series of trading frauds operated by Defendant. The Court entered a final judgment by consent as to Mr. Costello, enjoining him from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The judgment also precludes Defendant from participating in any offering of a penny stock. Monetary relief will be considered by the Court in the future. See Lit. Rel. No, 25572 (W.D. Wash. November 4, 2022).
Crypto trading fraud: SEC v. Rounsville, Civil Action No. 3:22-cv-02458 (N.D. Tx. Filed November 3, 2022) is an action which names as defendant Jeremy K. Rounsville. Over a period of about one year, beginning in May 2018, Defendant Rounsville served as the public face and primary promoter of crypto asset trading program “The Trading program.” It used proprietary trading software to generate large returns, according to Defendants. The trading bot was marketed under the name Arbitraging.co. The bot could identify arbitrage trading situations that would generate profits of up to 1% per day, according to the sales pitch. Defendant was not paid and did not share in profits. In reality Trading Operation never operated as advertised. In fact the operation did not engage in anu trading. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the matter Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. The order also prevents him from participating in future offerings and imposes an officer/director bar. In addition, Defendant has been directed to pay penalties of $207,183. See Lit. Rel. No. 25569 (November. 3, 2022).
Financial fraud: SEC v. Gibson, Civil Action No. 15-cv-00363 (D. Del.) is a previously filed action which names as defendant David Gibson, the former COO of Wilmington Trust. In 2015 Defendant and others made misleading public statements and omissions regarding the institution’s loan portfolio. Those included underreporting by hundreds of millions of dollars its real estate loans which were 90 days or more past due. The false statements also concerned the credit quality of certain Wilmington Trust loans. Mr. Gibson settled with the Commission, consenting to the entry of a permanent injunction based on Section 17(a) of the Securities Act and Sections 10(b) and 13(a)(5) of the Exchange Act. The judgment also precludes aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The judgment bars Defendant from serving as an officer or director of a public company and requires him to pay a penalty of $100,000. See Lit. Rel. No. 25568 (Nov. 3, 2022).
Crypto Ponzi scheme: SEC v. Braga, Civil Action No. 2:22-cv-01563 (W.D. Wash. Filed November 3, 2022) names as defendants: Douver Torres Braga, currently a resident of Florida, who created Trade Coin Club and its operations; Joff Paradise, currently a resident of Panama, who previously described himself as the Director of the United States for Trade Coin Club; and Keleionalant Taylor, the highest paid official of Trade Coin Club. Defendants operated a Bit Coin Ponzi scheme called Trade Coin Club for a period of about two years, beginning in 2016. During that period the firm raised about $295 million from more than 100,000 investors. Defendant Braga not only created the Club, he was one of the main operators. Potential clients were told that the Club had a trading bot generating significant profits by conducting millions of microtransactions per second. The bot also had a stop loss to protect them. Blockchain analysis permitted the Commission to analyze the operations – or lack of operations – of Trade Coin Club. As operations continued , Defendants recruited new members using a pyramid scheme-like referral system. In early 2018 the Club announced it would discontinue operations in the U.S. It also limited withdrawals to ICoin, a new crypto asset that ultimately proved worthless. By the summer of 2018 operations terminated. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See also SEC v. Tetreault, Civil Action No. 2:22-cv-01567 (W.D. Wash. Filed Nov. 3, 2-22)(action against Jonathan- based on same basic facts). See Lit. Rel. No. 25571 (November 4, 2022).
Offering fraud: SEC v. Igbara, Civil Action No. 1:22-cv-06669 (S.D.N.Y. Filed November 2, 2022). Defendant Jebara Igbara is the founder of Halal Capital, LLC, a private investment fund. It was claimed to focus on making Quran-compliant investments. In addition, when Defendant Igbara began soliciting Muslim investors October 2019 he promised that his business expertise would result in returns on an annual basis of about 40% or more within a year. Within less than one year after he initiated the scheme, Defendant Igbara raised about $8 million from over a dozen different investors. None of the investor money was invested. To the contrary, the funds were misappropriated by Defendant. The investor funds were used for the expenses of Mr. Igbara or to make Ponzi like payments. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Eastern District of New York announced criminal charges against Defendant.
False statements: In the Matter of Koppers Holdings Inc., Adm. Proc. File No. 3-21223 (November 1, 2022) is a proceeding which names the firm as Respondent Throughout 2019 the firm repeatedly emphasized debt reduction in earnings calls and filings with the Commission. While in fact the firm did report debt reduction, it was achieved by not paying many invoices and billings. After reporting a reduction in debt for the year, the firm paid the billings. The Order alleges violations of Securities Act Section 17(a)(3) and Exchange Act Section 13(a) and related Rules. To resolve the matter Respondent undertook remedial acts and consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, Respondent agreed to pay a penalty of $1.3 million.
Free riding: SEC v. Arbab, Civil Action No. 1:22-mi-99999 (N.D. Ga. Filed October 31, 2022). The complaint in this action is the most recent enforcement action against Mr. Arbab. It names as defendants: Syed Arham Arbab, a graduate of Georgia State University who is currently serving a 60 month in federal prison for securities fraud; Tomas Javier Jimenez, a friend of Defendant Arbab who at the time here a cook; Blake Douglas McKinney, also a friend of Mr. Arbab who is now pursuing a degree at the University of Michigan-Dearborn; Mushfiqur Rahman, a friend of Defendant Arbab’s father who is now pursuing a degree at Hunter College; John Ryan Shows who attended UGA with Defendant Arbab; and William Carl Spagnoli who attended UGA with Defendant Arbab. Over a three-year period, beginning in May 2019, Defendants Arhab, Jimenex, McKinney, Shows and Spagnoli engaged in a free riding scheme. Ultimately the scheme generated millions in profits for defendants; the broker-dealers were left with losses. The scheme was created by Defendant Arbab. Not only did he run his own scheme, Mr. Arbab also solicited dozens of individuals through group text messages and social media to engage in this fraud. In doing this he patiently explained the mechanics of the scheme. Defendant Arbab and his associates perpetrated their scheme by focusing on two broker-dealers. Each afforded “instance credit” to certain deposits. It is that instance credit which Arbab and his co-defendants, as well as people he solicited, utilized to make the scheme work. The instance credit permitted immediate trading before it was discovered that the electronic transfers did not cover the trades. Overall Mr. Arbab and his co-defendants initiated over $2 million in fraudulent electronic fund transfers into various accounts used during the scheme. Ultimately this resulted in at least $7.8 million in profits while leaving losses of at least $146,660. The other Defendants collectively accounted for fraudulent EFTs of nearly $1.3 million, withdrew profits of over $3.3 million and left broker-dealer with losses of $75,124. The free-riding scheme began on the heels of a Ponzi scheme orchestrated by Mr. Arbab for which he is service a sixty month sentence in prison. The Commission’s current complaint against Mr. Arbab alleges violations of Exchange Act Section 10(b). The case is pending.
Ransomware: The Financial Crimes Enforcement Network reported in a November 1, 2022, release that ransomware continues to be a significant threat. Specifically, the regulator found from an analysis of recent records that ransomware continues to be a significant issue. It is thus a continued threat to U.S. critical infra structure and business.
Articles: The annual form held by the Australia Securities and Investment Forum resulted in the publication of articles on topics which include: AI and the data revolution, strengthening cyber resilience, and new directions in the board room. The articles are available on the regulator’s website for November 4, 2022 (here).