This Week In Securities Litigation (Week of November 8, 2021)
Crypto continues to be a focus for the Commission and others in Washington. Last week Chair Gensler urged attorneys to avoid advising clients on how to circumvent the securities laws. Rather, they should assist with registration, according to the Chair. While there continues to be a substantial amount of discussion regarding crypto, it is unclear if there is going to be any legislation passed governing the area.
Remarks: Chair Gensler deliver remarks at the Securities Enforcement Forum on November 4, 2021, that focused on key principles regarding enforcement (here)(discussed here).
Remarks: Chair Gensler delivered remarks at the President’s Working Group on Stablecoins on November 1, 2021 (here).
Be careful, be safe this week
SEC Enforcement – Litigated Actions
Manipulation: SEC v. Lemelson, Civil Action No. 1:18 -cv- 11926 (D. Mass.) is an action which named as defendants Gregory Lemelson, the chief investment officer of Lemelson Capital Management, LLC, an Exempt Reporting Adviser. The charges centered on a claim that beginning in 2014 Mr. Lemelson sought to manipulate the share price of a pharmaceutical firm in which he held a short position. The manipulation was carried out in part through the publication of false research reports which were designed to drive down the share price of the pharmaceutical company. The jury returned a verdict against each defendant on November 5, 2021.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 3 civil injunctive actions and 1 administrative proceeding, exclusive of tag-along and other similar proceedings.
Misappropriation: SEC v. Mutin, Civil Action No. 21-cv-12607 (E.D. Mich. Filed November 5, 2021) is an action which names as defendant Steve Muntin, an investment adviser representative at a registered advisory. Over a period of about four years, beginning in January 2016, Defendant misappropriated over $305,000 from an elderly advisory client. During the period Mr. Muntin managed accounts for a number of firm clients. Starting in 2016 Defendant began soliciting Client A to write checks to his firm, supposedly for investment. In fact, the money was never invested – it was misappropriated. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 25255 (November 5, 2021).
Misappropriation: SEC v. Cammarata, Civil Action No. 2:21-cv-04845 (E.D.Pa. Filed November 3, 2021) is an action which names as defendants Joseph Cammarata, Erik Cohen, David Punturieri, Alphaplus Portfolo Recovery Corporation and Alpha Plus Recovery LLC. Mr. Cammarata formerly operated a registered broker-dealer. The entities are controlled by the individual defendants. Over a six-year period beginning in 2014, Defendants engaged in a scheme to defraud investors who were victims of securities fraud. Specifically, Defendants misappropriated at least $40 million from about 400 distribution funds formed as a result of securities class actions and SEC enforcement actions. Defendants implemented their plan by utilizing AlphaPlus as a “claims aggregator” which, for a fee, submitted claims to fund administrators for victims and supposedly distributed the proceeds to them. In fact, Defendants engaged in a series of deceptive acts such as filing claims for trades that were never made and fabricating brokerage records and other trading records. Defendants funneled the money through a series of bank accounts. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Eastern District of Pennsylvania filed a parallel criminal action. See Lit. Rel. No. 25257 (November 5, 2021).
Offering fraud: SEC v. BNZ One Capital, LLC, Civil Action No. 8:21-cv-01788 (C.D.CA. Filed October 28, 2021) names as defendants Brett Barber and Louis Zimmerle, in addition to the firm. The action centers on the sale of interests in a firm that was involved in real estate. Beginning in June 2019 Defendants raised at least $13.5 million from about 105 investors. Defendants told investors that they were in the business of making investments in real estate as well as alternative investments. Investors were promised that their money would be repaid, generally at 10% per year. The difficulty was revenue – the firm was not profitable. That may have happened in part because much of the investor money was not actually invested. For example, from June 2019 through February 2020, Defendants raised about $6.9 million. Only $2.7 million was invested. About $5,000 in profits resulted – not sufficient funds to pay investors the promised return. Some investors did, however, receive payments. Those came from Ponzi type payments using portions of investor capital. Significant payments were made to Defendants. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 15(a) and 20(a). The action is pending.
Offering fraud: In the Matter of Michael Margiotta, Adm. Proc. File No 3-20644 (November 2, 2021) is an action with names as respondent the majority share owner of Patient Identification Platform, Inc., a company that aggregated and analyzed patient data. In marketing the shares of his firm, largely to health care professionals, he repeatedly misrepresented the status of a possible merger of his firm with another health care company. Overall, Respondent raised about $1,146,000 from 16 investors. To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, he agreed to pay disgorgement of $765,039.55, prejudgment interest of $92,561.676 and a penalty of $500,000.
Prime bank fraud: SEC v. Kleyman, Civil Action No. 21-cv-01943 (D. Minn. Filed August 30, 2021) is an action which names as defendant attorney Howard Kleyman. Over a two year period, beginning in July 2017, Mr. Kleyman served as the “paymaster” in at least nine transactions. Investors would deposit funds in his attorney trust accounts, supposedly to purchase, lease, and/or monetize alleged bank instruments such as standby letters of credit or bank instruments. In fact, the bank papers were fictitious. Defendant made about $12,499.12 for his services. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). Defendant agreed to resolve the action by consenting to the entry of a judgment that included a conduct based injunction. Under the terms of the judgment Defendant also agreed to pay disgorgement in the amount of the fees he charged as well as a penalty of $50,000. In a related action he agreed to be barred from appearing or practicing before the Commission as an attorney. See Lit. Rel. No. 25252 (November 1, 2021).
Release: The Australia Securities and Investment Commission released guidance and examples of advice as guidance for registered investment advisers on November 1, 2021 (here).
Remarks: Ashley Alder, CEO of the Hong Kong Securities Commission, delivered the Key Note Address at the Green Horizon Summit at COP 26 on November 4, 2021 (here).
Remarks: Julie Leung, Deputy Chief Executive Officer of the agency delivered remarks titled: “Fintech: Metamorphosis of the Financial Industry at the Hong Kong FinTech Week 2021 on November 3, 2021 (here).
Event: The Sixth Annual FinTech Festival began on November 8 and will continue for four days. It is the largest festival.