This Week In Securities Litigation (Week of November 9, 2020)
The search for a new SEC Chair is likely to begin, now that a new President has been elected. While the President-elect and his team undoubtedly have more than enough on their plate, look for the nomination of a new SEC Chair early in the year. Chairman Clayton may not wait for the new appointment. Mr. Clayton’s desire to return to New York City may now be driven by personal concerns rather than behind the scenes bickering within the administration.
The Commission brought two new cases last week. One involved insider trading; another centered an offering fraud. The agency also settled with three of those involved in the Edgar hack.
Be safe and healthy this week
Whistleblowers: The Commission awarded over $3.6 million and $750,000 in separate awards, according to a release issued on November 5, 2020. Another award of $26 million was announced on November 3, 2020.
Report: The SEC’s Division of Enforcement published its annual report on November 2, 2020. The Report reviews the cases brought over the last government fiscal year (here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 1 civil injunctive action and 1 administrative proceeding last week, excluding 12j, tag-along-proceedings and other similar matters.
Cybersecurity: SEC v. Ieremenko, Civil Action No. 2:19-cv-00505 (D.N.Y. Filed Jan. 15, 2019). This is a previously filed case centered on the hack of the SEC’s Edgar Computer system. The original complaint name nine defendants: Oleksandr Ieremenko of Kiev, Ukrane; Spirit Trade, Ltd., Hong Kong; Sungjin Cho, Los Angeles; David Kwon, Los Angeles; Igor Sabodakha, Kiev, Ukraine; Victoria Vorochek, Luhans’ka Oblast, Ukraine; Ivan Olefir, Luhans’ka Oblast, Ukraine; Capylield Systems, Ltd., Belize City, Belize; and Andrey Sarafanov, Moskva, Russian Federation. The scheme was launched by international hacker Ieremenko and others in the spring of 2016. Common hacking techniques were used to search for access to material nonpublic information in EDGAR. The focus was to access test filings – those made by issuers which are not intended to become public. Rather, they are often made prior to the actual filing to ensure that format and other matters are correct. The test filings, accordingly, often contain information which is material and non-public. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Commission settled with Defendants Sungjin Cho and Ivan Olefir, along with his firm Capyield Systems, Ltd. Each of the settling defendants consented to the entry of a permanent injunction based on sections cited in the complaint. The individual defendants also agreed to conduct based injunctions which limit their ability to trade U.S. listed securities and derivatives. Defendant Cho agreed to pay a penalty of $175,000 while Defendant Oledfir and his firm will pay, on a joint and several basis, a penalty of $250,000. See Lit. Rel. No. 24956 (Nov. 5, 2020).
Insider trading: In the Matter of Michael J. Pires, Adm. Proc. File No. 3-20143 (Nov. 5, 2020) is a proceeding which names as Respondent Mr. Pires, an employee in the HR department of JetPay Corporation. In October 2018 NCR Corporation announced an agreement to merge with JetPay. Prior to that announcement Respondent purchased 2,500 shares of JetPay and persuaded his father to buy another 1,300 shares. Following the announcement, the share price increased 142%, yielding profits of $11,254.60. The Order alleges violations of Exchange Act Sections 10(b) and 14(e). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. He also agreed to pay a penalty of $18,569.60 which will be transferred to the U.S. Treasury.
Conflicts: In the Matter of Capitol Securities Management, Inc., Adm. Proc. File No. 3-20144 (Nov. 5, 2020) is a proceeding which names as a Respondent a dual registered investment adviser broker-dealer. Over a two-year period, beginning in January 2014 the adviser sold, recommended or had clients hold fund shares that paid 12(b)-1 fees when the same shares were available without the fees. The payment of the fees was not adequately disclosed by the adviser to the clients. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). The firm agreed to implement a series of undertakings. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. The adviser will also pay disgorgement and prejudgment totaling $203,414. The funds will be distributed to clients. The adviser will also pay a penalty of $55,000 that will be transferred to the U.S. Treasury.
Microcap fraud: SEC v. Curative Biosciences, Inc., Civil Action No. 8:18 -cv-0925 (C.D. Cal) is a previously filed action in which the Court entered final judgments against the firm, its former chairman, William M. Alverson, and its former CEO, Katherine West Alverson. The case centered on a scheme in which the individual defendants directed the firm to issue shares to third parties under the pretext that they were for payment of services or the discharge of debt. In fact, the shares were sold into the market, generating over $4 million in proceeds routed back to the former chairman and CEO. A jury found in favor of the Commission. The final judgment was based on Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The judgement also directs the two individual defendants to pay $847,851 in disgorgement and prejudgment interest. Each individual defendant will pay a penalty of $640,000. Previously, Defendant Steven G. Patton, who cooperated with the Commission, settled. See Lit. Rel. No. 24955 (Nov. 4, 2020).
Offering fraud: SEC v. Chalk, Civil Action No. 1:20-cv-09199 (S.D.N.Y.) is a previously filed action against Terrance Chalk, a/k/a Dr. Terrence Cash, and his Greenlight firms. Mr. Chalk is a convicted felon. Investors were told that Mr. Chalk was a “financial coach” retired from his firm that he sold for millions of dollars. Nothing was mentioned about his felony conviction. Over a three-year period, beginning in 2017, Defendant raised about $5 million from 40 investors. The funds were largely diverted to Mr. Chalk’s personal use, rather than invested. Portions of the funds raised were also used to make Ponzi type payments. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 24954 (Nov. 3, 2020).
Remarks: Ashley Alder, Hong Kong Securities and Futures Commission, delivered the Keynote Address at the Hong Kong Fin Tech Week, November 4, 2020 (here). His remarks focused on the regulatory response to evolving challenges.
Arrangement: The Bank of Indonesia and the Monetary Authority of Singapore extended a bilateral financial agreement on November 5, 2020. This is a USD10 billion financial arrangement. The term is one year. The arrangement will aid the financial stability of both countries amid the COVID-19 pandemic (here).
Video Program: OCIE Inspections and Exams: A Bad Day? You Need a Team! A video program on meeting the challenges and issues presented by these exams, Wednesday, Nov. 11, 2020. There is no charge and CLE is available. More information and registration (here).