This Week In Securities Litigation (Week of October 23, 2023)
This Week In Securities Litigation (Week of October 23, 2023)
Last week the Commission filed cases centered on crypto assets, Rule 105, insider trading and an offering fraud. EXAMS also announced its exam priorities.
SEC
Pricing: The Commission proposed a rule to address volume-based exchange transaction pricing for NMS stocks, in a release dated October 17, 2023 (here).
Exams priorities: The Division of Examinations announced its exam priorities for 2024 in a release dated October 16, 2023 (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 3 civil injunctive actions and 1 administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Crypto assets/unregistered securities: SEC v. Thor Technologies, Inc., Civil Action No. 3:22-cv-09043 (N.D. Cal.) is a previously filed action against the firm and David Chin for engaging in the sale of crypto assets which are unregistered securities. The judgments were entered by default. Each permanently enjoins Defendants from future violations of Securities Act Sections 5(a) and 5(c). The judgment against Thor also directs the payment of disgorgement in the amount of $744,555 along with prejudgment interest of $158,638 and a penalty of $150,000. See Lit. Rel. No. 25884 (October 19, 2023).
Rule 105: In the Matter of Anson Advisors Inc., Adm. Proc. File No. 3-21783 (October 19, 2023) is a proceeding which names the Canadian firm as a Respondent. Anson is registered with the Ontario Securities Commission and is an exempt reporting adviser in the U.S. In December 2019, June 2020 and April 2021 the firm violated Rule 105 of Regulation M on behalf of certain private fund clients. That rule makes it unlawful to purchase equity securities from an underwriter, broker or dealer participating in a covered public offering if that person has sold short the security that is the subject of the offering during the restricted period. Respondent consented to the entry of a cease-and-desist order based on Rule 105 of Regulation M. The firm will also pay disgorgement of $2,469,109.11, prejudgment interest of $261,285.30 and a penalty of $600,000.
False statements: SEC v. Rayat, Civil Action No. 1:21-cv-04777 (S.D.N.Y.) is a previously filed action which named as defendants, Harmel Rayat, RenovaCare, Inc., Jatinder Bhogal, Jeetenderjit Singh Sidhu and Sharon Fleming. The scheme centered on defrauding investors with material misstatements and undisclosed sales of shares while promoting the stock and engaging in manipulative trading. Defendants Sidhu and Fleming agreed to settle. The Court entered a final judgment against Defendant Sidhu, prohibiting violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2), 10(b) and 20(b). It also imposes an officer/director and penny stock bar. In addition, Defendant will pay disgorgement of $2,300,000 and prejudgment interest of $190,000 along with a penalty of $160,000. The judgement against Mr. Fleming permanently enjoins him from future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a) and imposes an officer/director bar and a penny stock bar. He is also ordered to pay disgorgement of $380,302, prejudgment interest of $76,389 and a penalty of $380,000. See Lit. Rel. No. 25883 (October 18, 2023).
Insider trading: SEC v. Rubin, Civil Action No. 23-cv-15013 (N.D. Ill. Filed October 17, 2023). Defendant Brian Marc Rubin was unemployed at the time of the events here. Previously, he had been employed as an options trader. This case centers on a tender offer by Pfizer Inc., a global biopharmaceutical firm for Array BioPharma Inc., a firm that developed certain cancer treatments. Mr. Rubin’s spouse worked at Array as an Access Account Director in the Midwest region. She was responsible for educating medical providers and insurers about her employer’s products prior to market launch. She also gathered market research regarding the firm’s drugs. The couple generally exchanged confidential information. They also had brokerage accounts controlled by Mr. Rubin. During the period of late March – April 2019 Array and Pfizer entered into confidentiality agreements to exchange information regarding the Acquisition. During the same period Defendant’s spouse learned from her company colleagues that the firm would likely be acquired. She had long been concerned that Array would be acquired and she would lose her job. She told her husband before May 6, 2019 that her employer was likely an acquisition target and she would lose her job — it would be eliminated. On Monday, May 6, 2019 Defendant contacted his investment adviser to secure options trading authorization for his brokerage account. While both spouses were required to sign the forms, Mr. Rubin executed the document for himself and his wife. On May 9, 2019 the option trading approval was obtained. The same day Defendant began trading options involving Array stock using what is ordinarily viewed as an aggressive and risky strategy. Defendant first collected a premium by shorting put options in Array stock. The proceeds from the transaction were then used to buy out-of the-money call options in Array. Subsequently, on June 3, 2019 Defendant used essentially the same high risk options trading strategy. When the trades were placed Mr. Rubin’s investment adviser asked if he had inside information – the adviser knew Mrs. Rubin worked at Array. Defendant denied having such information. Defendant had not previously traded options in the account. Before the market opened on June 17, 2019 Pfizer announced that it would acquire Array by tender offer at $48 per share. After the market open the share price for the stock increased nearly 57%. Mr. Rubin had profits of $90,458, a return of 688%. In contrast, Defendant realized losses on every other equity trade he opened and closed from October 2017 to January 2020. Defendant also lost money on his trades in other biotechnology stocks during the period. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). To resolve the case Defendant consented to the entry of a permanent injunction based on each of the Sections cited in the complaint. He also agreed to pay disgorgement in the amount of $90,458 and prejudgment interest in the amount of $16,914. In a parallel action the U.S. Attorney’s Office for the Northern District of Illinois announced criminal charges against Mr. Rubin. See Lit. Rel. No. 25882 (October 17, 2023).
Offering fraud: SEC v. Krishnan, Civil Action No. 4:23-cv-00885 (E.D. Tx. Filed October 5, 2023). The action names as defendants: Gopala Krishnan, Manivannan Shanmugam, Sakthivel Palani Gounder, Nanban Ventures LLC, GSM Eternal LLC, Himalayan Fintech LLC, and Centum Fintech LLC. Defendants Krishnan, Shanmugam and Gounder are known as the Founders. Through their controlled “Nanban” companies they are alleged to have raised funds from over 360 investors by targeting the Indian community in the DFW area. To maintain their enterprise, Defendants have falsified their claimed profitability and made Ponzi type payments.
The sales pitch revolved around a claim that the investor funds would be invested using “GK Strategies, named after Defendant Krishnan who goes by “GK.” This is supposedly an options trading method that never loses money and outperforms the market. Defendants used misrepresentations about the approach to enhance its attractiveness to investors. Investors were also told that their money would be used to invest in start-up technology companies and real estate. Defendant Nanban Ventures then provided investors with what was represented to be a statement of investments. The documents represented that most of the fund asserts were put into three “fintech” companies — those that use technology to improve financial services. The so-called “fintech” companies were actually Nanban entities controlled by the Founders. In fact, much of the investor money was not invested in fintech business. To the contrary, it was put into unsecured promissory notes issued by the related-party Founder Companies – those controlled by the Founders which have little or no assets. Finally, Nanban Ventures and the Founders acted as investment advisers to the fund at times. In this role they breached their fiduciary duty by putting the interest of the Founders and the funds before those of the investors as a result of undisclosed conflicts, missing assets and excessive compensation. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), And Advisers Act Sections 206(1), 206(3), 206(3) and 206(4). The case is in litigation.
Offering fraud: SEC v. Sharp, Civil Action No. 1:21-cv-11276 (D. Mass.) is a previously filed action which named as defendants Frederick Sharp, a Canadian citizen, Avtar Dhillon and seven others. Mr. Sharp was known for masterminding complex schemes from 201 to 2019 which deceived numerous investors with trading in microcap stocks. Mr. Dhillon was one of the members of the group which helped implement the schemes. A default judgment was previously entered against Mr. Sharp. Mr. Dhillon consented to the entry of a final judgment, entered by the Court last week, which enjoined him from violations of Securities Act Sections 5, 17(a) and Exchange Act Sections 10(b), 13(d) and 16(a) and the related rules. The judgment also imposes a penny stock bar and orders Defendant to pay disgorgement of $9,143,548 and prejudgment interest of $1,303,236 with an offset against his disgorgement amount of $1,493,500 that will be paid to the U.S. Attorney’s Office for the District of Massachusetts in his criminal case. See Lit. Rel. No. 25881 (October 13, 2023).
Australia
Remarks: Australian Securities and Investment Commission Chair Joe Longo delivered remarks before the Parliamentary Joint Committee on Corporations and Financial Services regarding the oversight of the ASIC on October 20, 2023 (here).
BaFin
Article: The Federal Financial Supervisory Authority published an article titled Digitalization is essential for the Capital Markets Union, October 17, 2023 (here).
ESMA
Release: The European Securities and Markets Authority published a statement on October 17, 2023 encouraging regulators to prepare for a smooth transition to supervision regarding crypto assets (here).
Singapore
Remarks: Ravi Menon, Managing Director of the Monetary Authority of Singapore, addressed the 61st ACI World Congress, delivering remarks titled ASEAN, Alternative Energy, Artificial Intelligence on September 21, 2023 (here).