This Week In Securities Litigation (Week of October 31, 2022)

Last week the Commission filed new actions involving a boiler room operation, a cherry-picking scheme, insider trading, financial misstatements and market manipulation. In addition, the agency announced the settlement of a number of cases.

Be careful, be safe this week


Clawback policy: Dodd-Frank added Section 10D to the Exchange Act which requires the SEC to direct the national securities exchanges to establish listing standards which require each issuer to develop and implement a clawback policy. Specifically, that policy must provide that if there is a restatement of the issuer’s financial statements the firm policy must mandate the repayment of any sum paid based on misstated financial reporting. The Commission approved rules implementing Section 10(D) on October 26, 2022 (here).

Fund reporting: The agency adopted amendments to modernize fund shareholder reports. The new provisions will also promote transparent fee and expense related information in fund advertisements, according to a release dated October 26, 2022 (here).

SEC Enforcement – Filed and settled actions

Last week the Commission filed 2 civil injunctive actions and 4 administrative proceedings, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.

Boiler room: SEC v. Lisser, Civil Action No. 20-civ-5798 (E.D.NY.) is a previously filed action which names as defendants Mark Lisser and his firm Knightsbridge Capital Partners which operated two boiler rooms. Beginning in 2018, and continuing for about a year, defendants raised about $2.1 million from the sale of shares to at least 71 retail investors. Those investors entered into transactions based on misrepresentations such as claims that the funds of Knightsbridge had “pre-IPO” shares. In fact, the funds did not have any shares. A large portion of the investor funds were misappropriated. Previously, Mr. Lisser plead guilty in a parallel criminal case and was sentenced to serve 24 months in prison. He also consented to the entry of an order barring him from the securities business. Last week he consented to the entry of a judgment that enjoined him from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, he was ordered to pay disgorgement of $890,092 and prejudgment interest of $71,347.209. Those amounts are deemed satisfied by an order of restitution entered in the parallel criminal case. See Lit. Rel. No. 25566 (October 27, 2022).

Cherry picking: SEC v. Sugranes, Civil Action No. 21-22152 (S.D.Fla. filed June 11, 2021) is an action which names as defendants: Ramiro Jose, a registered investment adviser; Lina Maria Garcia, President and an IAR associated with UCB Advisers; UCB Financial Advisers Inc., co-owned by the individual defendants; and UCB Financial Services Limited, owned by a holding company. Defendants are alleged to have participated in a long-running cherry-picking scheme. That scheme is alleged to have made approximately $4.6 million in profits. Defendant Sugranes and the two entity defendants resolved the matter, consenting to the entry of permanent injunctions which prohibit future violations of Securities Act Sections 17(a)(1) & (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). Mr. Sugranes was also directed to pay disgorgement of $4.6 million, in part based on joint and several liability with others, and a civil penalty of $500,000. Each entity defendant was ordered to pay a penalty of $250,000. Ms. Garcia consented to the entry of a final judgment precluding future violations of Securities Act Section 17(a)(3) and Advisers Act Section 206(2). She was also ordered to pay disgorgement, on a joint and several basis, with Mr. Sugranes, of $225,718 and prejudgment interest of $100,000. The relief defendants (parents of Mr. Sugranes) were ordered to pay disgorgement of $2,255,672 along with prejudgment interest, jointly and severally, with Mr. Sugranes. The Commission also ordered in administrative proceedings that Mr. Sugranes is barred from the securities business and Ms. Garcia was suspended for 12 months. See Lit. Rel. No. 25565 (October 25, 2022).

Insider trading: In the Matter of Scott A. Wooward, CPA, Adm. Proc. File No. 3-21219 (October 25, 2022) is a proceeding naming as respondent a certified public accountant who was engaged by PFSweb, Inc. in connection with a pending sale of the unit. Once Respondent learned of the deal he purchased shares despite a ban on such transactions by firm employees and having signed an agreement not to engaged in such transactions. As a result of the stock transactions, he made $21,326.36 in illicit trading profits. The Order finds that Respondent violated Exchange Act Section 10(b). Respondent consented to the entry of a cease-and-desist order based on the Section cited in the order. He is also denied the privilege of appearing or practicing before the Commission as an accountant. He is, in addition, required to pay disgorgement of $21,326.36 and prejudgment interest of $555.59 and a penalty equal to the amount of his trading profits.

Financial misstatements: In the Matter of Cronos Group Inc., Adm. Proc. File No. 3-21215 (October 24, 2022). In 2019 Cronos, a small Canadian company in its first years of operating as a U.S. publicly traded issuer, embarked on a significant business expansion. The firm sought to enter the nascent cannabis vaporizer market. It lacked not just expertise but “familiarity” with the requisite accounting requirements and internal controls, according to the Order Instituting Proceedings. This resulted in three material errors in three different quarters over a three-year period beginning in 2019. In that year there were two material errors. One occurred in the first quarter of 2019 while the second was in the third quarter of that year. During those periods the company improperly recognized revenue in connection with transactions involving the same counter party. Each transaction involved the sale of cannabis raw materials (or cannabis flower) by Cronos. Each occurred simultaneously with the purchase by Cronos of processed cannabis product. Separately, a now departed firm executive entered into an undisclosed oral agreement with a different counter-party to sell cannabis raw material to the counter-party but then repurchased the cannabis product, either as a derivative product or in another form the next quarter. The oral purchase agreement made it inappropriate for Cronos to recognize revenue in connection with the sale transaction. In the second quarter of 2021 a third error occurred. During that period Cronos failed to timely record impairment charges tied to goodwill and intangible assets associated with U.S. reporting. Following the discovery of the errors Cronos filed restated financial statements for the relevant quarters. For the first and third quarter of 2019 the company had overstated revenue by $5.8 million. In the third quarter of 2021 the firm disclosed that it should have recorded about $234.9 million in impairment charges for the U.S. reporting unit. For each quarter the firm disclosed that it had identified material weaknesses in its internal control over financial reporting. The Commission considered the cooperation of the firm in resolving the matter. The firm also agreed to implement certain undertakings which included the retention at its expense of a consultant. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections (10)(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). Respondent Cronos consented to the entry of a cease-and-desist order based on those Sections. The firm acknowledged that the Commission was not imposing a penalty based on its cooperation. See also In the Matter of William Hilson, CPA, CA, Adm. Proc. File No. 3-21216 (October 24, 2022)(proceeding naming firm’s former CFO and later CCO; action is based on facts above; resolved with a cease-and-desist order tied to the same Sections cited above; Respondent is also denied the right to appear before the Commission as an accountant with the right to apply for re-entry after 3 years).

Manipulation: SEC v. Gomes, Civil Action No. 1:20-cv-11092 (D. Mass.) is a previously filed action which named as defendants Douglas Roe and a controlled entity, Atlantean Management Co., Kelly Warawa and 11 other defendants. The complaint alleges that Defendant Gomes and his firm secretly held shares of certain penny stock issuers to conceal the identity of the shareholders while stock of the firm was dumped. On October 20, 2022, the Court entered an order imposing a penalty of $248,435 on Mr. Roe and $300,000 the company. Previously, the Court entered injunctions against Mr. Roe, the company and Ms. Warawa precluding violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and imposing a five-year penny stock bar on Ms. Warawa. The Court also ordered Mr. Roe to pay $548,435 in disgorgement plus prejudgment interest of $32,971 (a portion of which is joint and several with the company). See also Lit. Rel. No. 25563 (October 21, 2022).

Financial misstatements: In the Mater of Mattel, Inc., Adm. Proc. File No. 4355 (October 21, 2022). Mattel is a California based toy maker whose shares are listed on NASDAQ. In August 2019 the company received a whistleblower letter. It stated that the firm’s financial statements may have material errors. The letter also claimed that the engagement partner for the audits conducted on the firm’s financial statements may not have been independent. The company took action. First, a then on-going offering of notes was halted. Second, the Audit Committee launched an investigation. Investigators determined that there were in fact errors in the company financial statements. Specifically, the investigators discovered that the tax-related valuation allowance for Q3 2017 was understated by $109 million. They also found that the tax expense for Q4 2017 was overstated by $109 million. The valuation understatement in Q3 resulted from Mattel’s Thomas the Tank Engine being classified as a definite lived asset that should be amortized. That conclusion was wrong. At the time the toy was classified as indefinite lived. In October 2019 Mattel announced that it would restate the financial results for Q3 and Q 4, 2017. While the under and over statements in Q3 and Q 4 were each $109 million, there were additional issues. Mattel’s Q3 2017 provision for income taxes was understated by 14% and net loss and net loss per share were understated for income taxes by 15%. Likewise, for Q4 2017 the firm’s provision for income taxes was overstated by 62% and net loss and net loss per share were overstated by 63%. The engagement partner also violated the auditor independence rules. A restatement was conducted in 2019. The errors resulted from two material weaknesses in internal control with regard to financial reporting. One resulted from a failure to design and operate an internal control over the review of the income tax valuation allowance analysis. That was remediated by the end of December 2018. The other weakness resulted from a failure to design and effectuate the internal controls to properly assess and communicate known financial statement errors and internal control deficiencies in a timely manner to those correcting the error. In the end, the outside auditors also restated their report on internal control over financial reporting, issuing an adverse opinion. A restatement of the financial statements for the periods was made in November 2019.The Order alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The company cooperated with the Commission’s investigation. The CFO also left the firm. Mattel resolved the proceedings, consenting to the entry of a cease-and-desist order based on the Sections cited in the Order. The company also agreed to pay a penalty of $1.5 million. See also In the Matter of Joshua Abrahams, CPA, Adm. Proc. File No. 321214 (October 21, 2022)(proceeding naming engagement partner as Respondent alleging violations of Rule 102(e)(1)(iv)(B); the matter will be set for hearing).


Geographic targeting: The Financial Crimes Enforcement Network or FinCEN renewed and expanded its Geographic Targeting Orders. Those orders require U.S. title insurance companies to identify natural persons behind shell companies used in non-financed purchases of residential real estate transactions. The announcing was issued on October 26, 2022 (here).


Energy cooperation: ACER, the EU Agency for the Cooperation of Energy Regulators, and the European Securities and Markets Authority or ESMA, announced on October 18, 2022, the strengthening of their cooperation to improve information exchange and avoid potential market abuse in Europe’s spot and derivative markets (here).


Announcement: The German regulator issued a warning regarding fake offers of assistance from U.K. financial regulator the FCA, on October 10. 2022 (here).

Hong Kong

Climate: The Green and Sustainable Finance Cross-Agency Steering Group welcomed the launch on October 28, 2022, of the Core Climate, the international carbon marketplace established by the Hong Kong Exchange and Clearing Limited. Core Climate is designed to provide the effective and transparent trading of voluntary carbon credits and instruments across Asia. The program will connect capital with climate-related products and opportunities (here).


Cyber risk: The Monetary Authority of Singapore’s Cyber Security Advisor Panel – a group of cybersecurity experts from around the world – discussed actions to deal with new financial sector cyber risks on October 28, 2022 (here).

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