This Week In Securities Litigation (Week of Sept. 16, 2019)

A look forward; a look back:

With only two weeks until the end of the Government fiscal year it seems apparent that the Commission’s enforcement Division is not about to hit warp speed as it did last year with the filing of cases. With budget hearings looming in early October, perhaps the more interesting question is what plan the agency is going to roll out to justify a budget increase.

Increased enforcement efforts – generally a favorite of both sides of the political isle – may be the answer. Consider, for example, the Chairman’s recent remarks at the New York economic club. There Mr. Clayton delivered remarks which appeared to call for an increase in international cooperation to bolster FCPA enforcement. While at the time of his nomination many thought that Mr. Clayton was not a supporter of the Act, it appears he may lead the charge on international enforcement. And, it would also require an increased enforcement budget to pay for the effort.

Last week Enforcement focused largely on reporting settlements in prior actions. One new action brought focused on the sale of unregistered securities to support the development of a company doing cartoon streaming. That action did not claim the business was a fraud, only that neither the securities nor the sellers were properly registered with the Commission.


Remarks: Chairman Jay Clayton delivered remarks to the Economic Club of New York (Sept.9, 2019)(here). The Chairman reviewed efforts on behalf of retail investors and discussed enforcement of the FCPA.

Regulation Best Interest: State of New York v. SEC, Civil Action No. 1: 19 -cv-0835 (S.D.N.Y. Filed Sept. 9, 2019). The suit challenges the validity of Regulation Best Interest, the recently enacted standard governing broker-dealers when giving investment advice. The complaint The SEC’s regulation “increases confusion about the standards of conduct that apply when investors receive recommendations and advice from broker-dealers or investment advisers [and] makes it easier for brokers to market themselves as trusted advisors . . . and contradicts Congress’s express direction,” according to the complaint. The case is pending.

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 civil injunctive action and no administrative proceedings no last week, exclusive of 12j and tag-along actions.

Sale unregistered securities: SEC v. Toon Goggles, Inc., Civil Action No. 2:19-cv-07687 (D. Ca. Filed Sept. 5, 2019). Defendant Ira Warkol founded Toons Goggles in 2010. The company focused on marketing entertainment for children. Nevertheless, in 2011 the California Department of Business Oversight issued a cease and desist and refrain order against Mr. Warkol. Over a four-year, period beginning in 2012, Mr. Warkol raised over $19 million from at least 400 investors in a number of states. The shares were not registered or exempt. The California order was not disclosed to potential investors. While some of the offerings claimed to be limited to accredited investors, there were no verification procedures. The transaction records maintained were inadequate to document the investments. Although the five offerings were conducted at different points in time and purported to involve different vehicles for children’s entertain such as a streaming app or the creation of more content, the SEC alleged that they all constituted one, integrated, illegal offering. None of the offerings were registered or exempt. The Commission alleged that the offerings violated Securities Act Sections 5(a) and 5(c). In addition, Mr. Warkol orchestrated the solicitations and securities sales and was paid transaction based compensation. He was not a registered broker-dealer. Accordingly, the complaint also alleges violations of Exchange Act Section 15(a). The case is in litigation. See Lit. Rel. No. 24588 (September 6, 2019).

Misrepresentation: SEC v. Crawford, Civil Action No. 19-cv-1022 (S.D. Ohio) is a previously filed action which named as defendants Timothy Crawford and his firm, Cardinal Energy Group, Inc. After losing control of the oil and gas interests of the firm in mid-2017, Defendants made filings with the Commission representing that the leases would still be part of the firm. Similar representations were made to investors who acquired shares in the firm. To resolve the matter, Cardinal consented to the entry of a permanently based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 14(c). In a related proceeding the firm consented to the entry of a Section 12(j) order. See Lit. Rel. No. 24590 (September 12, 2019).

Cherry picking: SEC v. Strategic Capital Management, LLC, Civil Action No. 1:17-cv-10125 (D. Mass.) is a previously filed action which names as defendants the firm and Michael J. Breton. The complaint alleges that Defendants engaged in a cherry picking scheme. To resolve the action each Defendant consented to the entry of a permanent injunction prohibiting future violations of Advisers Act Sections 206(1) and 206(2). Mr. Brenton is also barred from the securities business. He previously pleaded guilty in a parallel criminal proceeding and was sentenced to two years in prison, two years of supervised release and ordered to forfeit $1,326,696 and pay restitution in the same amount. See Lit. Rel No. 24589 (September 10, 2019).

Criminal cases

Confidential information: U.S. v. Middendorf, No. 1:18-cr-00036 (S.D.N.Y.) is a case in which David Middendorf, the former head of KPMG’s National Office, was sentenced to serve one year and a day in prison for participating in a scheme to defraud the Public Company Accounting Oversight Board by obtaining confidential information. Specifically, Mr. Middendorf obtained confidential information from the PCAOB regarding which audit clients would be inspected. He disseminated this information within his firm. Following a jury trial, Mr. Middendorf was convicted of wire fraud.


Remarks: ASIC Chair James Shipton delivered remarks titled Making a Real Dfference for Real Australians at the Parliamentary Joint Committee on Corporations and Financial Services (September 13, 2019)(here). His remarks focused on key strategic priorities for developing a strong and efficient regulatory program.

Remarks: Australian Securities and Investment Commissioner Sean Hughes delivered remarks on risk management at the Risk Management Association Australia Event (September 10, 2019)(here). His remarks focused on strategic priorities of the agency, threats and harms and responses.

Hong Kong

Internal controls: The Securities and Future Commission fined HSBC (Hong Kong) $2.1 million for failing to have adequate internal controls regarding telephone recording arrangements requirements. Specifically, the SFC concluded that the firm failed to set up adequate recording for some of the telephone lines in its Private Banking Division from April 8, 2017 to January 31, 2018. In resolving the matter, the SFC considered the fact that the firm self-reported, took remedial actions and agreed to engage an independent reviewer to examine the effectiveness of its controls and remedies.

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