This Week In Securities Litigation (Week of Sept. 28, 2020)

The end of the government fiscal year is rapidly approaching. Without looking at the calendar the point is obvious. The Commission filed over 20 actions last week – more than double the typical weekly number. The cases were based on insider trading, misappropriation, illegal cross-trades, a failure to maintain suitable records, offering frauds, suitability and false statements. The cases were brought against individuals, public companies and private entities. And, there are two more days to complete the fiscal year.

Be safe and healthy this week

SEC

Rule amendments– whistleblowers: The Commission announced controversial amendments to its whistleblower rules on September 23, 2020 (here). The agency release states that the amendments are designed to provide “greater transparency, efficiency and clarify, and to strengthen and bolster the program in several ways” (https://www.sec.gov/news/press-release/2020-219). A portion of the proposed amendments were dropped. Other portions remain controversial and may be challenged by some groups (here).

Shareholder proposals: The agency announced on September 23, 2020 that it had adopted amendments to modernize its shareholder proposals (here). These amendments also are controversial.

SEC Enforcement – Filed and Settled Actions

The Commission filed 11 civil injunctive actions and 12 administrative proceedings last week, excluding 12j and tag-along-proceedings.

Misappropriation: SEC v. Morris, Civil Action No. 3:20-cv-02958 (N.D. Tx. Filed Sept. 24, 2020) is an action which names as defendants Oscar H. Morris, Jr. and Lakeside Capital Partners, L.P., a registered investment adviser owned by Mr. Morris. Over a two year period, beginning in May 2017, Defendants misappropriated over $120,000 from two investment funds managed by Lakeside. From the first — 974 Oil & Gas Exploration Partnership — Defendants misappropriated over $55,000. From the second — ACH/2012 Buckingham, L.P. — about $65,000 was misappropriated. The funds in each instance were diverted to projects of Mr. Morris. The complaint alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). The action is pending. See Lit. Rel. No. 24916 (Sept. 24, 2020).

Suitability – procedures: In the Matter of Morgan Wilshire Securities, Inc., Adm. Proc. File No. 3-20054 (Sept. 24, 2020) is an action which names the registered broker dealer as a respondent. Over a four-year period, beginning in 2015, the representatives at the firm repeatedly recommended that clients invest in inverse ETFs without regard to the holding period. Yet these complex instruments are built on a one day time period and if held for longer there is a significant prospect of loss. The representatives at the firm were not properly trained in these instruments. The firm did not have the proper compliance procedures to ensure trading and proper implementation. The Order alleges violations of Exchange Act Section 15(b)(4)(E). The Commission imposed a censure on Respondent and directed that the firm pay disgorgement of $87,609.09, prejudgment interest of $16,408.08 and a penalty of $75,000. A fair fund will receive the funds. The Commission considered the firm’s financial condition in determining to accept the offer of settlement.

Financial fraud: In the Matter of Power Solutions International, Inc., Adm. Proc. File No. 3-20062 (Sept. 24, 2020) is an action which names as a respondent, a manufacturer and seller of engines. The firm’s former CEO, former V.P. of sales, and former GM engaged in a series of fraudulent transactions designed to ensure that the firm met revenue guidance and analysts’ expectations. Specifically, in 2014 and 2015 Respondent inflated revenue by recognizing income for sales not yet agreed to with the customer, not completed, that were subject to “bill and hold” deals, and that had undisclosed side agreements. Collectively, these improper practices, coupled with concealing the transactions from the firm and the auditors, resulted in a restatement in May 2019 of the fourth quarter of 2014 and fiscal year 2015 for almost $25 million. The Order alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2) and 13(b)(2)(B). To resolve the matter the firm entered into a series of undertakings and consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, the firm will pay a penalty of $1.7 million that will be put into a fair fund. The U.S. Attorney’s Office for the Northern District of Illinois announced a non-prosecution agreement with the firm that includes an undertaking to remediate deficiencies in internal controls as to financial reporting.

Financial fraud: In the Matter of Bayerische Motoren Werke Aktiengesellschaft, Adm. Proc. File No. 3-20060 (Sept. 24, 2020) is a proceeding which names as respondents BMW of North America, LLC and BMW U.S. Capital, LLC. From 2016 through 2019 the firm took steps to inflate its sales in the U.S. to maintain its status. Specifically, the firm pushed vehicles to investors as demonstrators, used cookie-jar reserves to inflate revenue and extended the sales month to recognize transactions. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the proceedings Respondent cooperated with the staff, consented to the entry of a cease and desist order and agreed to pay a penalty of $18 million that will be put into a fair fund.

Financial fraud: SEC v. Revolution Lighting Technologies, Civil Action No. 3:20-cv-01440 (D. Conn. Filed Sept. 24, 2020) is an action which names as defendants the firm, CEO Robert LaPenta, CFO James DePalma, and two division level CFOs, Daniel O’Neal and Allen Gardner. Over a period of almost four years, beginning toward the end of 2014, Defendants engaged in a “bill and hold” scheme. Under this scheme, which was concealed, the firm and the named executives, fraudulently inflated company revenue by recognizing as income revenue for transactions that were incomplete – the revenue was recognized before it was earned under GAAP. The complaint alleges violations of each subsection of Securities Act Section 17(a), and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). To resolve the case each Defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. In addition, the firm will pay a penalty of $1.25 million and Messrs. LaPenta, DePalma, Garner and O’Neal will pay, respectively, $192,769, $100,000, $25,000 and $25,000. See Lit. Rel. No. 4170 (Sept. 24, 2020).

Offering fraud: SEC v. Rudnick, Civil Action No. 20-CV-00532 (W.D.N.C. Filed Sept. 24, 2020) is an action which names as defendants: James M. Rudnick, a real estate developer; Mary A II, LLC, a purported land mitigation bank controlled by Mr. Rudnick; Southeast Lot Acquisitions, LLC, an acquirer of distressed real estate controlled by Mr. Rudnick; Dana J. Bradley, an assistant to Mr. Rudnick; and Marlin S. Hershey, also an assistant. Over a five-year period, beginning in 2013, Mr. Rudnick raised about $16.7 for Mary A and Southeast Lot. He was assisted by two individuals. Although the offering documents represented that no commissions were charged, Mr. Rudnick paid 10% commissions. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3). Mr. Rudnick has been named as a defendant in another Commission enforcement action centered on an offering fraud. This case is pending. See Lit. Rel. No. 24914 (Sept. 24, 2020).

Offering fraud: SEC v. Zabala, Civil Action No. 1:20-cv-07880 (S.D.N.Y. Filed Sept. 24, 2020) is an action which names a defendant Craig A. Zabala who controlled Concorde Group Holdings, Inc. Over a five-year period, beginning in February 2015, Defendant raised at least $4.38 million from 17 investors scattered across the U.S. Those investors were told that the firm would be developed into a merchant bank and had nearly completed a $25 million offering. In fact, the representations were false. Defendant misappropriated a substantial portion of the investor cash and used portions to make Ponzi type payments. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24913 (Sept. 24, 2020).

Offering fraud: In the Matter of Platinum Wealth Partners, Inc., Adm. Proc. File No. 3-20067 (Sept. 24, 2020) is an action which names as respondents the former registered investment adviser and it principal, David Potter. Following a period of growth, in 2016 the firm suffered economic reversals and defaulted on a credit line. In soliciting investors to either purchase or roll over notes of the firm, Respondents gave them the impression that the adviser was profitable. In fact, it was not. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the proceedings Respondents consented to the entry of a cease and desist order based on the sections cited in the Order. Mr. Potter was also suspended from the securities business for a period of 12 months and prohibited from serving or acting as an employee or officer or director of an investment company for the same period. In addition, Respondents agreed to pay, on a joint and several basis, disgorgement of $1,204,000, prejudgment interest of $66,847.20 and a penalty of $50,000. The payments will be transferred to a fair fund.

Financial fraud: In the Matter of Steven Rosen, Adm. Proc. File No. 3-20057 (Sept. 24, 2020) is a proceeding with names as a respondent Mr. Rosen, an employee of TCA Fund Management Group, a registered investment adviser. From 2010 through 2016 the firm fraudulently inflated NAV by recording fees associated with four agreements with other firms to provide investment banking services. The metrics regarding the actual performance of the fund were also falsified by improperly recording a $34.3 million promissory note as revenue. Mr. Rosen prepared the documentation for these transactions which was sent to the fund administer who calculated NAV. The Order alleges violations of Securities Act Sections 17(a)(2) & (3) and Advisers Act Sections 206(2) and 206(4). To resolve the proceedings Respondent consented to the entry of cease and desist order based on the sections cited in the Order. In addition, Respondent is precluded from acting as a director or officer with any securities firm with the right to apply for reinstatement after three years. He is also denied the privilege of appearing before the Commission as an accountant with the right to reapply after three years. Finally, Respondent will pay a penalty of $35,000 which will be transferred to the U.S. Treasury. See also In the Matter of Michael Vernon, Adm. Proc. File No. 3-20056 (Sept. 24, 2020)(Respondent Vernon served as a Senior Analyst and Director of Credit Operations at the adviser and participated on the NAV calculations discussed above; settled on the same basis as above but without the denial of the ability to appear and practice before the Commission and with a $5, 000 penalty).

Insider trading: SEC v. Kelly, Civil Action No. 1:20-cv-04449 (E.D.N.Y. Filed Sept. 23, 2020) is an action which names as a defendant Edward T. Kelly, the retired controller of Aceto Corporation. After Mr. Kelly retired the firm had financial difficulties. In March 2018 Mr. Kelly was brought in to aid the firm. After determining that the company had financial issues, he sold all of his firm shares and exercised his stock options and sold those shares. By trading while in possession of inside information, and after the facts were disclosed, he avoided losses of over $85,000. The complaint alleges violations of Exchange Act Section 10(b). To resolve the action Mr. Kelly consented to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to the entry of an order that bars him from serving as an officer or director of a public company and to pay a penalty of $170,228. See Lit. Rel. No. 24912 (Sept. 23, 2020).

False statement/bankruptcy fraud: In the Matter of Alan J. Kau, Adm. Proc. File No. 3-20052 (Sept. 23, 2020) is an action centered on the bankruptcy of the firm for which Mr. Kau once served as President, Worthington Energy, Inc. In 2018 Mr. Lau signed off on a fraudulent Disclosure Statement Describing Debtor’s Joint Plan of Reorganization and Debtor’s Joint Plan of Reorganization as a Chapter 11 prepackaged plan. The materials were filed with the U.S. Bankruptcy Court for the Southern District of California. The materials were included in the plan of reorganization. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). 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 the entry of an officer-director bar and a penny stock bar with a right to apply for reentry after two years. In addition, he will pay a penalty of $15,000 that will be forwarded to the U.S. Treasury. See also In the Matter of Daniel C. Masters, Adm. Proc. File No. 3-20051 (Sept. 23, 2020)(action based on the same facts against the attorney involved; resolved with a cease and desist order based on the same sections and an officer and director bar, a penny stock bar and the revocation of his right to appear and practice before the Commission as an attorney; he will also pay a penalty of $50,000 that will be transferred to the U.S. Treasury).

Required records: In the Matter of Jonestrading Institutional Services LLC, Adm. Proc. File No. 3-20050 (Sept. 23, 2020) is an action against the registered broker-dealer. The Order alleges that Respondent failed to maintain certain required records in violation of Exchange Act Section 17(a) in 2018 and 2019. The records related to text messages exchange by and among certain registered representatives and in some instances third parties. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the Section cited in the Order and to a censure. The firm will also pay a penalty of $100.000 that will be transferred to the Treasury.

Offering fraud: SEC v. Duffield, Civil Action No. 18-iv-6984 (S.D.N.Y.) is a previously filed action which named as defendants Planda Biotechnology, Inc., a penny stock firm, and its CEO, Rober Duffield. Over a period of several months, beginning in late 2013, defendants sold 548,100 shares of the firm’s common stock to two unsophisticated investors. Investors were instructed to wire their payments to another privately held entity. Defendants claimed they had developed technology that would extract live plant material for use in the health and wellness industry. The numbers in the firm’s financial statements were, in part, incorrect and the disclosures misleading. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). Defendants resolved the action by consenting to the entry of permanent injunctions based on the sections cited in the complaint. The company and its CEO will also pay penalties of $200,000 and $20,000 respectively. Mr. Duffield also agreed to the entry of a penny stock bar. See Lit. Rel. No. 24911 (Sept. 23, 2020).

Offering fraud: SEC v. Sembritzky, Civil Action No. 4:20-cv-3287 (S.D. TX. Filed Sept. 22, 2020) is an action which names as defendants Verley L. Sembritzky, Jr., Bounty of the Ocean Inc. and Ocean Harvest LLC. Over a period of about two years, beginning August 2015, defendants raised about $7.2 million from 20 investors. The funds were supposed to be used for initial pre-construction for the building of a desalination and mineral recovery plant in Kenya that would use Defendant’s claimed revolutionary process. In fact, the process and the offering were fraudulent. Much of the money was misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24920 (Sept. 22, 2020).

Insider trading: SEC v. Yang, Civil Action No. 1:29-cv-04427 (E.D.N.Y. Filed Sept. 21, 2020). Yinghang “James” Yang and Yuanbiao Chen, respectively, the Senior Index Manager of Company and his friend, a manager at a sushi restaurant, are defendants in the action. Mr. Yang has held his position since September 2018. In that position he helped manage the firm’s Indexes. He also served on the Index Committee during which there were discussions regarding the components of the various indexes. The firm had confidentiality procedures in place to protect their information as Mr. Yang knew. Prior to the commencement of the scheme, Mr. Chen opened a Brokerage Account at Broker. Mr. Chen informed the brokerage that he had five years of experience in trading options. He executed an agreement that would permit trading options through the new account. Over a period of just over four months, beginning on June 24, 2019, Defendants purchased options in the shares of fourteen stocks shortly prior to the time the Company made additions or deletions from those Indexes. Following the announcement by Company of either the addition or deletion of stocks from an Index, Defendants closed the transactions. The trades were placed while in possession of material, non-public information about the actions to be taken for various securities with regard to being added or deleted from the Indexes of Company. Defendants placed the trades in Brokerage Account with computers using IP addresses at three locations. One was Mr. Yang’s home. A second was the Company. A third was at Mr. Chen’s place of employment. The transactions netted illegal trading profits of $912,082. The profits were divided by the two men. The complaint alleges violation of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24909 (Sept. 22, 2020).

Offering fraud: SEC v. Dosal, Civil Action No. 1:20-cv-02844 (D. Colo. Filed Sept. 21, 2020) is an action which names as a defendant Milton J. Dosal, a home appliance installer who falsely claimed to be a securities professional. Over a period beginning in late 2017, and continuing through early 2019, Mr. Dosal raised almost $98,000 from 41 investors, many of whom were cadets at the U.S. Air Force Academy. Investors were told that Defendant was a securities professional and would day-trade their stocks for them. In fact, Defendant was not a securities professional and was operating a Ponzi scheme. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 24907 (Sept. 21, 2009).

Microcap fraud: SEC v. PowerTradersPress.com, Inc, Civil Action No. 17 Civ. 04133 (E.D.N.Y.) is a previously filed case which named as defendants Emin Cohen, Dennis Vererosa and others. The complaint centered on a scheme that used fraudulent tactics to pressure investors to purchase penny stocks. The information obtained from the transactions was used by Defendants to take the opposite side of the orders. Messrs. Cohen and Verderosa settled with the Commission after pleading guilty in the parallel criminal case and being sentenced to serve 24 and 72 months in prison, respectively, followed by three years of supervised release. To resolve the Commission action each man consented to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The two men were directed to pay disgorgement of $136,373 and $383,344, respectively, along with prejudgment interest. Those amounts are deemed satisfied by the forfeiture and restitution ordered in the parallel criminal case. The judgments also impose penny stock bars. Mr. Cohen was barred from the securities business in separate administrative proceedings. The other defendants in the case settled earlier. See Lit. Rel. No. 24906 (Sept. 21, 2020).

Disclosure: In the Matter of Steven L. Jenkins, CPA, Adm. Proc. File No. 3-20036 (Sept. 21, 2020) is an action which names as a respondent a former director of RCI Hospitality Holdings, Inc. From 2015 through 2018 Respondent did not disclose his personal bankruptcy in the firm’s poxy materials on Schedule 14A. The Order alleges violations of Exchange Act Section 14(a) and the related disclosure rules. To resolve the proceedings Mr. Jenkins consented to the entry of a cease and desist order. He was also denied the privilege of appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after three years. Mr. Jenkins will also pay a penalty of $30,000. The funds will be transferred to the U.S. Treasury.

Cross trades: In the Matter of Palmer Square Capital Management LLC, Adm. Proc. File No. 3-20039 (Sept. 21, 2020) is a proceeding which names as a respondent the registered investment adviser. Over a two-year period, beginning in July 2014, the firm cross traded securities between four client accounts it advised. There were prearranged trades of one security from one client in another 351instances. Respondent failed to comply with the statutory requires governing a Registered Investment Company with respect to the transactions. The firm also engaged in principal transactions without making the required disclosures and did not implement the proper procedures to prevent unlawful cross and principal trading. The Order alleges violations of Investment Company Act Sections 17(a)(1) and 17(a)(2) and the related rules and Advisers Act Sections 206(3) and 206(4) and the related rule. To resolve the proceedings Respondent consented to the entry of a cease and desist order after taking remedial acts and to a censure. The firm will also pay a penalty of $450,000. The Order does not disclose the disposition of the funds.

Perks: In the Matter of RCI Hospitality Holdings, Inc., Adm. Proc. File No. 3-020035 (Sept. 21, 2020) is a proceeding which names as respondents RCI, a NASD traded holding firm, Eric Langan, the firm’s CEO and Chairman, and Philip K Marshall, the CFO of the company. Beginning in 2014 the firm failed to disclose $615,000 in executive compensation. Amounts for perks, such as the use of the company plane and cars, were not disclosed. The firm also failed to disclose amounts involving Mr. Langan’s father and brother and a director’s brother. Mr. Marshall caused these violations. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) along with the related rules. Respondents each consented to the entry of a cease and desist order based on the sections and rules cited. In addition, RCI will pay a penalty of $400,000. Mr. Langan will pay a penalty of $700,000. Mr. Marshall will pay a penalty of $35,000. The funds will be transferred to the U.S. Treasury.

Misappropriation: In the Matter of Northern Trust Hedge Fund Services LLC, Adm. Proc. File No. 3-2020 (Sept 18, 2020) is an action which names as respondents two indirect wholly owned subsidiaries of Northern Trust Corporation, a financial services firm. Respondents provided financial services to a group of funds called the Frontier Funds from January 1, 2016 through August of the next year. The services were furnished under a contract with L-R Managers and others. During the period Respondents permitted a group called the Advisers – L-R Managers and Donald LaGuardia who had been involved with the funds for years – to take over $200,000 from the funds without support and cause the amount to be recorded as promissory notes. During the period Respondents permitted a similar type of transaction to take place despite the presence of red flags. The revenues for Norther Trust were thus materially inflated. The Order alleges violations of Advisers Act Section 206(2) and 206(4). Respondents consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, Respondent Northern Trust Hedge Fund Services LLC will pay disgorgement of $15,076, prejudgment interest of $2,553 and on a jointly and severally, a penalty of $150,000. A Fair Fund will be established.

Offering fraud: SEC v. Rogas, Civil Action No. 20 cv 7628 (S.D.N.Y. Filed Sept. 17, 2020) is an action which names the founder of NS8 FP, LLC as a defendant. NS8 is a privately held high tech company founded by Adam Roges. In 2019, and again in 2020, Mr. Roges defraud investors purchasing shares of the firm. The scheme was implemented by altering the firm’s bank records to show millions of dollars in revenue. Those records were then furnished to the company which used them to prepare financial statements for the offerings. Mr. Rogas took steps to conceal his fraudulent acts but was persistent. In 2019 he continued the fraud after being questioned by a representative for an investor. He also continued to furnish false information to the company after being contacted by the staff. About $123 million was raised in the two offerings. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24905 (Sept. 18, 2020).

Filings: In the Matter of WCAS Management Corporation, Adm. Proc. File No. 3-20020 (Sept. 17, 2020) is a proceeding which names the registered investment adviser as a respondent. Welsh Carson manages filings for the firm. Generally, the adviser deals in privately held stocks. In 2016 the firm acquired a position in Hanger, Inc., a NYSE stock, with the intent of taking the firm private. A 7% stake was acquired. A Schedule 13D was filed reflecting the holdings and noting that in the firm planned to restructure Hanger. Later the firm changed its position and sold it off. In doing so it did not amend the Schedule noting the change of intent and the sales despite the Commission’s potion that the sale of 1% is material and subject to disclosure. The Order alleges violations of Exchange Act Section 13(d) and Rule 13d-2. To resolve the proceedings Welsh Cason (the Order defines Respondent WCAS Management Corporation to be Welsh Cason) consented to the entry of a cease and desist order based on the section and rule cited in the Order. In addition, Respondent was directed to pay a penalty of $100,000 which will be transferred to the U.S. Treasury.

Hong Kong

Notice: The Securities and Futures Commission issued a warning on September 24, 2020, to investors regarding investment scams that are being posted on social media (here).

AML: The SFC issued a notice of consultation on anti-money laundering guidelines on September 18, 2020. The purpose is to amend its anti-money laundering and anti-terrorism guidelines (here).

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