This Week In Securities Litigation (Week of September 18, 2023)
This Week In Securities Litigation (Week of September 18, 2023)
The Commission filed seventeen new cases last week. Those included 9 stemming from a sweep regarding the application of the new Marketing Rule. That Rule focuses on the use of hypotheticals in advertisements. The other cases centered on crypto assets, market manipulation and offering fraud cases.
Have a great and safe week.
Proposed rule: The Commission proposed rule and form amendments for EDGAR that are described as “technical” in the September 13, 2023 release (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 5 civil injunctive actions and 12 administrative proceedings, excluding 12j, tag-along proceedings and those presenting a conflict for the author.
Offering fraud: SEC v. NDB, Inc., Civil Action No. 3:23-cv-0424 (N.D. Cal. Filed September 14, 2023) is an action which names as defendants the company and Nima Golshrifi, respectively a start-up enterprise and a U.K. resident who is the CEO of the firm. Over a two-year period, beginning in August 2020, Defendants marketed what they claimed was a nuclear battery that had been tested by various authorities. In fact, there were no such tests – the product was a fraud. Following the issuance of a false press release touting the product about $660,000 was raised from investors. Later additional funds were raised. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25829 (September 14, 2023).
Cherry– picking: In the Matter of GlennCap LLC, Adm. Proc. File No. 3-21667 (September 14, 2023) names as respondents the firm, a registered investment adviser, and its owner, Jonathan Vincent Glenn. Over a period of two years, beginning in January 2020, Respondents engaged in a cherry-picking scheme. During the period a disproportionate number of trades with favorable results on the first day were allocated to certain select accounts that were favored by Mr. Glenn or affiliated with him. This was accomplished by holding the trades in an omnibus account. Respondents benefitted from the practice by making $96,542 in net performance fees attributable to part of the scheme. They also received at least $2,647,074 during the scheme. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). Respondents consented to the entry of a cease-and-desist order based on the Sections cited. Mr. Glenn was, in addition, barred from the securities business while the firm was censured. Respondents were also ordered to pay, on a joint-and-several basis, disgorgement of $2,743,616 and prejudgment interest of $251,357. Mr. Glenn was directed to pay a penalty of $500,000.
Crypto assets: In the Matter of Stoner Cats 2, LLC., Adm. Proc. File No. 321655 (September 13, 2023). Respondent managed and produced the Stoner Cats web series. It also offered and sold the Stoner Cats NFTs to the public. Beginning in late July 2021 Respondent conduced an offering of non-fungible tokens called Stoner Cats crypto assets. The coins sold for about $800 each. The offering sold out in 35 minutes. It generated about $8.2 million. The purpose of the Stoner Cats NFT offering was to fund the production of an animated web series called Stoner Cats. Investors were told that Respondent would develop the Stoner Cats web series using their money. SC2 promised investors that they would have exclusive access to the web series and an online community as well as future content. Each Stoner Cats NFT was associated with a unique still image of one of the characters in the web series. Purchasers could not select the character. To the contrary, purchasers had no control over which character was reflected. About 62% of the purchasers bought more than one coin. About 20% of purchasers resold the coin. Respondent offered and sold the Stoner Cats NFTs as “investment contracts and therefore securities, pursuant to . .” the Court’s decision in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). The Commission has also issued a Section 21(a) report, known as the DAO report, regarding the application of Howey to crypto assets. Under Howey and the DAO report Respondent was required to register the offering as securities. The failure to register, coupled with the sales, constituted a violation of Securities Act Section 5(a) and 5(c). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited above. Respondent will also pay a penalty of $1 million which will be distributed through a fair fund.
Manipulation: SEC v. Stubos, Civil Action No. 1:22-cv-04674 (S.D.N.Y.) is a previously filed action which named as defendant George Stubos, a Canadian citizen. In June 2022, according to the underlying complaint, Mr. Stobs hired individuals to create demand for the stock of several microcap companies he controlled. During the process he also engaged in manipulative trading. The Court entered a final judgment against Mr. Stubos by consent which prohibits future violations of Securities Act Section 17(a) and Exchange Act Sections 9(a) and 10(b). Defendant also agreed to pay disgorgement of $5,367,926 and prejudgment interest of $806,108. The settlement also imposes a penny stock bar and a conduct-based injunction that prohibits Defendant from participating in the issuance, purchase, offer or sale of any security other than for his own accounts. See Lit. Rel. No. 25824 (September 12, 2023).
Unprofessional conduct: In the Matter of Alfonse Gregpru Gluglano, Adm. File No. 3-21650 (September 12, 2023) is a proceeding which names as Mr. Gluglano, the National Assurance Services Leader and partner in charge of Marcum’s quality control system, including all relevant policies and procedures. Since at least 2020 Marcum engaged in systemic quality control failures and widespread violations of PCAOB audit standards. Those violations were primarily tied to SPACs. Throughout the period, Respondent failed to remediate the issues. Marcum failed to sufficiently monitor compliance with the standards. The Order alleges violations of Regulation SX, Rule 2-02(b)(1). As part of resolving the matter Respondent agreed to implement a series of undertakings. In addition, he consented to the entry of a cease and desist or based on the Regulation and Rule cited in the order and a censure. Respondent will also pay a penalty of $75.000.
Policies: SEC v. Virtu Financial Inc., Civil Action No. 1:23-cv-8072 (S.D.N.Y. Filed September 12, 2023) is an action which names as defendants Virtu Financial or Financial and Virtu Americas or Virtu, respectively, a public company and its subsidiary which is a registered broker-dealer. Virtu processes about 25% of market orders placed by U.S. retail investors. From January 2018 to April 2019 Val failed to maintain an effective barrier between the MNPI it held and those at the firm and its affiliates. Nevertheless, Val claimed that there was an effective barrier between the MNPI and the public which was incorrect. The conduct violated Securities Act Sections 17(a)(2) & (3). The case is in litigation.
Offering fraud: SEC v. Esos Rings, Inc., Civil Action No. 2:23-cv-07553 (C.D. Cal. Filed September 12, 2023 is an action which names as defendants: The firm and Michaele Silverstein Bisno who controls Esos Rings. Defendants have raised, since February 2017, about $1.95 million. Investors in the firm were told that the company manufactured and sold wearable rings that functioned as a debit card. Investors were also told that Defendants had patents on the process. All claims were false. Defendants have agreed to settle by consenting to the entry of permanent injunctions based on Securities Act Sections 17(a) and Exchange Act Section 10(b). In addition, Defendants will pay disgorgement of $566,483 and prejudgment interest of $46,386. Ms. Bisnoff also consented to the entry of an officer-director bar. She is, in addition, barred from offering for sale any unregistered securities but can purchase them for her account. See Lit. Rel. No. 25826 (September 12, 2023).
Offering fraud: SEC v. Nukarapu, Civil Action No. 5:23-cv-00503 (E.D. N.C. Filed September 11, 2023) is an action which names as defendants: Dharma Teja Nukarapu, the founder of the entity defendants; SharkDreams, Inc. and D Dollar, Inc. Beginning in January 2018, and continuing for over a year, Defendant Nukareapu raised about $2.7 million from over 20 investors through an offering of SharkDreams shares, a purported healthcare firm. The shares were sold by making a series of false statement about the company and its finances. In addition, in 2019 and 2022 Defendant Nukarapu raised another $650,000 from investors. It was represented to investors that a D Dollar subsidiary, Vera Smart Healthcare, would be the recipient of the funds. In fact, much of it was misappropriated by Mr. Nukarapu. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25825 (September 12, 2023).
Offering fraud: SEC v. Phoenix Asset Group, LLC, Civil Action No.. 23-2775 (D. Minn. Filed September 11, 2023) is an action which named as defendants the firm and Robyn A. Bowman. Over a two-year period Defendants raised about $2.7 million from 20 investors who purchased securities in Phoenix Asset Group. They were told that their funds would only be used to develop the business and that each year they would receive a return of up to 15%. Nevertheless, most of the funds raised were diverted to personal use. Money was also diverted from new investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 25828 (September 13, 2023).
Marketing rule: In the Matter of Banorte Asset Management, Inc., Adm. Proc. File No. 3-21636 (September 11, 2023) is one of 9 similar cases (here). Respondent has been a registered investment adviser since March 2019. The Huston, Texas based firm has about $139 million in regulatory assets under management. This action centers on amendments to Advisers Act Rule 206(4)-1 that were adopted by the Commission in December 2020. The Commission set a deadline of November 4, 2022, for compliance. Under the amended Marketing Rule a registered investment adviser cannot include any hypothetical performance in an advertisement unless the firm adopts “and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement” under Rule 206(4)-1(d)(6)(i). Under this rule the Commission believed that advisers would not generally be permitted to include hypothetical performance in advertisements directed to a mass audience or for general circulation. Following the compliance date Banorte published communications on its website that constituted advertisements which included hypothetical performance derived from models. The firm had not adopted policies and procedures designed to ensure that the performance was relevant to the likely financial situation and investment objectives of the intended audience. Accordingly, the firm violated Advisers Act Section 206(4) and Rule 206(4)-1(d). In resolving the matter, the firm agreed to implement certain undertakings designed to ensure compliance with the amended Marketing Rule as to hypotheticals. The Advisory consented to the entry of a cease-and-desist order based on the Section and Rule cited above and a censure. Respondent will also pay a penalty of $50,000.
Remarks: Dr. Sibel Kocatepe, an expert on Federal Financial Supervisory Authority, discussed the rapid development of cloud services, the associated risks and how BaFin is dealing with the issue on August 29, 2023 (here).
Annual report: The Securities and Futures Commission of Hong Kong issued its annual report titled Enabling a future of opportunities 2022-2023 (here).
Consultation: The Monetary Authority of Singapore published a Consultation Paper on Enhancing Pre- and Post- Transaction Safeguards for Retail Clients on August 24, 2023 (here).
Remarks: Ashley Alder, Chair, FCA delivered remarks at the Eurofi Conference focused on International collaboration and the modernization of financial services regulation in the UK on September 9, 2023 (here).