This Week In Securities Litigation (Week of September 12, 2022)
Crypto continues to be a key focus at the Commission. Earlier the agency added additional slots in the Division of Enforcement to focus on the assets. Now the Division of Corporation Finance has announced it is planning to add an Office focused on the assets.
Last week the Commission filed cases centered on a SPAC, insider trading and financial fraud.
Be careful this week, be safe
Organization: The Division of Corporation finance announced that it is planning to add an Office of Crypto Assets and an Office of Industrial Applications and Services, according to a release issued on September 9, 2022.
SEC Enforcement – Filed and settled actions
Last week the Commission filed 3 civil injunctive actions and 2 administrative action, exclusive of 12j, default, tag-a-long and other similar proceedings.
SPAC: In the Mater of Perceptive Advisors LLC, Adm. Proc. File No. 3-21031 (September 6, 2022) is a proceeding charging a registered investment adviser tied to its activities with a SPAC. Specifically, the firm failed to disclose certain conflicts, made material misrepresentations, and did not adopt sufficient compliance policies and procedures. The firm also lost its status as a passive investor while negotiating a potential transaction involving a SPAC and a public company of which it was a greater that 5% shareholder. Respondent did not file a Schedule 13D. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and Exchange Act Section 13(d). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure. The firm also agreed to pay a penalty of $1.5 million.
Insider trading: SEC v. Doucette, Civil Action No. 1:22-cv-00348 (D.N.H. Filed September 6, 2022) names as defendant Todd Doucette, the vice president of business transportation for Align Technology, Inc. The firm designs and manufactures medical devices for orthodontic and restorative treatment. Through his position he obtained information about future earnings. In the first quarter of 2018 Defendant traded in advance of the earnings announcement, purchasing 5,331 shares. After the earnings announcement he had profits of over $88,000. In the third quarter of the year he also traded prior to the earnings announcement. In that instance Defendant obtained over $88,000 in profits. The complaint alleges violations of Exchange Act Section 10(b). Without admitting or denying the allegations in the complaint Defendant consented to the entry of a permanent injunction based on the Section cited in the complaint. He also agreed to pay $348,689 in disgorgement, $30,793 in prejudgment interest and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 25498 (September 7, 2022).
Fees: In the Matter of Energy Innovation Capital Management LLC, Adm. Proc. File No. 3-21029 (September 2, 2022) is a proceeding which names as Respondent an exempt reporting adviser. Energy Innovation Capital advises several funds. The fund fee agreements provide in part that management fees will be reduced when there is a “Disposition” during the post-commitment periods which began in mid-January 2020. During the period the advisor served several funds. From mid-January 2020 through the end of March 2022 there were four items for which the fees should have been adjusted but were not: 1) certain adjustments specified in the LPA; 2) the fees on the wrong metric; 3) incorrectly added accrued interest to the fee base; and 4) to begin the post post-commitment period at the correct time. These errors resulted in overcharges. They caused the LPs to pay $678,681 in excess fees. This in turn resulted in violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure. In addition, the firm agreed to pay a penalty of $175,000 in addition to agreeing to certain undertakings.
Offering fraud: SEC v. Swaffer, Civil Action No. 1:22-cv-1554 (N.D.OH. Filed September 1, 2022). Named as defendants are: Kris Swaffer; Sean Williams and POHIH, Inc. Respectively, they are the owner and majority shareholder of POHIH, the COO of a related entity and the majority owner of a firm that cultivates cannabis for commercial purposes. Pure Organic Entities raised about $14 million from 75 investors in 14 states over a period of 4 years, beginning in 2016. Mr. Williams began with Pure Organic as an investor. By 2016 he was soliciting investors. Defendant Williams began paying Mr. Swaffer off payroll through a special account. By 2018 Mr. Williams was aware that Mr. Swaffer was misappropriating portions of the funds. Misrepresentations were used to induce investors to entrust their investment funds to Defendants. The central claim may have been that all issues regarding the legality of marijuana had been answered. The claim is incorrect. The point is reflected by the fact that many financial institutions closed accounts associated with Mr. Swaffer and the Pure Organic Entities. No distributions were ever made to investors. The Pure Organic group of firms failed to generate revenues. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(2) and (3). and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25496 (Sept. 2, 2022).
Financial fraud: SEC v. Pope, Civil Action No. 0:22-cv-02155 (D. Minn. September 2, 2022) is an action which names as defendant David Pope, the senior rail freight trader for a large Cooperative. Over a four-year period, beginning in 2014, Defendant manipulated the values of the contracts for freight and in some instances recorded numbers for phantom agreements. All of this activity caused a significant increase in revenue. In some instances, the adjustments he made were as much as 43% of previously reported net income figures. Ultimately the firm restated income. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)-5. The case is pending. The Cooperative settled in a separate action. See Lit. Rel. No. 25497 (September 2, 2022).
Initiative: The Australian Securities and Investment Commission remade its“sunsetting” class order on financial requirements for retail OTC derivative issuers. They were due to sunset on October 1, 2022, according to a release issued on September 9, 2022.
Remarks: Julia Leugn delivered the Keynote address at the AIMA APAC Annual Form 2022 (September 6, 2022)(here). Her remarks focused on the resiliency of the financial system and risk management and hedging Mainland assets.