This Week In Securities Litigation (Week of June 28, 2021)
Chair Gensler turned again to the question of climate change last week, this time in remarks delivered in London. The staff has been asked to put together recommendations on mandatory company disclosures on climate risk and human capital, according to the Chair. In the same remarks Mr. Gensler again referenced market structure, noting that the staff has been asked to examine the question of payment for order flow, another topic he has previously mentioned. Later this year it seems apparent that that there will be rule writing initiatives in these two areas along with the use of Rule 10b-5-1 plans by executives.
Be careful, be safe this week
Whistleblowers: The Commission made two awards this week. One was for over $1 million to a whistleblower whose information impacted multiple successful enforcement actions, according to a June 24, 2021 release. The second was for more than $5.3 million for assistance with a successful enforcement action, as noted in a release dated June 21, 2021.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 4 civil injunctive actions and 3 administrative proceedings, exclusive of tag-along and other similar proceedings.
Conflicts: In the Matter of Crown Capital Securities, L.P., Adm. Proc. File No. 3-20371 (June 24, 2021) names as a respondent the dual registered investment adviser and broker-dealer. Since at least 2014 the firm has invested client funds in shares that paid 12b-1 fees to the firm, and a cash sweep product that resulted in revenue sharing for the firm. The conflicts from these transactions were not disclosed to the clients. The Order alleges violations of Advisers Act Sections 206(2) and (4). To resolve the matter the firm agreed to implement a series of undertakings and consented to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. The firm also agreed to pay disgorgement in the amount of $1,138,740.02 and prejudgment interest of $295,000. The funds will be put into a fair fund for investors.
False data: In the Matter of Gateway One Lending & Finance, LLC, Adm. Proc. File No. 3-20372 (June 24, 2021) names as a respondent the finance firm which dealt in the securitization of auto loans until 2016. The firm stopped servicing the loans in 2019. From about 2014 the firm raised over $2 billion from investors through the securitization of interests in pools of auto loans it originated. The investments were supposed to provide investors with a steady stream of income. Gateway, however furnished investors with false financial information regarding the loans which understated the expenses. Ultimately investors suffered huge losses. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). Respondent resolved the proceedings by consenting to the entry of a cease-and-desist order and agreeing to pay disgorgement in the amount of $3,915,077 and prejudgment interest of $998,115.82. The firm will also pay a penalty in the amount of $1.6 million. The disgorgement will be returned to investors.
Bribery: SEC v. Berko, Civil Action No. 1:20-cv-01789 (E.D.N.Y.) is a previously filed action which named as a defendant Asante Berko, an executive of a foreign-based subsidiary of a U.S. bank holding firm. Mr. Berko is alleged to have arranged for a Turkish energy company that was a client of the firm to funnel at least $2.5 million to a Ghana-based intermediary to pay illicit bribes to Ghanaian govern officials. The purpose was to gain approval for an electric power plant company. To resolve the charges Mr. Berko consented to the entry of a final judgment that enjoins him from future violations of Exchange Act Section 30A. He was also ordered to pay disgorgement of $275,000 plus prejudgment interest of $54,163.92. See Lit. Rel. No. 25121 (June 23, 2021).
Misappropriation: SEC v. Geromini, Civil Action No. 1:21-cv-12880 (D.N.J. Filed June 23, 221) is an action which names as a defendant Joseph Geromini, an employee of Group K Diagnostics, Inc., an early stage medical device company. Over a period of less than a year he misappropriated over $200,000 from the firm’s investors for his personal use. During the period he encouraged investors to invest through the use of false offering documents. He misappropriated the funds by wiring them to a bank account he controlled, through unauthorized ATM withdrawals, by issuing company checks and by charging personal expenses to firm credit cards. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25120 (June 23, 2021).
Crypto coins: In the Matter of Loci, Inc., Adm. Proc. File No. 3-20369 (June 22, 2021). Respondent Loci was formed in Reston, Virginia in 2016 by John Wise, also a Respondent, who served as CEO of the firm which is now nearly defunct. Over about a three-year period, beginning in August 2017, Respondents raised capital selling digital tokens called LOCIcoin through an ICO. At the time InnVenn, a trading platform created by Loci, permitted its registered users to access the platform through unpaid or free subscriptions. Respondents planned to use part of the ICO proceeds to expand the capabilities of the trading platform. A presale of the coins began in August 2017. Initially, LOCcoin was sold in exchange for Ether using Simple Agreements for Future Tokens or FAFTs. To generate interest a white paper was sent directly to potential purchasers and made available on social media. The focus was on investor profits that would be generated through InnVenn where the coins were traded beginning shortly after the close of the ICO. Respondents also sought to initiate trading of the coins on other platforms. Since investor profits were a key part of the sales pitch, Loci and Mr. Wise told potential investors about the experienced management team and potential profits. For example, in August 2017 a pitch deck and one version of the white papers contained growth statistics for the venture and potential revenues. The statistics were also included in marketing materials. The information was false. The Order alleges that the interests marketed were unregistered investment contracts and the false statements constituted fraud. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Respondents resolved the proceedings, consenting to the entry of cease-and-desist orders based on the Sections cited above. Respondents will, in addition, comply with their undertakings which require, among other things, the destruction of all the coins and not engaging in future offerings. Mr. Wise was also ordered to pay disgorgement of $38,163 and prejudgment interest of $6,209.40, payment of which was waived based on financial condition. Respondent Loci was directed to pay a civil penalty of $7,600,000. The funds may be distributed by the Commission.
Misappropriation: SEC v. Abarbanel, Civil Action No. 1:21-cv-05429 (S.D.N.Y. Filed June 21, 2021) is an action which names as defendants: Ofer Abrbanel, an Israel citizen who controlled a registered investment adviser; Victor Chilelli, a portfolio manager for the adviser until 2020; and Income Collecting 1-3 Months T-Bills Mutual Fund, an off shore mutual fund with shares listed on Nasdaq. The firm had multiple share classes. Beginning in early 2018 Defendants engaged in an investment scheme designed to induce investors to put their funds in Income Collecting. The largest group put in about $106 million. The prospectus claimed that investor capital would be invested in stable, secure, liquid and easily redeemable securities that were either US Treasuries or loan agreements known as reverse repos. Rather than invest the funds in accord with the prospectus large portions of the investor money was misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Manipulation: SEC v. Miller, Civil Action No. 0:21-cv-01445 (D. Minn. Filed June 18, 2021) is an action which names as a defendant Mark Miller. Over a period of about two years, beginning in September 2017, Defendant Miller engaged in repeated pump-and-dump schemes using microcap stocks. His schemes followed the typical pattern of purchasing stock in the open market, gaining control of the company, and issuing false press releases to pump-up the price of the securities during which time he sold his shares. At the conclusion of each scheme he dumped his shares. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25118 (June 21, 2021).
Cherry picking: SEC v. Sugranes, Civil Action No. 1:21-cv-22152 (S.D. Fla. Filed June 10, 2021) is an action which names as defendants: Ramiro Jose Sugranes, a registered investment adviser; UCB Financial Advisers, Inc., a Florida registered investment adviser; and UCB Financial Services Ltd., also an investment adviser. Beginning in 2015 Defendants engaged in a cherry picking scheme by first placing trades and then holding them in an account. By the end of the day if the shares purchased increased in value they were allocated to a favored account. If the shares declined in value, they were allocated to one of the accounts that were not favored. The scheme had a negative impact on at least 75 accounts and involved about $4.6 allocated to the favored accounts. Overall the non-preferred accounts were allocated over $5.5 million in first day losses with 16 of the accounts having over $25,000 in first day losses and two others sustaining over $1 million in first day losses. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The Court granted a motion for emergency relief, ordering an asset freeze, an accounting and expedited discovery. The case is pending.
Remarks: Ashley Alder, CEO, Securities and Futures Commission of Hong Kong, delivered the Keynote address at City Week 2021 titled The Emerging Global Framework for Climate Change Regulation, June 23, 2021 (here). His remarks reviewed the IFRS Foundation proposal, ESG data and ratings and the global fund management industry.
Remarks: Lim Tuang Lee, Asst. Managing Director, delivered remarks titled Financial Services Post-COVID: Addressing Emerging Risks, June 21, 2021 (here). His remarks focused on climate change and collaboration.