This Week In Securities Litigation (Week starting August 5, 2019)
A look forward; a look back: Is the increasing split among Justices of the Supreme Court over the proper approach to statutory construction causing confusion among the lower courts? Consider the recent decision by the Ninth Circuit Court of Appeals construing the authority of the CFTC under two provisions of Dodd-Frank. The provisions 1) gave the agency authority over leveraged metals transactions for the first time and 2) strengthened the tools available to the agency against fraud by adding a provision which essentially mirrors Exchange Act section 10(b). CFTC v. Monex Credit Company, No. 18-55815 (9th Cir. Decided July 25, 2019).
In reversing the dismissal of the CFTC’s complaint, the Circuit Court’s analysis focused largely on parsing the text of the amendments and using the dictionary rather than considering the legislative materials and Congressional purpose. This, of course, is consistent with the approach the conservative Justices of the Supreme Court favor. See, e.g., Digital Radio v. Somers, 138 S.Ct. 767 (2018)( Justices Thomas, Alito and Gorsuch criticizing the majority opinion for citing legislative materials to bolster a reading of the statutory text).
In contrast, the Court gave deference to the reading of the new antifraud provision to the CFTC’s interpretation citing Skidmore v. Swift & Co., 323 U.S. 134 (1944). In doing so, the Court ignored the decision handed down by the Supreme Court at the end of the last term, delimiting a key deference decision with swing vote Chief Justice Roberts noting that distance between the majority of the Court was not that far from that of the dissenting conservatives. Kisor v. Wilkie, No. 18-15 (June 30, 2019). The Ninth Circuit’s inconsistent approach to statutory interpretation suggests, at a minimum, confusion on the part of the Court regarding the proper approach to interpreting federal statutes.
Crypto currency: U.S. v. BT-e, Civil Action No. 4:19-cv-04281 (N.D. Cal. Filed July 25, 2019). FinCEN filed a civil forfeiture action against a foreign based crypto exchange and its executive based on a failure to register as a money changer, to develop and implement an AML system and to file SARs. The penalties assessed include $12 million against executive Alexander Vannick and $88,586,314 against BTC-e, the exchange, for violations of the BSA. The penalties are predicated on the following: 1) Registration violations: The exchange, considered a financial institution under the BSA, did not register with FinCEN as a Money Services Business or MSB within 180 days of starting operations; 2) AML violations: The Bank Secrecy Act and the Money Services Business requirements require that the firm develop and implement an effective AML program; and 3) File SARs: Under the BSA an MSB the exchange must file a SAR if it becomes aware of or suspects a suspicious transaction or transactions that aggregate to at least $2,000 in value. The forfeiture case is pending.
DOJ has brought criminal charges against the firm and Mr. Vinnik. In May 2016 a two-count indictment charged BTC-e and Mr. Vinnik with operating an unlicensed Money Services Business. A superseding 21 count indictment centered on the same charges was returned early the next year. An extradition request for Mr. Vinnik has been initiated.
SEC Enforcement – Filed and Settled Actions
The Commission filed 4 civil injunctive action and 4 administrative proceedings this week, exclusive of 12j and tag-along actions.
Financial fraud: SEC v. Carroll, Civil Action No. 1:19-cv-07199 (S.D.N.Y. Filed August 1, 2019) is an action which names as defendants four executives of Brixmore Property Group, Inc., a REIT which is one of the largest owners of open air shopping centers. The executives are: Michael Carroll, CEO; Michael Papagallo, CFO; Steven Splain, Chief Accounting Officer; and Michael Mortimer, Senior V.P. of Accounting. Beginning in 3Q13, and continuing through 3Q 15 (with one exception), defendants manipulated the firm’s Same Property Net Operating Income Growth Rate, a key non-GAAP metric in the industry to meet guidance. This was done through a process internally called “making sausage.” It included falsifying accounting entries while disregarding proper procedures. The complaint alleges violations of Exchange Act Section 10(b) and certain related rules. The case is pending. See also In the Matter of Brixmore Property Group Inc., Adm. Proc. File No. 3-19300 (August 1, 2019)(settled proceeding against the firm based on the same conduct; the firm agreed to implement certain undertakings and consented to the entry of a cease and desist order based on Exchange Act Section 13(a) and related rules and pay a penalty of $7 million). The Manhattan U.S. Attorney’s Office filed a parallel criminal action.
Conflicts: SEC v. Commonwealth Equity Services, LLC, Civil Action No. 1:19-cv-11655 (D. Mass. Filed August 1, 2019) names the registered investment adviser as a defendant. Over a period of about 4 years, beginning in July 2014, the adviser breached its fiduciary duty by failing to disclose conflicts of interest related to its purchase of mutual fund shares. Specifically, the adviser had different financial incentives depending on which product it selected for clients. The undisclosed conflicts created substantial incentives for the adviser to act in its interest rather than those of its clients. The complaint alleges violations of Advisers Act Sections 206(2) and 206(4). The case is pending. See Lit. Rel. No. 24550 (August 1, 2019).
Insider trading: In the Matter of James W. Holden, Adm. Proc. File No. 3-19293 (July 31, 2019). Mr. Holden is a long-time friend of a member of the board of directors of Real Goods Solar Inc. That firm, based in Denver, focuses on solar energy. Its shares are listed on NASDAQ. The confidential, intimate type of relation between Board Member and Mr. Holden permitted Board Member to confide to his long time confident in May 2017 that Real Goods Solar had entered into a joint venture with the subsidiary of a large and well-known public Chemical Company. The venture focused on a solar shingle system that had been developed. The transaction continued to progress. At an August 30, 2017 meeting of the board of Real Goods Solar, the firm agreed to enter into the deal with Chemical Company. Due diligence was finalized. The next day Mr. Holden and Board Member had lunch, a practice they had followed for years. Board Member discussed the potential transaction with his long-time confidant, expressing optimism about it. The next trading day Mr. Holden sold about one third of the investments in his account. The proceeds were used to purchase 12,500 shares of Real Goods Solar. The transaction did not fit the profile of Mr. Holden’s account which centered on conservative investments that included mutual funds. Indeed, Mr. Holden had never purchased Real Goods Solar stock. After the close of the markets on October 3, 2017, Real Goods Solar announced an exclusive licensing deal with Chemical Company. The share price of Real Goods rose over 194% compared to the prior day close. Mr. Holden liquidated his holdings, realizing profits of $18,527.18. The Order alleges violations of Exchange Act Section 10(b). To resolve the proceedings Mr. Holden consented to the entry of a cease and desist order based on the section cited in the Order. He also agreed to pay disgorgement of $18,527.18, prejudgment interest of $1,348.32 and a penalty of $18,527.18.
Concealed charges: SEC v. Place, Civil Action No. 16-cv-04291 (E.D. Pa.) is a previously filed action against three officers of a now defunct transition brokerage firm: John T. Place, President; John G. Kirk, General Counsel; and Paul G Kirk, former COO. The Commission’s complaint alleged that defendants engaged in a scheme in which clients were told that the only fees received by the firm were those actually paid by the client. In fact, the firm was paid mark-ups and mark-downs by other brokers in addition to the amounts paid by the clients. The complaint alleged violations of Exchange Act Sections 10(b) and 15(c)(1). To resolve the action each Defendant consented to the entry of a permanent injunction which has now been entered by the Court, based on the sections cited in the complaint. In addition, John Kirk agreed to pay disgorgement of $379,795, prejudgment interest of $99,974 and a penalty of $379,795. Paul Kirk agreed to pay disgorgement of $90,939, prejudgment interest of $23,938, and a penalty of $90,939. John Place will pay disgorgement of $375,803 and prejudgment interest of $57,688. The Court did not order Mr. Place to pay a penalty in view of his cooperation. Each of the Kirk Defendants also consented to the entry of an order barring them from the securities business and John Kirk consented to the entry of an order denying him the privilege of appearing and practicing before the agency as an attorney. In the Mater of Paul G. Kirk, Esq. Adm. Proc. File No. 3019299 (July 31, 2019); In the Mater of John P. Kirk, Adm. Proc. File No. 3-19298 (July 31, 2019). See Lit. Rel. No. 24549 (July 31, 2019).
Unauthorized trading: In the Matter of Jonathan Brosk, Adm. Proc. File No. 3-19294 (July 31, 2019) is a proceeding which names the registered investment representative as a Respondent. Over a four-month period in 2016 Respondent engaged in high risk options trading and allocated the trades to client accounts without authorization. The actions were halted after discovery by the firm. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to the entry of an order barring him from the securities business with a right to apply for re-entry after three years. He was also ordered to pay a penalty of $25,000.
False prices: SEC v. Plaford, Civil Action No. 16-civ-4511 (S.D.N.Y.) is a previously filed action in which the Commission charged hedge fund manager Christopher Plaford and his fellow manager, Stefan Lumiere, with engaging in a fraudulent scheme in which they used sham broker quotes to mismark securities. That resulted in the fund reporting false returns and charging inflated fees. Mr. Plaford previously pleaded guilty in a parallel criminal action and was ordered to time served, three years of supervised release and to pay criminal forfeiture of $6,611 and a fine of $7,311. The Court entered a final judgment against him by consent in the Commission’s action, enjoining him from future violations of Exchange Act Section 10(b) and Advisers Act Sections 204A, 206(1), 206(2) and 206(4). The Commission also entered an order against Mr. Plaford barring him from the securities business. In the Matter of Christopher Plaford, Adm. Proc. File No. 3-19288 (July 29, 2019).
Manipulation: SEC v. Beauford Securities Ltd., Civil Action No. 18-cv-1317 (E.D.N.Y.) is a previously filed action which named as defendants the U.K. broker, and Panaylotis Kyriacou with manipulative trading with respect to a certain U.S. based microcap stock. In 2016 defendants were approached by an individual claiming to have expertise in such matters. After engaging in a manipulative scheme, defendants learned the person was in fact an undercover FBI agent. The complaint alleged violations of Exchange Act Section 10(b). Each Defendant consented to the entry of a permanent injunction based on the section cited in the compliant and to a bar from participating in penny stock offerings. The order as to Mr. Kyriacou also reserves the right to seek additional remedies in the future. The U.S. Attorney’s Office brought a parallel criminal action. The firm is being liquidated in the U.K. by a court appointed receiver. See Lit. Rel. No. 24546 (July 29, 2019).
Remarks: Jacqueline Loh, deputy Managing Director, Monetary Authority of Singapore, delivered the Keynote Address at the 10th Annual International symposium on Catastrophe Risk Management (August 1, 2019). Her remarks focused on risk management in the face of growing climate and disaster risks in the region (here).
Crpto currency: The Monetary Authority of Singapore issued a “Warning on Fraudulent Website Soliciting Bitcoin Investments” (July 31m 2019)(here).