This Week In Securities Litigation (Week starting July 15, 2019)
Note: Beginning today This Week in Securities Litigation is being retooled, focusing on critical unfolding tends in enforcement litigation as well as detailing key matters from the prior week. Going forward the initial portion of the article will focus on one or more unfolding issues. Those insights will be paired with the typical review of cases, rules, speeches and other important matters that that occurred around the globe last wee. Together this should provide the reader with superior insights and information when making decisions regarding SEC, DOJ and other investigations and enforcement actions.
Digital assets – are they the future? Some believe they are; others not. In fact, digital assets are where the past meets the future today. Digital assets were born to “get off the grid” — a new idea, new tech, new approach. But how does one “get off the grid” in today’s business world? More importantly, how does one conduct business and “get off the grid?”
The SEC’s DAO report, issued in the wake of the initial enforcement cases, is a good example of old meets new: The idea of what is an “investment contract” is defined by statutes tracing to the 1930s. It is amplified by a 1940s Supreme Court decision. By tying these concepts to digital assets the DAO Report put off the grid assets front and center in the middle of the grid. Other federal regulators took similar approaches. The CFTC applied traditional legal principles to conclude that digital coins are commodities. FinCEN applied traditional money laundering theory to the new assets, requiring in certain instances the filing of a SAR.
Now digital platforms run ads proclaiming that “the revolution needs rules” and probably regulators. Is this “off the grid?” Perhaps not. But the future is evolving. Where are the regulators and their traditional principles? Trying to move forward, as reflected in the release by the staffs of certain SEC divisions and FINRA discussed below, is difficult and uncertain. No doubt. But then the birth of new ideas is always difficult. And, the future is evolving quicker than many believe.
Statement re digital assets: The staffs of the Division of Trading and Markets, General Counsel’s Office and FINRA issued Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities (July 8, 2019)(here). Essentially the statement reviews possible applications of the federal securities laws to crypto assets. The issues covered include: 1) Registration; 2) the Customer Protection rule; 3) books, records and financial reporting; and 4) the SIPIC. The discussion of these points generally draws on the “historic approach to broker-dealer regulation and investor protection,” reiterating long established security principles meshed with the potential risks of digital currencies.” The Statement concludes by noting that “the Staffs encourage and support innovation in the securities markets and look forward to continuing to engage with investors and industry participants as the marketplace for digital asset securities develops.” This theme threads throughout the Statement as the staffs struggled to apply traditional securities law concepts to evolving digital assets. Those entering or participating in the digital securities space would be well served by carefully assessing the difficulties of the issues discussed in the Statement.
Comment: The CFTC and SEC invited public comment on a Joint Proposal to Align Margin Requirements for Security Futures with Requirements for Similar Financial Products (here).
Rules: Five federal financial regulatory agencies announced that they adopted a final rule to exclude community banks from the Volker Rule. The actions are consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act. The agencies are the SEC, CFTC, FDIC, OCC and Federal Reserve Board (here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 1 civil injunctive action and no administrative proceedings this week, exclusive of 12j and tag-along actions.
Insider trading: SEC v. Blakstad (S.D.N.Y. Filed July 10, 2019). Donald Blakstad is the operator of an investment firm. Martha Bustos was an accountant in the finance department of Illumina, Inc. and later a consultant. Over a two-year period, beginning in April 2016, Ms. Bustos repeatedly furnished material non-public information to her friend, Donald Blakstad. Prior to the firm’s preliminary revenue announcement on April 18, 2016, for example, Ms. Bustos furnished her friend with information regarding Illumina’s financial performance for the first quarter of 2016. Before the public disclosure of that information Mr. Blakstad passed it to two surrogates. Each traded options. Following the firm’s announcement of the quarterly results, the option positions were liquidated at a profit. This pattern was replicated three more times. In advance of Illumina’s October 10, 2016 preliminary revenue announcement Ms. Bustos informed her friend about the company financial results. When the Illumina release was issued it disclosed that the firm failed to meet revenue expectations for the period. The share price dropped significantly. Mr. Blakstad, who again recruited surrogates to place the trades, reaped substantial profits. Prior to firm’s August 1, 2017 and July 30, 2018 Ms. Bustos furnished material, non-public financial data taken from Illumina in violation of its policies to her friend. In each instance Mr. Blakstad had others trade on his behalf. In each instance the trades were profitable. While Mr. Blakstad was able to obtain millions of dollars in illegal trading profits, the payments for the information were minimal. Typically, Mr. Bustos entertained his friend. At times the gifts were what the complaint called “lavish,” such as a trip to New York that included first class air fare, hotel and dinner at a very expensive restaurant. The “lavish” did not begin to approach the over $6 million of trading profits the professional trader obtained from the arrangement. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The Manhattan U.S. Attorney’s Office filed a parallel case in which Ms. Bustos has pleaded guilty and is cooperating.
Trades: SEC v. Aquino, Civil Action No. 1:18-cv-08191 (S.D.N.Y.) is a previously filed action which named as a defendant Jovannie Aquino, formerly a registered representative associated with Windsor Street Capital. The complaint alleged that Defendant defrauded seven retail customers by recommending a series of frequent, short-term trades that resulted in large commissions and expense for the customers. The Court entered an amended final judgment by consent prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The judgment also directs the payment of $568,805 in disgorgement and $42,212 in prejudgment interest. In addition, Defendant consented to the entry of an administrative order barring him from the securities business and imposing a penny stock bar. In the Matter of Jovannie Aquino, Adm. Proc. File No. 3-19199 (July 8, 2019).
Mismarking: U.S. v. Ahuja, No. 1:18-cr-00328 (S.D.N.Y. Verdict July 11, 2019) is an action which named as defendants Amelesh “Neil” Ahuja, the founder, CEO and CIO of Premium Point Investments LP, and Jeremy Shor, a trader at the firm. Defendants were each found guilty by a jury on the four counts in the indictment which were Conspiracy, to commit securities fraud, securities fraud, conspiracy to commit wire fraud and wire fraud. The charges were based on a scheme which took place over two years beginning 2016 during which they mismarked the value of securities held in the fund in order to inflate AMU and forestall withdrawals. Manipulation of these metrics aided the continuation of a once successful track record so the fund could compete with its perceived peers. See also SEC v. Premium Point Investments LP, Civil Action No. 1:18-cv-04145 (S.D.N.Y.).
Offering fraud: U.S. v. Nordlicht, No. 16-cr-640 (E.D.N.Y. Verdict July 8, 2019). Charged in the case were: Mark Nordlict, co-founder of the fund, David Levy, co-investment officer and Joseph SanFilippo, chief financial officer of the Value Arbitrage fund. The charges included multiple counts of conspiracy, wire and securities fraud. Mr. Nordlicht and co-defendant David Levy were found guilty of securities fraud, conspiracy to commit securities fraud and wire fraud conspiracy. The two men were acquitted on five other charges. Mr. SanFilippo was acquitted on all charges. Prior to the events that spawned the fraud, Platinum Partners enjoyed years of some of the best returns in the hedge fund industry. The firm’s flagship fund, Value Arbitrage, had average gains of 17% through 2015. Yet the fund was heavily invested in oil and gas interests that underperformed. As the fund tottered on the brink of collapse, executives lied to investors, according to the court papers, in an effort to stave off withdrawals and raise new capital. The result was a billion-dollar fraud, according to the government. The date for sentencing was not announced.
Remarks: Merlyn Ee, Executive Director of the Monetary Authority of Singapore, delivered the Key Note Address at the Association of Financial Advisors (Singapore) 18th Annual Conference (July 11, 2019)(here). In her remarks the ED focused on three point: shaping the right behavior through incentives; enhancing surveillance of representatives; and building a customer-centric culture (here).