Trends in SEC Enforcement: 1Q23, Part III 

This is the third segment of a four part series on trends in SEC enforcement during the first quarter of 2023. The first part of the series was published on Tuesday August 22, 2023 (here). It provided an overview of the period and compared the basic statistics for the quarter to those generated during similar periods. The second part of the series was published on Thursday, August 17, 2023 (here). It provided examples of actions filed during the first quarter which were in the four major categories of cases identified in the first part of the series.

This segment of the series provides examples of other significant cases filed during the first quarter of 2023. During the quarter a broad array of cases were filed. Those included actions centered on conflicts, false statements, disclosure, controls, touting, Rule 105, perks, beneficial ownership, cybersecurity, muni-offerings, non-GAAP metrics, and manipulation. An overview of each action is provided below the order each case was filed during the first quarter.

Other significant cases

Conflicts: In the Matter of Randy Robertson, Adm. Proc. File No. 3-21268 (January 5, 2023) is an action which names as respondent the BlackRock portfolio manager. Over a three-year period, beginning in 2015, BIT, a statutory trust traded on the NYSE, invested about $85 million in a lending facility to fund expenses for particular films Aviron Group LLC distributed. Respondent had a primary role with Aviron in overseeing the investments. He arranged for his daughter to meet with executives at Aviron to facilitate her career in the film industry. This constituted an undisclosed conflict in violation of Advisers Act Section 206(2). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order and agreed to pay a penalty of $250,000.

False statements – termination: In the Matter of Stephen J. Easterbrook, Adm. Proc. File No. 3-21269 (January 9, 2023). Named as Respondents are Stephen Easterbrook, a former board member and CEO of McDonald’s Corporation. When questions arose regarding Mr. Easterbrook’s conduct, the company retained outside counsel to conduct an internal investigation. During the inquiry outside counsel interviewed Mr. Easterbrook. In that interview the CEO admitted he had violated firm policy by having a physical, personal relationship with a company employee once. While company standards precluded the kind of conduct the former CEO admitted, the Board exercised its discretion and found that the discharge was not for cause. That determination permitted the former CEO to receive $47,534,341. Much of that sum was outstanding stock options and PSUs. The facts regarding Mr. Easterbrook’s termination were incorporated into a Form 8-K and a proxy, both filed with the agency. Subsequently, McDonald’s received an anonymous complaint alleging that another employee of the firm had also engaged in an inappropriate personal relationship with Mr. Easterbrook. A second investigation was launched. The evidence developed substantiated the claim. Suit was filed against the former CEO by the company. The complaint alleged a breach of fiduciary duty and fraud. The action was settled in December 2016. Under the terms of the settlement agreement Mr. Easterbrook repaid to the company the cash severance, prorated bonus, certain proceeds from the exercise of options and PRSUs and attorney fees. The company announced it would not have stated that the termination of Mr. Easterbrook had been on a “not for cause” basis had it known the truth. The Commission’s Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 14(a). To resolve the matter Mr. Easterbrook consented to the entry of a cease-and-desist order based on the Sections and Rules cited in the complaint. He also agreed to the entry of a director and officer bar for a period of five years and to the payment of disgorgement and prejudgment interest in the amount of $52,728,069, deemed satisfied by the payments made in McDonald’s Corporation v. Easterbrook, C.A. No 2020-0658 (Del. Ct. Ch). He will, in addition, pay a penalty of $400,000. McDonald’s also settled, consenting to the entry of a cease-and-desist order based on Exchange Act Section 14(a). The company acknowledged that no penalty was imposed based on its cooperation.

Disclosure: In the Matter of Bloomberg Finance, L.P., Adm. Proc. File No. 3-21284 (January 23, 2023). Respondent Bloomberg Finance is a subsidiary of Bloomberg I.P., a privately held financial, software, data and media firm based in New York City. The firm has long operated a pricing service known as BVAL. It provides daily price valuations to numerous subscribers and customers. Bloomberg Finance is an industry leader. Customers of the firm were told that when valuing fixed income securities, it did so either by direct observation algorithm or observed comparable algorithm. The former includes market data about the target security. Those observations are filtered by Bloomberg to include only the highest quality observations. The approach requires that executable levels and indicative market quotes be statistically corroborated. The firm also uses what it calls the Evaluator Input or EIT. This approach incorporates into the algorithm a single data point about the target security. This can be a broker quote that may not have been automatically incorporated by BVAL. What Respondent did not explicitly disclose over a six-year period, beginning in 2016 however, is the fact that in certain circumstances the use of EIT could result in a valuation based on an uncorroborated single data input. This omission made the Bloomberg disclosure materially misleading, according to the Order Instituting Proceedings. This is because it conveyed that the prices of fixed income securities from the observed algorithm were based on value relative to comparable securities only. That in fact is not correct since a single broker quote for the target security might be the basis. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the matter, Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. In addition, Respondent will pay a penalty of $5 million.

Touting: In the Matter of Paul Anthony Pierce, Adm. Proc. File No. 3-21305 (February 17, 2023) is an action which names as respondent the former professional basketball player. Over a brief period from late May to June Respondent touted a crypto asset and at least made negligent statements that were not correct. He also failed to disclose that he was being paid. The Order alleges violations of Securities Act Sections 17(a)(2) and 17(b). Respondent settled the matter, agreeing to certain undertakings and consenting to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, he agreed to pay disgorgement of $244,116, prejudgment interest of $15,449 and a penalty of $1.5 million.

Controls: In the Matter of African Gold Acquisition Corp., Adm. Proc. File No. 3-21309 (February 22, 2023) is an action which names as Respondent a publicly traded SPAC formed in the Cayman Islands and based in New York City. Its primary asset, as of March 31, 2021, was a bank account that held $1.5 million. Despite this fact, the firm lacked effective internal controls over the account. For example, it failed to establish sufficient segregation of duties and monitoring controls over the operating bank account. The firm also failed to reconcile the bank account activity. These failures permitted the firm’s former CFO to misappropriate most of the liquid assets. Indeed, the former employee took about $1.2 million while selectively determining which vendors to pay or not pay to facilitate not getting caught. The thefts were also aided by the fact that virtually all authority over the internal controls had been delegated to the former CFO. Management failed, in addition, to test the effectiveness of the existing controls. Ultimately, African Gold failed to disclose the amount of the losses in its Form 10-K filed for year-end 2021 with the Commission. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and the related rules. Respondent resolved the proceedings, consenting to the entry of a cease-and-desist order based on the provisions cited in the Order. The firm will also pay a penalty in the amount of $103,591.

Rule 105: SEC v. Candlestick Capital Management, Civil Action No. 3:23-cv-00206 (D. Conn. Filed February 17, 2023). Candlestick Capital Management LP is a Commission registered investment adviser. The advisor has about $3 billion in assets under management. The complaint involving the advisor focuses on June 2020. In that period the advisor sold short 350,000 shares of American Airlines common stock. The average price was $17.622891. Four days after the short sale American Airlines filed a preliminary prospectus. It supplemented an existing shelf registration for a follow-on offering of common stock to be priced after the market close on June 22, 2020. The same day the advisor recognized that the Funds’ June short sale fell within the Offering Period of Rule 105. The next day the advisor received an allocation of American Airline stock of 750,000 shares. Rule 105 was adopted to ensure that secondary and follow-on offerings are priced independently and not manipulated. Accordingly, the rule prohibits the purchase of equity securities from an underwriter, broker or dealer participating in a covered public offering if the buyer sold short the same security during a restricted period absent an exception. The period begins five business days before the pricing of the offered securities and ends with the pricing. Alternatively, it begins with the initial filing of a registration statement or notification on a designated Exchange Act Form and ends with the pricing. The rule is not based on intent but mechanics and dates. A bona fide purchase exception provides an exemption to the prohibition of the rule as long as the same security is purchased in at least the same amount and sold short during the restricted period. The purchase must also be made during regular trading hours, reported to an effective transaction reporting plan and meet certain other requirements that are designed to foster transparency of the activity to the market. That permits the effects of the purchase to be reflected in the security’s market price prior to the pricing of the offering. Here Candlestick did not qualify for the exception. After concluding that it violated Rule 105 Candlestick did not self-report to the Commission. The firm also did not accurately document the Rule 105 violation in its books and records. It did admit the violation to the inspection staff, but only after a direct question was asked. The Candlestick has undertaken remedial acts. The complaint alleges violations of Regulation M. Defendant resolved the action, consenting to the entry of a final judgment ordering it to pay a penalty of $810,000. It also agreed to the entry of an order directing the payment of disgorgement in the amount of $1,565,305 and interest of $89,439. In a separate administrative proceeding, the firm consented to the entry of a cease-and-desist order based on Rule 105. See Lit. Rel. No. 25642 (February 21, 2023); See also SEC v. Hite Hedge Asset Management, Civil Action No. 1:23-cv-109351 (D. Mass. Filed February 17, 2023)(similar action).

Undisclosed perks: In the Matter of The Greenbrier Companies, Inc., Adm. Proc. File No. 3-21318 (March 2, 2023) names the firm, an international supplier of equipment and services to global freight transportation markets, as a respondent. The Order alleges that former CEO William A. Furman, and other executives, failed to disclose certain information regarding related person transactions as required. Specifically, in proxy statements from 2017 to 2022 Greenbrier failed to disclose about $320,000 in perquisites to Mr. Furman and others for travel related expenses. Those filings also failed to disclose that the former CEO received about $1.6 million of the $3 million total Greenbrier paid for the charter of his private aircraft. The internal accounting controls, in addition, failed to require the recording in the books and records of certain travel-related personal security expenses as perquisites. The firm took remedial steps considered by the Commission regarding the controls over recording expenses in resolving this matter. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(a)(1)(A), 13(a)(2)(B) and 14(a). Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, Greenbrier will pay a penalty of $1 million. See also In the Matter of William A. Furman, Adm. Proc. File No. 3021317 (March 2, 2023)(action against former CEO; resolved with the entry of a cease-and-desist order based on same Sections as above and payment of a penalty in the amount of $100,000).

Beneficial ownership: In the Matter of Ralph Bartel, Adm. Proc. File No. 3-21337 (March 9, 2023) is a proceeding which names Mr. Bartel, a German citizen resident in Switzerland as Respondent. Mr. Bartel first had a disclosure obligation with respect to the shares of NASDAQ listed Wilhelmina International Inc. securities he controlled in mid-December 2015 when his holdings exceeded 5%. About one year later a Schedule 13G was filed but only for those shares in his name. He also failed to comply with his Section 16(a) obligations beginning in mid-May 2017 when his holdings in the company exceeded 10%. Again, accurate disclosures were not made. The Order alleges violations of Exchange Act Sections 13(d)(1), 13(g)(1), and 16(a). To resolve the matter, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, he will pay a penalty of $100,000.

Cybersecurity: SEC v. Blackbaud, Inc., Adm. Proc. File No. 3-21339 (March 9, 2023) is a proceeding which names as respondent the firm, a provider of donor relationship software to non-profit organizations. In May 2020, the firm discovered it had been the victim of a cyber-attack. At first the firm believe that the attack resulted in the unauthorized access and exfiltration of over a million files related to 13,000 persons, about one quarter of its customers. By mid-July 2020 the company announced the incident on its website and notified impacted customers. The disclosed information stated that the attack did not result in the access of donor information and social security numbers. Within days the company learned this information was incorrect. Nevertheless, the company filed a Form 10-K in early August which failed to disclose the correct facts about the impact of the attack. Rather, the filing only provided general information about it. In early September the company finally disclose the actual scope of the attack. Blackbaud also failed to maintain disclosure controls and procedures as defined in Exchange Act Rule 13a-15(c). The Order alleges violations of Securities Act Section 17(a)(2) & (3) and Exchange Act Section 13(a) along with the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections and Rules cited in the Order. In addition, Respondent agreed to pay a penalty of $3 million.

Muni offerings: In the Matter of Keybank Capital Markets Inc., Adm. Proc. File No. 3-21336 (March 7, 2023). Over a four-year period, beginning in September 2017, Respondent failed to comply with its obligations under Rule 15c2-12 which generally provides for what the industry calls continuous disclosure. Under the rule an underwriter of municipal securities such as Respondent is obligated for offerings over $100,000 that involve sales to 35 persons or more to make continuous disclosures with certain exceptions keyed to the knowledge and experience of the purchaser. Here Respondent did not comply with its obligations and did not determine that the exception applied. Indeed, Respondent did not have policies and procedures in place requiring the determination be made. Accordingly, the Order alleges violations of Exchange Act Rule 15c2-12 and MSRB Rule G-27. The Commission considered the remedial efforts of Respondent. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on Exchange Act Section 15B(c)(1), Rule 15c2-12 and MSRB Rule G-27. Respondent also agreed to pay disgorgement of $263,607.66, prejudgment interest of $33,528.55 and a penalty of $100,000. A portion of the penalty will be transferred to the MSRB.

Non-GAAP financial metrics: In the Matter of Technology Company, Adm. Proc. File No. 3-21342 (March 14, 2023) is a proceeding which names the international technology company as a Respondent. Beginning in 2018 the firm negligently diluted certain non-GAAP financial metrics. This resulted from the fact that DXS excluded transactions and separation and integration related costs from its non-GAAP net income, non-GAAP EPS and other non-GAAP metrics. Those items related to the integration, planning, financing, and advisory fees associated with the merger that created DXC, other acquisitions and the spin-off of a business. Thus, on a quarterly basis, DXC materially increased its non-GAAP earnings by misclassifying tens of millions of dollars in expenses and improperly excluding them in reporting non-GAAP measures. The firm failed to describe accurately the scope of expenses included in its adjustments. This resulted in violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Section 13(a) and the related rules. To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the order and agreed to pay a penalty of $8 million.

Manipulation – crypto: SEC v. Sun, Civil Action No. 1:23-cv-02433 (S.D.N.Y. Filed March 22,2023) is an action which names as defendants Justin Sun, a Chinese national who is an entrepreneur acting through the entity Defendants, Tron Foundation Ltd., a Singapore entity that conducted the offerings of TRX and BTT assets involved here. Also named as defendants are BitTorrent Foundation Ltd., a Singapore entity; Rainberry, Inc., a California entity; Austin Mahone, a singer; and Deandre Cortez Way, also a singer. Beginning in August 2017, and continuing, Defendant Sun, working through the entity Defendants, engaged in the offer and sale of crypto assets TRX and BTT while creating an active market for the assets. The crypto assets were sold under a claim that they were exempt from registration; they were not. Mr. Sun also engaged in wash trading the assets, again using the entity Defendants. The transactions were touted by the two singer Defendants. Mr. Sun falsely claimed the fees paid the two singers to tout the crypto assets were disclosed; they were not. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Sections 9(a)(1) & (2) and 10(b). The case is pending. See Lit. Rel. No. 25676 (March 24, 2023); See also. In the Matter of Lindsay Dee Lohan, Adm. Proc. File No. 3-21349 (March 22, 2023)(one of a series of actions against celebrities based on Securities Act Section 17(b); resolved with the entry into a cooperation agreement, a cease-and-desist order based on the Section and the payment of disgorgement in the amount of $10,000, prejudgment interest of $670 and a penalty of $30,000). Similar actions were filed against Michele Anne Mason; Miles Parks McCollum; Jake Joseph Paul; Shaffer Chimere Smith; and Allaune Danala Badara Akon Thiam. See Lit. Rel. No. 25676 (March 24, 2023).

Next: Conclusion