Trends in SEC Enforcement – 4Q23: Part III
This is the third part of a four of a four part series focused on trends in SEC Enforcement during the fourth quarter of 2023. The first part discussed metrics such as the number of cases filed during the period and the largest areas of focus. (here). Part II presented examples of the cases in the largest groups of actions (here). This section provides examples of cases not in the largest areas of concentration but which are nevertheless, significant. The cases below are presented in chronological order as they were filed during the quarter.
Other significant cases filed during 3Q23
Incorrect statements: In the Matter of Blackrock Advisors, LLC, Adm. File No. 3-21786 (October 24, 2023).The action centers on BlackRock and its client, BlackRock Investment Advisors, LLC or BTI. Blackrock is perhaps one of the best know registered investment advisers. Its client, BlackRock Multi-Sector Income Trust, is a closed-end management investment company. BTI is required to file periodic reports regarding its investments. The reports contain information supplied by BlackRock. In eight reports filed with the Commission, from October 2015 to October 2019, BlackRock inaccurately described the investments of BTI regarding Aviron Group LLC. At one point this was BTI’s largest investment. The reports described the firm as being engaged in Diversified Financial Services. Aviron, however, was not diversified; it was not a financial services firm. To the contrary, the firm was in the business of developing print and advertising plans for one or two films each year. It also underwrote the distribution expenses in exchange for an agreed upon rate of return from the proceeds of the films. Six of the Reports made during the period inaccurately reflected the coupon rate to be paid by Aviron to BIT. In those instances it appeared that the nominal yield derived from the investments would be larger than in fact is was while in four of the reports, smaller while one report provided conflicting information. In 2019, in connection with a review of the Aviron investment, BlackRock identified the errors and accurately reported the Aviron Investment going forward. The Order alleges violations of Advisers Act Section 206(4) and Investment Company Act Section 34(b). To resolve the action BlackRock consented to the entry of a cease-and-desist order, based on the Sections cited. In addition, the firm was censured and agreed to pay a penalty of $2.5 million. The firm cooperated with the staff and undertook remedial actions.
Crypto assets: SEC v. Safemoon LLC, Civil Action No. 1:23-cv-08138 (E.D.N.Y. Filed Nov. 1, 2023) is an action which names as defendants: Safemoon LLC, Safemoon US LLC, Kyle Nagy, Braden Karony, and Thomas Smith. Safemoon was organized in 2021with Defendant Thomas Smith as a 10% shareholder. The firm is based in Utah as is SafeMoon US, organized about the same time. Defendant Nagy created the SameMoon token and is one of the faces of the business along with Defendant Smith. Defendant Karony, another face of the enterprise, also acts as the CEO of the firm while Mr. Smith serves as the CTO. Defendants are alleged to have generated millions through the unregistered offer and sale of the SafeMoon Token. During the offering the price of the Token increased significantly. In addition, over a 12 month period, beginning in March 2021, the trading volume of the SafeMoon Token on crypto asset trading platforms increased about 55,000%. Defendants also created what they called a “liquidity pool” through which the Tokens could be swapped for BNB Tokens, another crypto asset security. Each of the Token transactions was subject to a 10% tax – 5% to be returned to SafeMoon Token holders as a kind of dividend and 5% to be deposited and retained by SafeMoon. While the assets retained were supposed to be “locked,” in fact they were not – Defendants moved them about at will. Defendants also took numerous Tokens and used them to manipulate the price. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The case is in litigation. See Lit. Rel. No. 25888 (Nov 1, 2023).
Cybersecurity SEC v. Solarwinds Corp., Civil Action No. 1:23-cv-09518 (S.D.N.Y. Filed October 30, 2023). Defendant Solar Winds, based in Austin, Texas, was created in 1999, conducted an IPO in 2009, went private in 2016 and two years later went public again. The firm claims to be skilled in the area of cybersecurity. Defendant Timothy Brown is a vice president at the company. The firm has a range of clients from companies to government agencies. Each retains the firm for its presumed expertise in the cybersecurity area. The true level of the firm’s expertise was revealed in its Form 8-K, filed on December 14, 2020. There the company disclosed that its network monitoring software contained malicious code that had been inserted by threat actors as part of a supply-chain attack. The filing failed to disclose that the vulnerability which permitted Solar Winds to be successfully attacked had alsobeen used to attack and harm company customers and a U.S. Government Agency six months earlier. The attack on Solar Winds follows years in which the company and Mr. Brown provided software that numerous companies and government agencies relied on to manage their information technology infrastructure. The statements by Defendants about the software were wrong. For example, the company claimed that its software products were created in a secure development lifecycle that followed standard security practices. Those supposedly include vulnerability, regression, penetration, and product security testing. This claim, and many others, is false. The false statements made by the company also concealed a number of poor cybersecurity practices utilized by Solar Wind. Those included a failure to consistently maintain a secure development lifecycle for software developed by the firm, a failure to enforce the use of strong passwords on all systems and the failure to remedy access control issues which persisted for years. The filings made by the company with the Commission aided the concealment of Solar Wind’s deficiencies by containing general, high-level risk disclosures that inappropriately lumped cyberattacks in a list of risks alongside natural disasters, fires, power losses and telecommunication losses. Mr. Brown and others at the firm knew about, and participated in, the publication of these and other misleading statements. This point is illustrated by a number of internal communications which contradict public statements made by the company. For example, in a January 2018 email senior managers admitted that the discussion by the firm about its Secure Development Lifecycle incorporated in an article is false. In the end, the company became a victim of its own deception when it was attacked and damaged. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(b)(2)(B) and the related rules. The case is pending. See Lit. Rel. No. 25887 (October 31, 2023). See Lit. Rel. No. 25887 (Oct. 31, 2023).
Controls: In the Matter of Charter Communications, Inc., Adm. Proc. File No. 3-21797 (November 14, 2023) is a proceeding which names the broadband and cable company as Respondent. This proceeding centers around the firm’s stock repurchases since 2016 which constitute about 50% of its shares. From 2017 to 2021 the firm used trading plans to conduct the repurchases. The trading plans were designed to ensure that Charter maintained a continuous buyback program while meeting the company’s publicly disclosed leverage ratio target. One provision used to ensure compliance was a new funding mechanism which allowed Charter to increase the Plan Dollar Cap if it completed a debt offering in which a stated use of the proceeds from that offering included share repurchases. This was referred to as the “accordion” provision since it created flexibility to increase the repurchases as new funds became available through debt closures. The trading plans did not satisfy the requirements of Rule 10b5-1, the Order states. Since the accordion provision gave Charter the ability to change the total dollar amount available for share repurchases, and the timing of additional repurchases, Charter’s plans did not meet the conditions of Rule 10b5-1(c)(1)(i)(B). Accordingly, the firm did not devise and maintain a system of internal controls sufficient to provide reasonable assurances that its repurchases were executed in accord with the Board’s authorizations which were predicated on the repurchases being in accord with Rule 10b-5-1. Accordingly, the firm violated Exchange Act Section 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. The Commission also imposed a penalty of $25 million.
Custody rule: In the Matter of Egan Capital Management, LLC, Adm. Proc. File No. 6491 (December 1, 2023) is a proceeding which names as respondent the registered investment adviser. The Order alleges violations of the custody rule in two respects. First, since 2018 Egan Capital has failed to comply with the custody rule for funds it advises. Second, for two other private real estate funds it also advises, the firm violated the custody rule. In resolving the matter, the advisor agreed to implement certain undertakings, including the retention of an independent compliance consultant who will conduct a review. The Order alleges violations of Advisers Act Section 206(4) and the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section and Rules cited in the Order and a censure. The firm will also pay a penalty of $50,000.
Loss contingency: In the Matter of Mallinckrodt PLC, Adm. Proc. File No. 3-21806 (November 30, 2023) is a proceeding which names as respondent the pharmaceutical firm. The company was informed by the Centers for Medicare and Medicaid Services that it had overcharged Medicaid for the flagship drug of the company. By January 2019, the amount of the overcharge had increased to over $500 million. The amount was not disclosed despite the fact that GAAP requires a public company to disclose material loss contingencies that are reasonably possible, and trends or uncertainties that are reasonably likely to affect future net sales. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings, Respondent consented to a cease-and-desist order based on the Sections cited in the Order. It also agreed to pay a penalty in the amount of $40 million and implement certain undertakings.
>Muni offerings – disclosure: In the Matter of PNC Capital Markets, LLC, Adm. Proc. File No. 3-21259 (December 21, 2022) is a proceeding which names the registered broker-dealer as Respondent. From March 2018 through November 2021 PNC, while serving as sole underwriter for 36 muni offerings that sold securities to market professionals without complying with Rule 15c2-12. That rule requires that the offering be for at least $100,000, involve 35 or more persons, and that the underwriters have a reasonable belief that each purchaser has the experience to evaluate the merits of the investment and not purchasing the securities for more than one account. During the period Respondent did not comply with the Rule. The Order alleges violations of Exchange Act Section 15B(c)(1), Rule 15c2-12 and MSRB Rule G-26. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the provisions cited and to a censure. The firm also agreed to pay disgorgement of $81,362 and prejudgment interest of $16,961 along with a penalty of $100,000.
Conflicts: In the Matter of Wilmington Investment Management, LLC, Adm. Proc. File No. 3-21780 (October 10, 2023). Respondent Wilmington has been a registered investment adviser since 1992. The firm has about $599 million in regulatory assets under management. As of June 2021, the firm no longer served as the manager and investment adviser to the Wrap Program which is at the center of this case. Beginning in February 2020, and continuing until August of that year, the firm offered a wrap program option for advisory clients. In conjunction with the program Respondent was responsible for paying client trading costs. The firm avoided incurring transaction fees for wrap program clients by investing client funds in higher cost mutual fund shares from no-cost share classes of the same funds that were available at a higher cost but which did not charge a fee. Clients thus incurred a higher cost for the same shares. The adviser failed to fully disclose to clients the manner in which shares were selected for investment with their funds. The firm also breached its duty of care and to seek best execution as a result of the manner in which shares were selected for investment by clients in the wrap fund program. In addition, the advisor failed to implement written compliance policies and procedures to prevent the violations of the Advisors Act incurred here. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). In connection with resolving the charges, the adviser reimbursed the clients involved. The firm also agreed to implement certain undertakings. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm also agreed to pay disgorgement in the amount of $999,559, prejudgment interest of $77,588 and a penalty of $250,000.
FCPA: In the Matter of Honeywell International, Inc., Adm. Proc. File No. 4368 (December 19, 2022) is an action which names the international manufacturing and technological firm as a Respondent. The years long scheme here has two key facets. First, through a wholly owned subsidiary, and in conjunction with an intermediary, Respondent offered up to $4 million to the Brazilian state-owned oil firm to secure a contract. Second, through another subsidiary, and with the assistance of another intermediary, the Company paid to secure he cooperation of a government official of Algerian. The Company books and records were not properly maintained, and it failed to have sufficient internal controls to deter the wrongful transaction. The Order alleges violations of Exchange Act Section 30A, 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, the firm will also pay disgorgement of $64,672,563 and prejudgment interest of $16,485,630. Respondent will get a credit of up to $38,712,216 for any disgorgement paid to the Controladoria-Geral de Uniao and the Ministerio Publico Federal reflected by evidence acceptable be to the Commission in a parallel proceeding. The Company also settled with the Department of Justice, entering into a deferred prosecution agreement and agreeing to pay over $78 million.
Next: The concluding part of this series will be published on Friday, February 16, 2024
Trends in SEC Enforcement – 4Q23: Part III
This is the third part of a four of a four part series focused on trends in SEC Enforcement during the fourth quarter of 2023. The first part discussed metrics such as the number of cases filed during the period and the largest areas of focus. (here). Part II presented examples of the cases in the largest groups of actions (here). This section provides examples of cases not in the largest areas of concentration but which are nevertheless, significant. The cases below are presented in chronological order as they were filed during the quarter.
Other significant cases filed during 3Q23
Incorrect statements: In the Matter of Blackrock Advisors, LLC, Adm. File No. 3-21786 (October 24, 2023).The action centers on BlackRock and its client, BlackRock Investment Advisors, LLC or BTI. Blackrock is perhaps one of the best know registered investment advisers. Its client, BlackRock Multi-Sector Income Trust, is a closed-end management investment company. BTI is required to file periodic reports regarding its investments. The reports contain information supplied by BlackRock. In eight reports filed with the Commission, from October 2015 to October 2019, BlackRock inaccurately described the investments of BTI regarding Aviron Group LLC. At one point this was BTI’s largest investment. The reports described the firm as being engaged in Diversified Financial Services. Aviron, however, was not diversified; it was not a financial services firm. To the contrary, the firm was in the business of developing print and advertising plans for one or two films each year. It also underwrote the distribution expenses in exchange for an agreed upon rate of return from the proceeds of the films. Six of the Reports made during the period inaccurately reflected the coupon rate to be paid by Aviron to BIT. In those instances it appeared that the nominal yield derived from the investments would be larger than in fact is was while in four of the reports, smaller while one report provided conflicting information. In 2019, in connection with a review of the Aviron investment, BlackRock identified the errors and accurately reported the Aviron Investment going forward. The Order alleges violations of Advisers Act Section 206(4) and Investment Company Act Section 34(b). To resolve the action BlackRock consented to the entry of a cease-and-desist order, based on the Sections cited. In addition, the firm was censured and agreed to pay a penalty of $2.5 million. The firm cooperated with the staff and undertook remedial actions.
Crypto assets: SEC v. Safemoon LLC, Civil Action No. 1:23-cv-08138 (E.D.N.Y. Filed Nov. 1, 2023) is an action which names as defendants: Safemoon LLC, Safemoon US LLC, Kyle Nagy, Braden Karony, and Thomas Smith. Safemoon was organized in 2021with Defendant Thomas Smith as a 10% shareholder. The firm is based in Utah as is SafeMoon US, organized about the same time. Defendant Nagy created the SameMoon token and is one of the faces of the business along with Defendant Smith. Defendant Karony, another face of the enterprise, also acts as the CEO of the firm while Mr. Smith serves as the CTO. Defendants are alleged to have generated millions through the unregistered offer and sale of the SafeMoon Token. During the offering the price of the Token increased significantly. In addition, over a 12 month period, beginning in March 2021, the trading volume of the SafeMoon Token on crypto asset trading platforms increased about 55,000%. Defendants also created what they called a “liquidity pool” through which the Tokens could be swapped for BNB Tokens, another crypto asset security. Each of the Token transactions was subject to a 10% tax – 5% to be returned to SafeMoon Token holders as a kind of dividend and 5% to be deposited and retained by SafeMoon. While the assets retained were supposed to be “locked,” in fact they were not – Defendants moved them about at will. Defendants also took numerous Tokens and used them to manipulate the price. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The case is in litigation. See Lit. Rel. No. 25888 (Nov 1, 2023).
Cybersecurity SEC v. Solarwinds Corp., Civil Action No. 1:23-cv-09518 (S.D.N.Y. Filed October 30, 2023). Defendant Solar Winds, based in Austin, Texas, was created in 1999, conducted an IPO in 2009, went private in 2016 and two years later went public again. The firm claims to be skilled in the area of cybersecurity. Defendant Timothy Brown is a vice president at the company. The firm has a range of clients from companies to government agencies. Each retains the firm for its presumed expertise in the cybersecurity area. The true level of the firm’s expertise was revealed in its Form 8-K, filed on December 14, 2020. There the company disclosed that its network monitoring software contained malicious code that had been inserted by threat actors as part of a supply-chain attack. The filing failed to disclose that the vulnerability which permitted Solar Winds to be successfully attacked had alsobeen used to attack and harm company customers and a U.S. Government Agency six months earlier. The attack on Solar Winds follows years in which the company and Mr. Brown provided software that numerous companies and government agencies relied on to manage their information technology infrastructure. The statements by Defendants about the software were wrong. For example, the company claimed that its software products were created in a secure development lifecycle that followed standard security practices. Those supposedly include vulnerability, regression, penetration, and product security testing. This claim, and many others, is false. The false statements made by the company also concealed a number of poor cybersecurity practices utilized by Solar Wind. Those included a failure to consistently maintain a secure development lifecycle for software developed by the firm, a failure to enforce the use of strong passwords on all systems and the failure to remedy access control issues which persisted for years. The filings made by the company with the Commission aided the concealment of Solar Wind’s deficiencies by containing general, high-level risk disclosures that inappropriately lumped cyberattacks in a list of risks alongside natural disasters, fires, power losses and telecommunication losses. Mr. Brown and others at the firm knew about, and participated in, the publication of these and other misleading statements. This point is illustrated by a number of internal communications which contradict public statements made by the company. For example, in a January 2018 email senior managers admitted that the discussion by the firm about its Secure Development Lifecycle incorporated in an article is false. In the end, the company became a victim of its own deception when it was attacked and damaged. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(b)(2)(B) and the related rules. The case is pending. See Lit. Rel. No. 25887 (October 31, 2023). See Lit. Rel. No. 25887 (Oct. 31, 2023).
Controls: In the Matter of Charter Communications, Inc., Adm. Proc. File No. 3-21797 (November 14, 2023) is a proceeding which names the broadband and cable company as Respondent. This proceeding centers around the firm’s stock repurchases since 2016 which constitute about 50% of its shares. From 2017 to 2021 the firm used trading plans to conduct the repurchases. The trading plans were designed to ensure that Charter maintained a continuous buyback program while meeting the company’s publicly disclosed leverage ratio target. One provision used to ensure compliance was a new funding mechanism which allowed Charter to increase the Plan Dollar Cap if it completed a debt offering in which a stated use of the proceeds from that offering included share repurchases. This was referred to as the “accordion” provision since it created flexibility to increase the repurchases as new funds became available through debt closures. The trading plans did not satisfy the requirements of Rule 10b5-1, the Order states. Since the accordion provision gave Charter the ability to change the total dollar amount available for share repurchases, and the timing of additional repurchases, Charter’s plans did not meet the conditions of Rule 10b5-1(c)(1)(i)(B). Accordingly, the firm did not devise and maintain a system of internal controls sufficient to provide reasonable assurances that its repurchases were executed in accord with the Board’s authorizations which were predicated on the repurchases being in accord with Rule 10b-5-1. Accordingly, the firm violated Exchange Act Section 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. The Commission also imposed a penalty of $25 million.
Custody rule: In the Matter of Egan Capital Management, LLC, Adm. Proc. File No. 6491 (December 1, 2023) is a proceeding which names as respondent the registered investment adviser. The Order alleges violations of the custody rule in two respects. First, since 2018 Egan Capital has failed to comply with the custody rule for funds it advises. Second, for two other private real estate funds it also advises, the firm violated the custody rule. In resolving the matter, the advisor agreed to implement certain undertakings, including the retention of an independent compliance consultant who will conduct a review. The Order alleges violations of Advisers Act Section 206(4) and the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section and Rules cited in the Order and a censure. The firm will also pay a penalty of $50,000.
Loss contingency: In the Matter of Mallinckrodt PLC, Adm. Proc. File No. 3-21806 (November 30, 2023) is a proceeding which names as respondent the pharmaceutical firm. The company was informed by the Centers for Medicare and Medicaid Services that it had overcharged Medicaid for the flagship drug of the company. By January 2019, the amount of the overcharge had increased to over $500 million. The amount was not disclosed despite the fact that GAAP requires a public company to disclose material loss contingencies that are reasonably possible, and trends or uncertainties that are reasonably likely to affect future net sales. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings, Respondent consented to a cease-and-desist order based on the Sections cited in the Order. It also agreed to pay a penalty in the amount of $40 million and implement certain undertakings.
Conflicts: In the Matter of Wilmington Investment Management, LLC, Adm. Proc. File No. 3-21780 (October 10, 2023). Respondent Wilmington has been a registered investment adviser since 1992. The firm has about $599 million in regulatory assets under management. As of June 2021, the firm no longer served as the manager and investment adviser to the Wrap Program which is at the center of this case. Beginning in February 2020, and continuing until August of that year, the firm offered a wrap program option for advisory clients. In conjunction with the program Respondent was responsible for paying client trading costs. The firm avoided incurring transaction fees for wrap program clients by investing client funds in higher cost mutual fund shares from no-cost share classes of the same funds that were available at a higher cost but which did not charge a fee. Clients thus incurred a higher cost for the same shares. The adviser failed to fully disclose to clients the manner in which shares were selected for investment with their funds. The firm also breached its duty of care and to seek best execution as a result of the manner in which shares were selected for investment by clients in the wrap fund program. In addition, the advisor failed to implement written compliance policies and procedures to prevent the violations of the Advisors Act incurred here. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). In connection with resolving the charges, the adviser reimbursed the clients involved. The firm also agreed to implement certain undertakings. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm also agreed to pay disgorgement in the amount of $999,559, prejudgment interest of $77,588 and a penalty of $250,000.
FCPA: In the Matter of Honeywell International, Inc., Adm. Proc. File No. 4368 (December 19, 2022) is an action which names the international manufacturing and technological firm as a Respondent. The years long scheme here has two key facets. First, through a wholly owned subsidiary, and in conjunction with an intermediary, Respondent offered up to $4 million to the Brazilian state-owned oil firm to secure a contract. Second, through another subsidiary, and with the assistance of another intermediary, the Company paid to secure he cooperation of a government official of Algerian. The Company books and records were not properly maintained, and it failed to have sufficient internal controls to deter the wrongful transaction. The Order alleges violations of Exchange Act Section 30A, 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, the firm will also pay disgorgement of $64,672,563 and prejudgment interest of $16,485,630. Respondent will get a credit of up to $38,712,216 for any disgorgement paid to the Controladoria-Geral de Uniao and the Ministerio Publico Federal reflected by evidence acceptable be to the Commission in a parallel proceeding. The Company also settled with the Department of Justice, entering into a deferred prosecution agreement and agreeing to pay over $78 million.
Next: The concluding part of this series will be published on Friday, February 16, 2024