Kelly Gibson was named Acting Deputy Director, Division of Enforcement last week. Ms. Gibson has served as a member of the staff for 13 years, holding positions which included Director of the Philadelphia Regional Office. The announcement followed the earlier statement that Satyam Khanna was named as a Senior Policy Advisor for Climate and ESC in the Office of the Acting Chair. Mr. Khanna was most recently a resident fellow at NYU Law School’s Institute for Corporate Governance and finance. Previously, he served on the Presidential transition committee.
Be careful, be safe this week
Comments: The Commission issued a release seeking comments on potential money market reform options highlighted in the President’s Working Group Report (here).
Securities Class Actions
Cornerstone Research published its annual Securities Class Action Filings Report, Year in Review (here). Last year 334 securities class actions were filed. That included 100 Federal M&A filings, 33 Federal Section 11 and State 1933 Act cases and 201 other federal filings. This is the lowest total number of actions filed since 2016 when 288 cases were initiated. In contract, in 2019 a total of 427 actions were filed while in 2018 there were 420 filings and in 2017 412 cases were brought.
The complaints filed were based largely on Exchange Act Rule 10b -5. Last year 85% of the complaints alleged violations of that Rule while Securities Act Section 11 violations were asserted in about 16% of the cases and Section 12(a) claims in about 7%. Those percentages for each section are roughly comparable to those over each of the four prior years.
The primary claim asserted in the complaints filed in 2020 centered on misrepresentations in financial documents. Approximately 90% of the federal actions filed asserted this claim. The next largest group of claims was 43% which were based on assertions of false forward-looking statements followed by 27% based on alleged accounting violations. Again, the percentages were comparable to those in recent years.
SEC Enforcement – Litigated Actions
Financial fraud: SEC v. Revolutionary Concepts, Inc., Civil Action No. 1:18-cv-01832 (N.D. GA.) is a previously filed action in which the Commission prevailed on summary judgment against former V.P. Solomon RC a/k/a Richard M. Carter. The complaint alleged that several transactions touted as having a positive impact on the company in press releases were in fact shams. The Court concluded that Defendants had violated Securities Act Section 17(a) and Exchange Act Section 10(b) by making false statements about the deals and not informing investors that none of the transactions were arms-length. The Court also found that Mr. Ali failed to comply with his reporting requirements under Exchange Act Section 16(a) regarding the 18 million shares of the firm he controls. Accordingly, summary judgment was entered in favor of the Commission. The Court entered a final judgment against Mr. Ali on January 22, 2021. The Court’s order enjoined Defendant from future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 16(a). The Court also imposed a ten-year officer and director bar and a ten-year penny stock bar against the former executive. Mr. Ali was ordered to pay a civil penalty of $107,500. See Lit. Rel. No. 25019 (Jan. 29, 2021).
SEC Enforcement – Filed and Settled Actions
The Commission filed 2 new civil injunctive actions and 1 administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters.
False statements: SEC v. GPB Capital Holdings, LLC, Civil Action No. 1:21-cv-00583 (E.D.N.Y. Filed Feb. 4, 2021) is an action which names as defendants: The firm, a registered investment adviser; Ascendant Capital, LLC, a placement agent for GPB Capital; Ascendant Alternative Strategies, LLC, a registered broker-dealer; David Gentile, the founder, owner and CEO of GPB Capital; Jeffry Schneider, a minority owner of AAS and the sole owner and CEO of Ascendant Capital; and Jeffrey Lash, the managing partner of GPB Capital. The firm is an asset manager that serves as general partner and fund manager for several funds. It invests primarily in automotive retail, waste management and healthcare interests. Since 2013 it has raised over $1.7 billion for at least five limited partnership funds from about 17,000 investors, 4,000 of whom are seniors. While the firm projected success, claiming to consistently have an annualized 8% return and stressing its special distributions, the assertions were an “illusion,” according to the complaint. The fraud continued for 4 years with investors in the dark. The complaint claims that investor did not receive audited financial statements, made false statements and failed to disclose conflicts of interests. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 12(g) and 21F and Advisers Act Sections 206(1), (2) and (4). The case is pending. A parallel criminal action was filed by the U.S. Attorney for the Eastern District of New York. U.S. v. Gentile, No. 21-cr-54 (E.D.N.Y. Unsealed Feb. 4, 2021).
Insider trading: SEC v. CR Intrinsic Investors, Civil Action No. 12-cv-8466 (S.D.N.Y.) is a previously filed action in which a final judgment was entered against Defendant Mathew Martoma, a former portfolio manager at CR Intrinsic. The complaint alleged that Mr. Martoma obtained inside information regarding clinical trial results for a drug being jointly developed by two firms. He then caused several hedge funds to trade based on the inside information which was about negative trial results. The firms avoided losses of over $275 million. Mr. Martoma was previously convicted on criminal charges based on the same conduct. He was sentenced to serve 9 years in prison. The Court entered a permanent injunction based on consent prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 25022 (Feb. 3, 2021).
Financial fraud: SEC v. Premier Holding Corp., Civil Action No. 1:17-cv-09485 (S.D.N.Y.) is a previously filed action which names as defendants the company, a provider of energy services, Randall Letcavage, its CEO and Joseph Greenblatt, a CPA who provided accounting services for the company. The complaint alleges that the firm and its CEO arranged a series of apparently important transactions designed to feign activity at the company to mislead investors. One key transaction involved the inflation of the value of its largest tangible asset, an unsecured promissory note with a face value of $5 million. Mr. Greenblatt is alleged to have assisted the scheme. The complaint alleged violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The Court entered a final judgment on January 20, 2021against the company and its CEO. The judgments imposed permanent injunctions based on each of the sections cited in the complaint, except the judgment as to the company was not based on Exchange Act Section 13(b)(5). The judgments also require the two Defendants to pay, on a joint and several basis, disgorgement and prejudgment interest totaling $8,691,500 and a $1 million penalty as to each. Bars were imposed on Mr. Letcavage prohibiting him from being an officer or director or participating in a penny stock offering. See Lit. Rel. No. 25021 (Feb. 2, 2021).
Financial fraud/false statements: In the Matter of Joseph Jackson, Adm. Proceeding No. 3-20217 (Feb. 2, 2021) is a proceeding which names as respondents Mr. Jackson and Colm Callan, respectively, the CEO and CFO of WageWorks, Inc. In 2016 and 2017 Respondents made misleading statements regarding $3.6 million of revenue in 2016 from the firm’s largest client. As a result, the revenue was recorded. The statements were false. A restatement followed. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings each Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. Mr. Jackson also agreed to reimburse the firm $1,029,740. He will also pay a penalty of $5,000 that will be transferred to the Treasury. Mr. Callan will reimburse the firm a total of $157,590. He will pay a penalty of $100,000 which will also be transferred to the Treasury.
Offering fraud – crypto: SEC v. Krstic, Civil Action No. 21-Civ. 0529 (E.D.N.Y. Filed Feb. 1, 2021) is an action which names as defendants Kristijan Krstic a/k/a Felix Logan, the founder and CFO of Start Options and control person of Bitcoiin2Gen; John DeMarr, formerly a private detective and a primary promoter of Start Options and Bitcoiin2Gn; and Robin Enos and attorney who resigned his license when faced a with disciplinary hearing. Over a period of several months, beginning in late 2017, Defendants raised about $11.4 million from over 460 investors using Start Operations and Bitcoiin2Gen. The offerings purported to be ICOs but in fact were shams. A large portion of the proceeds were misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The action is pending. See Lit. Rel. No. 25020 (Feb. 1, 2020). A parallel criminal case was filed by the U.S. Attorney for the Eastern District of New York. U.S. v. DeMarr, No. 21-mj-128 (E.D.N.Y. Unsealed Feb. 1, 2021).
MOU: The Securities and Futures Commission of Hong Kong announce an MOU on February 3, 2021 on Cross-boundary Wealth Management Connect Pilot Scheme in Guangdong-Hong Kong-Macao Greater Bay Area with the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, the Hong Kong Monetary Authority and the Monetary Authority of Macao. The agreement is designed to provide a framework for exchanging supervisory information and enforcement cooperation as well as investor protection (here).
Statement: The Monetary Authority of Singapore and the Singapore Exchange Regulation issued a statement advising the investing public to be on “heightened alert to the risks related to trading in securities incited by online discussion forums and social media chat groups” on February 2, 2021 (here).