Nutter Securities Enforcement Update: February 1, 2023Print PDF
The Nutter Securities Enforcement Update is a periodic summary of noteworthy recent securities enforcement activity, settlements, decisions, and charges. For more information on these cases or about how they may impact you, contact your Nutter attorney.
Investment Advisers/Investment Companies
In the Matter of Randy Robertson, Rel. IA-6211, IC-34795 (Jan. 5, 2023) – A former director at BlackRock Advisors, LLC and a former co-portfolio manager for the BlackRock Multi-Sector Income Trust (“BIT”), a closed-end management investment company, were charged with failing to disclose a conflict of interest concerning the largest investment held by BIT, a lending facility in affiliates of Aviron Group, LLC. When playing a primary role in identifying, selecting, and overseeing the Aviron investment, the respondent requested that Aviron help his daughter’s career, and on occasion Aviron presented her with potential opportunities in the film industry. The respondent failed to disclose to BIT’s board that his daughter appeared in a 2018 film funded by BIT. Violations of Advisers Act Section 206(2). Remedies included censure and a civil monetary penalty of $250k.
In the Matter of Moors & Cabot, Inc., Rel. 34-96719, IA-6222 (Jan. 19, 2023) – In a settled matter, a dually registered investment adviser and broker-dealer was charged with failing to disclose material facts and conflicts of interest associated with revenue sharing and financial incentives from two unaffiliated clearing brokers. The revenue sharing was based on the investment of client assets in cash sweep programs, margin lending, and postage and handling fees. In addition, the respondent received transaction fee discounts and incentive credits contingent on reaching threshold dollar amounts in FDIC insured bank deposit cash sweep products. Charges under Advisers Act Section 206(2), Section 206(4) and Rule 206(4)-7. Remedies included censure, cease-and-desist, disgorgement of over $1.4m plus interest, and a $375k civil penalty.
In the Matter of Terrance Reagan and Nathaniel Clay, Lit. Rel. 25619 (Jan. 20, 2023) – In a litigated matter, two brokers were charged with making unsuitable recommendations, including in costly high-frequency trading strategies to individual customers. Charges under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Defendant Clay consented to a final judgment including an injunction, disgorgement of approximately $150k plus interest, and a civil penalty in the same amount. The case against the remaining defendant is still pending.
In the Matter of National Trust, et al., Rel. 33-11146, 34-96668, IC-6218 (Jan. 17, 2023) – In a settled matter, a trust company and two officers were charged with engaging in broker-dealer activities without registration and with making misrepresentations to investors in connection with their non-depository trust services. The company provided trustee and trust administration services, including an online platform to create irrevocable trusts. The company represented that the trust plans had no annual fees. Through an unregistered subsidiary, the company received mutual fund 12b-1 fees on class A and class C shares, while disclosures on monthly account statements stated that the company “may” earn 12b-1 fees and other compensation. Charges under Securities Act Section 17(a)(2) and (a)(3) and Exchange Act Section 15(a). Penalties included cease-and-desist, individual practice bars, disgorgement of about $100k plus interest, and civil penalties of $225k (company) and $75,000 and $40,000 (individuals).
SEC v. DiScala, Lit. Rel. No. 25606 (Jan. 4, 2023) – In a litigated action, the court entered bifurcated judgments against Marc Wexler and Matthew Bell, enjoining them from certain violations of the federal securities laws. The complaint alleged that starting in 2013 Wexler and Bell, along with the other defendants, were involved in a scheme to manipulate the securities of CodeSmart Holdings, Inc. The SEC alleged that Wexler and others sought to flood the market with CodeSmart shares and engaged in a promotional campaign to artificially inflate the price of the stock. Meanwhile Bell and another individual invested their brokerage clients in CodeSmart. Charges under Sections 5(a), 5(c), and 17(a) of the Securities Act, Sections 9(a) and 10(b) of the Exchange Act, Rule 10b-5 thereunder. Remedies included permanent injunctions and a penny stock bar. Wexler additionally consented to an officer-and-director bar. Wexler and Bell have pleaded guilty and are awaiting sentencing in a parallel criminal proceeding.
SEC v. Andrew DeFrancesco, Lit. Rel. 25610 (Jan. 6, 2023) – In a litigated action, officers and an employee of Cool Holdings, Inc. were charged for their roles in a scheme to mislead Cool Holdings investors. The complaint alleges that the defendants made false statements and omitted material information in Cool Holdings’ filings. Further, several of the defendants arranged for the publication of a series of fraudulent promotional articles about Cool Holdings. Finally, one defendant secretly sold 1.6 million shares of the stock for proceeds of more than $8 million. Charges under Sections 5(a), 5(c), 17(a) of the Securities Act, Section 10(b), Rule 10b-5, Section 13(d), 13d-1(a), Rule 16a-3 of the Exchange Act. Remedies sought include permanent injunctions, disgorgement with prejudgment interest, civil monetary penalties, and officer-and-director bars.
Issuer Reporting/Audit and Accounting/Directors and Officers/Compliance
In the Matter of Stephen J. Easterbrook and McDonald’s Corporation, Rel. 33-11144, 34-96610 (Jan. 9, 2023) – In a settled matter, McDonald’s former CEO Stephen J. Easterbrook was charged with failing to disclose, during an internal investigation, physical relationships he had with company employees. McDonald’s was charged with failing to disclose in its Form 8-K that it exercised discretion in terminating Easterbrook “without cause” under the relevant compensation plan documents after finding that he violated corporate policy, allowing Easterbrook to retain certain equity-based compensation that would have been forfeited if the company had terminated him for cause. Charges against Easterbrook under Exchange Act Sections 10(b) and 13(a) and Rules 10b-5(a) 12b-20, 13a-11 thereunder and Securities Act Section 17(a). Charges against McDonald’s under Exchange Act Section 14(a) and Rule 14a-3 thereunder. Remedies include cease-and-desist, bar from acting as an officer or director (Easterbrook), disgorgement and prejudgment interest of $52,728,069 (Easterbrook), and civil penalty of $400k (Easterbrook). The SEC did not impose a civil penalty against McDonald’s based upon its cooperation. Commissioners Peirce and Uyeda dissented with respect to charges against the company for its discretionary decision to categorize the CEO dismissal as “without cause.”
Doe v. PCAOB, Civ. A. No. 3:23-cv-00149-S (N.D.Tx. Jan. 19, 2023) – An anonymous accountant who is the subject of a pending disciplinary hearing filed an action against the Public Company Accounting Oversight Board asserting multiple constitutional claims, including that the PCAOB’s self-funding mechanism violates the Appropriations Clause, the PCAOB enforcement staff uses executive law enforcement powers without adequate supervision in violation of Article II of the Constitution, the PCAOB hearing officer’s appointment and removal procedures violate Article II, the disciplinary hearing process violates principles of due process, and respondents in disciplinary hearings are entitled to a jury trial.
In the Matter of Bloomberg Finance, LP, Rel. 33-11150 (Jan. 23, 2023) – In a settled matter, Bloomberg Finance was charged with making misleading statements or omissions regarding the methodologies by its securities pricing service, BVAL. Bloomberg had provided to its customers, including mutual funds and investment managers, a detailed description of the BVAL methodologies for pricing fixed income securities, without disclosing that, valuations for thinly traded securities could in certain circumstances be largely driven by a single data point, such as a broker quote. Charge under Securities Act Section 17(a)(2). Remedies included cease-and-desist and a $5m penalty. Commissioners Peirce and Uyeda voted against bringing this action, stating that the order did not charge that the respondent provided misleading prices and involved a “strained” reading of Section 17(a)(2)’s “in the offer or sale of securities” element.
SEC v. Samuel Bankman-Fried, Civ, Lit. Rel. 25616 (Jan. 19, 2023) – In a litigated matter arising out of the collapse of cryptocurrency platform FTX, the SEC charged Bankman-Fried with undisclosed diversion of FTX customer funds to Alameda, his privately-held crypto hedge fund; undisclosed special treatment afforded to Alameda including a line of credit; undisclosed risk from FTX’s exposure to Alameda’s overvalued, illiquid assets; and commingling customer funds. Charges under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Parallel charges are being brought by the U.S. Attorney in S.D.N.Y. and the Commodity Futures Trading Commission.
In the Matter of Nexo Capital, Inc., Rel. 33-11149 (Jan. 19, 2023) – In a settled matter, a Cayman Islands corporation was charged with making an unregistered public offering and sale of securities to U.S. investors. Nexo Capital allegedly managed an “Earn Interest Product” in which investors tendered digital assets to the respondent, which the respondent used as capital to, among other things, invest in other digital assets, trade on decentralized finance platforms, and lend money. The SEC alleged that the EIP was an investment contract that involved a promise of repayment with interest based on a share of the respondent’s profits from its use of the deposited assets. The respondent’s cooperation, including ceasing sales and phasing out products and services in the U.S., was cited. Charges under Securities Act Sections 5(a) and 5(c). Remedies included cease-and-desist and a civil penalty of $22.5m.
U.S. v. Blaszczak, Nos. 18-2811, 18-2825, 18-2867, 18-2878 (2d Cir. Dec. 27, 2022) – On remand from the Supreme Court in light of Kelly v. U.S., 140 US 1565 (2020), the Second Circuit vacated the defendants’ insider trading convictions for trading certain health care stocks in advance of public announcements of changes in Medicare and Medicaid reimbursement rates. In Kelly, the Supreme Court had held that a government agency must itself be deprived of “money or property” and not merely inconvenienced to meet the requirements of wire fraud and other statutes using that language. The Blaszczak prosecutors accordingly dropped all charges based on claims that the nonpublic information about federal reimbursement changes were “property” or a “thing of value” to the government. The Second Circuit held that Kelly did not bar the remaining insider trading charges because the applicable statute, 18 USC Section 371, had broader language that could encompass a conspiracy to “defraud the United States . . . in any manner for any purpose.” Rather than affirming the convictions, the Court remanded for a new trial because the property-rights-based charges could have influenced the prior jury verdict.
In the Matter of Donna Matuizek, Rel. 34-96759 (Jan. 27, 2023) – In a settled matter, the Commission charged a vice president for a key supplier to Pandion Therapeutics with purchasing Pandion shares prior to the announcement of Merck’s acquisition of Pandion. The trader allegedly learned of the pending acquisition because she had been contacted during Merck’s due diligence. Pandion had a policy against the use of insider information and a confidentiality policy with respect to proprietary information of third parties with which the company did business. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included cease-and-desist, disgorgement of $27,800 plus interest, and a civil penalty of $27,800.
SEC v. Covington & Burling LLP, Lit. Rel. No. 25612 (Jan. 12, 2023) – In an application for show cause, the SEC is seeking an order directing Covington & Burling LLP to comply with an investigative subpoena and provide the names of any clients whose information had been viewed, copied, modified, or exfiltrated during the Microsoft Hafnium cyberattack. According to the SEC’s application, the SEC is investigating potential violations of the federal securities laws arising out of the Microsoft Hafnium cyberattack which began in or around November 2020 and continued into at least March 2021. The SEC’s application alleges that during the cyberattack, the threat actors gained unauthorized access to Covington’s computer network and certain individual devices and accessed legal files for approximately 300 of its clients. The SEC is requesting an order requiring Covington to show cause why it should not produce the names of clients whose information had been viewed, copied, modified, or exfiltrated during the cyberattack
This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the Rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.