Nutter Securities Enforcement Update: March 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
SEC v. Steven J. Susoeff, Lit. Rel. 25629 (Feb. 2, 2023) – In a litigated action, a Nevada-based investment advisor was charged with conducting a cherry-picking scheme that defrauded their clients. The advisor allegedly placed securities trades using his firm’s omnibus trading account early in the trading day, but did not allocate the trades to specific clients. Susoeff allegedly disproportionally allocated profitable trades to himself and two favored clients and unprofitable trades to his other clients’ accounts. Charges under Exchange Act Section 10(b), Rule 10b-5, Securities Act Section 17(a)(1) and (3), and Advisers Act Sections 206(1), 206(2). Remedies sought include permanent injunctions, disgorgement with prejudgment interest, and civil penalties.
In the Matter of Ensign Peak Advisors, Inc. and The Church of Jesus Christ of Latter-Day Saints, Rel. 34-96951 (Feb. 21, 2023) – In a settled matter, the Church of Jesus Christ of Latter-Day Saints and its investment advisor, which is exempt from registration as a nonprofit advisor that solely advises charitable organizations, were charged with failing to file quarterly Forms 13F as required for advisors that exercise discretion on over $100m in publicly traded securities. The respondents were charged with forming thirteen LLCs for the purpose of filing Forms 13F and preventing public disclosure of the Church’s equity holdings. Charges under Exchange Act Section 13(f)(1) and Rule 13f-1 thereunder. Remedies included cease-and-desist and penalties of $4m (Ensign Peak) and $1m (Church).
In the Matter of Candlestick Capital Management, LP, Rel. 34-96952 and In the Matter of HITE Hedge Asset Management LLC, Rel. 34-96953 (both Feb. 21, 2023) – In separate settled matters, private fund managers were charged with violating Rule 105 of Reg M by selling short a public company’s common stock within Rule 105’s restricted period and then purchasing the same company’s common stock in a follow-on offering. The orders note that the rule “is prophylactic and prohibits the conduct irrespective of the short seller’s intent in effecting the short sale.” The fund managers were ordered to cease and desist from future violations.
In the Matter of Huntleigh Advisors, Inc. and Datatex Investment Services, Inc., Rel. IA-6251 (Feb. 27, 2023) – In a settled matter, RIAs were charged with failing to provide full and fair disclosure of conflicts of interest related to the receipt of compensation from client transaction fees, cash sweep revenue sharing, and mutual fund 12b-1 fees. The SEC also charged that the RIAs failed to meet their duties of care and of best execution. Charges under Advisers Act Sections 206(2) and 206(4), and Rule 206(4)-7. Remedies included cease-and-desist, censure, disgorgement of $608,251 plus interest, and penalties of $130,000 and $50,000 respectively. Commissioners Peirce and Uyeda dissented from the Order’s finding that the RIAs breached their duties of care and of best execution with respect to mutual fund 12b-1 fees, because mutual funds sell and redeem shares at net asset value and because 12b-1 fees are paid from fund assets and are not commission-based.
In the Matter of The Options Clearing Corporation, Rel. 34-96945 (Feb. 16, 2023) – In a settled matter, The Options Clearing Corporation (OCC), the sole registered clearing agency for exchange listed option contracts in the U.S. and a designated Systemically Important Financial Market Utility, was charged with failure to implement and comply with applicable financial stress testing rules. The SEC alleged that OCC was underfunded by nearly $600 million at times between October 2019 and May 2021. Charges under Section 17A(d)(1) of the Exchange Act and Rules 17Ad-22(e)(4)(iii) and 17Ad-22(e)(17)(i) thereunder; Rules 1002(b)(1) and 1002(b)(2) of Regulation SCI under the Exchange Act; and Section 19(g) of the Exchange Act. Remedies included cease-and-desist, censure, and a $17m penalty.
SEC v. Giguiere, Lit. Rel. 25631 (Feb. 3, 2023) – In a previously-filed litigated action, the SEC agreed to a settlement with Annetta Budhu, who was alleged to be involved in a fraudulent scheme to inflate the price and volume of the stock of Arias Intel Corp. in which she profited $5,000. The SEC alleged that as part of the scheme, she sold shares and lied to a transfer agent about the sale. Charges under Exchange Act Section 10(b), Rule 10b-5. Remedies included permanent injunction, penny stock bar, disgorgement of $5k with prejudgment interest, and civil penalty of $5k.
SEC v. Milan Patel, Lit. Rel. 25641 (Feb. 16, 2023) – In a litigated action, the SEC charged a stock promoter with participating in a fraudulent scheme to manipulate the market for securities of publicly-traded companies by disseminating false rumors designed to cause the price of target companies’ stock and call options to rise temporarily. According to the complaint, the defendant received draft rumors from three associates, then would disseminate the false rumors to his contacts at real-time financial news services, financial chat rooms, and certain other financial news purveyors via instant messages. The complaint further alleges that through this scheme, the defendant generated $1,125,263 in ill-gotten gains. Charges under Securities Act Section 20(d) and Exchange Act Section 21(d). Remedies sought include permanent injunction, disgorgement, and a civil penalty.
Issuer Reporting/Audit and Accounting/Directors and Officers/Compliance
In the Matter of Activision Blizzard, Inc., Rel. 34-96796 (Feb. 3, 2023) – In a settled matter, one of the world’s largest video game development and publishing companies was charged with lacking disclosure controls and procedures designed to ensure that information related to employee complaints of workplace misconduct would be communicated to the company’s disclosure personnel. These complaints were relevant, in the SEC’s view, to the company’s risk factor disclosure about its ability to identify, hire, and motivate qualified personnel. Separately, the company was charged for entering into separation agreements that required former employees to notify the company if they received a request from a government agency in connection with a report or complaint, impeding those individuals from communicating directly with the Commission about a possible securities law violation. Charges under Exchange Act Section 31a-15(a), Rule 21F-17(a). Penalties included cease-and-desist and a $35m civil penalty.
In the Matter of Roadrunner Transportation Systems, Inc., Rel. 33-11156, 34-96909, AAER-4375 (Feb. 14, 2023) – In a settled matter, a publicly-traded shipping and logistics company was charged with engaging in a fraudulent scheme to (a) hide major expenses, (b) hide the poor performance of some of its recently acquired operating companies, and (c) avoid the write-off of significantly overstated or impaired assets and accounts in order to meet its earning goals. To facilitate the scheme, the SEC alleged the company used accounting techniques that (a) improperly deferred recognition or known expenses to future quarters, (b) failed to write down assets in accounts that it knew were worthless (or overvalued), and (c) manipulated contingent earnout liabilities related to the respondent’s recent acquisitions. Charges under Securities Act Sections 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13. Remedies included cease-and-desist and disgorgement ($7.1m), plus interest.
In the Matter of Alan J. Markowitz, CPA, Rel. 33-96995 (Feb. 28, 2022) – In a litigated administrative proceeding, the lead engagement partner in an audit of FTE Networks was charged with violated PCAOB standards by relying on management representations and failing to obtain sufficient audit evidence regarding unbilled receivables, notes payable, and equity transactions. Charges under Exchange Act Section 4C(a)(2), 2-02(b)(1) of Regulation S-X and Rule 102(e)(1)(ii) of the Commission’s Rule of Practice.
SEC v. Payward Ventures, Inc. (D/B/A Kraken) and Payward Trading, Ltd. (D/B/A Kraken), Lit. Rel. No. 25637 (Feb. 9, 2023) – In a settled matter, the defendants, both commonly known as Kraken, were charged with failing to register their offer and sale of securities involving the staking of crypto assets. According to the complaint, Kraken offered a staking-as-a-service program, where investors transferred crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent. Charges under Securities Act Sections 5(a) and 5(c). Remedies included cease-and-desist, disgorgement ($30m), and permanent injunction.
SEC v. Kirchner, Lit. Rel. No. 25638 (Feb. 14, 2023) – In a litigated action, the co-founder and former CEO of Slync, Inc., a privately-held software company, was charged with fraudulently offering and selling more than $67 million of securities to multiple investors and then misappropriating more than $28 million of the proceeds. According to the complaint, the SEC alleged that the defendant misrepresented the financial condition of Slync as well as the planned use of the fundraising proceeds. The SEC also alleged the defendant misappropriated proceeds by transferring millions to his personal bank accounts and by paying for his personal expenses directly out of Slync’s bank accounts. Charges under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Remedies sought include permanent injunction, disgorgement, civil penalty, and officer-and-director bars. The U.S. Attorney’s Office for the Northern District of Texas has filed related criminal charges against the defendant.
In the Matter of Paul Anthony Pierce, Rel. 33-11157 (Feb. 17, 2023) – In a settled matter, Paul Pierce, a former professional basketball player and current sports analyst, was charged with negligently making materially false and misleading misstatements in Tweets promoting the crypto asset security, EMAX. In one misleading Tweet, Pierce claimed he made more money with EMAX in the past month than he did in a year as a sports analyst for ESPN. The SEC further alleged that Pierce did not disclose that he was being compensated by EthereumMax, the entity offering and selling EMAX. Charges under Securities Act Sections 17(a)(2) and 17(b). Remedies included cease-and-desist, disgorgement ($244,116) plus interest, and a civil penalty ($1.1m). Pierce also agreed to undertakings to forgo receiving or agreeing to receive compensation for the promotion of crypto asset securities for a period of three years.
SEC v. Van de Grift and Friedman, Lit. Rel. 25645 (Feb. 23, 2023) – In a litigated matter, the SEC charged a former private equity firm partner with tipping a friend, who was a day trader, about the private equity firm’s potential acquisition of Verifone. Charges under Exchange Act Section 10(b) and Rule 10b-5 thereunder.
SEC v. Stiles, Lit. Rel. 25647 (Feb. 23, 2023) – In a litigated matter with parallel criminal charges, a former employee at a medical supply chain company who worked closely with Eastman Kodak and his cousin were charged with trading in Eastman Kodak shares in advance of the announcement of a $765 million loan to Kodak to manufacture key supply chain chemicals as part of the response to the COVID-19 epidemic. Charges under Exchange Act Section 10(b) and Rule 10b-5 thereunder.
SEC v. Clark, No. 22-1157 (4th Cir. Feb. 23, 2023) – In an ongoing litigation, the Fourth Circuit Court of Appeals reversed a summary judgment ruling against the SEC on its charges that the defendants engaged in an insider trading scheme. The SEC alleged that defendant Clark traded shares of Corporate Executive Board, Inc. (CEB) in advance of a merger announcement, based on nonpublic information obtained from his brother-in-law, defendant Wright, who was CEB’s corporate controller (and who had separately settled the claim). The district court had granted Clark’s summary judgment motion, agreeing that there was insufficient evidence that Wright possessed material nonpublic information that he could have passed to Clark. The Fourth Circuit reversed, stating that the district court “failed to consider the evidence in the light most favorable to the Commission.” It found that the SEC had presented circumstantial evidence from which a reasonable jury could conclude that Wright had inside information and passed it to Clark.
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