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10.01.2023 | Legal Update

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.

Because of the large number of September cases, we have separated this month’s update into two parts. Part 1 includes Investment Advisers/Investment Companies, Broker-Dealers, Private Funds, and Market Manipulation. Part 2 includes Issuer Reporting/Audit and Accounting, Securities Offerings, Public Finance, Insider Trading, and FCPA.

Issuer Reporting/Audit and Accounting

In the Matter of Fluor Corporation, Press Rel. No. 2023-170, Rel. No. 34-98292 (Sept. 6, 2023) – In settled matters, the SEC charged Texas-based Fluor Corporation and five of its former and current officers. The SEC alleges that Fluor, a global engineering, procurement, and construction company, bid on two projects relying on overly optimistic cost and timing estimates and subsequently experienced cost overruns that worsened over time. Fluor failed to sufficiently maintain internal controls to account for the projects in accordance with GAAP. Charges under Exchange Act Section 13(a), 13(b)(2)(A) and (B), and Rules 13a-1, 13a-13, and 12b-20. Penalties included cease-and-desist and civil penalties to Fluor of $1.5m and to five officers ranging from $15k to $25k.

SEC v. Guosheng Qi et al., Lit. Rel. 25822 (Sept. 7, 2023) – In a litigated matter, the SEC charged Gridsum Holding, Inc. and its CEO Guosheng Qi with misuse and unreported use of funds raised in the company’s 2016 IPO and failure to disclose millions of dollars in related-party transactions. The complaint alleges undisclosed related-party transactions of $7.1 million (with $5.2 million going directly or indirectly to family members). The complaint further alleges undisclosed payments of $3.8 million of IPO proceeds to directors and officers and $2.5 million of IPO proceeds to Qi’s wife. Charges under Securities Act Section 1(a)(1)-(3), Exchange Act Sections 13(a) and 13(b)(2)(B) and Rules 13a-14 and 13b2-2. Remedies sought include injunctions, disgorgement, civil penalties, and officer-and-director bar.

In the Matter of Monolith Resources, LLC, Press. Rel. 2023-172, Rel. 34-98322 (Sept. 8, 2023) – In a settled matter, the SEC announced charges against Monolith Resources, LLC, a privately-held energy and technology company headquartered in Nebraska, for using employee separation agreements that violated the SEC’s whistleblower protection rules. Monolith used separation agreements that required certain departing employees to waive their rights to monetary whistleblower awards in connection with filing claims with or participating in investigations by government agencies. Charges under Exchange Act Rule 21F-17. Remedies included a civil penalty of $225k and remedial actions, including notifying former employees that the agreements do not limit their ability to obtain whistleblower awards.

In the Matter of Maximus, Inc., Rel. 34-98351 (Sept. 11, 2023) – In a settled matter, a NYSE-listed public company was charged with failing to report on Forms 10Q or 10K or Schedule 14A that a recently promoted executive officer had two siblings who were employed by the same firm and received annual compensation of over $120,000. Charges under Exchange Act Sections 13(a) and 14(a), and Rules 13a-1 and 14a-3. The company’s self-reporting, cooperation, and remediation of the issue were noted in the release. Remedies included cease-and-desist and a $500k penalty.

In the Matter of Lyft Inc., Press Rel. 2023-182, Rel. 34-98413 (Sept. 18, 2023) – In a settled matter, the SEC charged Lyft Inc. with failure to disclose a director’s role in an approximately $424 million shareholder sale of private shares of Lyft’s stock prior to Lyft’s IPO in March 2019. The Order alleges that the director arranged for the shareholder to sell its shares to a special purpose vehicle which was affiliated with the director. Lyft, which approved the sale, was a participant in the transaction, and the director received millions of dollars for his role in negotiating the deal. The Order further alleges that Lyft failed to disclose that the director profited from this transaction in its Form 10-K for 2019. Charges under Exchange Act Section 13(a) and Rule 13a-1. Penalties included cease-and-desist and a $10m civil penalty.

In the Matter of CBRE, Inc., Press Rel. 2023-184, Rel. 34-98429 (Sept. 19, 2023) – In a settled matter, the SEC charged CBRE, Inc. with violating the SEC’s whistleblower protection rule. The Order alleges that CBRE required employees who were receiving separation pay to sign releases attesting that the employees had not filed a complaint against CBRE with any federal agency. The Order further alleges that the requirement that employees sign the release to receive separation pay constituted action by CBRE to impede potential whistleblowers from making complaints to the SEC. Charges under Exchange Act Rule 21F-17. Penalties included cease-and-desist and $375k civil penalty.

In the Matter of Kandi Technologies Group, Inc., Rel. 33-11240, 34-98476 (Sept. 21, 2023) – In a settled matter, the SEC charged a China-based vehicle manufacturer with making materially misleading statements and omissions in periodic filings and press releases regarding its planned launch of highway passenger electric vehicles (EVs) in the United States. According to the Order, the manufacturer falsely claimed that its EVs met all necessary U.S. government requirements, inaccurately stated it had a contract to supply 2,000 EVs to its U.S. subsidiary, and made false statements about the sale of “street-legal” and “highway-legal” EVs in the U.S. Charges under Securities Act Section 17(a)(3), Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-11, and 13a-13. Remedies included cease-and-desist and a $710k civil penalty.

In the Matter of GTT Communications, Inc., Rel. 33-11241, 34-98491, AAER-4459 (Sept. 25, 2023) – In a settled matter, a publicly traded telecom company was charged with material misstatements and omissions in its reporting of cost of revenue in quarterly and annual financial reports. According to the Order, the company had made a series of acquisitions but “struggled to integrate” the acquired companies’ businesses into its systems and failed to implement policies designed to ensure that the company’s reported COR data were based on reasonable support. Charges under Securities Act Sections 17(a)(2) and (3), Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a). Remedies included cease-and-desist. Due to the company’s self-reporting, cooperation, and voluntary remedial measures, the SEC did not impose a civil penalty.

SEC Charges Corporate Insiders for Failing to Timely Report Transactions and Holdings, Press Release 2023-201 (Sept. 27, 2023) – In settled matters arising out of ongoing investigations, five public companies and six individual officers, directors, or major shareholders of publicly traded companies were charged with failing to timely report information about the individuals’ holdings and transactions in company stock on Forms 4 (for transactions by officers, directors, and beneficial owners of over 10% of a registered share class) and Schedules 13D and 13G (for over-5% owners of a registered share class regarding their holdings and intentions with respect to the company). Charges under Exchange Act Sections 13(d)(1) and (2) and 16(a), and Rules 13d-2(a), 13d-3, and16a-3. Remedies included cease-and-desist and civil penalties ranging from $66k to $150k for the individuals and from $115k to $190k for the companies.

SEC v. Caridi, Lit. Rel. 25847 (Sept. 25, 2023) – In a litigated matter, the SEC alleged that the former board chair of Tree of Knowledge International Corp. (“TOKI”), a publicly traded microcap issuer, issued press releases claiming that the company had successfully “pivoted” to being a personal protective equipment supplier, without mentioning its failure to meet its delivery obligations to its largest customer. In addition, the SEC alleged that the defendant had misappropriated substantial funds from the proceeds of the unperformed contract. Charges under Exchange Act Section 10(b) and Rule 10b-5.

SEC v. Intrusion Inc. Lit. Rel. 25854 (Sept. 26, 2023) – In a litigated matter, the SEC charged Intrusion Inc. with making false and misleading statements regarding the company’s success in marketing a cybersecurity product, the terms for multiple contracts, and the background and experience of its former CEO. Intrusion agreed to settle the SEC’s charges and the settlement is subject to court approval. Charges under Exchange Act Section 10(b) and Rule 10b-5, Section 13(a) and Rules 13a-11 and 13a-15(a), Securities Act Section 17(a). Remedies sought include permanent injunctions.

SEC v. Hyzon Motors Inc., et al., Lit. Rel. 25855 (Sept. 27, 2023) – In a litigated matter, the SEC announced settled charges against Hyzon Motors Inc. for misleading investors about its business relationships and vehicle sales before and after a July 2021 merger with publicly-traded special purpose acquisition vehicle (SPAC). The SEC also charged Hyzon’s former CEO and the former managing director of Hyzon’s European subsidiary for their roles in the fraudulent scheme. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, as well as violations or aiding and abetting violations of additional books and records, control, reporting, and proxy solicitation provisions of the Exchange Act. Remedies included permanent injunctions, civil penalties ($25m for Hyzon, $100k for former CEO, $200k for managing director), and officer-director bars (five years for former CEO, ten years for managing director). The settlements are subject to court approval.

SEC v. Edward O’Donnell and Victor Bozzo, Lit. Rel. 25860 (Sept. 28, 2023) – In a litigated matter, the SEC charged the CFO and CCO of a telecommunications company, Pareteum Corp., with fraudulent revenue recognition practices. The SEC alleges that the scheme involved recognizing revenue from non-binding purchase orders for SIM card services from Pareteum customers, despite knowing that the customers had not committed to paying for the services. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5 for the CCO and CFO. Charges for the CFO under Exchange Act Section 13(b)(5) and Rules 13a-14, 13b-2, and 13b2-2 as well as aiding and abetting Pareteum’s violations of the Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of and Rules 12b-20, 13a-1, 13a-11, and 13a-13. Remedies sought include injunctive relief, disgorgement and prejudgment interest, civil penalties, and officer-and-director bars against the CCO and CFO. The SEC also seeks to order the CFO to reimburse Pareteum certain compensation.

In the Matter of Stanley Stefanski, CPA, Rel. 33-11245, 34-98577, AAER 4462 (Sept. 28, 2023) – In a bifurcated settled matter, the SEC charged Pareteum’s former Controller in connection with an alleged scheme which involved recognizing revenue from non-binding purchase orders for SIM card services from Pareteum customers. The Order alleges that this caused Pareteum to improperly recognize revenue for the purchase orders before the SIM cards were shipped to the customers, resulting in overstated revenue and misleading filings. Charges for the Controller under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5; and willfully aiding and abetting and causing Pareteum’s violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, and 13a-13. Remedies include cease-and-desist, an officer-and-director bar, and denial of practicing before the SEC as an accountant. An ALJ will hold a hearing to determine monetary relief.

In re TAL Education Group, Rel. 34-98611 (Sept. 28, 2023) – In a settled matter, a foreign private issuer was charged with inflating a subsidiary’s revenues due in part to a material weakness in its internal controls over financial reporting, including a failure to detect employees’ forging of contracts and other documentation. Claims under Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and Rules 12b-20 and 13a-16. Remedies included cease-and-desist and a civil penalty of $1.25m.

In the Matter of Exelon Corporation and Commonwealth Edison Company, Press Rel. 2023-307, Rel. 33-11248, 34-98616 (Sept. 28, 2023) – In a settled matter, a publicly traded utility services company and its subsidiary, ComEd, the largest utility company in Illinois, were charged with arranging payments to, entering into contracts with, and providing largely fictitious jobs to various associates of the Speaker of the Illinois House of Representatives, in a scheme to reward the speaker for legislation beneficial to the company, along with related misstatements to investors. Claims under Securities Act Section 17(a), Exchange Act Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B) and Rule 10b-5. Remedies included cease-and-desist and a civil penalty of $46.2m.

SEC v. Anne Pramaggiore, Lit. Rel. 25866 (Sept. 28, 2023) – In a litigated matter, ComEd’s former CEO was charged with failing to disclose the above-described scheme, misleading investors by characterizing the company’s lobbying activities as legitimate, lying to auditors, and filing false certifications. Charges under Securities Act Section 17(a)(2) and Exchange Act Sections 10(b), 13(b)(5) and Rules 10b-5(b), 13a-14, 13b2-1, and 13b2-2(a); aiding and abetting charges under Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Remedies sought include permanent injunctions, disgorgement with prejudgment interest, civil penalties, and an officer-and-director bar.

SEC v. Prager Metis CPA, LLC, Lit. Rel. 25868 (Sept. 29, 2023) – In a litigated matter, the SEC alleged that accounting firm Prager Metis violated auditor independence rules by including indemnification provisions in its audit engagement letters. According to the SEC, the alleged violation also caused the firm to be aiding and abetting its clients’ violations of the federal securities laws that require independent audits. Charges for direct violations of Regulation S-X Rule 2-02(b) and Exchange Act Rule 17a-5(i) for aiding and abetting the firm’s clients’ violations of Exchange Act Sections 13(a), 15(d), and 17(a) and Rules 13a-1, 13a-11, 13a-13, 15d-1, 15d-13, and 17a-5 and Advisers Act Section 206(4) and Rule 206(4)-2.

In the Matter of Spruce Power Holding Corp., Rel. 33-11247, 34-98612 (Sept. 28, 2023) – In a settled matter, the SEC charged a formerly publicly traded SPAC with making pre- and post-merger misrepresentations about sales and sales projections based on allegedly speculative sales opportunities. Charges under Securities Act Sections 17(a)(2) and (3), Exchange Act Sections 13(a) and 14(a) and Rules 12b-20, 13-a-11 and 14a-19. Remedies included a civil penalty of $11m.

Securities Offerings

In the Matter of Linus Financial, Inc. Rel. 33-11229 (Sept. 7, 2023) – In a settled matter, the SEC announced charges against Linus Financial, Inc. for failing to register the offers and sales of its retail crypto lending product, the Linus Interest Accounts. On March 25, 2022, shortly after the SEC announced charges against a similar crypto asset investment product, Linus Financial voluntarily ceased offering the Linus Interest Accounts to new investors and asked existing investors to withdraw their funds by late April 2022. All investor funds have since been withdrawn. The SEC determined not to impose civil penalties against Linus Financial because of the Nashville-based company’s cooperation and prompt remedial actions.

In the Matter of Stoner Cats 2, LLC, Rel. 33-11233 (Sept. 13, 2023) - In a settled matter, a creator of NFTs was charged with conducting an unregistered offering of crypto asset securities under the name “Stoner Cats NFTs.” The SEC charged that the firm offered and sold the NFTs as an investment in the firm’s efforts to create an animated web series, that the offering sold out in 35 minutes, and that the majority of the NFTs were resold in secondary market within several months. Charges under Securities Act Sections 5(a) and 5(c). Remedies included cease-and-desist, destruction of remaining NFTs in the firm’s control, and a penalty of $1m. Commissioners Peirce and Uyeda dissented, comparing the firm’s activity to crowdfunding for fan collectibles or other artistic efforts which have not historically been the subject of SEC enforcement.

SEC v. NDB, Inc., et al., Lit. Rel. 25829 (Sept. 14, 2023) – In a litigated matter, the SEC charged a private nuclear-based battery start-up and its founder with making false and misleading statements in a press release about having successfully tested its battery technology at two independent laboratories and having signed two beta customers. The defendants allegedly raised over $1.2 million from investors after the press release. Charges under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5.

In the Matter of GGToor, Inc., Rel. No. 11236 (Sept. 18, 2023) – In a settled matter, the SEC charged GGToor, Inc., with violating regulations related to the sale of securities by offering and selling shares without complying with Regulation A’s limited exemption from registration under the Securities Act of 1933. According to the Order, GGToor raised over $2.1 million by selling shares that did not qualify for this exemption. Although GGToor initially qualified for the exemption, it failed to meet the requirements, such as properly changing share prices and updating financial statements. Charges under Securities Act Section 5(a) and 5(c). Remedies included cease-and-desist and a $40k civil penalty.

In the Matter of James Michael Wines, Rel 33-11239 (Sept. 20, 2023) – In a bifurcated settled matter, the SEC charged a lawyer in connection with a cryptocurrency securities offering that raised over $1.5 million. According to the Order, the lawyer was involved in creating, reviewing, and approving a press release that promoted the offering and the associated purchase agreements. The Order alleged that the press release falsely claimed that the offering had secured commitments of over $50 million, even though this amount had not actually been committed or transferred by investors. The Order also states that the offering agreements referred to the recipient of the proceeds as a “contractor” rather than a creditor with a significant judgment against one of the offering entities. Charges under Securities Act Section 17(a)(2) and (3). Remedies included cease-and-desist. Due to his agreement to cooperate in a related investigation, the Commission did not at this time impose disgorgement, prejudgment interest, or civil penalties, which will be determined in a later proceeding.

In the Matter of Hightimes Holding Corp., Rel. 33-98574 (Sept. 27, 2023); In the Matter of Cloudastructure, Inc., Rel. 33-98575 (Sept. 27, 2023) – In settled matters, the SEC charged two issuers for making fraudulent and concealed payments to a stock promoter while engaged in securities offerings under Regulation A. Charges for both companies under Exchange Act Section 10(b) and Rule 10b-5. Charges for Hightimes under Securities Act Sections 5 and 17(a). Remedies for Hightimes include cease-and-desist and a monetary penalty of $558,071. Remedies for Cloudastructure include cease-and-desist and a monetary penalty of $558,071.

Public Finance

SEC v. Speight, et al., Lit. Rel. 25870 (Sept. 29, 2023) – In a settled matter, an audit firm and its principal settled charges that they issued an auditor’s report to a Louisiana-based school board after an audit that did not comply with GAAS, knowing that the school board would use the audit report in connection with its sale of $120 million of bonds. The audit firm agreed to a conduct-based injunction preventing them from participating in the audit of financial statements that might be submitted to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website. The defendants also agreed to $12,826 in disgorgement and civil penalties totaling $30k.

Insider Trading

In the Matter of Xia Hong, Rel. 34-98401 (Sept. 14, 2023) – In a settled matter, a former senior manager of Lumentum was charged with trading in the securities of two companies based on MNPI about Lumentum’s acquisitions of those companies prior to public announcements. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included cease-and-desist, a director-and-officer bar, disgorgement of approximately $75k plus interest, and a $75k penalty.

SEC v. Jonathan J. Ferrie, Lit. Rel. 25830 (Sept. 18, 2023) – In a settled matter, the SEC charged a former division controller at Cigna Group with insider trading and prohibited options trading based on MNPI he alleged gained about the division’s lower-than-expected profitability due to pandemic-related health insurance cost increases. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included cease-and-desist, $16,039.78 in disgorgement, prejudgment interest, a civil money penalty of $16,039.78, and a three-year officer-and-director bar.

SEC v. Robert Del Prete, Lit. Rel. 25836 (Sept. 18, 2023) – In a settled matter, the SEC charged an accounting consultant for a SPAC based on non-public information regarding its merger with Quantum-Si Incorporated (QSI). According to the SEC’s complaint, the accounting consultant was present at board meetings discussing the merger and had agreed to keep this information confidential. The SEC alleges the accounting consultant purchased the SPAC’s shares after attending a board meeting, and then sold them for an approximately 100% profit within hours of a press release about the merger. The SEC also alleges that when questioned about his trades, the accounting consultant falsely claimed he was unaware of the merger before the press release, despite his involvement in the deal. Charges under Exchange Act Section 10(b) and Rule 10b-5. A proposed settlement is subject to court approval.

SEC v. Jonathan Becker, Lit. Rel. 25843 (Sept. 21, 2023) – In a litigated matter, the SEC filed insider trading charges against a New Jersey resident, alleging he traded based on information he received unlawfully from his friend and former roommate. According to the SEC’s complaint, the defendant traded ahead of a February 2021 announcement of Merck & Co., Inc.’s tender offer for Pandion Therapeutics, Inc. based on information about the acquisition received from his friend, who had obtained a tip about the deal from his cousin. Charges under Exchange Act Section 10(b), 14(e) and Rules 10b-5 and 14e-3.

SEC v. Anthony Viggiano, Stephen A. Forlano, Christopher Salamone, and Nathan Bleckley, Lit. Rel. 25861, (Sept. 28, 2023) – In a litigated matter, the SEC filed charges against a former analyst at a major investment firm and later at an international investment bank, along with three others, for engaging in insider trading related to multiple acquisition transactions. The SEC’s complaint alleges that the analyst, in his roles at these financial institutions, allegedly obtained confidential information about eight transactions and shared this information with one of the other charged individuals, resulting in the first individual making approximately $322,000 in profits. According to the SEC, the analyst also tipped off a second individual about at least four transactions, leading to the second individual making around $113,000 in profits. This second individual, then, shared this information with others, including his friend, the third individual, who made almost $25,000 in profits according to the SEC’s complaint. Charges against the analyst and the three individuals under Exchange Act Section 10(b) and Rule 10b-5. Charges against the analyst and the first individual under Exchange Act Section 14(e) and Rule 14e-3. Penalties include injunctive relief, disgorgement with prejudgment interest, and civil penalties.

FCPA

In the Matter of Clear Channel Outdoor Holdings, Inc., Rel. 34-98615, AAER-4466 (Sept. 28, 2023) – In a settled matter, the SEC charged Clear Channel Outdoor Holdings, Inc. with violating anti-bribery, recordkeeping, and internal accounting controls provisions of the Foreign Corrupt Practices Act based on the actions of its Chinese subsidiary, Clear Media Limited. According to the Order, the subsidiary bribed Chinese officials and used false invoices to pay for off-book consultants in connection with obtaining advertising contracts resulting in $16.4 million in benefits. Charges under Exchange Act Sections 30A, 13(b)(2)(A), and 13(b)(2)(A). Remedies included cease-and-desist orders, disgorgement of $16,355,567, prejudgment interest of $3,760,920, and a civil monetary penalty of $6m.

In the Matter of Albermarle Corporation, Rel. 34-98622, AAER-4468 (Sept. 29, 2023) – In a settled matter, a global specialty chemicals company was charged with paying bribes to obtain sales of catalysts to public sector oil refineries in Vietnam, India, and Indonesia and to private sector oil refineries in India in violation of the anti-bribery, books and records, and internal accounting controls provisions of the FCPA. Claims under Exchange Act Sections 30A and 13(b)(2)(A) and (B). Remedies included cease-and-desist and payment of disgorgement plus interest of $103,618,310. The SEC did not impose a penalty in light of a $99 million criminal fine as part of Albermarle’s resolution with the Department of Justice.

(NSEU 23-12)

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.