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11.01.2023 | 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.

Remedies/Disgorgement

SEC v. Govil, No. 22-1658 (2d Cir. Oct. 31, 2023) – On appeal of a litigated matter, the Second Circuit made two significant holdings about the SEC’s ability to obtain disgorgement in enforcement actions. First, the court held that as a prerequisite for obtaining any disgorgement under either Section 21a(d)(5) and (7) of the Exchange Act, the SEC must show that victims suffered pecuniary harm. Second, when calculating the amount of disgorgement that a defendant was ordered to pay based on the value of securities that he had received as a result of the alleged misconduct, the court held that the district court erred by failing to value securities that the defendant surrendered and to credit that value against the disgorgement award.

Subpoena Enforcement

SEC v. Musk, Lit. Rel 25880 (Oct. 5, 2023) – In a litigated action, the SEC sought an order directing Elon Musk to comply with an investigative subpoena calling for his appearance for testimony. According to the complaint, the testimony relates to an ongoing investigation by the SEC regarding, among other things, potential violations of the federal securities laws in connection with (a) Musk’s 2022 purchases of Twitter, Inc. stock, and (b) Musk’s 2022 statements and SEC filings relating to Twitter. The complaint alleges that Musk failed to appear for testimony despite agreeing to appear and raising no objection to the subpoena reflecting the agreed-upon date.

Investment Advisers/Investment Companies

In the Matter of Wilmington Trust Investment Management, Inc., Rel. IA-6455 (Oct. 10, 2023) – In a settled matter, an RIA was charged with investing advisory clients’ assets in higher-cost no-transaction fee (“NTF”) mutual fund share classes, when other share classes with more favorable value were available, without disclosing that a conflict of interest existed because the firm had agreed to cover transaction fees. Charges under Advisers Act Sections 206(2) and 206(4) and Rule 206(4)-7. Remedies included censure, cease-and-desist, disgorgement of approximately $1m plus interest, and a penalty of $250k.

SEC v. Krishnan, et al., Press Rel. No. 2023-223 (Oct. 16, 2023) – In a litigated matter, the SEC obtained a temporary restraining order, asset freeze, and other emergency relief to halt an alleged fraudulent scheme targeting the Indian American community. Nanban Ventures LLC and its three founders are accused of raising approximately $130 million since April 2021. The SEC alleges that they collected over $89 million from more than 350 investors for supposed venture capital investments managed through Nanban Ventures LLC, and an additional $39 million from 10 investors in entities controlled by the founders. The SEC also alleges that the defendants overstated the profitability of these investments, paid investors fake profits, and misrepresented one of the founder’s trading expertise. Charges under Securities Act Section 17(a), Exchange Act 10(b) and Rule 10b-5 thereunder, and Advisers Act Section 206 and Rule 206(4)-8 thereunder. Remedies include permanent injunction, disgorgement, and civil penalties in addition to officer-and-director bar.

In the Matter of BlackRock Advisors, LLC, Rel. IA-6468, IC-35035 (Oct. 24, 2023) – In a settled matter, the investment adviser to a closed-end mutual fund was charged with misstatements in the fund’s annual and semiannual reports. The reports allegedly inaccurately categorized an investment in a film distribution company as being in the “Diversified Financial Services” industry and misstated the coupon rate on the investment. The firm was credited with cooperation, including prompt correction of the reporting error and covering losses to the fund resulting from the investment. Charges under Advisers Act Section 206(4) and Rule 206(4)-8, and Investment Company Act Section 34(b). Remedies included censure, cease-and-desist, and a $2.5m penalty.

Issuer Reporting/Audit and Accounting

SEC v. Rayat, et al., Lit. Rel. No. 25883 (Oct. 18, 2023) – In a litigated matter, final judgments were issued against certain individual defendants and relief defendants in a microcap fraud case. The SEC’s amended complaint alleged RenovaCare, Inc. and its controlling shareholder, as well as his associates, including the settling individual defendants, were involved in a fraudulent scheme that included misleading statements to investors, undisclosed share sales while promoting the stock, and manipulative trading. Charges under Securities Act Section 17(a) and Exchange Act Section 9(a)(2), 10(b), 20(b), and Rule 10b-5. Remedies include officer-and-director bar, penny stock bar, disgorgement of $2.3m plus interest, and a civil penalty of $160k for one individual. Remedies include officer-and-director bar, disgorgement of $380,802, prejudgment interest of $76,389, and a civil penalty of $380k for the other individual.

SEC v. SolarWinds Corp., et al., Lit. Rel. 25887 (Oct. 31, 2023) – In a litigated matter, the SEC charged SolarWinds and its Chief Information Security Officer with fraud and internal control failures related to allegedly known cybersecurity risks and vulnerabilities. The SEC alleges that the company, a publicly traded provider of software used by thousands of companies and government agencies to manage their IT infrastructure, made only generalized cybersecurity risk disclosures in its public statements when it knew of specific vulnerabilities and was the subject of a major cybersecurity attack. Following disclosure of the attack, the company’s stock price allegedly dropped by 35 percent. Charges under Securities Act Section 17(a), and Exchange Act Sections 10(b), 13(a) and (b), and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13 and 13a-15. Relief sought includes an injunction, director-and-officer bar, disgorgement, and civil penalties.

Market Manipulation

In the Matter of Anson Advisors Inc., Rel. 34-98775 (Oct. 19, 2023) – In a settled matter, Anson Advisors Inc. (AAI), a Canada-based firm, was alleged to have violated Rule 105 of Regulation M by short selling an equity security during a restricted period and then purchasing the same security in public offerings. AAI participated in three such offerings between December 2019 and April 2021. Remedies include cease-and-desist, disgorgement of $2,469,109.11, prejudgment interest of $261,285.20, and a civil penalty of $600k.

SEC v. Hernandez, et al., Press Release 2023-228 (Oct. 31, 2023) – In a litigated matter, the SEC charged four individuals in a free-riding scheme. The SEC alleges that the defendants opened hundreds of brokerage accounts (“Loser Accounts”) using the broker-dealer’s instant deposit credit feature, then engaging in matched trades in illiquid options with accounts (“Winner Accounts”) controlled by the defendants at other broker-dealers, at prices set by the defendants. The defendants then closed the Loser Accounts before they could be funded, effectively saddling the broker-dealer firm with the losing sides of the trades. Charges under Exchange Act Section 10(b) and Rule 10b-5. Relief sought includes injunctive relief, disgorgement, and civil penalties.

Securities Offerings

SEC v. Westhead, et al., Lit. Rel. 25877 (Oct. 2, 2023) – In a litigated matter, the SEC charged principals Shannon Westhead, Alec Vagnozzi, and Michael Tierney and various affiliated entities in connection with their participation in the more than $500 million unregistered and fraudulent securities offering by Complete Business Solutions Group, d/b/a Par Funding (“CBSG.”). These entities, acting as agent funds of CBSG, and individuals raised more than $65 million from approximately 260 investors nationwide for the purpose of investing in CBSG. Charges under Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(a) and Rule 10b-5. Remedies sought include permanent injunctions, disgorgement, and civil monetary penalties. The SEC also filed a settled civil injunctive action against various ABFP Funds, through which one defendant raised approximately $99 million from more than 570 investors related to CBSG’s offerings. Charges under Securities Act Section 5. Remedies included injunctive relief, disgorgement of $4,531,248 plus prejudgment interest, and civil penalty of $400k.

Insider Trading

SEC v. Rubin, Lit. Rel. 25882 (Oct. 17, 2023) – In a partially settled matter, the SEC charged the spouse of a company employee with insider trading in stock options of Array BioPharma Inc. ahead of the acquisition announcement by Pfizer, Inc. The SEC’s complaint alleges that the trader bought options based on material, nonpublic information he learned from his spouse, who worked at Array, resulting in illegal profits of $90,458. Rubin has agreed to a judgment, pending court approval. Charges under Exchange Act Sections 10(b) and 14(e) and Rules 10b-5 and 14e-3 thereunder. Remedies include permanent injunction, disgorgement of $90,458 plus $16,914 in prejudgment interest, and a civil penalty to be determined at a later date. In a related action, the U.S. Attorney’s Office for the Northern District of Illinois has also filed criminal charges against Rubin.

In the Matter of Joseph Conlan, Rel. 34-98824 (Oct. 30, 2023) – In a settled matter, a company’s head of business development was charged with insider trading in the securities of his employer, Gain Capital Holdings, Inc. (GCAP), in advance of the announcement that the defendant’s then-former employer would acquire GCAP. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included cease-and-desist, director-and-officer bar, disgorgement of approximately $74k plus interest, and a penalty of approximately $74k.

(NSEU 23-13)

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