Trending publication

04.01.2024 | Legal Update

The Nutter Securities Enforcement Update is a periodic update of noteworthy recent securities enforcement activity, settlements, decisions, and charges. We provide brief summaries that highlight recent enforcement action filings and developments to help identify enforcement trends, changes in the law, new theories, and new areas of enforcement focus. 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 HG Vora Capital Management, LLC, Rel. 34-99651 (Mar. 1, 2024) – In a settled matter, an RIA was charged with failing to disclose its change of intent to control the issuer. According to the SEC, the RIA owned 5.6% of a company’s stock, which it disclosed in a Schedule 13G filing, used for shareholdings not acquired with the intent to influence or control the issuer. The RIA continued to buy shares between January and April 2022 reaching almost 10% ownership. By the end of April, the RIA had the intent to control the issuer, but failed to file a Schedule 13D disclosing its control purpose within 10 days as required. On the same day that the RIA first disclosed its change in intent and updated ownership details, it proposed acquiring the remaining shares at a premium. Charges under Exchange Act Section13(d)(1) and Rule 13d-1 thereunder. Remedies include cease-and-desist and a civil money penalty of $950k.

In the Matter of 3D/L Capital Management, LLC, Rel. IA-6568 (Mar. 6, 2024) – In a settled matter, an RIA was charged with failing to disclose conflicts of interest when the investment adviser received payments from an exchange-traded fund (ETF) manager for including their funds in client portfolios and managing one of their funds. According to the SEC, these payments created an incentive for the RIA to favor the ETF manager’s funds. The SEC alleged that the RIA waited too long to disclose this conflict and failed to implement proper compliance policies procedures for disclosing conflicts. Charges under Advisers Act Sections 206(2), 206(4), and Rule 206(4)-7 thereunder. Remedies include cease-and-desist order, disgorgement of $153,069, prejudgment interest $7,538, and a civil money penalty of $125k.

SEC v. Rashid, No. 20-4080-cv (2d Cir. Mar. 13, 2024) – On appeal from a judgment that defendant violated Advisers Act Section 206(2), the Second Circuit reversed. After a bench trial, the trial court found that a former senior partner at private fund adviser Apollo Management had submitted personal expenses for reimbursement as business expenses, and that those expenses were ultimately paid by clients, the Apollo-managed funds. Apollo has separately conducted an investigation and defendant paid back approximately $325k in connection with a separation agreement. The trial court found defendant liable under the negligence standard of Advisers Act Section 206(2), but that he lacked the scienter necessary to support liability under Section 206(1) because he did not know that the funds, rather than Apollo Management, would bear the costs of reimbursement. The Second Circuit noted that many of the defendant’s peers testified that they assumed that the firm, not the funds, would pay business expenses, and that this assumption was not unreasonable because Apollo’s accounts receivable was in fact improperly billing the funds for expenses that should have been borne by Apollo. “Applying ordinary negligence principles,” the court concluded that the defendant did not breach his duty of care to the funds because it was not reasonably foreseeable to him that the funds would be charging for his reported expenses.

In the Matter of Delphia (USA) Inc., Rel. IA-6573 (Mar. 18, 2024) – In a settled matter, a formerly registered investment adviser was charged with representing in advertisements and regulatory filings that it used artificial intelligence and machine learning to analyze its retail clients’ spending and social media data to inform its investment advice when, in fact, no such data was being used in its investment process. The adviser was also charged with failing to fully correct these issues after an SEC exam, and with failing to adopt and implement appropriate written policies and procedures. Charges under Advisers Act Sections 206(2) and 206(4) and Rules 206(4)-1, and 206(4)-7. Remedies included censure, cease-and-desist, and a $225k penalty.

In the Matter of Global Predictions, Inc., Rel. IA-6574 (Mar. 18, 2024) – In a settled matter, a registered internet investment adviser was charged with several marketing rule violations: making misleading claims about its use of artificial intelligence and its status as the “first regulated AI financial advisor;” failing to substantiate performance claims; failing to disclose conflicts of interest of individuals giving testimonials; and advertising hypothetical performance without adopting and implementing policies required by the Advisers Act marketing rule. In addition, the SEC charged the adviser with failing to provide advance notice of material changes to its advisory contracts and purporting to waive non-waivable causes of action in its advisory contracts. Charges under Advisers Act Section 206(4) and Rules 206(4)-1 and 206(4)-7. Remedies included censure, cease-and-desist, and a $175k penalty.

SEC v. Steven J. Jacobson and Advisor Resource Counsel, Lit. Rel. 25953 (Mar. 22, 2024) – In a settlement of a litigated matter, the court entered a final judgment against an RIA charged with making false and misleading statements in its Forms ADV Part 2A. The SEC alleged that, among other things, the RIA misrepresented that its allocation procedures would be fair and equitable and that it failed to adopt policies and procedures designed to prevent cherry-picking. Charges under Securities Act Section 17(a)(2), Advisors Act Sections 204(a), 206(2), and 206(4), and Rules 204-2(a)(7), 204-2(a)(14), and 206(4)-7 thereunder. Remedies included permanent injunction, civil penalty of $300k, and undertakings, including retaining independent compliance consultant.

Broker-Dealers

In the Matter of ShapeShift AG, Rel. 34-99676 (Mar. 5, 2024) – In a settled matter, the SEC alleged ShapeShift AG acted as an unregistered dealer in connection with its operation of an online crypto asset trading platform where it acted as the counterparty to every transaction. The crypto assets ShapeShift bought and sold included crypto assets offered as securities. Charges under Exchange Act Section 15(a). Remedies include a cease-and-desist order and penalty of $275k.

Issuer Disclosure/Audit and Accounting

In the Matter of Skechers USA, Inc., Rel. 34-99693 (Mar. 7, 2024) – In a settled matter, footwear company Skechers was charged with failing to disclose required information about certain related party compensation in its Form 10-K filings over a four-year period. Item 404 of Reg S-K requires disclosure of transactions in excess of $120,000 in which a director or executive officer or an immediate family member, had a material interest. The SEC charged that “a person sharing the same household” with a director and executive officer had received over $200,000 as an independent contractor in certain years and that “a sibling-in-law” of a director and executive officer had received over $200,000 as a non-executive employee. In addition, the SEC charged that one or more executive officers or directors owed in excess of $120,000 for reimbursement of personal expenses. Charges under Exchange Act Sections 13(a) and 14(a) and Rules 13a-1 and 14a-3. Remedies included cease-and-desist and a $1.25m penalty.

Securities Offerings

SEC v. Padilla, et al., Lit. Rel. 25952 (Mar. 20, 2024) – In a settlement with one defendant in a litigated matter, the court entered final judgments against Kevin Dills (and two entities he controlled) related to a fraudulent stock selling scheme. From early 2020 into 2022, Dills allegedly conspired with Joseph Padilla to sell stock of Oncology Pharma, Inc., a company that Dills secretly controlled, while avoiding legal requirements for a control person’s sale of stock to the public. Charges under Securities Act Sections 5 and 17(a), and under Exchange Act Section 10(b) and Rule 10b-5. Remedies as to Dills included a $223k civil penalty and penny stock bar, and disgorgement of $6.2m and prejudgment interest of $787k, owed with his entities, jointly and severally. If the court in a parallel criminal action accepts Dills’ plea agreement, disgorgement is offset by payments in the criminal case.

SEC v. Jonathan William Mikula, et al., Lit. Rel. 25957 (Mar. 27, 2024) – In a settlement of a litigated matter, a defendant consented to a judgment on charges related to a scheme to promote the securities of issuers that were purporting to conduct offerings pursuant to Regulation A. The SEC alleged that the defendant arranged to receive a percentage of investor funds raised by the issuers under the guise of fake consulting agreements with the issuers. Charges under Securities Act Sections 17(a)(1), 17(a)(3), and 17(b) and Exchange Act Section 10(b), and Rule 10b-5(a). Penalties include permanent injunction, promotional campaign bar, and disgorgement of approximately $450k plus prejudgment interest. Based on Fernandez’s cooperation, no penalty was ordered.

SEC v. FLiK, et al., Lit. Rel. 25961 (Mar. 29, 2024) – In a settlement of a litigated matter, the creator of crypto offerings consented to a judgment on charges related to two fraudulent initial coin offerings (ICOs). The SEC alleges that the creator promoted two fraudulent ICOs based on promises to build a digital streaming platform, FLiK, and a cryptocurrency trading exchange, CoinSpark. According to the SEC, he misappropriated the FLiK tokens and sold them into the market, reaping an additional $2.2 million in profits, and he engaged in manipulative trading to inflate the price of CoinSpark tokens. Charges under Securities Act Sections 5(a) and (c) and 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Penalties include permanent injunction, issuer and director/officer bars, and disgorgement of $2.8m plus prejudgment interest.

Insider Trading

In the Matter of Hemant Agrawal, Rel. 34-99666 (Mar. 4, 2024) – In a settled matter, a former Vice President of pharmaceutical company Viatris, Inc. purchased shares of Oyster Point Pharma, Inc. in advance of the announcement of Viatris’ acquisition of Oyster Point. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included cease-and-desist, an officer and director bar, disgorgement of approximately $30k plus prejudgment interest and a penalty of approximately $30k.

SEC v. Cook, et al., Lit. Rel. 25948 (Mar. 12, 2024) – In a settled matter, a former board member of Tallgrass Energy, LP and four of his friends were charged with trading in advance of public announcements regarding an upcoming acquisition of Tallgrass. According to the SEC, the director learned of the acquisition, traded in family trusts, and tipped his friends. Charges under Exchange Act Section 10(b), Section 16(a), and Rule 10b-5. Remedies included disgorgement of trading profits ranging from $13,520 to $524,525 plus prejudgment interest, a civil penalty against the director of $800k, and a director-and-officer bar.

SEC v. Qsar, et al., Lit. Rel. 25956 (Mar. 26, 2024) – In a litigated matter, the SEC charged four current or former minor league baseball players with trading in advance of the announcement that Del Taco Restaurants would be acquired by Jack in the Box, Inc. According to the SEC, a finance employee of Jack in the Box, who was not charged, shared information with a friend, expecting that the information would remain confidential, but the friend traded and tipped three others, making about $189,000 in profits combined. Charges under Exchange Act Section 10(b) and Rule 10b-5.

SEC v. Bechtolsheim, Lit. Rel. 25955 (Mar. 26, 2024) – In a settled matter, the founder and Chief Architect of Silicon Valley tech company, Arista Networks, was charged with trading in advance of the pending acquisition of a different company, Acacia Communications, by a Cisco Systems. He learned of the information from a fourth tech company, unnamed in the complaint, that was also considering an acquisition of Acacia. According to the SEC, the trader conducted the trading in accounts of a close relative and an associate, resulting in profits of about $415k. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included a permanent injunction, five-year director and officer bar and a penalty of over $923k.

Remedies

In the Matter of Ellen McCarthy, Esq., Rel. 34-99832 (Mar. 21, 2024) – In a settled matter, an attorney was charged violating her obligation to remain independent of Manhattan Transfer Registrar Company for two years following her work as engagement manager preparing an independent compliance report for the company. According to the SEC, the attorney served as the engagement manager on the work implementing the Report, despite Commission staff explicitly refusing her request to modify or waive the independence requirement. The SEC alleged that the attorney then took steps that she knew or should have known would hide the work she performed in violation of the independence requirement. Charges under Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. Remedies included Rule 102(e) bar from appearing or practicing before the Commission.

(NSEU 24-04)

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.