This Week In Securities Litigation (Week of October 12, 2020)
SEC Enforcement may be continuing a trend that seemed emerge at the end of the Government fiscal year – filing financial fraud cases. As the bevy of cases were filed to close the fiscal year, a number were based on financial fraud claims. That seems to be continuing as the new fiscal year is launched. One new financial fraud action was filed while two others were resolved. A fourth case initiated centered on promoting crypto ICOs.
Be safe and healthy this week
SEC
Proposed order: The Commission filed a proposed order on October 9, 2020 under which there would be a conditional limited exemption to the requirements of Exchange Act Section 15(a) for finders. Specifically, the proposal suggests that there be two tiers of finders based on the notion that finders are important for capital formation and investor protection, particularly for small investors (here).
Staff report: A staff report on U.S. Credit Market Interconnectedness and the Effects of the COVID-19 Economic Shock was released on October 5, 2020 (here)
SEC Enforcement – Filed and Settled Actions
The Commission filed 2 civil injunctive actions and no administrative proceedings last week, excluding 12j and tag-along-proceedings.
Financial fraud: SEC v. SAExploration Holdings, Inc., Civil Action No. 1:20-cv-08423 (S.D.N.Y. Filed Oct. 8, 2020) is an action which names as defendants the firm, whose shares are listed on NASDAQ and which provides seismic data acquisition and logistical support. Others named as defendants are the firm’s CEO, Jeffrey H. Hastings, its CFO, Brent N. Whiteley, the firm founder, Brian A. Beatty, and the executive v.p. of operations, Michael J. Scott. Over a four-year period, beginning in 2015, Defendants orchestrated a financial fraud which permitted SAE to recognize about $100 million in revenue from transactions that supposedly involved a customer. In fact, the deals were with a firm named Alaskan Seismic Ventures, LLC, set up by company executives and controlled by Defendants Hastings and Whiteley. Alaskan Seismic was established to have a data library that was purportedly unrelated to SAE. That company was established with about $5.8 million in funds misappropriated from SAE. A portion of the misappropriated funds were kept by the executives. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) and SOX Section 304(a). The case is pending. See Lit. Rel. No. 24943 (Oct. 9, 2020).
Financial fraud: SEC v. Nanotech Engineering, Inc., Civil Action No. 19-cv-3633 (D.D.C.) is a previously filed action which named as defendants the firm, its CEO David Sweaney, the CFO Michael J. Sweaney and the COO Jeffery Gange. The firm was supposedly involved with solar energy and claimed to have a revolutionary panel it called the “Nanopanel.” The Court entered a final judgement by consent against the CEO, David Sweaney. The judgement imposed a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). It also imposes a permanent officer/director bar and directs the payment of disgorgement and penalties as determined on motion by the Commission. The litigation will continue since the Commission is filing an amended complaint which alleges that the Nanopanel does not exist and the firm is a sham. See Lit. Rel. No. 24942 (Oct. 8, 2020).
Crypto offerings: SEC v. McAfee, Civil Action No. 20 Civ. 8281 (S.D.N.Y. Filed Oct. 5, 2020) is an action which names as defendants John McFee and his body guard Jimmy Watson Jr. The complaint alleges that Defendant McAfee promoted multiple ICOs on Twitter. In those communications, and others with investors, he falsely appeared to be independent, claimed he did not profit from promoting the offerings and that he had invested in some of the offerings. The claims were false. He was paid about $23 million in digital assets and had not invested in the offerings. Mr. Watson was paid at least $316,000. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and 17(b) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office filed a parallel criminal action against Mr. McAfee. See Lit. Rel. No. 24941 (Oct. 6, 2020).
Financial fraud: SEC v. Hill International, Inc., Civil Action No. 1:20-cv-02143 (E.D. Pa.) is a previously filed action which named as defendants the firm, former senior accountant Nicholas Tornello and others. The complaint alleged that the firm attempted to “bleed” losses out that were suffered as a result of foreign currency transactions rather than make the correct entireties. Mr. Tonello consented to the entry of a permanent injunction based on Exchange Act Sections 13(a) and 13(b)(2)(A). In a related administrative action Mr. Tornello was suspended from appearing and practicing before the Commission as an accountant with the right to reapply after 1 year. The company and its former chief accounting officer previously settled with the Commission. See Lit. Rel. No. 4185 (Oct. 5, 2020).
DOJ
Report: The Department of Justice published a report titled The Cryptocurrency Enforcement Framework on Friday, Oct. 9, 2020 (here). This is the second edition of the work. It provides an overview of the assets, discusses various legal and regulatory tools the government may use and reviews difficulties that may be encountered with these assets.
FinCEN
Ransomware: Treasury issued, on October 1, 2020, an advisory regarding ransomware to increase awareness and thwart cyber attacks (here).
BaFin
Trading: The Federal Supervisory Authority of Germany published guidelines for trading CFD or Contracts For Difference on September 30, 2020 (here).
ESMA
Program: The European Securities and Markets Authority published its 2021 Work Program on October 2, 2020 (here). The Program details the regulator’s priorities and areas of focus over the next twelve months in support of its mission to enhance investor protection and promote stable and orderly financial markets.
U.K.
Remarks: Lisa Osofsky, the Director of the Serious Frauds Office, delivered remarks at the Royal United Services Institute, October 8 2020. Her remarks focused on the future challenges in economic crime (here).