This Week In Securities Litigation (Week of December 9, 2024)

The commission filed three new enforcement actions last week. One focused on false statements while as second focused on books and records. The third action centered on cherry picking

Be careful, be safe this week

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the Commission filed 2 new civil injunctive action and 1 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Insider trading: SEC v. Qsar, Civil Action No. 3:24-cv-00560 (S.D. Cal.) is a previously filed action which named as defendants, Jordan Qsar, Austin Bernard and Grant Witherspoon. The court entered final judgements against each defendant last week. The case centered on insider trading in advance of an announcement that Jack in the Box would be taken over by Del Taco Restaurants, Inc. on December 6, 2021. Each Defendant is a minor league baseball player. Mr. Qsar learned about the acquisition deal from a friend and former teammate working on the transaction for Jack in the Box. He then tipped the other two Defendants. Each traded. To resolve the matter each Defendant consented to the entry of a permanent injunction based on Exchange Act Section 10(b) and Rule 10b-5. In addition, Mr. Qsar paid disgorgement in the amount of $56,470, prejudgment interest of $9,986.60 and a penalty of $63,194. Mr. Bernard paid disgorgement of $64,693.00, prejudgment interest of $11,440.82 and a penalty of $6,877. Mr. Witherspoon consented to pay disgorgement of $42,768.00, prejudgment interest of $11,440.82 and a penalty of $48,143.00. See Lit. Rel. No. 26186 (Dec. 5, 2024).

Ponzi scheme: SEC v. Dow Rockwell LLC, Civil Action No. 3:22-cv02069 (N.D. Cal.) is a previously filed action in which the two defendants settled. One Defendant is Dow Rockwell LLC, a former California registered investment adviser; the other is Richrd Dow Rockwell, the sole proprietor of the firm. The complaint is based on claims that Defendants failed to disclose that they were paid compensation by Professional Investors, Inc., a California real estate investment and management company that operated as a Po)zi scheme. Defendants also failed to disclose the founder’s prior criminal conviction and that neither was registered with the SEC as a broker or associated with a registered broker-dealer. Each Defendant consented to the entry of permanent injunctions based on Advisers Act Sections 206(1) and 206(2), Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a)(1). On a joint and several basis each agreed to pay disgorgement of $402,075, prejudgment interest of $121,843.85 and a penalty of $50,000. See Lit. Rel. No. 26185 (Dec. 3, 2024).

False statements: SEC v. Chiriva-Inrternati. Civil Action No. 4:24-cv-4729 (S.D. Tx. Filed Dec. 3, 2024). Defendant Maurizio Chiviva-Internati is the founder and president of Kiromic BioPharma, Inc. The firm is a publicly traded biotherapeutics company based in Huston. It is attempting to develop and commercialize cell therapies that focus on immune-oncology. About two weeks before the company raised $40 million through a public offering in July 2021, the U.S. Food and Drug Administration placed a clinical hold on two Investigational New Drug applications the firm filed several months earlier. The firm did not, however, disclose the holds in filings, at road shows or in diligent calls. Rather, the filings and other communications disclosed a hypothetical centered on such a communication. Mr. Chiviva-Internati did not specifically disclose that in fact the FDA had told the company that consideration of two firm drugs had been put on hold. Indeed, in June 2021 after the FDA call, and again in August 2021, Defendant signed off on filings for the company made with the Commission that did not disclose the FDA communications. The complaint alleges violations of Securities Act Sections 17(a) (2) and 17(a)(3). It also alleged aiding and abetting the firm’s violation of Exchange Act Section 13(a). Defendant resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, he will pay a penalty of $125,000 and will be barred from serving as an officer or director of a public company for three years. See Lit. Rel. No. 26184 (Dec. 3, 2024).

Books & records: In the Matter of Industrial and Commercial Bank of China Financial Services, LLC, Adm. Proc. File No. 3-22335 (Dec. 2, 2024) is a proceeding which names as respondent a wholly-owned subsidiary of Industrial and Commercial Bank of China Limited. The firm is registered with the Commission as a broker-dealer. In November 2023 the firm was the victim of a ransomware cyberattack. That attack disrupted the firm’s access to, and ability to, update its books and records in various systems. It also caused the firm to terminate connectivity to its clearing firms and agents. Between November 8, 2023, and March 1, 2024, the firm failed to keep the proper books and records. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Rules 17a-3(a) and 10b-10(a) under the Exchange Act. The firm resolved the matter, consenting to the entry of a cease-and-desist order based on the provisions cited in the Order as well as a censure. No penalty was imposed based on cooperation.

Cherry picking: SEC v. Leech, Civil Action No. 1:24-cv-09017 (S.D.N.Y. Filed Nov. 25, 2024). Defendant Stephen K. Leech is the former co-chief investment officer of Western Asset Management Company, LLC. Over a period of years he engaged in what is typically called a “cherry picking” scheme. Specifically, beginning in January 2021, and continuing through October 2023, Defendant was named portfolio manager for several investment strategies. As part of his duties he placed trades using omnibus brokerage accounts. When placing trades Mr. Leech did not immediately allocate the trade to a particular account. Rather, he waited until later in the day, and in some instances after market close, to assign a particular trade to an accountant. During much of the period the trader assigned the trades which had favorable first day results to select accounts which also benefited him. Those that had unfavorable results were assigned to other accounts. The complaint alleges violations of Securities Act Section 17(a)(1), Exchange Act Section 10(b) and Rule 10b-5, Advisors Act Sections 206(1) and 206(2) and Investment Company Act Sections36(a) and 37. A parallel action was filed by the U.S. Attorney’s Office for the Southern District of New York. See, Lit. Rel. No. 26183 (Nov. 25, 2024).

Offering fraud: SEC v. Taong, Civil Action No. 3:24-cv-02179 (S.D. Cal.) is a previously filed action which names a defendants Touzi Capital, LLC and Eng Taing, the sole member of the firm which is a California entity. The complaint centers on a $115 offering by Defendants in which investor were solicited from 2020 to 2023. Those investors were told that their funds would be used to finance debt rehabilitation businesses or for crypto asset mining. While the funds were in part used for those purposes, they were also comingled with funds from other entities. In addition, Defendants misled investors about the business operations, claiming that they were stable when in fact they were not. Investors were, in addition, misled about the nature of the crypto mining business with claims that in fact Defendants could profitably mine bitcoin at prices far below those prevailing in the market when they could not. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26182 (Nov. 29, 2024).

Australia

Remarks: ASIC Commissioner Alan Kirkland of the Australian Consumer Law Roundtable in Melbourne delivered remarks as the keynote speaker delivered titled The Case for Prohibiting Unfair Trading Practices In Financial Services, on December 6, 2024 (here).

BaFin

Remarks: Hanno Burgau and Luca Pausewang, BaFin IT Supervision, delivered remarks titled Simulating Attacks to Enhance Security in which they advocated the practice to improve responses to cyberattacks, December 4, 2024 (here).

Singapore

Remarks: The Monetary Authority of Singapore published the remarks of Lim Tuang Lee, Asst. Managing Director of MAS, delivered at the Futures Industry Association Asia Derivatives Conference, December 4, 2024, titled Capital Markets Priorities in a Dynamic Landscape (here).