This Week In Securities Litigation (Week of April 25, 2022)
Last week the Enforcement Division focused on microcap fraud. Long a key issue for the agency, most of the cases filed last week involved microcap manipulations including the classic pump-and-dump manipulation. This approach is in line with trends that have been building in recent weeks. It is also consistent with the overall focus of the enforcement program in recent months.
Be careful, be safe this week
SEC Enforcement – Filed and settled actions
Last week the Commission filed 9 civil injunctive actions (including 1 case not reported because of conflicts) and 2 administrative actions, exclusive of 12j, tag-a-long and other similar proceeding.
Manipulation – false statement: SEC v. Passos, Civil Action No. 1:22-cv-03156 (S.D.N.Y. Filed April 18, 2022) is an action which names as defendant Fernando Passos, the executive vice president of finance and investor relations for Brazilian reinsurance company IRB Brazil Resseguros S.A. In February 2020 IRB’s stock price dropped following a letter by a short seller questioning the firm’s financial results. Defendant then planted a false news story claiming that Berkshire Hathaway Inc. had invested in the firm. Subsequently, in late February and early March the IRB stock price increased about 6%. After Berkshire denied the story the share price dropped about 40%. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25370 (April 18, 2022).
Microcap fraud: SEC v. Good, Civil Action No. 7:22-cv-00060 (E.D. NC Filed April 18, 2022) is an action which names as defendant Shawn Good, a registered representative at a large Wall Street brokerage house. Over a period of about 10 years, beginning in December 2012, Defendant convinced select clients to reinvest their funds with him personally by withdrawing money from their then current investments and transferring the cash to him. While Defendant promised to invest the cash, he did not. To the contrary, Defendant misappropriated it and diverted it to his personal use. In fact, there was no investment fund – he was effectively operating a Ponzi scheme. To date, the staff has identified about $4.8 million of investor funds. The complaint alleges violations of Securities Act Section 17(a)(1), Exchange Act Section 10(b) and Advisers Act, Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 25371 (April 19, 2022)
Financial fraud: In the Matter of Rollins, Inc., Adm. Proc. File No. 3-20824 (April 18, 2022). Respondents are Rollins and its CFO, Paul Northen. The Atlanta based firm provides termite and other pest control services to residential and commercial companies through brands such as Orkin. Its shares are traded on the NYSE. Mr. Northen served as CFO for seven years beginning in 2015. Rollins fostered the development of a culture focused in part on earnings consistency. In the first quarter of 2016 the quarterly report filed with the Commission announced that the firm was posting its “40th consecutive quarter of improved revenues and earnings. . .” The earnings release for the second quarter of 2017 announced the “45th consecutive quarter of improved earnings and revenue.” Each quarter the company made a determination as to the appropriate amount to reserve or accrue for several categories of lability accounts. Those included reserves for items such as a termite reserve which is an estimate of actual or potential damage claims by customers. The firm also had certain corporate-level reserve accounts. Those were determined after the results for reporting units were available. The CFO had the final determinative authority over the amount of the corporate-level reserves. In the second quarter of 2017 CFO Northen directed a reduction to certain corporate-level accounting reserves. The purpose was to enable the company to publicly report earnings per share in line with research analysts’ consensus estimates. Mr. Northen was aware at the time that the company earnings were close to but not at consensus estimates when directing that the adjustments be made. Without the adjustments for the first quarter of 2016 and the second quarter of 2017 the company would have been below the consensus by one cent. At the time of the reserve adjustments Rollins’ accounting personnel had significant discretion. The company failed to devise and maintain sufficient internal accounting controls. The Order alleges violations of Securities Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and 13(b)(5). The Commission considered the cooperation and remedial acts taken by Rollins. To resolve the proceedings the company consented to the entry of a cease-and-desist order based on each of the Sections cited in the Order except Exchange Act Section 13(b)(5). The firm will pay a civil penalty of $8 million. In addition, Mr. Northen resolved the proceedings as to him, consenting to the entry of a cease-and-desist order based on each of the Sections cited in the Order. He agreed to pay a civil penalty in the amount of $100,000.
Microcap fraud: SEC v. Elliott, No. 1:20-cv-10860 (D. Mass.) is a previously filed action which named as defendant Damon Elliott. The complaint alleges that Mr. Elliott operated a Ponzi scheme. Based on a series of recent settlements the Court ordered the payment of about $13.1 million. The case is discussed in detail here. See Lit. Rel. 254369 (April 15, 2022).
Insider trading: SEC v. Iberger, Civil Action No. 1:22 – cv-10565 (D. Mass. Filed April 15, 2022) is an action which names as defendants Carl Iberger, the CFO of Precipio, Inc. and Timothy Iberger, the son of the CFO. Precipio is a medical diagnostics company. Once the COVID pandemic started the firm shifted its line of business to test kits. After some initial success in this area, the firm entered into an agreement regarding the distribution of kits with the FDA at the end of May 2020. A press release was to be issued on July 30, 2020, announcing the arrangement. Prior to that time the executive team of the company reviewed the press release and other materials. The executives involved included Carl Ibderger. Before the issuance of the press CFO told his son about the pending announcement who intern told a friend. The son and his friend each traded in the shares of Iberger prior to the announcement. Following the issuance of the press release son and his friend had illicit gains as the price increased. The complaint alleges violations of Exchange Act Section 10(b). To resolve the matter, father and son each consented to the entry of permanent injunctions based on the Section cited in the complaint. In addition, Timothy will pay disgorgement of $68,350, prejudgment interest of $3,305 and a penalty of $68,350. Carler Ibeerger will pay a penalty of $69,323 which equals the total profits of the two traders. He also agreed to the entry of an officer and director bar. See Lit. Rel. No. 25368 (April 15, 2022).
Microcap manipulation: SEC v. Shaw, Civil Action No. 22CV3012 (S.D.N.Y. Filed April 14, 2022) is an action which names as defendants: Dean Shah, a U.K. citizen residing in Spain; Henry Clarke, also a U.K. citizen who resides in Spain; Julius Csurgo, a Canadian and Hungarian citizen residing in Canada; and Antevorta Capital Partners, Ltd., a firm incorporated in Canada and the British Virgin Islands that claims to be in the finance and consulting business. This case is one of three related international microcap market manipulations. Over a five-year period, beginning in 2013, Defendants engaged in classic microcap manipulations involving at least two firms. In each instances control of the firm was secretly acquired, shares were distributed without registration and then dumped on the market. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The case is pending. See also SEC v. Calabrigo, Civil Action No. 1:22-cv-03096 (S.D.N.Y. Filed April 14, 2022)(named as defendants are Domenic Calabrigo, Curtis Lehner, Hasan Sario, and Courtney Vasser; over a two year period, beginning in 2016, Defendants essentially engaged in the same conduct alleged above involving different issuers; the complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Section 9(a)(2) and 10(b)); SEC v. Bauer, Civil Action No. 1:22-cv-31089 (S.D.N.Y. Filed April 14, 2022) (named as defendants: Ronald Bauer; Craig Auringer; Alon Friedlander; Massimiliano Pozzoni; Daniel Ferris; Petar Mihaylov; David Sidoo; and Adam Kambeitz ; over a 14 year period beginning in 2006, Defendants engaged in microcap fraud manipulations similar to those in the other two cases, yielding $145 million in illicit profits; the complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Section 10(b); the case is pending).
Microcap manipulation: SEC v. Calabrigo, Civil Action No. 1:22-cv-03096 (S.D.N.Y. Filed April 14, 2022) is an action which names as defendants: Domenic Calabrigo, a Canadian citizen resident in the Bahamas; Curtis Lehner, also a Canadian citizen; Hasan Sario, a resident of Turkey; and Courtney Vasseur, a resident of British Columbia. The action centers on a two-year period, beginning in 2016, during which the Defendants engaged in the manipulation of the shares of at least nine microcap issuers. In each instance Defendants conducted a typical pump-and-dump manipulation: First, they obtained a controlling interest in the issuer and concealed it; next they used a series of emails to falsely inflate the stock; as the shares were promoted they were often manipulated; and in the end Defendants dumped the shares and took the profits. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. The Court entered a temporary freeze order. See Lit. Rel. No. 25372 (April 19, 2022). The Manhattan U.S. Attorney’s Office filed parallel criminal charges against Defendants Calabrigo, Lehner, Sario and Vasseur.
FCPA
In the Matter of Stericycle, Inc., Adm. Proc. File No. 3-20826 (April 20, 2022). This is a proceeding charging the company with violations of the FCPA books, records and internal control and bribery provisions. Stericycle is an Illinois based firm specializing in medical waste services and others. The firm’s shares are traded on the Nasdaq National Market LLC.
The company began operations in Latin America in 1997. During the period 2012 through 2016 the firm operated through wholly-owned subsidiaries in Brazil, Mexico, and Argentina. The firm established a Latin America division based in Miami in 2013 that had responsibility for, and management of ,the operations, financial reporting and books and records of Stericycle Brazil, Stericycle Mexico and Stericycle Argentina. During that period the firm paid millions of dollars in the form of hundreds of bribe payments to obtain and maintain business from government customers in Brazil, Mexico and Argentina and to obtain priority release of payments owed under government contracts. As a result, the books and records of the company were not properly maintained. Overall Stericycle benefited by about $22.2 million during the period.
The Order alleges violations of Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B). In resolving the matter, the company agreed to implement certain undertakings which included engaging an Independent Compliance Monitor and reporting to the Commission staff periodically. The reports will remain non-public with certain exceptions.
Stericycle consented to the entry of a cease-and-desist order based on the Exchange Act Sections cited above. The company agreed to pay disgorgement in the amount of $22,184,981 and prejudgment of $5,999,258.80. The company will receive a disgorgement offset of up to $4,196,719 (about 1/3 of its net profits from its violations related to Brazil) based on the U.S. dollar value of any disgorgement paid to the Brazilian authorities reflected by evidence acceptable to the Commission staff. No penalty was imposed based on the settlement with the Department of Justice. There the company entered into a three-year deferred prosecution agreement under which Stericycle acknowledged responsibility for criminal conduct relating to certain findings in the Order.
ESMA
Report: The Joint Committee of the European Supervisory Authorities published its report on 2021, according to a release dated April 14, 2022 (here).