This Week In Securities Litigation (Week of April 29, 2024)
Last week the Commission filed four new enforcement actions. One centered insider trading, another on an offering fraud, a third on the sale of unregistered securities and a final action involved claims about artificial intelligence.
The agency also prevailed on two partial motions for summary judgement. Each case centered on claims involving muni securities.
Be careful, be safe this week.
SEC Enforcement – Litigated Actions
Breach of duty: SEC v. City of Rochester, New York, Civil Action No. 22-cv-6273 (W.D.N.Y. Ruling on April 15, 2024). Named as defendants in the action are: The City of Rochester; Capital Markets Advisors, LLC; Richard Tortora, a principal of that firm; and Richard Granci, also a principal of Capital Markets. The complaint claimed that there was a material conflict of interest arising from the compensation arrangements of the advisory firm which required disclosure. Specifically, a municipal adviser has a material conflict when its compensation is contingent on the size or closing of a client’s transaction. Under those circumstances the adviser must disclose its material arrangements prior to, or when engaging as a into, municipal adviser. In this matter the advisory firm, as well as Messrs. Tortora and Granci, made written representation to the clients stating that the advisory firm did not have any undisclosed material conflicts. The representations were false. In addition, the advisory firm did not establish written supervisory procedures requiring the disclosure of all material conflicts of interest. Indeed, even after the firm adopted such procedures it failed to implement them. The Court granted summary judgment in favor of the Commission and against the three Defendants, concluding that there were repeated violations arising from the undisclosed conflicts: 1) When Defendants failed to disclose their conflicts in violation of Exchange Act Section 15B(c)(1) and MSRB Rule G-42; 2) By failing to deal fairly with their clients and in fact being dishonest and/or engaging in dishonest or unfair practices; 3) By violating MSRB Rule G-42 by engaging in dishonest and unfair practices and not providing full and fair disclosure of the conflicts to their clients in writing; 4) By violating MSRB Rule G-17 by failing to deal fairly with their clients and engaging in wrongful, deceptive conduct; 5) By violating MSRB Rule G-44 by failing to establish appropriate policies and procedures to prevent such conduct; and 6) by violating Exchange Act Section 15B(c)(1) through their conduct. The Commission did not seek summary judgment on other claims involving the advisory, Mr. Ganci and the City of Rochester. Those claims remain pending. See Lit. Rel. No. 25981 (April 22, 2024). See also SEC v. Choice Advisors LLC, Civil Action No. 3:21-cv-01669 (S.D. Cal. Filed September 23, 2021)(similar action in which court granted partial summary judgment against municipal advisor and one of its principals for breach theof fiduciary duty tied to the transaction by failing to disclosure their unregistered capacity at beginning of transaction, engaging in impermissible fee splitting, and by failing to deal fairly with the clients; the court denied the summary judgment motion of defendants).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 4 new civil injunctive action and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Insider trading: SEC v. Crotty, Civil Action No. 1:24-cv-3387 (N.D. Ill. Filed April 26, 2024) is an action which names as defendant Kevin Crotty, an employee of British Petroleum p.l.c. during the time of this action. On February 16, 2024, TravelCenters of America, Inc., a full-service truck stop and travel center company based in Ohio announced that it would be acquired by BP p.l.c. Prior to the announcement Mr. Crotty learned about the potential deal through his employment as a senior manager for BP. On February 15, 2023, Mr. Croty purchased 848,824 shares of TravelCenters of America. After the deal announcement the stock price increased by over 70%. That created $30,667 in unlawful trading profits for Mr. Crotty. The complaint alleges violations of Exchange Act Section 10(b). Defendant agreed to settle the matter, consenting to the entry of a permanent injunction based on the Section cited in the complaint. In addition, he agreed to pay disgorgement of $30,667, prejudgment interest of $1,274.50 and a civil penalty of $30,667. In a parallel action filed by the U.S. Attorney’s Office for the Northern District of Illinois, criminal charges were filed against Defendant. See Lit. Rel. No. 25985 (April 26, 2024).
Offering fraud: SEC v. Allen, Civil Action No. 1:24-cv-01771 (N.D. Ga. Filed April 24, 2024) is an action which names Craig Allen who was the sole shareholder of C.M. Allen Capital Management, Inc., the general partner of Cheetah Fund. Capital Management is a firm that was administratively dissolved. Cheetah Fund is a hedge fund formed in 1998 and based in Atlanta, Georgia. The firm supposedly made short term trades. The fund is not compliant with Georgia state securities laws. Beginning in 2019, and continuing through early 2023, Defendant and the firm raise about $9.9 million from investors by selling shares of Cheetah Fund. When selling the shares Defendant misrepresented the firm’s operating track record, the identity of its auditors and its records while misappropriating at least $2.64 million of investor funds. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4)-8. The case is in litigation. See Lit. Rel. No. 25984 (April 24, 2024).
Unregistered securities: SEC v. Geosyn Mining, LLC, Civil Action No. 4:24-cv-00365 (N.D. Tx. Filed April 24, 2024) is an action which names as defendants: the firm, a crypto asset and mining service; Caleb J. Ward, president and CEO of Geosyn; and Jeremy G. McNutt, co-founder and Chief Operating Officer of the firm. Beginning in late November 2021, and continuing for about one year, defendants raised approximately $5.6 million from 64 investors through the sale of investment contracts that are securities called Client Services Agreements. Under the terms of the deal Defendants were supposed to maintain and operate crypto asset mining machines and distribute the mined assets, such bitcoin, to the investors for a fee. Defendants falsely claimed that they had favorable contracts with electricity providers, failed to inform new investors that they never purchased mining machines and that the company would not provide services such as allowing investors to personalize their crypto mining strategy or provide 24/7 onsite monitoring of the mining machines. Defendants also misappropriated about $1.2 million of the investor funds raised. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 4:24-cv-00365 (April 24, 2024).
Artificial intelligence: SEC v. Brackett, Civil Action No. 1:24-cv002965 (S.D.N.Y. Filed April 19, 2024). Defendant is Michael Brackett. He has an MBA degree and managed a $650 million dairy portfolio prior to his association with Centricity. Mr. Brackett was the CEO of Centricity until his resignation in June 2021 when he moved to Zurich, Switzerland. On August 15, 2023, Mr. Brackett was arrested during a trip to Maine and charged with one count of securities fraud, U.S. v. Brackett, 23-cr-392 (S.D.N.Y.). Centricity was created by Mr. Brackett in 2019. The firm, with a principal place of business in New York City, was a start-up technology company. It claimed to use artificial intelligence to analyze hundreds of millions of internet searches daily to provide clients with information regarding consumer demand in specific geographic areas. Start-ups like Centricity typically raise capital in what are called “rounds” or “series” of external funding. Investors provide funding to the company in exchange for equity at a specific valuation. The initial round is usually the “seed” round. When the firm is sufficiently mature it will generate revenue and grow through a Series A round of financing. Here CEO Brackett raised about $2.8 million for Centricity through two rounds. The rounds were initiated in 2019 and continued for about two years. Potential investors were told that the firm had contracts with several large national companies. Those arrangement supposedly created substantial revenue for Centricity. While Defendant Brackett did raise revenue for the firm, Centricity did not generate substantial revenue. In 2020 and 2021 for example, the firm had revenue of less than $60,000. The representations Defendant made to investors about the company were false. The representations he made to investors about his background were false. The representations made to investors about the company were false. The complaint alleges violations of Securities Act Section 17(a)and Exchange Act Section 10(b). The case is in litigation.
FinCEN
Reminder: The Financial Crimes Enforcement Network issued a reminder on Earth Day, April 22, 2024, that all firms must be vigilant to protect the environment (here).
Australia
Notes: The Australian Securities and Investments Commission and the Australian Prudential Regulation Authority released notes on the Supernation CEO Roundtables held on March 27 and 28, 2024. The roundtables were hosted by ASIC Commissioner Simone Constant and APRA Executive Director Carmen Beverley-Smith (here).
BaFin
Article: The Federal Financial Supervisory Authority of Germany released a paper discussing the time table under which all firms must comply with DORA, the EU regulation regarding cyber security. The paper, dated April 12, 2024) (here), discusses the time table and implementation of the requirements
Singapore
Remarks: Chia Der Jiun, Managing Director, Monetary Authority of Singapore, delivered remarks at the Financing Asia’s Transition (FAST) Conference, April 17, 2024. The managing director offered insights for collective action on moving forward to resolve the significant challenges ahead (here).
This Week In Securities Litigation (Week of April 29, 2024)
Last week the Commission filed four new enforcement actions. One centered insider trading, another on an offering fraud, a third on the sale of unregistered securities and a final action involved claims about artificial intelligence.
The agency also prevailed on two partial motions for summary judgement. Each case centered on claims involving muni securities.
Be careful, be safe this week.
SEC Enforcement – Litigated Actions
Breach of duty: SEC v. City of Rochester, New York, Civil Action No. 22-cv-6273 (W.D.N.Y. Ruling on April 15, 2024). Named as defendants in the action are: The City of Rochester; Capital Markets Advisors, LLC; Richard Tortora, a principal of that firm; and Richard Granci, also a principal of Capital Markets. The complaint claimed that there was a material conflict of interest arising from the compensation arrangements of the advisory firm which required disclosure. Specifically, a municipal adviser has a material conflict when its compensation is contingent on the size or closing of a client’s transaction. Under those circumstances the adviser must disclose its material arrangements prior to, or when engaging as a into, municipal adviser. In this matter the advisory firm, as well as Messrs. Tortora and Granci, made written representation to the clients stating that the advisory firm did not have any undisclosed material conflicts. The representations were false. In addition, the advisory firm did not establish written supervisory procedures requiring the disclosure of all material conflicts of interest. Indeed, even after the firm adopted such procedures it failed to implement them. The Court granted summary judgment in favor of the Commission and against the three Defendants, concluding that there were repeated violations arising from the undisclosed conflicts: 1) When Defendants failed to disclose their conflicts in violation of Exchange Act Section 15B(c)(1) and MSRB Rule G-42; 2) By failing to deal fairly with their clients and in fact being dishonest and/or engaging in dishonest or unfair practices; 3) By violating MSRB Rule G-42 by engaging in dishonest and unfair practices and not providing full and fair disclosure of the conflicts to their clients in writing; 4) By violating MSRB Rule G-17 by failing to deal fairly with their clients and engaging in wrongful, deceptive conduct; 5) By violating MSRB Rule G-44 by failing to establish appropriate policies and procedures to prevent such conduct; and 6) by violating Exchange Act Section 15B(c)(1) through their conduct. The Commission did not seek summary judgment on other claims involving the advisory, Mr. Ganci and the City of Rochester. Those claims remain pending. See Lit. Rel. No. 25981 (April 22, 2024). See also SEC v. Choice Advisors LLC, Civil Action No. 3:21-cv-01669 (S.D. Cal. Filed September 23, 2021)(similar action in which court granted partial summary judgment against municipal advisor and one of its principals for breach theof fiduciary duty tied to the transaction by failing to disclosure their unregistered capacity at beginning of transaction, engaging in impermissible fee splitting, and by failing to deal fairly with the clients; the court denied the summary judgment motion of defendants).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 4 new civil injunctive action and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Insider trading: SEC v. Crotty, Civil Action No. 1:24-cv-3387 (N.D. Ill. Filed April 26, 2024) is an action which names as defendant Kevin Crotty, an employee of British Petroleum p.l.c. during the time of this action. On February 16, 2024, TravelCenters of America, Inc., a full-service truck stop and travel center company based in Ohio announced that it would be acquired by BP p.l.c. Prior to the announcement Mr. Crotty learned about the potential deal through his employment as a senior manager for BP. On February 15, 2023, Mr. Croty purchased 848,824 shares of TravelCenters of America. After the deal announcement the stock price increased by over 70%. That created $30,667 in unlawful trading profits for Mr. Crotty. The complaint alleges violations of Exchange Act Section 10(b). Defendant agreed to settle the matter, consenting to the entry of a permanent injunction based on the Section cited in the complaint. In addition, he agreed to pay disgorgement of $30,667, prejudgment interest of $1,274.50 and a civil penalty of $30,667. In a parallel action filed by the U.S. Attorney’s Office for the Northern District of Illinois, criminal charges were filed against Defendant. See Lit. Rel. No. 25985 (April 26, 2024).
Offering fraud: SEC v. Allen, Civil Action No. 1:24-cv-01771 (N.D. Ga. Filed April 24, 2024) is an action which names Craig Allen who was the sole shareholder of C.M. Allen Capital Management, Inc., the general partner of Cheetah Fund. Capital Management is a firm that was administratively dissolved. Cheetah Fund is a hedge fund formed in 1998 and based in Atlanta, Georgia. The firm supposedly made short term trades. The fund is not compliant with Georgia state securities laws. Beginning in 2019, and continuing through early 2023, Defendant and the firm raise about $9.9 million from investors by selling shares of Cheetah Fund. When selling the shares Defendant misrepresented the firm’s operating track record, the identity of its auditors and its records while misappropriating at least $2.64 million of investor funds. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4)-8. The case is in litigation. See Lit. Rel. No. 25984 (April 24, 2024).
Unregistered securities: SEC v. Geosyn Mining, LLC, Civil Action No. 4:24-cv-00365 (N.D. Tx. Filed April 24, 2024) is an action which names as defendants: the firm, a crypto asset and mining service; Caleb J. Ward, president and CEO of Geosyn; and Jeremy G. McNutt, co-founder and Chief Operating Officer of the firm. Beginning in late November 2021, and continuing for about one year, defendants raised approximately $5.6 million from 64 investors through the sale of investment contracts that are securities called Client Services Agreements. Under the terms of the deal Defendants were supposed to maintain and operate crypto asset mining machines and distribute the mined assets, such bitcoin, to the investors for a fee. Defendants falsely claimed that they had favorable contracts with electricity providers, failed to inform new investors that they never purchased mining machines and that the company would not provide services such as allowing investors to personalize their crypto mining strategy or provide 24/7 onsite monitoring of the mining machines. Defendants also misappropriated about $1.2 million of the investor funds raised. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 4:24-cv-00365 (April 24, 2024).
Artificial intelligence: SEC v. Brackett, Civil Action No. 1:24-cv002965 (S.D.N.Y. Filed April 19, 2024). Defendant is Michael Brackett. He has an MBA degree and managed a $650 million dairy portfolio prior to his association with Centricity. Mr. Brackett was the CEO of Centricity until his resignation in June 2021 when he moved to Zurich, Switzerland. On August 15, 2023, Mr. Brackett was arrested during a trip to Maine and charged with one count of securities fraud, U.S. v. Brackett, 23-cr-392 (S.D.N.Y.). Centricity was created by Mr. Brackett in 2019. The firm, with a principal place of business in New York City, was a start-up technology company. It claimed to use artificial intelligence to analyze hundreds of millions of internet searches daily to provide clients with information regarding consumer demand in specific geographic areas. Start-ups like Centricity typically raise capital in what are called “rounds” or “series” of external funding. Investors provide funding to the company in exchange for equity at a specific valuation. The initial round is usually the “seed” round. When the firm is sufficiently mature it will generate revenue and grow through a Series A round of financing. Here CEO Brackett raised about $2.8 million for Centricity through two rounds. The rounds were initiated in 2019 and continued for about two years. Potential investors were told that the firm had contracts with several large national companies. Those arrangement supposedly created substantial revenue for Centricity. While Defendant Brackett did raise revenue for the firm, Centricity did not generate substantial revenue. In 2020 and 2021 for example, the firm had revenue of less than $60,000. The representations Defendant made to investors about the company were false. The representations he made to investors about his background were false. The representations made to investors about the company were false. The complaint alleges violations of Securities Act Section 17(a)and Exchange Act Section 10(b). The case is in litigation.
FinCEN
Reminder: The Financial Crimes Enforcement Network issued a reminder on Earth Day, April 22, 2024, that all firms must be vigilant to protect the environment (here).
Australia
Notes: The Australian Securities and Investments Commission and the Australian Prudential Regulation Authority released notes on the Supernation CEO Roundtables held on March 27 and 28, 2024. The roundtables were hosted by ASIC Commissioner Simone Constant and APRA Executive Director Carmen Beverley-Smith (here).
BaFin
Article: The Federal Financial Supervisory Authority of Germany released a paper discussing the time table under which all firms must comply with DORA, the EU regulation regarding cyber security. The paper, dated April 12, 2024) (here), discusses the time table and implementation of the requirements
Singapore
Remarks: Chia Der Jiun, Managing Director, Monetary Authority of Singapore, delivered remarks at the Financing Asia’s Transition (FAST) Conference, April 17, 2024. The managing director offered insights for collective action on moving forward to resolve the significant challenges ahead (here).