This Week In Securities Litigation (Week of April 3, 2023)
Last week the Commission continued to focus on crypto assets. Two new actions were filed. One centered on a crypto exchange, seemingly the new topic in this area. The second involved a crypto offering, a more traditional area. Also in the mix of cases last week was an insider trading case, a action based on a manipulation and an offering fraud action.
Be careful; be safe this week.
SEC
Conference: The Commission will host a Municipal Securities Disclosure Conference on May 10, 2023 (here).
Whistleblowers: The Commission awarded $2.5 million to two whistleblowers last week, according to a March 30, 2023, release.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 5 civil injunctive cases and 1 administrative proceeding, excluding 12j and tag-along proceedings as well as those raising conflicts for author (which are counted in totals).
Insider trading: SEC v. Wygovsky, Civil Action No. 2:23-cv-01810 (D. N.J. Filed March 30, 2023) is an action which names as defendants Sean Wygovskv and Christopher Matthaei, respectively a former trader at a Canadian Asset Manager and a former partner at a U.S. broker-dealer. From May 2021 to April of the same year Defendant Wygovsky was furnished inside information on SPAC mergers by Defendant Matthaei. To help conceal the communications an encrypted app was frequently used. In April 2021 Mr. Mathaei learned that his friend was the subject of an unrelated securities fraud investigation being conducted by the Commission. The two men decided to halt their scheme. Following the arrest of Mr. Wygovsky, Defendant Mathaei gave him $5,000 in cash and showed him a bank account balance of about $2.5 million in cash which he promised to give him at a later time. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. A parrel action was filed by the U.S. Attorney’s Office for the District of New Jersey.
Unprofessional conduct: In the Matter of Spicer Jeffries LLP, Adm. Proc. File No. 3-21353 (March 29, 2023) is a proceeding which names as respondents the audit firm and one of its engagement partners, Sean Tafaro, CPA. In 2019 Respondents completed the audits of two private funds of Investment Adviser. The audits were conducted to comply with the custody rule. The audits, however, were not conduct in accord the applicable standards. Specifically, engagement partner Tafaro, and the firm, failed to respond adequately to significant risks identified during the planning stage of the audits, obtain sufficient appropriate audit evidence to support an opinion, or exercise due care. In resolving the proceedings the firm agreed to implement certain undertakings which included retaining an independent consultant. The Order alleges improper professional conduct within the meaning of Rule 102(e)(1)(ii). In addition, the firm was censured and Mr. Tafaro denied the privilege of appearing or practicing before the Commission as an accountant. After one year he may apply for re-admission.
Unregistered broker/exchange: SEC v. Beaxy Digital, Ltd., Civil Action No. 23-cv-1962 (N. D. Ill. Filed March 29, 2023) is an action which names as defendants: Beaxy, an off-shore entity; Artak Hamazaspyan, the founder and president of Beaxy Digital; Windy Inc., which maintained the Beaxy Platform; Nicholas Murphy, co-owner and co-president of Windy; Radolph Bay Abbott, co-owner and co-president of Windy; Braverok Investments, LLC, a firm that provide market making services for crypto securities; Windy Financial LLC; Future Financial LLC, a firm that also provided market making services for crypto securities: and Brian Peterson. Beginning in May 2018, and continuing for the next year, Beaxy Digital and its founder, Defendant Hamazaspyan, conducted an unregistered private sale of crypto asset security called BXUY, raising over $8 million. In October 2019 Defendants Murphy and Abbot – each a high-level Beaxy Digital official – discovered that Defendant Hamazaspyan had misappropriated investor assets. They arranged for his separation from the firm and took control. Defendants Murphy and Abbott continued the operations. Windy still did not register as a national securities exchange. Windy also did not register as a broker or clearing agency. In addition, beginning in 2019, Windy Financial worked with Braverock Investments, Beaxy Digital and Future Financial (collectively the “Braverock Defendants”) to provide market making services to Windy and Dragonchain, Inc., the issuer of DRGN, a crypto asset offered for sale as a security. Defendant Peterson owned the Braverock Defendants. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 5, 10(b), 15(a) and 17(A) & (b). The case is pending.
Misappropriation: SEC v. Couture, Civil Action No. 1:21-cv-10908 (D. Mass.) is a previously filed action in which the Court entered a final judgment as to Defendant James K. Couture, a registered investment adviser. The complaint alleged that Defendant engaged in a fraudulent scheme over a ten-year period beginning in 2019. Defendant convinced clients to sell portion of their securities holdings to fund large money transfers to an entity Defendant controlled. Portions of the sales proceeds were then misappropriated. When clients asked for a return of their funds Defendant took assets from his other advisory clients, channeling them through a web of third party accounts. The final judgement enjoins Defendant from future violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The Commission previously barred Defendant from the securities business and participation in a penny stock offering. In a parallel criminal case Defendant Couture pleaded guilty to ten counts including one of investment adviser fraud. In January Defendant was sentenced to serve 100 months in prison and ordered to pay $1,924,585 in restitution. See Lit. Rel. No. 25678 (March 28, 2023).
Offering fraud: SEC v. Perera, Civil Action No. 2:23-cv-02316 (E.D.N.Y. March 22, 2023). Named as defendants are Surage Kamal Roshman Perera, employed in the brokerage industry for years and the only authorized signer for the bank accounts of Defendant Janues Capital Incorporated. That firm claimed to be a capital markets advisor. Over a period of about one year, beginning in February 2022, defendants raised millions of dollars from one investor. Defendant Perera convinced the investor that Janues had access to certain restricted securities at discount prices through contacts with institutions. He also claimed to have an essentially fool proof trading strategy – options straddles. This trade technique prevented losses, according to the sales pitch. It also guaranteed returns of at least 9% and up to 50%. Over the period Mr. Perera obtained about $4.3 million from the investor. He did not, however, use the funds to purchase and employ options straddles. Rather, he misappropriated the funds obtained from the investor, diverting the cash to his own purposes. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) & (2). The case is pending. The U.S. Attorney’s Office for the Eastern District of New York announced the filing of parallel criminal charges.
Crypto asset fraud: SEC v. Barksdale, Civil Action No. 1:22-cv-01933 (S.D.N.Y.) is a previously filed action which named as defendants John and JonAtina Barksdale. The Court entered a final judgment on March 15, 2023. The complaint claimed that Defendants raised millions of dollars in a period of months, beginning in June 2017. The investor funds were generated in part through the fraudulent offerings of cypto asset securities called Ormeus Coin. Defendants also operated a multi-level marketing business called Ormeus Global through which investors purchased subscription packages that included Ormeus Coins. Road shows were used to market the coin. Oermeus Coin was supported by what was once the world’s largest crypto asset mining operation. The judgement, entered by default, prohibits future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The judgment also requires the payment of disgorgement in the amount of $46,2597,463, on a joint and several basis, as well as prejudgment interest of $10,044,822 and a civil penalty of $23,148,73. See Lit. Rel. No. 25680 (March 30, 2023).
Suitability: SEC v. Sapere Wealth Management, Civil Action No. 3:23-cv-00172 (W.D.N.C. Filed March 22, 2023) is an action which names as defendants the investment adviser and its principal, Scott Trease. It centers on recommendations of unsuitable investments in 2018 and 2019. In May 2019, for example, Defendants recommended that three investment advisory clients put $7.3 million into two risky alternative investment deals. Defendants incorrectly believed the transactions were collateralized by gold. The investments came from a person Defendant Trease befriended at Bible Study. Subsequently, similar opportunities were presented. In one recommended by Defendants a client lost $2.3 million. In another the client put $5 million at risk. Ultimately the investor was able to recover the funds. The recommendations where were made without a reasonable understanding of the investments and despite red flags suggesting the investment may not be suitable. The complaint alleges violations of Advisers Act Section 206(2). To resolve the matter Defendants consented to the entry of a permanent injunction based on the Section cited in the complaint, to a five year injunction requiring the retention of a due-diligence consultant and to the payment of a $100,000 civil penalty along with an order to circulate the complaint in this case to their clients See Lit. Rel. No. 25681 (March 30, 2023).
FinCEN
Analysis: The financial regulator disclosed an analysis of trends and patterns in business email in the real estate sector. In 2020 and 2021 email in the real estate sector disproportionately reflected compromised email, according to a release dated March 30, 2023 (here).
ESMA
Announcement: The European Markets regulator issued a statement on derivative trading obligations. Specifically, in view of the coming closure of ICE Clear Europe’s credit default swap clearing services on October 27, 2023 the regulator issued this statement to aid an orderly process on March 30, 2023 (here).
Hong Kong
Consultation: The Securities and Futures Commission of Hong Kong issued a consultation on proposed subsidiary legislation for implementing an uncertified securities market in Hong Kong. It has two facets. One focuses on operational and technical matters. The second centers on rules tied to the regulation of share registers, according to the March 27, 2023 release (here).
Singapore
Remarks: Lim Cheng Khai, Executive Director, Financial Markets Development, Monetary Authority of Singapore, delivered remarks titled The Next Key Driver in Private Markets, at the Private Debt Investor’s APAC Forum on March 29, 2023 (here). He spoke about the emerging role of private credit in Asia.