This Week In Securities Litigation (Week of August 5, 2024)
The Commission filed a series of cases last week. They focused on offering frauds, insider trading, financial fraud, a prime bank scheme and manipulative trading. Cornerstone Research also published an update on trends in securities class action filings.
Be careful, be safe this week and stay cool.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 7 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Offering fraud: SEC v. Al-Naji, Civil Action No. 1:24-cv-05738 (S.D.N.Y. Filed July 30 2024) is an action which names as Defendant, Nader Al-Naji, a resident of LA who created the BitClout blockchain protocol known as DeSo and developed the BitClout platform. Beginning in late 2020 Defendant raised over $257 million from offerings of crypto asset securities called BTCLT. Defendant offered and sold BTCLT as a security. He claimed it would increase in value as the platform moved forward. Supposedly anyone could acquire BTCLT through its decentralized platform. Defendant also formed Intangible Holdings, LLC, a relief defendant, to enter into transactions for BTCLT. Defendant assured investors that he would not use investor funds for himself. The claims were false. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) as well as Exchange Act Section 10(b). The case is in litigation. A parallel action was filed by the U.S. Attorney’s Office for the Southern District of New York. See Lit. Rel. No. 26063 (July 30, 2024).
Insider trading: SEC v. Baugh, Civil Action No. 9:24-cv-80919 (S.D. Fla. Filed July 30, 2024). Defendant Charles Baugh is a resident of Boca Raton, Florida. The company involved here is ADT, Inc., a publicly traded firm that provides residential and small business electronic security and alarm monitoring services in the U.S. On August 3, 2020, ADT announced that it had entered into a long-term partnership with Google LLC. The purpose of the deal was to create the next generation of smart home security services. ADT and Google began discussions that yielded an agreement in early 2020. By mid-July 2020 Google presented an agreement and proposed equity investment in ADT to its board. Negotiations continued. Eventually the agreement required a $450 million investment by Google in ADT to acquire a 6.6% ownership in ADT. The news release explained that the partnership would combine ADT’s award-winning hardware and services called Nest with Google’s machine learning technology to create a more helpful smart home experience for customers. A Baugh Family Member had been employed at ADT as a senior employee since 2019. Defendant and Family Member shared a close familial relationship. Family Member often consulted Defendant, whom he considered a close confident. During a July 4, 2020, family gathering, Defendant learned material, non-public information regarding the possible partnership between ADT and Google from Family Member. In view of Family Member’s senior position with ADT, the complaint alleges that Defendant realized the information shared about the potential deal was material. Defendant also recommended to another relative that ADT securities be purchased. On July 6, 2020, when the markets opened after the holiday, Defendant began purchasing ADT call options. Five different brokerage accounts were used to build a position. About $66,000 was invested. Family Member also purchased ADT securities. Immediately after the deal announcement, Defendant began liquidating his potion. He realized a profit of over $320,900 – almost a 500% profit. Family Member had invested $8,000 in ADT securities. The position was liquidated after the deal announcement was published. Family Member was not told that Defendant had invested. The complaint alleges violations of Exchange Act Section 10(b). Defendant resolved the matter, consenting to the entry of a permanent injunction based on the Section cited in the complaint. He also agreed to pay disgorgement in the amount of $320,908 based on his trading profits and that of Family Member. In addition, Defendant will pay a penalty of $473,660. See Lit. Rel. No. 26062 (July 30, 2024).
Offering fraud: SEC v. Moretz, Civil Action No. 5:24-cv-00171 (W.D. N.C. Filed July 29. 2024) is an action which defendant Garrett Moretz, a registered representative and investment adviser of Broker A deceived individuals to sell them securities. Specifically, Defendant sold what he called L Bonds, a high-risk investment, as being guaranteed. Since at least 2017 Defendant has sold L Bonds to at least four investors. His claims were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26061 (July 29, 2024). See Lit. Rel. No. 26061 (July 29, 2024).
Insider trading: SEC v. Nellore, Civil Action No. 5:19-cv-08207 (N.D. Ca.) is a previously filed action which names as defendants Janardhan Nellore and four of his friends – Sivannarayana Barama, Ganapathi Kunadharaju, Saber Hussain and Prasad Malempati. Mr. Nellore had been the IT manager at Palo Alto Networks, Inc. He obtained inside information from his employer beginning in late 2015 and distributed it to the other defendants who were his friends through mid-2018. At the peak of the scheme in 2017 Defendants had obtained over $7 million from trading largely options. The complaint alleges violations of Exchange Act Section 10(b). Each of the defendants in the case settled except Mr. Barama. The Court then granted summary judgment as to him. Mr. Barama was permanently enjoined from future violations under Exchange Act Section 10(b) by the court and ordered to pay disgorgement and prejudgment interest of $8,462,737. See Lit. Rel. No. 26060 (July 29, 2024).
Offering fraud: SEC v. San Miguel, Civil Action No. 4:24-cv-002805 (S.D.Tx. Filed July 29, 2024). Defendant Thomas San Miguel is a resident of Montgomery, Texas. During the time of this action he served as the President, CEO and sole director of SGR Energy, Inc., a private company based in Huston, Texas. The company operated until late 2021. In July 2022 a creditor initiated involuntary Chapter 7 bankruptcy proceedings for the company. In re SGR Energy, Inc., Case No. 4:22-bk-32050 (Bankr. Tex. Filed July 22, 2022). A Trustee currently oversees the company. Beginning in November 2015, and continuing until December 2021, Defendant San Miguel raised about $21.3 million from over 300 investors. Those investors purchased interests in his firm, SGR Energy, Inc. Investors were told that the shares had a 12% annual dividend. Investors were told that the dividend was funded by escalating revenues and profits and a $19 million account receivable. There were, in addition, other sources of revenue and funds to assure potential investors that they should put their cash into SGR shares. The investor funds were supposed to grow the company and expand its fuel-blending business. This would be done by expanding the geographical scope of its customers and acquiring strategically situated blending facilities and terminals. Defendant also touted SGR’s supposed acquisition of a large fuel terminal in Columbia. Investors were assured that commissions were not paid to sales personnel. The claims were false as were the books. Defendant knew that the revenues were minimal. Defendant knew that there was no $19 million account receivable. And, he knew that no terminal in Columbia was acquired. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26059 (July 29, 2024).
Financial fraud: SEC v. Campo, Civil Action No. 1:24-cv-2198 (D.D.C.) is a previously filed action which named as defendant Juan Campo, the former CEO of View Systems, Inc. Over three-year period Defendant engaged in multiple schemes to support claims that his firm was engaged in potentially profitable business. In this regard he: 1) claimed the company had acquired Sannabis S.A.S., a Colombian cannabis company; 2) disseminated statement claiming that the firm had developed a temperature screening device during the COVID epidemic; and 3) signed and certified company filings claiming the firm financial statements had been audited. Each claim was false. The complaint alleges violations of Exchange Act Section 10(b), 13(a) and the related Rules. See Lit. Rel. No. 26058 (July 26, 2024).
Prime bank fraud: SEC v. Bailey, Civil Action No. 1:24-cv-03309 (N.D.Ga. Filed July 25, 2024) is an action which names as defendants: Roosevelt Bailey, Borg Investment Bank & Capital Trust and Alvin Jones. Borg Bank and Mr. Baily sold interests in two types of investment contracts using what were supposedly bank documents and claimed interests in gold and gem stones. Investors were promised large returns based on the documents – a prime bank fraud scheme. In reality, Defendant Borg Bank never monetized the bank documents and only a few precious stones were obtained from the alleged gold and diamond investments. Defendants did raise about $1.6 million from investors. Portions of the money was distributed for Defendant Bailey’s benefit. Finally, as part of the scheme investors were directed to send their funds to Alvin Jone, an attorney. His activities focused on assisting Mr. Bailey and his firm. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See 26057 (July 26, 2024).
False trading scheme: SEC v. Left, Civil Action No. 2:24-cv-06311 (C.D.Cal. Filed July 26, 2024) is an action which names as defendants Andrew Left and his firm Citron Capital, LLC. Beginning in 2008 Defendant Left published tweets and reports recommending investments through what was claimed to be an online platform, Citron Capital. In fact, the firm was controlled by Defendant Left. The firm would put out information regarding various stocks. Much of that information was false and misleading. For example, the firm would recommend trading a stock up to a certain dollar limit and immediately after making the recommendation take a contrary position. This and similar techniques were used to mislead investors for the benefit of Mr. Left. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a). See Lit. Rel. No. 26056 (July 26, 2024).
Cornerstone Research
Report: The group published their mid-year report on securities class actions. The Report, titled Securities Class Action Filings 2024 Midyear Assessment, reports that in the first half of 2024 plaintiffs filed 112 securities class actions in federal and state court. That is an increase from the 103 class actions filed in the second half of 2023. The Report is available here.
Australia
Notice: The ASIC or Australian Securities and Investment Commission filed a notice stating that it is extending transactional relief to foreign financial services providers for an additional 12 months. The relief is from the requirement to hold and Australian financial services license when providing financial services to Australian wholesale clients. The notice is dated July 31, 2024 (here).
ESMA
Notice: The European Securities and Market Authority published what it calls a “second batch” of policy products under DORA. Those focus on technical standards – one set of implementing technical standards and 2 guidelines. The purpose is to enhance the digital operational resilience of the EU’s financial sector. The release is dated July 17, 2024 (here).
Singapore
Notice: The Monetary Authority of Singapore or MAS has established a review group to strengthen equities market development, according to a release issued August 2, 2024 (here).