This Week In Securities Litigation (Week of December 16, 2024)
Last week the Commission filed several of new enforcement actions. Those cases included actions based on false statements, microcap fraud, an offering fraud and a sham transaction. In addition, the agency brought administrative proceedings against seven firms that failed to file Form PF which is used by the Commission to collect information regarding private funds for various purposes and noted below.
Be careful, be safe this week
SEC
The Commission filed seven actions last week against private fund advisers for repeatedly failing to file Form PF. Each proceeding claimed that the adviser failed to file annual reports as required. The Form is used by the Commission in its regulatory program (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the Commission filed 6 new civil injunctive action and 8 new administrative proceedings (discussed above), excluding tag-along actions and those that present a conflict for the author.
SPAC false statements: In the Matter of Cantor Fitzgerald, L.P., Adm. Proc. File No. 3-22348 (Dec. 12, 2024) is a proceeding which names the firm as respondent in an action which claims that two special purpose acquisition firms or SPACs under its control made materially misleading statements. Specifically, the Order alleges that in two instances SPACs controlled by a small group of Cantor employees, engaged in merger discussions and represented that there had been no earlier such discussions. In each instance the claims were false. The Order, which alleged violations of Securities Act Sections 17(a)(2) & (3), was resolved. Cantor consented to the entry of an order based on the Section cited, imposing a cease-and-desist order. The firm also agreed to pay a money penalty of $6.75 million.
Sham transactions: SEC v. Augustine, Civil Action No. 24-cv-11026 (D. N.J. Filed Dec. 11, 202) is an action which names as defendants: Chibuzo Augustine Onyeachonam, Stanley Chidubem Asiegbu and Chukwuebuka Martin Nwekeeze, all Nigerian nationals living in Nigeria. Defendants in this action are charged with impersonating U.S. broker-dealers and investment advisers in telephone calls and other media. In those appearances, which began as early as 2019, Defendants solicited U.S. citizens for business. Overall about 22 individuals invested approximately $2.9 million from for supposed investments that were represented to pay good returns. In fact, Defendants are not registered with the Commission and the solicitations and transactions were based on false statements. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. A parallel action was filed by the U.S. Attorney’s Office for the District of New Jersey. See Lit. Rel. No. 26194 (Dec. 12, 2024).
Microcap fraud: SEC v. Clayton, Civil Action No. 2:24-cv-918 (C.D. Utah Filed Dec. 11, 2024) is an action which names as defendants: First Equity Holdings Corp., Standard Register and Transfer Co., Inc., Daniel W. Jackson, Donald H. Perry, Clark M. Mower, Timothy J. Rieu, and Chesapeake Group, Inc. as defendants. A series of related entities are named as relief defendants. This action centers on the period 2014 to 2024 during which Mr. Clayton engaged in a series of microcap fraud actions with the assistance of the other named defendants. Specifically, Clayton is alleged to have divided his holdings in a number of issuers among various defendants to conceal his ownership. Defendant Clayton is also alleged to have used the arrangements to make illegal sales of the stock by creating the appearance that the shares were exempt from the securities laws. Portions of the stock involved was obtained by Mr. Clayton through what were supposedly loans. Frequently he used First Equity and Standard Register for the transactions. Those efforts were assisted by Defendants Jackson, an attorney, Perry, Mower, Rieu, and Chesapeake. Frequently, Defendant Perry worked with Mr. Clayton’s bookkeeper to manage the accounts and furnish false information for various solicitations. Defendant Mower was the CEO of one of the firms whose shares were sold by Defendant Clayton. He is alleged to have furnished false documents to Mr. Clayton while Mr. Rieu and his firm, Chesapeake, were stock promotes used to increase the price of various shares. Finally, Mr. Clayton used Standard Register, a stock transfer firm, to remove the restrictive legends from stock sold. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and 17(b) and Exchange Act Sections 10(b), 13(a) and 16(a). See, Lit. Rel. No. 26193 (Dec. 11, 2024).
Offering fraud: SEC v. Dencer, Civil Action No. 2:24-cv-10622 (C.D. Cal. Filed Dec. 10, 2024) is an action which names as defendants: Frederick Tayton Dancer, his son Luke Dencer and their firms, Standard Huaxia, Ltd., and Dennis Butler. Over a period of late 2017 to 2023 Frederick Dencer and his son are alleged to have defrauded at least 40 investors of at least $17 million through the sale of non-exist stock. The money was supposed to be used to build a firm implementing a streaming service to China. In fact, it did not exist. Defendant Butler served as an unregistered broker to facilitate the fraud. The complaint alleges violations of Securities Act Section 17(a), and Exchange Act Sections 10(b), 15(a)(1) and 20(a). See Lit. Rel. No. 26192 (Dec. 11, 2024).
False statements: SEC v. Kennedy, Civil Action No. 2:24-cv-10608 (C.D. Cal.) is a previously filed action which named as defendant Christopher Kennedy. The complaint alleges that Mr. Kennedy, a registered representative at a brokerage firm, made false statements to clients. Mr. Kennedy has agreed to settle the action by consenting to the entry of a permanent injunction based on Securities Act Sections 17(a) and Exchange Act Section 10(b). He will also pay disgorgement of $958,134, prejudgment interest of $218,267 and a penalty of $958,134. See Lit. Rel. No. 26191 (Dec. 10, 2024).
Misuse of offering funds: SEC v. Qi, Civil Action No. 1:23-cv-07924 (S.D.N.Y.) is a previously filed action which named as defendants Guosheng Qi, Gridsum Holding, Inc. and, as relief defendant, Huijie He. Gridsum Holdings is a China-based analytics company whose CEO is Mr. Qi and his wife. The complaint claims that Gridsum Holdings repeatedly stated in filings that none of the proceeds from the firm’s IPO were used to pay offers and directors. The claims were false since about $2.5 million of those proceeds were paid from U.S. bank accounts that Defendant Qi controlled to Mr. Q’s wife. A default judgment was entered. The judgment is based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 13(b)(2)(B). The Order requires the payment of disgorgement of $5,244,969, prejudgment interest of $1,852,185 on a joint and several basis by Defendants Qi and He. Defendant Qi is also directed to pay a penalty of $5,244,969. Defendant Qi is also precluded from serving as an officer or director of a public firm. See Lit. Rel. No. 26190 (Dec. 10, 2024).
Offering fraud: SEC v. Bell, Civil Action No. 24-03403 (D. Colo. Filed Dec. 9, 2024). Defendant Ian G. Bell is a resident of Denver, Colorado. Prior to December 2023 he had not had a full time job since at least 2019. He was, however, an investment adviser representative of a Denver based advisor. Mr. also held a securities industry license. Beginning in July 2020, and continuing until March 2023, Mr. Bell sold interests in his day trading operation which conducted transactions involving index futures contracts. Over the period Mr. Bell raised in excess of $1.3 million from investors. Those investors were told about his day-trading operation which involved index futures contracts and other commodities. In the early part of the operation he raised about $100,000 from at least six investors. He was entrusted with the money based on assertions that it would be invested in his day-trading operation. By mid-2021, Mr. Bell had expanded his fundraising to include family and groups of friends. From May 2021 to July 2022 Defendant raised over $1 million in additional funds from another 23 investors for his program. Mr. Bell repeatedly told investors that he had been successful as an investor. Some investors were told that his program was not just successful but safe. Investors were not given written materials about his program or strategy. No materials were furnished about his claimed record of success. In fact, Mr. Bell was an unsuccessful trader. Typically, his trading losses exceeded his profits. Mr. Bell fabricated performance information to distribute to investors. The reports made it appear that there were significant profits. In fact, there were not. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5, thereunder. A parallel action was filed by the U.S. Attorney’s Office for the District of Colorado. See Lit. Rel. No. 26189 (Dec. 10, 2024).
Fraudulent stock sales: SEC v. Smith, Jr., Civil Action No. 1:24-cv-24802 (S.D.Fla. Filed Dec. 9, 2024) is an action which names as defendants Steve Smith and Xtreme Fighting Championships, Inc. Mr. Smith is the CEO of Xtreme Fighting. The case centers on a scheme that began in January 2020 and continued until April 2022. During that period Defendants sold shares of the company that were not registered with the Commission or exempt from registration. Defendant Smith and the firm’s in-house counsel (who has passed away) concealed control of the shares during the transactions. The company received about $436,000 of the $5 million in illegal proceeds generated from the sale. The firm also filed a Form 10K for the company that was false because the audit for the financial statements was incomplete. The complaint alleges violations of Securities Act Sections 5(a), 5(c). and 17(a)(3) and Exchange Act Section 10(b). See Lit. Rel. No. 26188 (Dec. 10, 2024). See Lit. Rel. No. 26188 (Dec. 10, 2024).
Fraudulent stock sales: SEC v. Banister, Civil Action No. 1:24-cv-09308 (S.D.N.Y. Filed Dec. 6, 2024) is an action which names as defendants David Banister and his firm, The Market Analysts Group, LLC. The complaint alleges that beginning in December 2020, and continuing until March 2021, Defendants touted and sold shares of BioVie Inc., a public company. During the period Defendants failed to disclose as they touted the publicly traded shares of BioVie that in fact they were selling their shares in the firm they controlled. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3), Exchange Act Section 9(a)(1) and 10(b) and Advisers Act Sections 206(1) & (2). See Lit. Rel. No. 26187 (Dec. 10, 2024).
BaFin
Statement: The Federal Financial Supervisory Authority published a statement regarding future regulation which states that the regulator will simplify regulation. The basis is set forth in a paper titled A Palpable Contribution Towards Reducing Bureaucracy.” It was published on December 12, 2024 (here).
ESMA
Conference: The European regulator is planning a conference titled Shaping the Future of EU Capital Markets. It will be held on February 5, 2025 (here).