This Week In Securities Litigation (Week of July 15, 2024)
Last week the Commission filed three new actions. One centered on false statements, a second on insider trading and the third involved misrepresentations.
Be careful, be safe this week and stay cool.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 3 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. Iakovou, Civil Action No. 4:22-cv-00194 (MD Ga.) is a previously filed action which named as defendants George Iakovou, Vika Ventures, LLC and Penelope Zbravos. Defendants George Iakovou and Penelope Zbravos are from New York. They control Vika Ventures. The complaint claimed that over a three-year period, beginning in 2019, the two individual defendants, who are dating, and their company conducted an offering fraud centered on the sale of what were supposed to be pre-IPO shares. Investors were solicited using claims that the shares in the offering were of firms that were about to go public. Elaborate documents were created for review by potential buyer about the opportunity. In fact, there was no opportunity because Defendants never had any shares, just a fictitious story spun by two individual defendants who supposedly had over $80 million in assets under management. Investors entrusted Defendants with over $6 million dollars. The only actual investments made, unfortunately, were in the lifestyles of Mr. Iakovou and Ms. Zbravos. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Previously, the court entered a final judgment against Mr. Iakovou. He also resolved parallel criminal charges in January 2024. In that case he pleaded guilty to one count of conspiracy to commit wire fraud and was sentenced to 97 months in prison followed by three years of supervised release. Defendant Iakovou was also ordered to pay restitution of more than $5,958,505 and entered into a pretrial diversion agreement. The firm was ordered to pay a penalty of $8,929,120. Finally, although the Commission alleged that initially Ms. Zbravos did not know about the fraud, there were sufficient red flags over time that she must have learned about it. She consented to the entry of a permanent injunction based on the Securities Act Section 17(a)(3). The final judgement imposes disgorgement and prejudgment interest of $1,843,472.09. See Lit. Rel. No. 26048 (July 9, 2024).
Misrepresentations: SEC v. Amah, Civil Action No. 7:21-cv-06694 (S.D.N.Y) is an action which named as defendant, Evarist C. Amah, an investment adviser. The complaint alleged that Defendant ran a years-long scheme centered on providing clients with false information about his performance as an investment adviser. In September 2023, the court granted the Commission’s motion for summary judgment, concluding that Defendant was liable for fraudulently soliciting investments using positive projections while failing to disclose the losses. A final judgement was entered this week. It enjoins future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4)-8. The court also orderd the payment of disgorgement in the amount of $10,000, prejudgment interest of $1,617.82 and a civil penalty of $669,6667. See Lit. Rel. No. 26047 (July 8, 2024).
Insider trading: SEC v. Levoff, Civil Action No. 2:19-cv-054536 (D. N.J. July 2, 2024). Gene Daniel Levoff is a lawyer and the Director of Corporate Law from 2008 to 2013 and later the Senior Director of Corporate Law at a large, well-known Company. He also served on Company Disclosure Committee from 2008 through 2018 and at one point was the Chair. This position gave him access to inside information about Company. Over a five-year period, beginning in 2015 Mr. Levoff engaged in insider trading, using information obtained from Company to trade in its shares. Through a series of six trades Mr. Levoff had profits of, or avoided losses, which yielded him $382,480. At the time he had a net worth of over $30 million. In 2023 Mr. Levoff’s insider trading scheme ended. He was charged by the U.S. Attorney’s Office with insider trading. He pleaded guilty in December 2023. The Court sentenced him to four years of probation, 2,000 hours of community service and ordered that he pay a fine of $30,000 and forfeit $604,000. Mr. Levoff had a mental disorder which did not erase his liability. Mr. Levoff described his disorder as “self-sabotage.” While Defendant was wealthy, he did not live a lavish life-style. The Commission moved for summary judgement in its case following the resolution of the criminal action. Its motion was based on the guilty plea in the criminal case. Mr. Levoff also moved for summary judgment. The ultimate question for resolution, however, was not guilt or innocence but the amount of the penalty. Frequently, in cases such as this the Commission agrees that monetary remedies are satisfied by those paid in the parallel criminal case. Not here. The key question in this case became the amount of the penalty. The agency wanted three times the profits made/losses avoided or $1,147,440. The Court considered the standard factors – the egregiousness of the violations, the isolated or recurrent nature of them, the degree of scienter and the individual’s net worth. While the Court cited Mr. Levoff’s “mental disorders,” those were not determinative. Ultimately the Court issued a written opinion which seemed to focus on the high degree of scienter. While Mr. Levoff did have a mental disorder and made little money from the trades, he also served on the committee at the Company that “ensured compliance with securities laws and applicable trading restrictions,” the Court wrote. No credit from the criminal case offset the remedies ordered in the civil case. Mr. Levoff was ordered to pay a penalty of $1,147,440.
False statements: SEC v. Silvergate Capital Corporation, Civil Action No. 24 Civ. 4987 (S.D.N.Y. Filed July 1, 2024) names as defendants: the firm, a public company that filed an S-1 registration statement that went effective in late October 2019; Alan Lane who joined Silvergate in 2008 and became its CEO; Kathleen Fraher who joined the company in 2008 and became its COO; and Antonio Martino. A Canadian citizen who joined the firm in 2019 and later became the CFO. From November 2022 through January 2023 Defendants made false or misleading statements and engaged in other conduct that was misleading regarding the effectiveness of the Bank’s BSC or Bank Secrecy and Anti-Money Laundering or AML compliance programs. While Defendants claimed the systems were very effective in fact they were not. For much of the period the Bank had not conducted the necessary compliance testing. Key to the system was the Silvergate Exchange Network or SEN which, when tested, failed. Nevertheless, the Bank continued to publish positive statements regarding the system. The Bank had borrowed billions of dollars as the CFO knew, and would have to sell billions of dollars of securities to managing the debt. Yet Mr. Martino falsely disclosed that the institution would only sell a relatively small amount of securities. In an earnings release Mr. Martino approved the use of a method that miscalculated the potential losses. When regulators threatened an enforcement action in view of these misstatements and demands by the auditors for corrections, the firm announced it would liquidate. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) as to the company which settled by agreeing to the entry of permanent injunctions based on the cited Sections. The firm will also pay a $50 million penalty. Defendants Lane and Fraher settled, consenting to the entry of permanent injunctions, a five-year officer and director bar and agreed to each pay a penalty of $250,000 each. Silvergate’s payment may be offset by penalties paid to the Board of Governors of the Federal Reserve System and/or the California Department of Financial Protection and Innovation. Mr. Martino was charged with aiding and abetting Silvergate’s violations of Securities Act Sections 17(a)(2) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). In parallel actions the FRB and DFPI announced settled charges against Silvergate. See Lit. Rel. No. 26044 (July 23, 2024).
FinCEN
Release: The Financial Crimes Enforcement Network or FinCEN issued a supplemental alert on Israeli Extremist violence in the West Bank on July 11, 2024 (here).
Australia
Release: The Australian Securities and Futures Commission issued the final rules and information for the financial accountability regime on July 11, 2024 (here).
BaFin
Announcement: The Federal Financial Supervisory Authority for Germany published a release on July 3, 3024, noting that while there has not ben a particularly extensive range of European Long-Term Investment Funds available, that is likely to change (here).
ESMA
Report: The European Securities and Markets Authority or ESMA published the Final Report on the Guidelines on Enforcement Sustainability Information and a Public Statement on the first application of the European Sustainability Reporting Standards on July 5, 2024 (here).
Hong Kong
Release: The Securities and Futures Commission of Hong Kong and the China Securities Regulatory Commission recently held their 16th regular high level meeting on enforcement cooperation. The key point was on initiatives to strengthen collaboration, according to the July 12, 2024 statement (here)Remarks: Julia Leung delivered the keynote address at the recent Bond Commect Anniversary Summit 2024 on July 9, 2024 (here).
Singapore
Announcement: The Monetary Authority of Singapore announced the return of the FinTech Festival 2024 with a Spotlight on Artificial Intelligence and Quantum Technology, July 8, 2024 (here).