This Week In Securities Litigation (Week of July 22, 2024)
The Commission filed two new proceedings, one focused on a Ponzi scheme and the second on insider trading. The latter is an administrative proceeding settled with the imposition of a monetary penalty just two days before the Supreme Court published its opinion in SEC v. Jarkesy, No. 22-859 (June 27, 2024). There the Court held that the agency cannot impose a monetary penalty in an administrative proceeding. Stay tuned.
Be careful, be safe this week and stay cool.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 1 new civil injunctive action and 1 new administrative proceeding, excluding tag-along actions and those that present a conflict for the author.
Ponzi scheme: SEC v. Weinstein, Civil Action No. 3:23-cv-03848 (D.N.J. Amended Complaint filed July 12, 2024). This action centers on a Ponzi scheme. Named as defendants are: Defendant Eliyahu Weinstein, the creator of a scheme who has two prior felony convictions that were concealed for a time; he currently resides at Monmouth County Correctional Institution in Freehold Township, New Jersey and is a named defendant in U.S. v. Eliyahu Weinstein, No. 23 MJ-03038 (D.N.J.). Joel L. Wittels was initially involved with the books and records. He has pleaded guilty in the criminal case listed above. Aryeh Bromberg is a member of the board of directors of Optimus Investments, Inc., a key company here. He has been primarily involved in raising capital for that firm and has been named as a defendant in one of the parallel criminal cases. Joel L. Wittels has been involved with the bookkeeping for Optimus. He pleaded guilty in March 2024 to a three count information in one of the parallel criminal cases, U.S. v. Wittels, No. 24-cr-210 (D.N.J.). Richard M. Curry has been primarily involved with raising capital for Tryon Management Group, Inc. The company was formed to interact with the other entities in the scheme. He pleaded guilty in U.S. v. Curry, 23-cr-689 (D.N.J.). Christopher J. Anderson is a co-founder of Tryon. He pleaded guilty in U.S. v. Anderson, 23-cr-684 (D.N.J). Ala Mohamed Hattab controls certain entities that acted as brokers in the cases. Shlomo Erez is a citizen and resident of Israel who currently resides in New Jersey. He controlled the investor funds in connection one of the entities involved. He is also a licensed attorney, but not in the United States, who became involved in money laundering charges. In late November 2021 Defendants Weinstein, Bromberg and Wittels, through Optimus, sought to rise money from investors. Supposedly, the funds were to finance lucrative transactions for Optimus involving the purchase, distribute and re-sell of health care products. Two months later Defendants Anderson and Curry formed Tryon Management Group LLC. The purpose was to raise capital to invest in Optimus through the sale of short-term promissory notes issued by Tryon. Over the next several months Defendants Weinstein, Bromberg, Wittels, Anderson and Curry sought to raise capital in connection with the sale of Tryon notes. Investors were solicited using a series of false statements. As investor funds were raised, they were used in part to make Ponzi type payments. By August 2022 the actual identity of Mr. Weinstein began to emerge. Details regarding fraudulent actions in connection with deals being made by Optimus also began to emerge. Nevertheless, the deals moved forward. Defendants collectively raised funds from at least 150 Tryon investors. At least $38 million was raised from the investors. The Commission’s complaint, which has been updated with an amendment, reflects key developments in the cases. It currently alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26049 (July 15, 2024).
Insider trading: In the Matter of Robert J. Schettino, Adm. Proc. File No. 3-21977 (June 25, 2024). This action centers on trading in the securities of NAPCO Security Technologies, Inc. by Robert Schettino. The company is a Delaware corporation based in Amityville, New York. It designs and manufactures electronic security devices, and cellar communications services for intrusion and fire alarm systems and school security systems. Respondent Schettino has been employed at NAPCO since 1991. Initially, he was the controller. He has also served as vice president of finance. Throughout his time at the firm, Respondent has been responsible for overseeing the process of finalizing the accounting records for each quarter and the preparation of the financial reports for the company. Prior to the second fiscal quarter of 2020 NAPCO had not reported a quarter-over-quarter decline in equipment revenue in recent years. Yet in the second fiscal quarter of 2020 Respondent and other company officers received data showing that NAPCO revenue on a quarter-over-quarter basis for equipment revenues declined. The numbers also showed that consolidated revenues for the quarter would be below analyst consensus figures. On January 17, 2020, while he was overseeing the finalization of the accounting records for the period, Respondent sold all of the 20,975 shares of NAPCO stock in his brokerage account. He had not purchased or sold a share of company stock for five years. The sale constituted a breach of fiduciary duty. When the company results were issued on February 3, 2020, the share price for NAPCO declined about 22%. As a result of his trades, Respondent avoid losses of about $198,566. The Order alleges violations of Exchange Act Section 10(b) and Rule 10b-5. To resolve the proceedings, Mr. Schettino consented to the entry of a cease-and-desist order based on the Section and Rule cited in the Order. He is also prohibited from acting as an officer or director of any issuer registered under Exchange Act Section 12 or required to report under Exchange Act Section 15(d). He is, in addition, denied the privilege of appearing or practicing before the Commission as an accountant. Finally, Respondent is ordered to pay disgorgement of $198,566, prejudgment interest of $38,815 and a penalty equal to the amount of the loss avoided.
FinCEN
Release: The Financial Crimes Enforcement Network joined with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency in issuing a joint statement on notices of proposed rulemaking that would strengthen and modernize financial institutions’ anti-money laundering and countering the financing of terrorism programs. The statement is dated July 19, 2024 (here).
Australia
Release: The Australian Securities and Investments Commission and the Office of the Australian Information Commission signed an MOU for the sharing of data and privacy breach information. The focus of the MOU is to accelerate data and privacy breach responses. The release is dated July 19, 2024 (here).
BaFin
Article: Birgit Rodolphe, Chief Executive Director of Resolutions and Prevention of Money Laundering, published an article focused on human trafficking as global crime which she calls “as brutal as it is profitable.” The article was published on July 18, 2024 (here).
Hong Kong
Release: The Securities and Futures Commission of Hong Kong issued a release establishing a timeline for completing the legislation on its proposed code and guidelines for implementing a not certificated securities market in Hong Kong. The release was published on July 16, 2024 (here).