This Week In Securities Litigation (Week of June 29, 2020)
The Commission was a leading news story this week in many publications, but not for any action taken or case filed or resolved. The focus was, and continues to be, the Chairman and speculation that he wants to resign and become the U.S. Attorney for Manhattan. There has been no formal nomination of the Chairman for the position, although apparently, he has an interest.
The Enforcement Division at the Commission filed a settled FCPA action, along with the DOJ, involving Novartis AG. Three offering fraud actions were also brought, two of which were tied to digital assets. Finally, las week a settled financial fraud action was brought against a large REIT. The firm had been victimized by senior officers. The firm self-reported and settled, paying a large penalty.
Be safe this week
SEC
Volker rule: Five federal regulatory agencies finalized modifications to the rule that applies to banking entities investing in or sponsoring hedge funds or private equity funds known as covered funds, according to an announcement on June 25, 2020. The final rule is substantially similar to the one proposed in January (here).
OCIE: A Risk Alert was published by the Office of Inspections and Examinations or OCIE, alerting Investment Advisers of managed private funds to key issues that have arisen in prior examinations. The Alert highlights a series of deficiencies, some of which have resulted in enforcement actions, in three categories: Conflicts, fees and expenses and MNPI/code of ethics. Risk Alert, Office of Inspections and Examinations (June 23, 2020)(here).
MOU: The Commission and the Antitrust Division of the Justice Department entered into their first interagency Memorandum of Understanding on June 22, 2020. The MOU is designed to foster communication between the parties and enhance competition in the securities industry (here). In connection with the MOU Chairman Clayton and Director, Division of Trading and Markets, Brett Redfearn deliver remarks titled “Modernizing U.S. Equity Market Structure” (here). Assistant Attorney General Makan Delrahim delivered remarks titled “Changes in Latitudes, Changes in Attitudes: Enforcement Cooperation in Financial Markets” (here).
Supreme Court
The Supreme Court significantly limited the SEC’s ability to seek disgorgement. Specifically, the Court held that any award must be limited to the wrongdoer’s “net profits” and be awarded “for victims.” The Court rejected the expansive concepts used by the agency for years. Essentially, the remedy has been returned to its historic roots, as reflected in the opinion written by Justice Sotomayor for the Court. Liu v. Securities and Exchange Commission, No. 18-1501 (June 22, 2020).
SEC Enforcement – Filed and Settled Actions
The Commission filed civil 4 injunctive actions and 3 administrative proceeding last week, excluding 12j and tag-along-proceedings.
Offering fraud: SEC v. NAC Foundation, LLC, Civil Action No. 3:20-cv-04188 (N.D. Ca. Filed June 25, 2020) is an action which named as defendants the firm and Rowland M. Andrade, its CEO. The action centers on the sale of digital assets by defendants called AML that supposedly had anti-money laundering features that met regulatory requirements and other security features encoded in the smart contracts for the token. Mr. Andrade was the primary architect of the product and promoted it with lobbyist Jack Abramoff (see separate case below). The tokens were sold over an 18 month period beginning in August 2017. The claims regarding AML were false and the coins had no worth. In addition, about $1.1 million of the offering proceeds was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See also SEC v. Abramoff, Civil Action No. 3:20-cv-04190 (N.D. Ca. Filed June 25, 2020)(action against lobbyist involved in claims alleged above; alleges violations of same sections as complaint above).
Blue-sheets: In the Matter of SG Americas Securities, LLC, Adm. Proc. File No. 3-19833 (June 24, 2020) is a proceeding which named the broker-dealer as a respondent. Over a period of five years, beginning in January 2014, Respondent submitted over 16,400 blue-sheets to the Commission. Over 13,600 of those submissions were inaccurate. The Order alleges violations of Exchange Act Section 17(a)(1). To resolve the matter the firm undertook certain remedial acts and consented to the entry of a cease and desist order based on the sections cited and to the entry of a censure. The firm also agreed to pay a penalty of $1.5 million.
Offering fraud: SEC v. Lahr, Civil Action No. 5:20-cv-1593 (E.D. Pa.) is a previously filed action which named as defendants attorney Todd Lahr and Thomas Megas. Defendants targeted attorney Lahr’s clients to raise funds for several business ventures, some of which were overseas. In fact, the fund was a Ponzi scheme. Mr. Lahr settled, consenting to the entry of a permanent injunction based on Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Section 10(b). Mr. Lahr also agreed to pay disgorgement of $976,879 and prejudgment interest of $179,888 which will be offset by the forfeiture and restitution ordered in the parallel criminal action in which he pleaded guilty and is awaiting sentencing. See Lit. Rel. No. 24843 (June 24, 2020). See also In the Matter of Todd H. Lahr, Esq., Adm. Pro. File No. 3-19832 (June 24, 2020)(tag-along-proceeding re Rule 102(e)).
Financial fraud: In the Matter of Vereit, Inc., Adm. Proc. File No. 3-19831 (June 23, 2020) is a proceeding against a large REIT. In late 2014 the firm discovered that its now former CFO and CAO had falsely reported and manipulated the firms Adjusted Funds from Operations, a key GAAP performance metric relied on by management and investors to assess performance. The firm informed investors that the financial reports for 2013 and the first two quarters of 2014 could no longer be relied on. The firm self-reported to the Commission and cooperated with the staff. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and the related rules. The firm resolved the matter, consenting to the entry of a cease and desist order based on the sections cited in the Order and agreed to pay a penalty of $8 million.
Offering fraud: SEC v. Hvizdzak Capital Management, LLC, Civil Action 1:20-cv-154 (W.D. Pa. Filed June 16, 2020 and unsealed on June 19) is an action which names as defendants the management firm, High Street Capital, LLC, High Street Capital Partners, LLC, Shane Hvizdzak and Sean Hvizdzak. Since late 2019 Defendants have raised and misappropriated millions of dollars from the High Street Capital Fund. The investor capital was raised through the sale of limited partnership interests. The Fund was supposed to hold digital assets for investors. In fact, investors were furnished false financial statements and forged audit reports to induce them to purchase interests. The investor money was moved out of the Fund without the knowledge of the investors. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is pending.
Offering fraud: SEC v. Eyal, Civil Action No. 1:19-cv-11325 (S.D.N.Y. Filed Dec. 11, 2019). Named as defendants were Eran Eyal, a dual citizen of South Africa and Israel residing in Brooklyn, and his firm, Uniteddata, Inc, d/b/a “Shopin.” Over a period of about eight months, beginning in August 2017, Defendants raised about $42.5 million in digital assets. Shopin supposedly planned to create a universal shopper profile that would track customer shopping histories at online retailers that would recommend purchases. The offering, conducted in typical two stage ICO fashion using a pre-sale and a sale, was based on a series of misrepresentations. Those included claims that two successful tests of Shopin’s approach had been conducted, a claim that the firm had on-going partnerships with well-known retailers, a representation that a prominent Silicon Valley blockchain entrepreneur advised the firm and a suggestion that a successful online company had invested in the firm. Shopin never created a functional platform. The proceeds from the offering were diverted to the personal use of Mr. Eyal. The complaint alleged violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The Commission settled with Eran Eyal. He consented to the entry of a permanent injunction based on the Sections cited in the complaint. The settlement, entered by the District Court, also contained an officer and a director bar and a conduct-based injunction tied to digital assets. In addition, the Court’s order requires him to pay disgorgement of $422,100 in ill-gotten gains and $34,940 in prejudgment interest. Those amounts are deemed satisfied by the payment of 3,105.78 Ether tokens pursuant to Mr. Eyal’s prior plea agreement in a parallel New York state criminal action. The claim as to Shopin was dismissed. See Lit. Rel. No. 24842 (June 23, 2020).
FCPA
In the Matter of Novartis AG, Adm. Proc. File No. 3-19835 (June 25, 2020) is a proceeding which names as a respondent, the Swiss based provider of pharmaceutical and healthcare products. Over a period of four years, beginning in 2012, the firm through its subsidiaries and affiliates, sought to increase the use of its products. In Korea, Vietnam and Greece the local subsidiary and affiliates made improper payments through various means to secure the use of its products. The firm also falsified its books and records and lacked sufficient internal controls during the period. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). In resolving the matter, the firm agreed to cooperate with the Commission, took certain remedial steps and agreed to implement certain undertakings. It also consented to the entry of a cease and desist order based on the sections cited in the Order and agreed to pay disgorgement of $90,300,000 and prejudgment interest of $20,500,000. A penalty was not imposed in view of the firm’s settlement with the Department of Justice.
The firm’s Greek subsidiary entered into a three-year deferred prosecution agreement with DOJ. In that agreement the firm acknowledged wrongful conduct and agreed to the entry of certain findings. A second subsidiary of the firm also entered into a three-year deferred prosecution agreement with the Department which contained admissions of wrongful conduct. A criminal fine of $233,925,000 was imposed in connection with these resolutions.
Hong Kong
Consultation: The Hong Kong Monetary Authority and the Securities and Futures Commission issued joint consultation conclusions on the annual update to the list of Financial Services Providers under the clearing obligation for over-the-counter derivatives transactions, according to a June 24, 2020 announcement. The list can be downloaded from the SFC’s website.
Report: The SFC published its Annual Report 2019-2020 on June 24, 2020 (here).
Singapore
Consultation: The Monetary Authority of Singapore issued a set of three consultation papers on its proposed Guidelines on Environmental Risk Management for banks, insurers and asset managers, according to a June 25, 2020 announcement (here).
Consumer prices: A May 2020 Report, published on June 23, 2020, by MAS is the latest update on consumer prices in Singapore prepared by the agency and the Ministry of Trade and Industry (here).