This Week In Securities Litigation (Week of March 20, 2023)
The Commission continued to revamp its rules last week. This time the focus was on cybersecurity and the markets. The agency proposed a new Rule 10 as the centerpiece of a series of proposals designed for protecting the markets from cyber attacks. There are also proposed modifications to related provisions such as Form SCIR which serves a dual purpose of keeping the agency up to date and containing material written for public disclosure regarding any material breach
Be careful, be safe this week.
SEC
Cybersecurity – the markets: Propose Rule 10 is key to new rules for market participants and cyber security, published March 15, 2023 (here). It would require that Market Entities – essentially most broker-dealers other than some small firms – to address the risks presented by adopting a set of policies and procedures. Those would be reviewed each year and amended or updated in view of the evolving cyber risks. Market entities would also be required to provide the Commission with a written electronic notice immediately if there is a reasonable basis for believing that a significant cybersecurity event has occurred as well as updates and certain public disclosures. Covered entities would also be required to complete Form SCIR. A portion of the form would contain information about any breach and be posted on the firm’s website and provided to customers. Another section would be used to update the Commission. For related rule proposals see those for Regulation SCI, March 15, 2023 (here); and Regulation S-P (March 15, 2023 ((here)).
SEC Enforcement – Filed and settled actions
Last week the Commission filed 5 new civil injunctive actions and 2 new administrative proceedings, exclusive of 12j, default, conflicts (which are included in tabulating the number of cases), tag-a-long and other similar proceedings.
Offering fraud: SEC v. Karpavicius, Civil Action No. 1:23-cv-2205 (S.D.N.Y. Filed March 15, 2023). Named as defendants in this action are: Darius Karpavicius; TBO Capital Group; Gary Capital Group; HMC Trading, LLC; and HMC Management, LLC. Mr. Karpavicius is a Lithuanian citizen who conducted business through TBO Capital Group and Gray Capital Group. He also incorporated HMC Trading and HMC Management and is the sole member of each entity. Beginning in December 2021 Defendants raised about $4.1 million from dozens of investors, selling interests in what were claimed to be mutual funds. The scheme was conducted through the websites of TBO Capital Group and Gray Capital Group. Each site claimed its investment funds were operated by a group of experienced professions. Each site displayed the pictures of those professionals. Each site also claimed to have annual returns of 50+% without a single down year. Each had another key feature in common — everything was fictitious. Three of the four pictures on each site were of the same people. The description of the funds on each site were near copies. The graphic layout of each was virtually identical. The sites also listed the same company address and telephone number. In the end, the claimed people supposedly associated with each site did not exist; the investments did not exist. Not a single share of stock was purchased. What did exist was real investor cash. It was transferred to Defendant Karpavicius who moved much of it to his bank account and ultimately to crypto trading platforms. 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.
Offering fraud: SEC v. Kwok, Civil Action No. 23-cv-2200 (S.D.N.Y. Filed March 15, 2023) is an action which names as defendants: Ho Wan Kwok, a citizen of Hong Kong and New York who controlled GTV, Saraca Media Group, Inc., G Club Operations and G-Fashions; Kin Ming Je is a long time investment banker who worked with the Kwok family; Mountains of Spices LLC and G Club Operations. Since April 20 Defendant Guo has conducted several fraudulent securities offerings that have collectively raised hundreds of millions of dollars from investors in the U.S. and other countries. Defendants have misappropriated large portions of the money raised. For example, over a period of several months in 2020 the two individual Defendants raised about $452 million through a private placement in which the funds were to be used to develop social media in China that would be based on free speech principles and be free of the government. In fact, much of the money was misappropriated. Similarly, in an offering of shares of GTV, conducted from July 2020 to March 2021, the individual Defendants sold Convertible Loans raising about $150 million that supposedly could be converted into shares of GTV worth as much as $20 billion from stock then trading at $18 per share. The valuations were fraudulent. Other schemes conducted were similar. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and each subdivision of that Section and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. March 15, 2023).
Offering fraud: SEC v. Gessin, Civil Action No. 8:23-cv-00460 (C.D. Cal. Filed March 14, 2023) is an action which names as defendants John Gessin, the founder of each entity defendant; Equifunds, Inc.; and ICE Fleet LLC. Beginning in 2016 Defendant Gessin, using the name John David to conceal his criminal history, marketed the entity Defendants to raise $1.6 million over the next year that was claimed to be for business purposes. In fact, Defendant Gessin used much of the money for himself, despite claims to the contrary. He also used about $1.3 million obtained from a government COVID relief fund for personal purposes. Investors were told that the firms faced bankruptcy because of the pandemic. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25664 (March 14, 2023)
Financial metrics: In the Matter of Technology Company, Adm. Proc. File No. 3-21342 (March 14, 2023) is a proceeding which names the international technology company as a Respondent. Beginning in 2018 the firm negligently diluted certain non GAAP financial metrics This resulted from the fact that DXS excluded transactions and separation and integration related costs from its non-GAAP net income, non GAAP EPS and other non-GAAP metrics. Those items related to the integration, planning, financing and advisory fees associated with the merger that created DXC, other acquisitions and the spin-off of a business. Thus, on a quarterly basis, DXC materially increased its non-GAAP earnings by misclassifying tens of millions of dollars in expenses and improperly excluding them in reporting non-GAAP measures. The firm failed to describe accurately the scope of expenses included in its adjustments. This resulted in violations of Securities Act Sections 17(a)(2) &(3) and Exchange Act Section 13(a) and the related rules. To resolve the proceedings Respondent consented 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. Krieger, Civil Action No. 9:23-80398 (S.D. Fla. Filed March 13, 2023) is an action which names a defendant Peter Krieger. Beginning in May 2016, and continuing for a period of four years, Defendant used Oban Energies, LLC, to raise about $15 million from 23 investors based on representations that the funds would be used to establish an oil refinery and storage facility in the Bahamas. In fact, Defendant misappropriated much of the investor money for personal use. The complaint alleges violations of Securities Act Section 17(a) and 17(a)(3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25666 (March 15, 2023).
Compliance: In the Matter of E. Magnus Oppenheimer & Co. Inc., Adm. Proc. File No. 3-21340 is a proceeding naming as respondent the dual registered broker-dealer and investment adviser. The Order alleges that over a period of years the firm has failed to adopt compliance procedures and policies as required by Adviser Act Section 206(4) and Rule 206(4)-7. To resolve the matter the firm agreed to comply with a series of undertakings including the retention of an independent consultant. The firm consented to the entry of a cease-and-desist order based on the provisions cited in the Order and a censure. It will also pay a penalty in the amount of $50,000.
Financial fraud: SEC v. Evoqua Water Technologies Corp., Civil Action No. 1:23-cv-00105 (D. R.I. Filed March 13, 2023) is an action which names as defendants the company, a provider of water and wastewater treatment solutions, and Imran Parekh, its finance director after a merger, as defendants. Beginning in 2016 the firm improperly recognized revenue in violation of GAAP. The firm earns revenue by selling water technology and treatment products. The firm prematurely recognized revenue on these products thereby improperly inflating its revenue. In addition, in 2017 the firm was under pressure to further increase revenue. The Finance Director then took additional steps to further inflate revenue through the adoption of a “bill and hold” scheme – transactions in which the seller bills the buyer but holds onto the product. These techniques were pervasive at the firm involving. The firm reported almost $12 million of additional revenue for 2017, for example. This approach was also used when the firm conducted an IPO – it is reflected in the prospectus – and in subsequent filings with the Commission. When the auditors challenged the accounting methods being used. The firm declared the amounts immaterial when the practice came to light. Subsequently, the firm also moved the location where “bill and hold” materials were stored. The complaint alleges violations of Securities Act Sections 17(a)(1), (2) and (3) and Exchange Act Sections 10(b), 13(a), 13(a)(1)(A) and 13(a)(2)(B), 13(b)(5) and related rules. The company resolved the action, consenting to the entry of a permanent injunction based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The company will pay a penalty of $8.5 million. Mr. Parekh also resolved the matter, consenting to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b) as well as the same books and records and control Sections as the firm. The amounts of any monetary remedies will be determined by the court. See Lit. Rel. No. 25662(March 14, 2023).
BaFin
Release: The regulator released a publication tiled The EU Sustainable Finance Disclosure Regulation: opening the door to greater transparency, dated March 8, 2023 (here).
ESMA
Release: The European Securities and Markets Authority announced that the ECB and the ESDAs are now requesting enhanced climate-related disclosure for structured finance products, according to a release dated March 13, 2023 (here).
UK
Statement: The Financial Conduct Authority or FCA announced that that the Bank of England, in consultation with the Prudential Regulation Authority, HM Treasury and the FCA have taken a decision to sell Silicon Valley Bank UK Limited, a subsidiary of the US bank. The customers of the UK bank will, however, continue to have access to the Financial Services Compensation Scheme and Financial Ombudsman Scheme. Other consumer rights are unaffected (here).
This Week In Securities Litigation (Week of March 20, 2023)
The Commission continued to revamp its rules last week. This time the focus was on cybersecurity and the markets. The agency proposed a new Rule 10 as the centerpiece of a series of proposals designed for protecting the markets from cyber attacks. There are also proposed modifications to related provisions such as Form SCIR which serves a dual purpose of keeping the agency up to date and containing material written for public disclosure regarding any material breach
Be careful, be safe this week.
SEC
Cybersecurity – the markets: Propose Rule 10 is key to new rules for market participants and cyber security, published March 15, 2023 (here). It would require that Market Entities – essentially most broker-dealers other than some small firms – to address the risks presented by adopting a set of policies and procedures. Those would be reviewed each year and amended or updated in view of the evolving cyber risks. Market entities would also be required to provide the Commission with a written electronic notice immediately if there is a reasonable basis for believing that a significant cybersecurity event has occurred as well as updates and certain public disclosures. Covered entities would also be required to complete Form SCIR. A portion of the form would contain information about any breach and be posted on the firm’s website and provided to customers. Another section would be used to update the Commission. For related rule proposals see those for Regulation SCI, March 15, 2023 (here); and Regulation S-P (March 15, 2023 ((here)).
SEC Enforcement – Filed and settled actions
Last week the Commission filed 5 new civil injunctive actions and 2 new administrative proceedings, exclusive of 12j, default, conflicts (which are included in tabulating the number of cases), tag-a-long and other similar proceedings.
Offering fraud: SEC v. Karpavicius, Civil Action No. 1:23-cv-2205 (S.D.N.Y. Filed March 15, 2023). Named as defendants in this action are: Darius Karpavicius; TBO Capital Group; Gary Capital Group; HMC Trading, LLC; and HMC Management, LLC. Mr. Karpavicius is a Lithuanian citizen who conducted business through TBO Capital Group and Gray Capital Group. He also incorporated HMC Trading and HMC Management and is the sole member of each entity. Beginning in December 2021 Defendants raised about $4.1 million from dozens of investors, selling interests in what were claimed to be mutual funds. The scheme was conducted through the websites of TBO Capital Group and Gray Capital Group. Each site claimed its investment funds were operated by a group of experienced professions. Each site displayed the pictures of those professionals. Each site also claimed to have annual returns of 50+% without a single down year. Each had another key feature in common — everything was fictitious. Three of the four pictures on each site were of the same people. The description of the funds on each site were near copies. The graphic layout of each was virtually identical. The sites also listed the same company address and telephone number. In the end, the claimed people supposedly associated with each site did not exist; the investments did not exist. Not a single share of stock was purchased. What did exist was real investor cash. It was transferred to Defendant Karpavicius who moved much of it to his bank account and ultimately to crypto trading platforms. 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.
Offering fraud: SEC v. Kwok, Civil Action No. 23-cv-2200 (S.D.N.Y. Filed March 15, 2023) is an action which names as defendants: Ho Wan Kwok, a citizen of Hong Kong and New York who controlled GTV, Saraca Media Group, Inc., G Club Operations and G-Fashions; Kin Ming Je is a long time investment banker who worked with the Kwok family; Mountains of Spices LLC and G Club Operations. Since April 20 Defendant Guo has conducted several fraudulent securities offerings that have collectively raised hundreds of millions of dollars from investors in the U.S. and other countries. Defendants have misappropriated large portions of the money raised. For example, over a period of several months in 2020 the two individual Defendants raised about $452 million through a private placement in which the funds were to be used to develop social media in China that would be based on free speech principles and be free of the government. In fact, much of the money was misappropriated. Similarly, in an offering of shares of GTV, conducted from July 2020 to March 2021, the individual Defendants sold Convertible Loans raising about $150 million that supposedly could be converted into shares of GTV worth as much as $20 billion from stock then trading at $18 per share. The valuations were fraudulent. Other schemes conducted were similar. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and each subdivision of that Section and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. March 15, 2023).
Offering fraud: SEC v. Gessin, Civil Action No. 8:23-cv-00460 (C.D. Cal. Filed March 14, 2023) is an action which names as defendants John Gessin, the founder of each entity defendant; Equifunds, Inc.; and ICE Fleet LLC. Beginning in 2016 Defendant Gessin, using the name John David to conceal his criminal history, marketed the entity Defendants to raise $1.6 million over the next year that was claimed to be for business purposes. In fact, Defendant Gessin used much of the money for himself, despite claims to the contrary. He also used about $1.3 million obtained from a government COVID relief fund for personal purposes. Investors were told that the firms faced bankruptcy because of the pandemic. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25664 (March 14, 2023)
Financial metrics: In the Matter of Technology Company, Adm. Proc. File No. 3-21342 (March 14, 2023) is a proceeding which names the international technology company as a Respondent. Beginning in 2018 the firm negligently diluted certain non GAAP financial metrics This resulted from the fact that DXS excluded transactions and separation and integration related costs from its non-GAAP net income, non GAAP EPS and other non-GAAP metrics. Those items related to the integration, planning, financing and advisory fees associated with the merger that created DXC, other acquisitions and the spin-off of a business. Thus, on a quarterly basis, DXC materially increased its non-GAAP earnings by misclassifying tens of millions of dollars in expenses and improperly excluding them in reporting non-GAAP measures. The firm failed to describe accurately the scope of expenses included in its adjustments. This resulted in violations of Securities Act Sections 17(a)(2) &(3) and Exchange Act Section 13(a) and the related rules. To resolve the proceedings Respondent consented 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. Krieger, Civil Action No. 9:23-80398 (S.D. Fla. Filed March 13, 2023) is an action which names a defendant Peter Krieger. Beginning in May 2016, and continuing for a period of four years, Defendant used Oban Energies, LLC, to raise about $15 million from 23 investors based on representations that the funds would be used to establish an oil refinery and storage facility in the Bahamas. In fact, Defendant misappropriated much of the investor money for personal use. The complaint alleges violations of Securities Act Section 17(a) and 17(a)(3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25666 (March 15, 2023).
Compliance: In the Matter of E. Magnus Oppenheimer & Co. Inc., Adm. Proc. File No. 3-21340 is a proceeding naming as respondent the dual registered broker-dealer and investment adviser. The Order alleges that over a period of years the firm has failed to adopt compliance procedures and policies as required by Adviser Act Section 206(4) and Rule 206(4)-7. To resolve the matter the firm agreed to comply with a series of undertakings including the retention of an independent consultant. The firm consented to the entry of a cease-and-desist order based on the provisions cited in the Order and a censure. It will also pay a penalty in the amount of $50,000.
Financial fraud: SEC v. Evoqua Water Technologies Corp., Civil Action No. 1:23-cv-00105 (D. R.I. Filed March 13, 2023) is an action which names as defendants the company, a provider of water and wastewater treatment solutions, and Imran Parekh, its finance director after a merger, as defendants. Beginning in 2016 the firm improperly recognized revenue in violation of GAAP. The firm earns revenue by selling water technology and treatment products. The firm prematurely recognized revenue on these products thereby improperly inflating its revenue. In addition, in 2017 the firm was under pressure to further increase revenue. The Finance Director then took additional steps to further inflate revenue through the adoption of a “bill and hold” scheme – transactions in which the seller bills the buyer but holds onto the product. These techniques were pervasive at the firm involving. The firm reported almost $12 million of additional revenue for 2017, for example. This approach was also used when the firm conducted an IPO – it is reflected in the prospectus – and in subsequent filings with the Commission. When the auditors challenged the accounting methods being used. The firm declared the amounts immaterial when the practice came to light. Subsequently, the firm also moved the location where “bill and hold” materials were stored. The complaint alleges violations of Securities Act Sections 17(a)(1), (2) and (3) and Exchange Act Sections 10(b), 13(a), 13(a)(1)(A) and 13(a)(2)(B), 13(b)(5) and related rules. The company resolved the action, consenting to the entry of a permanent injunction based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The company will pay a penalty of $8.5 million. Mr. Parekh also resolved the matter, consenting to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b) as well as the same books and records and control Sections as the firm. The amounts of any monetary remedies will be determined by the court. See Lit. Rel. No. 25662(March 14, 2023).
BaFin
Release: The regulator released a publication tiled The EU Sustainable Finance Disclosure Regulation: opening the door to greater transparency, dated March 8, 2023 (here).
ESMA
Release: The European Securities and Markets Authority announced that the ECB and the ESDAs are now requesting enhanced climate-related disclosure for structured finance products, according to a release dated March 13, 2023 (here).
UK
Statement: The Financial Conduct Authority or FCA announced that that the Bank of England, in consultation with the Prudential Regulation Authority, HM Treasury and the FCA have taken a decision to sell Silicon Valley Bank UK Limited, a subsidiary of the US bank. The customers of the UK bank will, however, continue to have access to the Financial Services Compensation Scheme and Financial Ombudsman Scheme. Other consumer rights are unaffected (here).