This Week In Securities Litigation (Week of March 4, 2024)
The Commission filed three new actions last week. Two centered on false financial statements while a third is based on false advertising. And, Cornerstone Research published a new report focused on accounting and auditing cases initiated by the Commission in fiscal 2023.
Other regulators, such as BaFin, published an interview stressing the need for transparency in the assent management area. The Securities and Futures Commission of Hong Kong published a map focused in Green Fin Tech.
Be careful, be safe this week.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 1 new civil injunctive action and 2 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
False financials/auditor independence: In the Matter of Lordstown Motors Corp., Adm. Proc. File No. 3-21875 (February 29, 2024) is an action which names as respondent the vehicle manufacture, currently utilizing the Lordstown, Ohio car manufacturing plant. The firm was founded by Scott Burns. The Order alleges that Respondents announced plans for the company to develop an electric car. The company, born of a SPAC transaction, would be the first to market a viable electric pickup truck. The company also filed audited financial statements. The claims regarding an electric vehicle were false, according to the complaint. In addition, the audit firm that prepared the company financial statements issued a false opinion – it was not independent since it had provided prohibited book keeping services to the company. The manufacturer filed for bankruptcy. The Order alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Sections 13(a) and 14(a). To resolve the matter the company consented to the entry of a cease-and-desist order based on the Sections cited above. The firm also agreed to implement certain undertakings and pay disgorgement of $25.5 million which is deemed paid by the entry of certain orders in the Chapter 11 proceeding in Ohio. See also In the Matter of Clark Schaefer Hackett & Co., Adm. Proc. File No. 3-21878 (audit firm for the company; charged with violations of Rule 2-02(b) of Regulation S-X and found to have caused Lordstown’s violations as detailed above; resolved by consenting to the entry of a cease-and-desist order and paying $50 million as a penalty).
False statements: SEC v. Liddle, Civil Action No. 3:23-cv-00054 (W.D. Wis.) is a previously filed action which named as defendant Anthony B. Liddle, formerly the operator of Wealth Management, LLC, a Wisconsin state registered advisory. The case was based on claims that Defendant fabricated documents regarding what was claimed to be the reinvestment of certain client funds that were in fact misappropriated. Previously, To resolve the matter, Defendant consented to the entry of permanent injunctions based on Securities Act Sections 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The judgements also require the payment of disgorgement in the amount of $1,662,041, deemed paid in the parallel criminal case in which Defendant pleaded guilty. The judgment was entered by the Court on February 29, 2024. See Lit. Rel. No. 25946 (February 29, 2024).
Market manipulation: SEC v. Rayat, Civil Action No. 1:21-cv-04777 (S.D.N.Y.) is a previously filed action which named as defendants Hamel Rayat, a Canadian citizen, Jatinder Bhogal and RempvaCare, Inc. and others. The complaint alleged a pump-and-dump market manipulation scheme and asserted violations of Securities Act Section 17(a) and Exchange Act Section 9(a)(2), 10(b), 15(d) and 20(b). Each Defendant resolved the action. Defendant Rayat consented to the entry of permanent injunctions based on each of the Securities Act and Exchange Act Sections cited in the complaint (except Section 15(d)). He will pay disgorgement of $1,270,352, prejudgment interest of $207,656 and a penalty of $1,270,352. Defendant Rayat also agreed to the imposition of an officer/director bar and from participating in any penny stock transaction. The final judgment as to Defendant Bhogal is based on each of the Sections cited except 20(b). He is also barred from serving as an officer or a director and participating in any penny stock offering. Mr. Bhogal, along with a relief defendant, will pay disgorgement of $1,136, 182prejudgment interest of $194,562 and a penalty of $669,687. The final judgment as to the company is based on each of the Sections cited in the order except 20(b). The company will pay a penalty of $500,000. See Lit. Rel. No. 25945 (February 27, 2024).
False statements/advertising: SEC v. Pereira, Civil Action No. 1:24-cv-20757 (S.D. Fla. Filed February 27, 2024). Named as defendant is Paul A. Periera, a resident of Miami who co-founded a firm later renamed Alfi, Inc. The firm purportedly focused on advertising technology which was used to measure and generate reporting on audience presence, demographics and responses to digital advertising. It shares were eventually listed on NASDAQ. In May 2021 the company’s Form S-1 registration statement went effective. The company reportedly raised over $17 million. Investors also exercised warrants in the following months which brought the firm another $16 million. Alfi became a “meme stock” — its share price vacillated from an opening price of $3.60 to as high as $22 per share. By June 2021 Mr. Pereira began posting materially false statements about the company on Stocktwits. A few days later Alfi filed its first Form 10Q. It reported $17, 450 in revenue. This filing was followed by an interview Mr. Pereira gave reporting a significant but false new business deal. While Mr. Pereira continued to try and boost the share price of his firm with false advertising, the efforts failed. By late October the Board of Directors placed him on administrative leave and authorized an independent internal investigation. Eventually Mr. Pereira resigned and the firm was forced to file for Chapter 7 bankruptcy protection. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b). The case is in litigation.
Accounting & Auditing Cases
There was a 22% increase in the number of accounting and auditing cases filed by the SEC in FY 2023, according to a new report published by Cornerstone Research, SEC Accounting and Auditing Enforcement Activity (here). The Report discusses key points regarding the actions initiated during the last Government fiscal year.
The Report begins by noting that 83 accounting and auditing enforcement actions were filed during fiscal 2023. That represents a significant increase over the prior year. It is also the highest number of accounting and auditing cases filed in one year by the agency since 2019.
The most common allegations in the 83 actions filed tied to revenue recognition and/or internal controls. One or both of those allegations were made in over half of the cases filed during the period. Only 4 actions involved claims based on auditor independence, a small decline from the prior year. The number of cases involving a Section 304 claim also declined compared to the prior year.
Finally, the amount of civil penalties imposed in 2023 represented less than half of the total monetary settlements. Specifically, only about one third of the total monetary settlements were penalties.
BaFin
Interview: Dr. Thorsten Potzsch, the regulator’s Chief Executive Director for Securities Supervision and Asset Management, gave an interview on February 28, 2024, regarding the need for lasting transparency in the asset management industry (here).
Hong Kong
Map: The agency published a map on March 1, 2024, illustrating the Green Fintech firms operating in Hong Kong. It includes over 50 firms (here).
This Week In Securities Litigation (Week of March 4, 2024)
The Commission filed three new actions last week. Two centered on false financial statements while a third is based on false advertising. And, Cornerstone Research published a new report focused on accounting and auditing cases initiated by the Commission in fiscal 2023.
Other regulators, such as BaFin, published an interview stressing the need for transparency in the assent management area. The Securities and Futures Commission of Hong Kong published a map focused in Green Fin Tech.
Be careful, be safe this week.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 1 new civil injunctive action and 2 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
False financials/auditor independence: In the Matter of Lordstown Motors Corp., Adm. Proc. File No. 3-21875 (February 29, 2024) is an action which names as respondent the vehicle manufacture, currently utilizing the Lordstown, Ohio car manufacturing plant. The firm was founded by Scott Burns. The Order alleges that Respondents announced plans for the company to develop an electric car. The company, born of a SPAC transaction, would be the first to market a viable electric pickup truck. The company also filed audited financial statements. The claims regarding an electric vehicle were false, according to the complaint. In addition, the audit firm that prepared the company financial statements issued a false opinion – it was not independent since it had provided prohibited book keeping services to the company. The manufacturer filed for bankruptcy. The Order alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Sections 13(a) and 14(a). To resolve the matter the company consented to the entry of a cease-and-desist order based on the Sections cited above. The firm also agreed to implement certain undertakings and pay disgorgement of $25.5 million which is deemed paid by the entry of certain orders in the Chapter 11 proceeding in Ohio. See also In the Matter of Clark Schaefer Hackett & Co., Adm. Proc. File No. 3-21878 (audit firm for the company; charged with violations of Rule 2-02(b) of Regulation S-X and found to have caused Lordstown’s violations as detailed above; resolved by consenting to the entry of a cease-and-desist order and paying $50 million as a penalty).
False statements: SEC v. Liddle, Civil Action No. 3:23-cv-00054 (W.D. Wis.) is a previously filed action which named as defendant Anthony B. Liddle, formerly the operator of Wealth Management, LLC, a Wisconsin state registered advisory. The case was based on claims that Defendant fabricated documents regarding what was claimed to be the reinvestment of certain client funds that were in fact misappropriated. Previously, To resolve the matter, Defendant consented to the entry of permanent injunctions based on Securities Act Sections 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The judgements also require the payment of disgorgement in the amount of $1,662,041, deemed paid in the parallel criminal case in which Defendant pleaded guilty. The judgment was entered by the Court on February 29, 2024. See Lit. Rel. No. 25946 (February 29, 2024).
Market manipulation: SEC v. Rayat, Civil Action No. 1:21-cv-04777 (S.D.N.Y.) is a previously filed action which named as defendants Hamel Rayat, a Canadian citizen, Jatinder Bhogal and RempvaCare, Inc. and others. The complaint alleged a pump-and-dump market manipulation scheme and asserted violations of Securities Act Section 17(a) and Exchange Act Section 9(a)(2), 10(b), 15(d) and 20(b). Each Defendant resolved the action. Defendant Rayat consented to the entry of permanent injunctions based on each of the Securities Act and Exchange Act Sections cited in the complaint (except Section 15(d)). He will pay disgorgement of $1,270,352, prejudgment interest of $207,656 and a penalty of $1,270,352. Defendant Rayat also agreed to the imposition of an officer/director bar and from participating in any penny stock transaction. The final judgment as to Defendant Bhogal is based on each of the Sections cited except 20(b). He is also barred from serving as an officer or a director and participating in any penny stock offering. Mr. Bhogal, along with a relief defendant, will pay disgorgement of $1,136, 182prejudgment interest of $194,562 and a penalty of $669,687. The final judgment as to the company is based on each of the Sections cited in the order except 20(b). The company will pay a penalty of $500,000. See Lit. Rel. No. 25945 (February 27, 2024).
False statements/advertising: SEC v. Pereira, Civil Action No. 1:24-cv-20757 (S.D. Fla. Filed February 27, 2024). Named as defendant is Paul A. Periera, a resident of Miami who co-founded a firm later renamed Alfi, Inc. The firm purportedly focused on advertising technology which was used to measure and generate reporting on audience presence, demographics and responses to digital advertising. It shares were eventually listed on NASDAQ. In May 2021 the company’s Form S-1 registration statement went effective. The company reportedly raised over $17 million. Investors also exercised warrants in the following months which brought the firm another $16 million. Alfi became a “meme stock” — its share price vacillated from an opening price of $3.60 to as high as $22 per share. By June 2021 Mr. Pereira began posting materially false statements about the company on Stocktwits. A few days later Alfi filed its first Form 10Q. It reported $17, 450 in revenue. This filing was followed by an interview Mr. Pereira gave reporting a significant but false new business deal. While Mr. Pereira continued to try and boost the share price of his firm with false advertising, the efforts failed. By late October the Board of Directors placed him on administrative leave and authorized an independent internal investigation. Eventually Mr. Pereira resigned and the firm was forced to file for Chapter 7 bankruptcy protection. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b). The case is in litigation.
Accounting & Auditing Cases
There was a 22% increase in the number of accounting and auditing cases filed by the SEC in FY 2023, according to a new report published by Cornerstone Research, SEC Accounting and Auditing Enforcement Activity (here). The Report discusses key points regarding the actions initiated during the last Government fiscal year.
The Report begins by noting that 83 accounting and auditing enforcement actions were filed during fiscal 2023. That represents a significant increase over the prior year. It is also the highest number of accounting and auditing cases filed in one year by the agency since 2019.
The most common allegations in the 83 actions filed tied to revenue recognition and/or internal controls. One or both of those allegations were made in over half of the cases filed during the period. Only 4 actions involved claims based on auditor independence, a small decline from the prior year. The number of cases involving a Section 304 claim also declined compared to the prior year.
Finally, the amount of civil penalties imposed in 2023 represented less than half of the total monetary settlements. Specifically, only about one third of the total monetary settlements were penalties.
BaFin
Interview: Dr. Thorsten Potzsch, the regulator’s Chief Executive Director for Securities Supervision and Asset Management, gave an interview on February 28, 2024, regarding the need for lasting transparency in the asset management industry (here).
Hong Kong
Map: The agency published a map on March 1, 2024, illustrating the Green Fintech firms operating in Hong Kong. It includes over 50 firms (here).