This Week In Securities Litigation (Week of May 22, 2023)
The Commission filed 14 new proceedings last week. Most of those actions centered on violations of Regulation A which provides a limited exemption from the registration requirements under certain circumstances. While in some instances certain issuers ultimately named in the proceedings had complied, by the time to the offerings all twelve issuers were not in compliance. Each settled with the Commission.
The agency also continued to issue new rule proposals. Last week the proposals centered on a package of rule amendments and new proposals to improve risk management in certain instances (here).
Be careful; be safe this week.
SEC
Rule proposals: The Commission proposed a package of rule amendments and new proposals to improve clearing risk management and resilience. The proposals include policies and procedures to establish a risk-based margin system that monitors intraday exposures. They also have provisions to establish a risk-based margin system that addresses the use of substantive inputs and for recover and orderly wind-down plans, according to a release dated May 17, 2023 (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 2 civil injunctive actions and 12 administrative proceeding, excluding 12j and tag-along proceedings as well as those presenting conflicts for the author (which are counted in the totals).
Offering fraud: SEC v. Callahan, Civil Action No. 2:12-cv-01065 (E.D.N.Y.) is a previously filed action which names as defendants Bryan Callahan, an investment adviser, Adam Mason, his brother-in-law, and two entities he controlled. Defendant Callahan raised over $90 million over seven years, beginning in 2005, from over 45 investors. Portions of the funds were used to pay other investors and inflated fees; other portions were diverted to personal use. Defendants Callahan, Manson, Distinctive Investments and Distinctive Ventures consented to the entry of final judgments that enjoin them from violating the antifraud provisions. Earlier Defendant Callahan’s investment advisory and offshore funds were enjoined from violating the antifraud provisions and a receiver was appointed in a parallel criminal action to distribute $51 million to harmed investors. In 2014 Messrs. Callahan and Manson pleaded guilty to securities fraud charges in a parallel criminal action. U.S. v. Callahan, Crim. No. 13-453 (E.D.N.Y.), See Lit. Re. No. 25728 (May 12, 2023).
Unregistered securities: Regulation A created a limited exemption from the registration requirements of Section 5, Securities Act for those who comply with the dictates of the Regulation. Generally, it requires that certain information be furnished to investors for what are often limited offerings. A good example of how the Regulation works is In the Mater of Hemp Naturals, Inc., Adm. Proc. File No. 3-21430 (May 16, 2023). There the firm initially complied with the dictates of the regulation regarding a specific number of shares priced within a range. Ultimately, however, the issuer improperly changed the offering price and did not update its financial information as required. The firm’s offering of shares was thus found to be in violation of Section 5 of the Securities Act since the Regulation did not apply. The company resolved the case by consenting to the entry of a cease-and-desist order based on Section 5 and paying a penalty of $50,000. The Commission concluded that nine other issuers had run afoul of one or more of the requirements for utilizing the Regulation in a fashion similar to the Hemp Naturals proceeding. Yet each issuer sold its shares to investors. Each issuer thus violated Section 5 of the Securities Act. Those named in the proceedings, in addition to Hemp Naturals, are: CW Petroleum Corporation; DNA Brands Inc.; Graystone Company, Inc., Green Stream Holdings Inc.; LiveWire Ergogonenics, Inc; Principal Solar Inc.; SFL Maven Corporation; The Marquie Group Inc.; and Verde Be Holdings Inc. To resolve the charges each issuer consented to the entry of a cease-and-desist order based on Section 5. In addition, each issuer agreed to pay a penalty in an amount ranging from a high of $90,000 to a low of $5,000.
Offering fraud: SEC v. Redrock Secured, LLC, Civil Action No, 2:23-cv-03682 (C.D. Cal. Filed May 15, 2023) is an action which names as defendants: the firm and three of its executives, Sean Kelly, Anthony Spencer and Jeffrey Ward. Over a period of about five years, beginning in early 2017, Defendant Kelly, the CEO of the firm, and Defendants Spencer and Ward, sought to and often did, persuade investors to liquidate their retirement accounts and purchase what were called Red Rock premium coins to “protect” their retirement accounts. The Red Rock executives typically told potential investors that the markup to acquire the coins was minimal since the maximum was about 29% pf the cost of what they called premium metals. In making this sales pitch the executives claimed that the market value of the coins was substantially higher than that reported. The claims were false. Nevertheless, at least 700 investors paid over $50 million to secure the coins, The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is in litigation, See Lit. Rel. No, 25727 (May 145, 2023).
FinCEN
Alert: The Financial Crimes Enforcement Network issued a release dated May 19, 2023 (here) warning investors to be virulent regarding Potential Russian Export Control Evasion Attempts. The warning was joined by the Department of Commerce’s Bureau of Industry and Security (here).
ESMA
Proposed legislation: The European Securities and Markets Authority, the EU’s financial markets regulator and supervisor, published an Opinion of the European Commission suggesting clarifications of the legislative provisions under the UCITS Directive and the AIFMD relating to the undue costs in funds, in an announcement made on May 17, 2023 (here).
Hong Kong
Takeovers: The Securities and Futures Commission of Hong Kong announced that is has launched a consultation on proposed amendments on the Code on Takeovers and Mergers and Share-buybacks. The proposals focus on clarifications of select provisions of the code. The consultation was announced on May 19, 2023 (here).
Singapore
Consultation: The Monetary Authority of Singapore published a consultation paper on proposed amendments to the Securities & Futures Regulation. It focuses on derivatives. Consultation was announced in a release dated May 16, 2023 (here).