This Week In Securities Litigation (Week of June 6, 2022)
The Commission continues to focus on the environment. Last week the agency added another proposed set of rules. This time the proposals do focus on ESG, requesting that advisers and funds disclose their practices regarding certain broad areas and strategies that may be in use. These proposals appear to be moving forward from those issued earlier which largely focused on the kind of disclosures currently being made by firms.
Be careful, be safe this week
SEC
Proposed rules: The Commission proposed to enhance the disclosure requirements for certain investment advisers and investment companies about ESG investment practices by seeking to categorize broadly certain types of ESG strategies. The advisers and funds will be required under the proposal to enhance their disclosures. The proposal was issued on May 25, 2022 (here)
SEC Enforcement – Filed and settled actions
Last week the Commission filed 6 civil injunctive actions and 2 administrative actions, exclusive of 12j, tag-a-long and other similar proceeding as well as those where the author’s firm has conflicts (three actions).
Misappropriation: SEC v. Campbell, Civil Action No. 22 Civ. 423 (W.D.N.Y. Filed June 2, 2022) is an action which names as defendant Jennifer Campbell, formerly the Chief Compliance Officer of an investment adviser that was registered. Over a three-year period, beginning in early 2019, Ms. Campbell misappropriated about $483,000 from seven different client accounts. She attempted to conceal her conduct by falsifying documents. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The U.S. Attorney’s Office for the Western District of New York filed a parallel criminal action. The case is pending. See Lit. Rel. No. 25408 (June 2, 2022).
Financial fraud: SEC v. Sirotka, Civil Action No. 2:22-cv-00348 (M.D.Fla. Filed June 2, 2022) is an action which names as defendant Anthony Sirotka, the chief administrative officer of FTE Networks, Inc. Over a two-year period, beginning in 2016, Mr. Sirotka, along with the Michael Palleschi, the CEO of the firm, and David Lethem, the CFO of the company, orchestrated a financial fraud by recording about $12.5 million in revenue from claimed receivables from completed construction projects that had not been billed. As part of the scheme documents were forged. By 2018 the scheme unraveled and the firm had to restate its financial statements for 2016, 2017 and 2018. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The case is pending. See Lit. Rel. No. 25406 (June 2, 2022),
Offering fraud: SEC v. Shumaker, Civil Action No. 21-cv-12193 (E.D.Mich) is a previously filed action that was partially settled earlier. The action, which named as defendants Robert Shumaker, crowdfunding issuer 420 Real Estate, LLC and its CEO Willard Jackson, concluded the settlement. The case centered on a crowdfunding offering through 420 Real Estate, a hemp company, through a registered portal. Messrs. Shumake and Jackson raised over $800,000. In the offering they concealed Mr. Shumaker’s involvement because of his prior criminal conviction. Investor funds were diverted to personal use. Mr. Jackson and the firm consented to the entry of permanent injunctions based on Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). Mr. Jackson also agreed to the entry of an officer/director bar. The judgments order Mr. Jackson to pay a penalty of $360,000 and disgorgement and prejudgment interest of $477,420 by the firm and him on a joint and several basis. See Lit. Rel. No. 25407 (June 2, 2022),.
FCPA: In the Mater of Tenaris S.A., Adm. Proc. File No. 3-295030 (June 2, 2022) is an action based on alleged violations of the FCPA by the Luxembourg based international steal pipe company. Specifically, over a five-year period, beginning in 2008, about $10.4 million in bribes were funded on behalf of the Tenaris Brazilian subsidiary by firms affiliated with its controlling shareholder. The bribes were paid to Brazilian government officials in connection with a bidding process for an SOE. The Tenaris Brazilian subsidiary obtained over $1 billion in contracts from Petrobras. In resolving the case, the firm agreed to implement a series of undertakings. Respondent consented to the entry of a cease-and-desist order based on Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). The firm will also pay disgorgement of $42,842,497, prejudgment interest of $10,257,841 and a penalty of $25 million.
Mini bond fraud: SEC v. Breland, Civil Action No. 3:22-cv-01470 (D.La. Filed June 2, 2022) is an action which named as defendant Vern Breland, former Mayor of the Town of Sterlington, Louisiana. The action centers largely around an April 26, 2017, offering and sale by the Town of $4 million of water and sewer utility bonds and the sale on September 28, 2018, of $1.8 million of “refunding bond” water and sewer utility revenue bonds. Essentially, the offerings replaced then existing bonds. The offerings were approved by the state bond commission. In fact, the offerings were based on false financial projections as Defendant Breland knew. Defendant Breland also deceived the state bond commission. In addition, he did not disclose that over $3 million of the proceeds from the earlier offerings had been misused. The complaint alleges violations of each subsection of Securities Act Sections 17(a) and Exchange Act Section 10(b). The case is pending. See also SEC v. Fletcher, Civil Action No. 3:22-cv-01467 (D.La. Filed June 2, 2022 (Acton against Aaron Fletcher and Twin Spires Financial LLC, the municipal advisory firm and its owner on the offerings, alleging violations of the same statutes as above; settled with entry of cease-and-desist orders based on Securities Act Section 17(a) and Exchange Act Section 10(b) and agreement to pay disgorgement, prejudgment interest and penalties in amounts to be determined later); In the Matter of Town of Sterlington Louisiana, Adm. Proc. File No. 3-20873 (June 2, 2022)(action against the town alleging same facts; resolved based on remedial acts of town plus its consent to the entry of a cease-and-desist order based on Securities Act Section 17(a) and Exchange Act Section 10(b)).
Accounting fraud: SEC v. iFresh, Inc., Civil Action No. 1:22-cv-3200 (E.D.N.Y. Filed May 31, 2022). Named as defendants in this case are: iFresh, Inc., an Asian grocer operating stores in four states and had shares listed on the NASDAQ until late 2021 when they were delisted; now the stock is quoted on the OTC Expert Market. Long Deng, also a defendant, was the Chairman of iFresh’s board of directors until April 2022. He was also the firm’s CEO and COO through at least April 2022. The complaint is built on self-dealing which shrouded the true financial condition of the firm from August 2016, when its initial registration statement was file, through the fiscal year ending March 31, 2020. From inception Defendant Deng was responsible for the firm’s operations and financial information. He also controlled the firm’s financial transactions. No transactions involving iFresh and its affiliate were properly disclosed in the firm’s financial statements. Yet in 2016, 2017, 2018, 2019 and 2020 transactions involving iFresh and an affiliate represented from 18% to 54% of the grocery firm’s accounts receivables. All of those transactions were related party transactions. All of those transactions should have been fully disclosed under the accounting standards. None were disclosed. During the period 2016 through 2020 investors were not told that iFresh’s finances were heavily dependent Mr. Deng’s brother. Thus, investors were not told that over $12 million in payments were owed to a company by Mr. Deng’s brother. During the period not only did Mr. Deng control the financial records, the firm did not have adequate internal controls and those which are concerned with the identification of related party transactions. As a result, the Defendants violated Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The case is pending. See Lit. Rel. No. 23404 (June 1, 2022)
False statements re COVID test kits: SEC v. Schessel, Civil Action No,. 22-cv-03287 May 31, 2022) is an action which names as defendants: Marc Schessdel, the CEO of defendant SCWorx Corp., a firm that is a “software-as-a-service provider to the healthcare industry. On April 13, 2020 Defendants issues a false and misleading press release claiming to have a “committed purchase order” to obtain two million COVID-19 test kits with a provision to obtain more totaling $840 million. In fact, the firm had only had discussions with Telehealth Company. Yet following the press release the company’s stock went up 425% on volume of 96.2 million shares, over 900 times its three-month average daily volume. While the statement did not name the kit supplier, a link was provided to Supplier Company. In fact, there was no “committed purchase order and Supplier Company was not a legitimate supplier of those kits. The day after the release Telehealth Company notified Mr. Schessel and SCWorx in writing that there was no committed press release but only a preliminary summary draft – no agreement. Nevertheless, Defendant Schessel repeated the claims on April 16, 2020, during an investor call. Because of the price inflation of the stock Defendant Schessel used stock to pay off the company debt. Later, on April 30, 2020, before having a single kit, the company reported the deal was terminated – no kits. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The U.S. Attorney’s Office for the District of New Jersey and the Fraud Section of DOJ announced parallel criminal actions. The cases are pending.
ESMA
Report: The European Securities and Markets Authority reported the supervision of costs and fees in investment funds. Specifically, the EU regulator published a report on the Common Supervisory Action on costs and fees for investment funds carried out by the National Competent Authorities. The purpose is to ensure that investors are not charged with undue costs. The report was issued May 31, 2022 (here).
Singapore
Remarks: Ravi Menon, Managing Director, Monetary Authority of Singapore, delivered remarks on the greening of the financial system on May 31, 2022 (here).