This Week In Securities Litigation (Week of November 13, 2023)

The Commission filed two new actions last week. One centers on an offering fraud; the other is based on a financial. The CFTC published its fiscal year statistics which show an increased focus on crypto assets. At the same time Australian regulators announced an initiative centered on unfair contract terms while European regulators announced a new focus on cybersecurity.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 2 civil injunctive action and no administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Offering fraud: SEC v. Masanotti, Civil Action No. 3:23-cv-01481 (D. Conn. Filed Nov. 9, 2023) is an action which names as defendants John Masanotti Jr. and Middlesex Mortgage Group, LLC., respectively, the owner of Middlesex and the manager of a pooled investment vehicle. Over a period of about seven years, beginning in 2016, Defendant Masanotti solicited largely elderly investors to put their funds into Middlesex. That firm supposedly had a proprietary trading system that generated healthy returns. In fact, most of the investor funds were misappropriated. The scheme began to unravel as investors sought the return of their money which was not available – the financial accounts of Defendants were largely empty. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is in litigation.

Financial fraud: SEC v. Soberal, Civil Action No. 1:23-cv-01585 (Nov. 9, 2023 E.D.Ca.) is an action which names as defendants: Jake Soberal and Irma Olguin, Jr. Each Defendant is a co-founder of Bitwise Industries, Inc. and served the firm as CO-CEO. Bitwise is a California entity which has initiated its liquidated through Chapter 7 of the Bankruptcy code. In 2022 Bitwise conducted a Series B-2 offering based on fabricated documents. The firm was supposedly connected to the real estate business and had several offices. Specifically, Defendants inflated each of the firm’s key financial metrics. Investors were told that the company had significant revenue and a healthy cash balance. Defendants also lied about the results of an audit of the firm. The scheme unraveled in May 2023 when the company ran out of cash and could not pay its hundreds of employees. By late June the firm was forced to file a petition for Chapter 7 bankruptcy. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is in litigation.

Valuations: SEC v. Premium Point Investments LP, Civil Action No. 1:18-cv-04145 (S.D.N.Y.) is a previously filed action in which the Court entered a final judgment by consent as to Defendant Jeremy Shor, formerly a trader at the firm. The judgement entered enjoined him from future violations of Securities Act Sections 17(a)(1) & (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (3) & (4). The injunctions are based on a scheme in which the trader and firm received what were essentially kickbacks from a secret deal under which broker-dealer Premium Point received mortgage backed securities at false and inflated prices and used “imputed” values to enhance profits at the expense of its clients. No penalty was imposed based on financial condition. See Lit. Rel. No. 25890 (Nov. 8, 2023).

The CFTC

The CFTC published its annual enforcement statistics last week, highlighting its work during the Fiscal Year 2023. The releases focus on the number of cases initiated as well as specific actions filed and/or litigated during the year. Overall, the agency filed 96 enforcement actions during the period. That compares with 82 such actions initiated in FY 2022 and 113 during 2021. Key areas of focus included: 1) Crypto assets: An example of these actions is the one against Samuel Bankman-Fried, FTX Almeda, and others with fraud. The case, along with a parallel criminal action and others,centered on fraud claims involving billions of dollars and the actions of Mr. Bankman-Fried and his firm, FTX. In the parallel criminal action Defendant Bankman-Fried was found guilty. Sentencing has not taken place. 2). Trading platforms: Here the Commission filed, for example, an action against the company and its former CEO, Alex Mashinsky. It alleged fraud and misrepresentations involving commodity pool schemes tied to digital asset commodities and charged a trading platform with illegal operations. 3) Swap data: The cases in this group focused on actions such as the one involving prominent banks on Wall Street which centered on swap data reporting and related disclosure violations. 4) Confidential information: An example of these cases is the settled action filed against an introducing broker, its owners and affiliated firms, alleging the misappropriation of material, nonpublic information and use to take the opposite side in thousands of brokerage customer block trade orders without the consent of the customer. 5) Commodity pool operators: The cases here are typified by the one which charged advisors and their affiliates, along with the co-founder and former Co-CIO, with deception and manipulation in a $30 million scheme to illegally trigger payouts on two large binary option contracts that were swaps. 6) Protecting customers: Here the Commission filed, for example, its first case involving a “Pig Butchering,” which involved cultivating a friendly or romantic relation with a potential customer using false statements to ultimately solicit a customer to participate in a fraud.

Australia

Contract terms reform: The Australian Securities and Investment Commission (ASIC) published a release on November 9, 2023, detailing is new Unfair Contract Terms prohibition which will go into effect shortly. Under the provision, contract terms deemed unfair will be prohibited and subject to substantial penalties (here).

ESMA

Cyber risk: The European Market Authority (ESMA) announced an initiative to make cyber a risk under the Union Strategic Supervisory Priority in a release dated November 9, 2023)(here). Under the initiative the European Market authority will now give greater emphasis to cyber risk in connection with the Digital Operational Resilience Act.

Hong Kong

Remarks: Ms. Julia Leung delivered remarks on November 10, 2023 (here) at the Financial Street Forum, 2023, titled “Deepening Capital Market Reform. Her remarks focus on recent reforms in the IPO process in China.

Singapore

Paper: The Monetary Authority of Singapore (MAS) published on November 9, 2023 (here), the statement of The Financial Action Task Force, reviewing the processes for the Republic of Korea and Iran in view of the COVID pandemic; it concludes that each is a high risk jurisdiction.

U.K.

Statement: The Financial Conduct Authority (FCA) published an article on November 11, 2023 (here) calling for firms to strengthen anti-fraud systems and provide for better treatment of victims of fraud (here).