This Week In Securities Litigation (Week of November 20, 2023)

Last week the Commission filed two new cases. One was based on an offering fraud scheme. The second focused on controls. The Enforcement statistics for FY2023 were also published.

Be careful, be safe this week.

SEC

Rules: The Commission adopted Rules on November 16, 2023, which are designed to improve clearing agency governance and mitigate conflicts of interest (here).

Results: The Commission announced the Enforcement Results for FY 2023 on November 14, 2023 (here), discussed below.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 1 new civil injunctive action and 1 new administrative proceeding, excluding tag-along actions and those that present a conflict for the author.

Cherry picking scheme: SEC v. Torobian, Civil Action No. 22-cv-715 (E.D.Pa.) is a previously filed action which named as defendants Bell Rock Capital, LLC and its founder, Marguerite Cassandra Torobian. The complaint alleged violations of Advisers Act Sections 206(1), (2) and (4) as well as Securities Act Section 17(a) and Exchange Act Section 10(b). Defendants agreed to settle this action which is based on a cherry picking scheme. Ms. Torobian consented to the entry of permanent injunctions based on each of the Sections cited in the complaint. She also agreed to pay disgorgement of $883,579 and prejudgment interest of $185,451 and a penalty of $220,000. The firm consented to the entry of permanent injunctions based on the Sections cited in the complaint and agreed to pay a penalty of $220,000. See Lit. Rel. No. 2584 (November 16, 2023).

Offering fraud: SEC v. Melson, Civil Action No. 1:23-cv-10060 S.D.N.Y. Filed November 15, 2023). Defendant Matthew Melton was a resident of Puerto Rico in 2018 when the scheme at the center of the case began. He had formed an entity named Price Physics in May 2017. Mr. Melton relocated to Colorado in 2018. Over a period of about two and one half years, beginning in April, 2018, Defendant Melton targeted those who shared an affinity for the outdoors, soliciting them to purchase securities in his firm, Price Physics. Investors were told that Mr. Melton would invest their funds in stock index futures using a trading algorithm of Price Physics. The trading, investors were told, could be expected to generate consistent returns of 12% per month. To profit from the trading scheme, investors agreed to execute either a “loan agreement” or a “promissory note.” Each constituted a security. The funds obtained from the investors were sent directly to Defendant’s personal bank accounts and comingled with other investor funds.

Defendant Melton did not invest the funds obtained from investors as promised. To the contrary, about $1.5 million of the $3.4 the investor funds was misappropriated and either used to pay personal expenses of Defendant or for Ponzi like payments. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. A parallel criminal action has been filed by the U.S. Attorney’s Office for the Southern District of New York. See Lit. Rel. No. 25893 (November 15, 2023).

Controls: In the Matter of Charter Communications, Inc., Adm. Proc. File No. 3-21797 (November 14, 2023) is a proceeding which names the broadband and cable company as Respondent. This proceeding centers around the firm’s stock repurchases since 2016 which constitute about 50% of its shares. From 2017 to 2021 the firm used trading plans to conduct the repurchases. The trading plans were designed to ensure that Charter maintained a continuous buyback program while meeting the company’s publicly disclosed leverage ratio target. One provision used to ensure compliance was a new funding mechanism which allowed Charter to increase the Plan Dollar Cap if it completed a debt offering in which a stated use of the proceeds from that offering included share repurchases. This was referred to as the “accordion” provision since it created flexibility to increase the repurchases as new funds became available through debt closures. The trading plans did not satisfy the requirements of Rule 10b5-1, the Order states. Since the accordion provision gave Charter the ability to change the total dollar amount available for share repurchases, and the timing of additional repurchases, Charter’s plans did not meet the conditions of Rule 10b5-1(c)(1)(i)(B). Accordingly, the firm did not devise and maintain a system of internal controls sufficient to provide reasonable assurances that its repurchases were executed in accord with the Board’s authorizations which were predicated on the repurchases being in accord with Rule 10b-5-1. Accordingly, the firm violated Exchange Act Section 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. The Commission also imposed a penalty of $25 million.

FY23 Enforcement Statistics

The Commission and the Division of Enforcement published a release detailing the results of the Enforcement program for Fiscal Year 2023 (here). The headline asserts that 784 enforcement actions were filed during the period, nearly $5 million in financial remedies imposed and nearly $1 billion was distributed to harmed investors. By any standard, these are impressive numbers.

The balance of the release amplifies and clarifies the numbers by providing details and examples of the results in three areas. First, another table clarifies the 784 number. This table states that in FY 2023 the Division of Enforcement filed 501 enforcement action if follow-on administrative proceedings and delinquent filing cases are not included in the total number of cases. That number is the second highest over a period tracing back to FY 2018. The largest number of cases filed in that period was 526 in FY 2019. FY 2023 represents the second largest number of case initiated during the period while the 490, filed in FY 2018, was third. A second amplification comes in a table which shows the number of cases filed broken down by category. This “Primary Classification” chart lists 13 categories of cases. Four classifications in FY 2023 were the largest: Securities offering at 33% of the total cases filed; Investment advisers/investment company actions, a tie for second/third place at 14%; and in third place was broker dealers cases at 12% of the total. The remaining categories or classifications listed had relatively small percentages of the overall total number of cases filed.

Australia

Proposals: The Australian Securities and Investment Commission proposes to extend parent entity financial reports and auditor independence, according to a release issued November 17, 2023 (here).

MOU: The ASIC and the Australian Financial Security Authority or AFSA executed a refreshed memorandum of understanding of their agreement executed in 2014, according to a November 16, 2023 release (here).

Consultation: The ASIC and the Australian Banking Association opened a consultation on proposed changes to its Banking Code of Practice, according to a November 17, 2023 release (here).

BaFin

Interview: The Federal Financial Supervisory Authority published an interview with Birgit Rodolphe, Chief Executive Director of Resolution and :Prevention of Money Laundering, on November 3, 2023 (here).

ESMA

Cybersecurity: The European Securities and Market Authority announced that it has altered its priorities to focus on cyber risk and digital resilience alongside ESG disclosures, according to a release dated November 11, 2023 (here).

Singapore

Remarks: The Monetary Authority of Singapore published remarks by Ravi Menon, Managing Director, MAS, at the Singapore FinTech Festival 2023 titled Shaping the Financial Ecosystem of the Future in a release dated November 16, 2023 (here).