This Week In Securities Litigation (Week of October 3, 2022), Part I

Friday, September 30, 2022, marked the conclusion of the government fiscal year. As is customary the Commission filed a large number of cases during the final days of the fiscal year. In view of the volume of cases initiated, This Week In Securities Litigation will be published in two parts. This is Part I. It covers cases filed up through Wednesday, September 28, 2022. Those filed on Thursday and Friday, September 29 and 30, 2022 will be covered in Part II of this article. It will be published on Wednesday, October 5, 2022.

Be careful this week, be safe

SEC Enforcement – Filed and settled actions

Crypto – manipulation: SEC v. The Hydrogen Technology Corporation, Civil Action No. 1:22-cv-08284 (S.D.N.Y. Filed September 28, 2022). Named as defendants in this matter are: Hydrogen, a firm which now focuses on programing interfaces; Michael Kane, the CEO of Hydrogen; and Tyler Ostern, president of Moonwalkeres, a South African firm which claims to be engaged in marketing. Over a period of about one year, beginning in January 2018, Hydrogen and Defendant Kane offered and sold crypto asset securities. They also hired Defendant Ostern to manipulate the price and volume of the coins on a crypto asset trading platform. The plan was to create a blockchain-based software ecosystem and develop and release so-called “Hydro protocols” on the platform which users would employ to pay for Hydro Tokens. Defendants used a trading bot to sell the Hydro tokens and tactics such as placing purchase orders that were then cancelled to manipulate the price. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) and Exchange Act Sections 9(a), 10(b), 15(a) and 20(a). The case is pending.

Valuation: 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 final judgements against defendants Premium Point Investments LLC and its CEO Anlesh Ahuja. The complaint alleged that Defendants falsely inflated the value of the private funds they advised by hundreds of millions of dollars. The Court entered a final judgment against Premium Point and Mr. Ahuja by consent, permanently enjoining them from violating Securities Act Sections 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The Commission also barred Mr. Anhuja from the securities business. See Lit. Rel. No. 25532 (September 28, 2022).

Fraudulent investment scheme: SEC v. Rupp, Civil Action No. 1:21-cv-643 (W.D. Mich.) is a previously filed action alleging Defendant Joshua Rupp conducted a fraudulent investment scheme that raised over $2 million from about 20 investors. To induce investors to participate Defendant made misrepresentations and fake documents. The Court entered a final judgment by consent that prohibits future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). Defendant also consented to the entry of a Commission order barring him from the securities business. See Lit. Rel. No. 25534 (September 28, 2022).

Misappropriation: SEC v. Eakes, Civil Action No. 3:22-cv-01055 (M.D. Fla. Filed September 28, 2022). Named as defendants are: Jared D. Eakes, the owner-president and an investment adviser representative of GraySail Advisors, LLC.; and James Daughtry, the operator of a small investment advisory business in Alabama. Over a period of about one year, beginning in January 2019, Defendant Fakes misappropriated over $2.6 million from clients of GraySail. This was done largely by inducing clients to purchase promissory notes that supposedly were issued by Small World Capital, LLC. In fact, that company did not issue the notes. Several of the clients who purchased the notes had previously been a client of Defendant Daughtry prior to the time he joined GraySail. Mr. Daughtry did not tell the clients that Mr. Eakes paid him to move his clients to GraySail. At that firm Defendant Daughtry expected to continue his existing practice of reviewing transactions in client accounts with them prior to execution by Defendant Eakes. In fact, he did not. Again, the clients were not told. Defendant Daughtry also recruited new clients for GraySail after he sold his advisory business to Defendant Eakes. The new clients were assured by Defendant Daughtry that he would monitor their accounts. He did not. This facilitated fraud by Defendant Eakes. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3), Exchange Act Section 10(b), and Advisers Act Sections 206(1) & (2). The case is pending. A parallel action was filed by the Alabama Securities Commission against Messrs. Eakes and Daughtry. A bar from the securities business is being sought in that action. See Lit. Rel. No. 25533 (September 28, 2022).

Manipulation: SEC v. Nicosia, Civil Action No. 1:22-cv-05761 (E.D.N.Y. Filed September 27, 2022) is an action which names as defendants: Matthew Nicosia, William Reinnger, Fabrizio De Carlo and Ronald Touchard. Defendants orchestrated a scheme to manipulate three penny stocks. Specifically, in each instance Defendants concealed their control over the stock as part of the scheme while promoting the shares to the public beginning in August 2019 and continuing through September 2020. The complaint alleges violations of Securities Act Sections 17(a)(1) 7(3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25529 September 28, 2020).

False valuations and fees: SEC v. Hu, Civil Action No. 1:20-cv-5496 (S.D.N.Y.) is a previously filed action against David Hu, the co-founder and chief investment officer of International Investment Group. The Court entered a final judgment enjoining Defendant from future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The Court also ordered the payment of disgorgement in the amount of $4,732,232 and prejudgment interest of $4,61,477 both of which will be deemed satisfied by the payment of the restitution ordered in the parallel criminal proceeding where Defendant pleaded guilty. See Lit. Rel. No. 25530 (September 29, 2022).

Required B-D records: In the Matter of Barclays Capital, Inc., Adm. Proc. File No. 3-21164 (September 27, 2022) is one of 16 actions brought against Wall Street broker-dealers for failing to maintain proper records. Specifically, the Order in this action, and the others, charge violations of the record-keeping obligations of registered broker-dealer. Over a three-year period, beginning in January 2018, those employed by the firm regularly used approved means of communication to conduct business. In those instances, the communications were monitored properly. In other instances, non-approved methods were used by firm employees at all levels. In those instances, the communications were not properly recorded. The Order concludes that the firm violated Exchange Act Section 17(a) and Rule 17a-4(b)(4). The Section and Rule which require broker-dealers to preserve for at least three years all communications received and copies of all communications sent relating to its business. The failures in this and the other cases also resulted in a failure to reasonably supervise the firm’s employees, contrary to Exchange Act Section 15(b)(4)(e). The firm took remedial steps and agreed to implement certain undertakings in connection with resolving the matter. A compliance consultant will also be retained. The firm consented to the entry of a cease-and-desist order based on Exchange Act Section 17(a) and Rule 17a-4 and a censure. Barclays also agreed to pay a penalty of $125 million. Each of the other actions is similar. A complete list of those cited is available on the Commission’s website here.

Manipulation: SEC v. Parrino, Civil Action No. 1:22-cv-03888 (N.D.Ga. Filed September 27, 2022) is an action which names as defendant day trader Charles Parrino. Defendant participated in a fraudulent manipulation beginning in October 2017 and continuing through January 2020. Defendant drafted and edited false rumors that were shared with other scheme participants prior to dissemination. Defendant traded around the dissemination of the false rumors at least 138 times, earning $982,690. The complaint alleges violations of Securities Act Section and Exchange Act Section 10(b). The case is pending. A parallel action was filed by the U.S. Attorney’s Office for the Northern District of Georgia. See Lit. Rel. No. 25528 (September 28, 2022).

Offering fraud: SEC v. Pubblekick, Inc., Civil Action No. 2:22-cv-06984 (C.D.Ca. Filed September 27, 2022) is an action which names as defendants: The company (one in California another identical firm in Nevada), which provide entertainment; Donald Shiroishi, CEO of the firm; and Nancy Williams, a firm employee who solicited investors. Over a three year period, beginning in January 2018 about $17 million was raised from investors. Investors were told the proceeds from the notes sold would be used to finance the acquisition of intellectual property for the business. In fact, much of the money raised was misappropriated by Defendant Shiroishi. The complaint alleges violations of Securities Act Section 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a)(1). The case is pending. See Lit. Rel. No. 25531 (September 27, 2022).

Ponzi scheme: SEC v. Gonzalez, Civil Action No. 0:22-cv-61824 (S.D. Fla. Filed September 27, 2022) is an action which named as defendant Christian Gonzalez, an MJ Capital loan underwriter. Over a period of several months, beginning in February 2021, Defendant furthered the Ponzi scheme perpetrated by MJ Capital. That scheme is the subject of another Commission enforcement action. In that matter, the complaint states that over a two year period, beginning in June 2020, the company raised over $196 million from about 15,400 investors nationwide by selling unregistered, fraudulent securities – returns of 120% were promised. See SEC v. MJ Capital Funding, LLC, Civil Action No. 21-61644 (S.D. Fla.). Mr. Gonzalez aided MJ Capital by making false statements. That fraud continued until MJ Capital collapsed in the wake of a Commission enforcement action. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The matter is pending. See Lit. Rel. No. 25527 (September 27, 2022).

Insider trading: SEC v. Kendricks, Civil Action No. 2:18-cv-03695 (E.D. Pa.); SEC v. Ramsey, Civil Action No. 2:19-cv-02197 (E.D. Pa.). These cases are previously filed actions. According to the complaints, Damilare Sonoki, a former investment banking analyst, and Mark Ramsey, a friend, roommate and business partner of former NFL payer Mychal Kendricks, were involved in insider trading. Specifically, the papers claim that Defendant Sonoki tipped Mr. Kendricks regarding a potential merger. The trading yielded $1.2 million in illegal profits. Defendant Ramsey also participated in the scheme by obtaining inside information from Defendant Sonoiki concern corporation acquisition targets and traded. Messrs. Sonoiki and Ramsey were both charged in criminal actions brought by the U.S. Attorney for the Eastern District of Pennsylvania. Mr. Sonoki pleaded guilty to securities fraud and conspiracy to commit securities fraud. He was sentenced to serve one month in prison and 3 years on supervised release and pay a fine of $5,000 and $10,000 as a forfeiture. Defendant Ramsey was convicted at trial of securities fraud and conspiracy to commit securities fraud. He was sentenced to 60 days in prison, three years of supervised release and pay a fine of $5,000. Each Defendant also consented to the entry of a final judgment enjoining them from violating Exchange Act Sections 10(b) and 14(e). Mr. Sonoiki was also directed to pay a penalty of $15,000. The Commission entered an order in a related administrative proceeding barring Mr. Sonolki from the securities business or participating in a penny stock offering. See Lit. Rel. No. 25524 (September 27, 2022).

False statements: SEC v. Farnsworth, Civil Action No. 1:22-cv-08226 (S.D.N.Y. Filed September 26, 2022) is an action which names as defendants: Theodore Farnsworh, J. Mitchell Lowe and Khalid Itum. On August 15, 2017 Helios and Matheson Analytics Inc. or HMNY announced that MoviePass, Inc would be acquired. Beginning on August 2017, and continuing for the next two years, Defendant Farnswroth and Lowe, the CEOs of HMNY and MoviePass, respectively, circulated misleading statements regarding MoviePass rather than release the true facts regarding the little cash flow of the company and its poor financial condition. Defendants Farnsworth and Lowe also approved false invoices that firm executive Itum approved. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(b)(5), 13(b)(2)(A) and 13(b)(2)(B). See, Lit. Rel. No. 25525 (September 27, 2022).

Free riding: SEC v. Phan, Civil Action No. 4:22-cv-001 (M.D. Ga. Filed September 26, 2022). Defendants Sang Phan and Rich Phan are brothers residing in Columbus, Georgia. Brothers Sang and Rich are former restaurant and nail salon employees. During the first and second quarter of 2021 the brothers decided to implement a free riding scheme. That scheme sought to take advantage of the practice of certain brokerage firms that make “instant deposits” for investors — essentially credit extended clients to facilitate trading. In this matter the brothers sought out brokers that made instant deposits, hoping to use the credit extensions to make trades and profit from the use of the broker’s funds. During the first and second quarter of 2012 the brothers used four brokerage accounts at two firms to purchase nearly $60,000 of shares in a biotech company. The idea was to profit from the pandemic by using the broker’s funds to invest in biotech shares before the brokers discovered the scheme – that all the transactions would be funded only by the brokers and not the brothers. The brothers also sought to use over $30,000 in securities purchased in Rich Phan’s online account in the same manner. None of the trades were profitable. In each instance after the bogus fund transfers, the brokers froze the accounts and liquidated the securities holding. Those steps left the brothers with over $12,800 in losses, not the hoped for riskless profits. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25522 (September 26, 2022).

Manipulation: SEC v. Patten, Civil Action No. 1:22-cv-0503 (D.N.J. Filed September 26, 2022) is an action which names as defendants: James Patten, an employee of Tryon Capital LLC controlled by defendant Coker Sr.; Peter Coker Sr. ; and Peter Coker Jr. , a resident of Hong Kong who is the CEO of Hometown International. Defendants took control of the outstanding shares of Hometown International, Inc. and E-Waste Corporation. The former operates one deli in New Jersey while the latter is a shell company. Using their control, defendants manipulated the share price of each company. For example, the share price of E-Waste increased to $10.00 from $0.10. Accordingly, Defendants substantially profited from their actions. The complaint alleges violations of Securities Act Sections 17(a)(1) and 17)(a)(3) and Exchange Act Sections 9(a), 10(b) and 15(a). The action is pending. The U.S. Attorney’s Office for the District of New Jersey announced criminal charges against the Defendants. See Lit. Rel. No. 25526 (September 27, 2022).

Offering fraud: SEC v. Paris-Pinder, Civil Action No. 1:22-cv-23100 (S.D. Fla. Filed September 26, 2022) is an action which names as defendant Judith Paris-Pinder, president of Pinder Associates, Inc. and Pinder’s Multi-Services and Marketing Group, LLC. Over a two-year period about $2.3 million was raised from 280 investors, mostly Haitian-American’s living in South Florida. The transactions were implemented through misrepresentations made by defendant regarding the safety of the investments and the use of funds which was supposed to be to finance personal injury actions. A substantial portion of the investor funds were misappropriated by Defendant. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Defendant partially settled the matter, consenting to the entry of an injunction based on the Sections cited in the complaint. She also agreed that the Court will determine monetary relief. See Lit. Rel. No. 25521 (September 26, 2022).

False statements: In the Matter of Compass Minerals International, Inc., Adm. Proc. File No. 3-21145 (September 23, 2022) is a proceeding which names as respondent the firm which operates the largest underground salt mine in the world. This proceeding centers on certain disclosures made by the firm regarding its operations in 2017 and 2018. Specifically, the firm upgraded its mining system at its largest site. The company announced that these improvements would result in substantial savings. In fact, those savings did not materialize because of the cost of the program. While in 2018 investors were told that the company had already save about $5 million, the claim was wrong. The firm also misrepresented the amount of salt it was mining at the largest site. In addition, in 2017 and the first quarter of 2022, the firm failed to disclose the financial consequences stemming from the acquisition of a subsidiary or to assess those in view of the Brazilian environmental laws. The firm filed materially misleading financial statements because they did not comply with GAAP. The firm undertook remediation and will implement certain undertakings. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings the firm consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, the firm will pay a penalty of $12 million.

Offering fraud: SEC v. Barton, Civil Action No. 3:22-cv-02118 (N.D. Tx. Filed September 23, 2022) is an action which names as defendants: Timothy Barton who controls defendant Carnegie Development LLC; Haoquang Fu, a Chinese national with a green card; and Stephen Wall, a guilder and a series of land holding entities. Over a two-year period, beginning in March 2017, Defendant Barton, raised about $26 million from over 100 investors, most of whom are Chinese nationals. Investors were promised that their funds would be used to acquire individual parcels of property. The principal investments was to be repaid in two years. Once the investments were made, Defendant Barton misappropriated much of the investor funds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The U.S. Attorney for the Northern District of Texas announced parallel criminal charges against Mr. Barton. The case is pending. See Lit. Rel. No. 25523 (September 26, 2022).

False Statement: SEC v. Vallos, Civil Action No. 1:22-cv-11613 (D. Mass. Filed September 23, 2022) is an action which names Christopher P. Vallos as defendant. While he controlled a public company Mr. Vallos sold its stock to the public over a period of about one year beginning in July 2016. During the period he concealed the fact he controlled the firm. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the matter, Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, he agreed to the entry of a permanent bar prohibiting him from serving as an officer/director of a public company. See Lit. Rel. No. 25519 (September 23, 2022).

Failure to register: SEC v. Morningview Financial LLC, Civil Action No. 1:22-cv-08142 (S.D.N.Y. Filed September 23, 2022) is an action which names as defendants the firm and its controlling shareholder Miles M. Riccio. Over about a three-year period, beginning in July 2017, Defendants engaged in a convertible note business. Specifically, during the period Defendants funded 35 issuers in exchange for at least 68 convertible notes and 4 warrant agreements. The notes and warrants were converted into 3.2 billion shares of newly issued shares of common stock. About 90% of the new shares were sold into the public markets, raising $14.8 million in profits. Defendants began selling post-conversion shares soon after each converion, obtaining profits from the transaction. Defendants failed to register as either a broker or dealer. The complaint alleges violations of Exchange Act Sections 15(a)(1) and 20(a). The case is pending. See Lit. Rel. No. 25520 (September 23, 2022).

False statements: SEC v. Thompson, Civil Action No. 2:22-cv-01609 (D. Nev. Filed September 22, 2022) is an action which names as defendants: James Thompson, Barry Loveless and James Mylock, respectively, an attorney and the CEO of Spyr Inc., and and a Director of that firm. In January and May 2018 Defendants made false statements to the outside auditors of the firm. Specifically, they claimed not to be aware of any violations of federal or state law at a time that they knew the staff of the Commission intended to recommend the filing of charges. They also aided and abetted the violations of the firm by taking similar positions in the filings made with the Commission made on the Form 10K for 2017. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Section 13(a). Each defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, Defendants Thompson, Loveless and Mylock will each pay, respectively, a penalty of $50,000, $75,000 and $10,000. See Lit. Rel. No. 25517 (September 23, 2022).

Offering fraud: SEC v. Lam, Civil Action No. 2:22-cv-06831 (C.D.Ca. Filed September 22, 2022) is an action which named as defendants: Brian Lam, principal owner of Ninesauare; Ninesquare Capital Partners LLC, an exempt reporting adviser; Nathan Nhan Nguyen, principal of NGL; and Nguyen Group LLC. The action centers on an offering fraud that raised about $11.7 million through the sale of unregistered securities over a two-year period beginning in March 2020. Investor money was pooled. Those investors were told that the profits would range from 1.24% to 100%. Much of the money was solicited through NGL seminars, benefiting Defendant Nguyen. In fact, substantial portions of the money was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Sections 10(b) and 15(a) and Advisers Act Section 206(4). The case is pending. See Lit. Rel. No. 25518 (September 23, 2022).

FCPA

In the Matter of Oracle Corporation: Adm. Proc. File No. 3-21158 (September 27. 2022) is an action charging the technology company for the second time with violations of the Foreign Corrupt Practices Act. In this instance the Order violations of the Act beginning in 2014 and continuing for a period of five years. The wrongful conduct took place in India, Turkey and the United Arab Emirates. Specifically, the scheme involved using discounts and sham marketing reimbursement payments to finance slush funds held at Oracles channel partners. The funds were used to bribe foreign officials and/or provide benefits such as paying for foreign officials to attend technology conference around the world. The actions were contrary to Oracles internal policies and procedures. The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the order. In addition, the firm will pay disgorgement of $7.114.376.44, prejudgment interest of $791,040.20 and a penalty of $15 million.