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

This is Part II of This Week In Securities Litigation (Week of October 3, 2022). Part I was published on Monday, October 3, 2022. This segment contains cases and proceedings filed by the Commission in the last two days of the government fiscal year, Thursday and Friday September 29 and 30, 2022. The number of cases filed this week is recorded below. The number of actions initiated at the close of the government fiscal year may well be a record.

The overall results for the third quarter of the calendar year – fourth quarter of the government fiscal year – will be tabulated and discussed in future articles.

SEC Enforcement – Filed and settled actions

Last week the Commission filed 35 civil injunctive actions and 10 administrative proceedings, exclusive of 12j, default, conflicts (which are included in the tabulations of cases). tag-a-long and other similar proceedings.

Touting – offering fraud: SEC v. Mikula, Civil Action No. 2:22-cv-07096 (C.D. Cal. Filed September 30, 2022) is an action which names as defendants: Jonathan Mikula, the chief analyst and author of Palm Beach Venture who has been twice enjoined from violating the securities laws; Christian Fernandez, a Mexican citizen who controls entities used to funnel payments to Defendant Mikula for the promotion; Amit Rajberi, an Australian citizen who was CEO of Elegance Brands, Inc.; Sway Energy Corporation, a beverage firm; Avitar Singh Dhillon, a Canadian citizen who co-founded Emerald Heath; Emerald Health Pharmaceuticals, Inc., a biopharmaceutical company; and James De Mesa, president and CEO of Emerald Health. The action centers on a touting scheme directed by Defendant Mikula and others regarding four companies in 2019 and 2021. Despite claims that the promotions were not paid for, millions of dollars were paid for Defendants Mikula, Fernandez and Beri to promote the securities of the four firms using sham consulting agreements and false invoices. Investors put up $80 million to obtain shares of the companies. The complaint alleges violations of Securities Act Sections 5(a), 5(c), each subsection of 17(a) and 17(b) and Exchange Act Section 10(b). Defendants Elegance, Beri, Emerald Health, De Mesa and Dhillon agreed to settle the action, consenting to the entry of permanent injunctions based on the anti-fraud and other provisions of the securities laws cited in the complaint. Collectively, these Defendants will pay a total of $2.5 million to settle. In addition, Defendant Dhillon agreed to a permanent bar from acting as an officer/director, Defendant De Mesa agreed to a similar bar but for five years and Defendant Beri agreed to a ten year bar and a conduct based injunction prohibiting him from engaging in certain promotional activities. The Commission also instituted settled administrative proceedings against Defendant Sanford who will pay a penalty of $25,000 and be suspended from practice before the Commission with a right to apply for reentry after three years. See Lit. Rel. No. 25541 (September 30, 2022).

Insider trading: SEC v. Saini, Civil Action No. 2:22-cv-05788 (D.N.J. Filed September 30, 2022) is an action which names as defendants: Harpreet Saini, a citizen of India employed at newswire service provider Intrado Corporation, and John Natividad, a citizen of Canada who was also employed at Intrado. Between May 2018 and 2021 Defendants traded in advance of 1,264 and 395 market-moving announcements issued by Intrado for 554 and 262 publicly traded companies. They obtained profits of $864,773 and $657,352, respectively. About 99% of Defendants’ transactions were executed on U.S. exchanges. Access to the inside information was obtained through their positions at Intrado. The complaint alleges violation Exchange Act Section 10(b). The Ontario Securities Commission announced that Saini and Natividad have been charged with fraud and insider trading under the Ontario Securities Act.

Audit failure: In the Matter of RSM US LLP, Adm. Proc. File No. 3-21183 (September 30, 2022) is a proceeding which names as respondent the PCAOB registered audit firm. This action centers on the period 2015 to 2018 when the firm conducted multiple audits of Revolution Lighting Technologies. In conducting those audits, the firm failed to adhere to PCAOB auditing and quality control standards despite representations to the contrary in its audit opinions. At the center of its audit failures were “bill and hold” sales. While GAAP does permit revenue from such transactions to be recognized, certain specific factors must be present. Here the transactions failed to meet the applicable GAAP standards. During the course of the audits for 2017 the firm concluded that Revolution’s revenue misstatements were not material and thus a restatement was unnecessary. The evidence, however, fails to support this conclusion. Revolution’s misstatements of revenue significantly exceeded the quantitative audit materiality level that RSM had identified for several of the periods in question. By reaching a contrary conclusion RSM effectively disregarded its determination made at the outset of the work. Overall, the audit firm failed to exercise an appropriate level of skepticism. The lack of professional care by firm personnel had the effect of concealing RSM engagement team failures to properly conduct an audit. RSM violated Rule 2-02(b)(1) of Regulation S-X, according to the Order. RSM also issued audit reports for the period 2014 to 2017 attested it had done the work in accord with the standards of the PCAOB when it had not. RSM, in addition, caused Revolution to violate Exchange Act Section 13(a) and the related rules. Accordingly, the Order finds that RSM violated Rule 2-02(b) of Regulation S-X and Exchange Act Section 13(a) and Rule 13a-1. In resolving the proceedings, Respondent agreed to implement certain undertakings, including retaining an independent consultant who will conduct a review. The firm agreed to the entry of a cease-and-desist order based on Rule 2-02(b) of Regulation S-X and Exchange Act Section 13(a) and Rule 13a-1 and a censure. Respondent will pay a penalty of $3,750,000. See also In the Matter of Steven Kirn, CPA, Adm. Proc. File No. 3-21184 (September 30, 2022)(naming as respondents Steven Kirn, the engagement partner; Michael Piqueira, the senior manager; and Richard Condon, another firm partner; based on facts above; each consented to the entry of a cease-and-desist order based on the same provisions as above. In addition, each is denied the privilege of appearing and practicing before the Commission as an account with the right to file a request for reinstatement after 3 years and 1 year for Mr. Kirn and Mr. Piqueira, respectively. Mr. Condon was censured.

Fraudulent sale of publicly traded shares: SEC v. Stephens, Civil Action No. 22CV1483 (S.D.Ca. Filed September 30, 2022) is an action which names as defendants: David Stephens; Donald Danks; Jonathan Destler; and Robert Lazerus. The action centers on efforts to sell the shares of a firm whose stock is publicly traded while concealing the identity of the controlling shareholders. During the scheme each defendant worked to further the fraud by engaging in deceptive conduct. That included evading securities law disclosure, registration and reporting requirements. Those acts aided in concealing the ownership of the firm’s shareholders. Over the four-year period, beginning in 2014, millions of shares were sold. The complaint named the CEO of the company involved as a relief defendant. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b) and 15(a). See Lit. Rel. No. 25546 (September 30, 2022).

Insider trading: SEC v. Holzer, Civil Action No. 1:22-cv-08342 (S.D.N.Y. Filed September 30, 2022) is an action which names as defendant Charles Holzer, the Managing Member of Worth Capital, a real estate-focused family office owned by the Holzer family. This action centers on the acquisition of Dun & Bradstreet Corp. by an investor group, announced on August 8, 2018. Defendant Holzer learned about the deal approximately one week prior to the announcement from an investment adviser that was part of the Investor Group after executing a non-disclosure agreement. Despite the agreement, Defendant misappropriated the inside information and traded, realizing profits of $96,091. He also tipped his cousin who traded and had profits of $672,000. The complaint alleges violations of Exchange Act Section 10(b). To resolve the matter Defendant consented to the entry of a permanent injunction based on the Section cited in the complaint and an order directing him to pay disgorgement, prejudgment interest and a civil penalty in amounts to be determined by the Court. He is also barred from serving as an officer/director. See also SEC v. Moraes, Civil Action No. 1:22-cv-08343 (S.D.N.Y. Filed September 30, 2022)(based on similar facts defendant Fernando Moraes traded, realizing profits of $8,842; he also resolved the matter by consenting to the entry of a similar injunction and bar order and agreed to pay disgorgement of $8,842, prejudgment interest of $1,647 and a penalty of $48,646). See Lit. Rel. No. 25545 (September 30, 2022).

Offering fraud/Ponzi scheme: SEC v. Lauer, Civil Action No. 2:22-cv-01726 (E.D.Ca. Filed September 30, 2022) is an action which names as defendant Ari Lauer, an attorney admitted to practice in California. At the center of the case is a huge offering fraud that is largely a sham transaction created by Jeffrey and Paulette Carpoff. The scheme was based on selling securities through privately held alternative energy companies DC Solar Solutions, Inc. and DC Solar Distribution, Inc. Defendant Lauer facilitated the scheme by giving it the appearance of proprietary and writing all the documents to implement transactions in which non-existent generators were sold as part of the fraud. Over $910 million was obtained from investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25544 (September 30, 2022).

Financial fraud: SEC v. Moser, Civil Action No. 2:22-cv-00629 (M.D. Fla. Filed September 30, 2022) is an action which names as defendant Daniel Moser, the controller of FTE Networks, Inc. The publicly traded firm provides networking infrastructure to technology and telecommunications industries. Over a period of about one year, beginning in April 2017, the senior executives of the firm orchestrated a financial fraud, inventing about $12.5 million of revenue. Defendant Moeser participated in the scheme by furnishing false information to the auditors and making supporting false entries in the books and records of the company. By late 2018 the scheme created by FTE’s senior executives was uncovered. The company was required to restate its quarterly and annual financial statements for 2016, 2017 and 2018. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13b-5. Defendant resolved the matter, consenting to a bifurcated settlement. He agreed to the entry of permanent injunctions based on the Sections cited in the complaint. The Court will determine the amount of a civil penalty on motion by the Commission. See Lit. Rel. No. 25543 (September 30, 2022).

Financial fraud: SEC v. Lindell, Civil Action No. 1:22-cv-08368 (S.D.N.Y. Filed September 30, 2022) is an action which names a defendant Scott Lindell, the CCO of Infinity Q Capital Management LLC. That firm engaged in a fraudulent scheme that inflated the asset values of a hedge fund and mutual fund advised by Infinity by over $1 billion. The complaint as to Mr. Lindell alleges that he was negligent in not seeing a series of red flags which resulted in him giving investors and representatives of the mutual fund and the Commission false documents. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3), Rule 13b2-2, and Advisers Act Sections 206(2), 206(4), 207 and 204(a). Defendant has agreed to settle the matter by consenting to the entry of an injunction based on the provisions cited in the complaint and paying disgorgement, prejudgment interest and a penalty along with the entry of an officer/ director bar, all as determined by the Court. See Lit. Rel. No. 25542 (September 30, 2022).

Unregistered securities: SEC v. McKinley, Civil Action No. 1:22-cv-12326 (E.D. Mich. Filed September 30, 2022) is an action which names as defendants: Mark McKinley, JumpStart Equity LLC; and Paystr LLC. Over a two-year period, beginning in August 2019, Defendants offered and sold securities in JumpStart in order to raise money for Paystr, a firm that provides consulting services to start-ups. Defendant McKinley controls each entity. Paystr is the managing member of JumpStart. The securities were not registered. The complaint alleges violations of Securities Act Sections 5(a) and 5(c). Each Defendant consented to the entry of an injunction based on the Sections cited as well as conduct-based injunctions. Defendant McKinley will pay a penalty of $67,500 while JumpStart will pay $82,500. See Lit. Rel. No,. 25539 (September 30, 2022).

Offering fraud: SEC v. Vivera Pharmaceuticals, Inc., Civil Action No. 8:22-cv-01792 (C.D. Ca. Filed September 30, 2022) names as defendants: the company, EFT Global Holdings, Inc.; and Paul Edalat. Mr. Edalat controlled each firm and is the CEO of Vivera. Over a two year period, beginning in 2018, Vivera raised about $6.6 million from 63 individual investors through a private placement. The Memorandum claimed that the company owned an exclusive global license to a sublingual drug-deliver technology for the pharmaceutical use of cannabidiol or tetrahydrocannabinol or THC. What the PPM failed to disclose that Defendant Edalat controlled each company, that he used his control over both companies to paydown a $10 million licensing fee, that previously overlapping license rights had been conveyed to a third party and that Defendants had profited from these deals. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25538 (September 30, 2022).

Manipulation: SEC v. Arbitrade Ltd., Civil Action No. 1:22-cv-23171 (S.D. Fla. Filed September 30, 2022) is an action which names as defendants: The company, a Bermuda firm; Cryptobontix Inc., a Canadian company; Troy R.J. Hogg, a resident of Toronto and the founder and owner of Cryptobontix and control person of Arbitrade; James Goldbert, a resident of Florida and also a control person of Arbitrade; Stephen Braverman, a resident of California and a person who has been represented to be the COO of Arbitrade; and Max Barber, a resident of Salt Lake City and founder of SION, a UAE firm. Over a period of about one year, beginning in May 2018, Arbitrade and other defendants issued announcements claiming that the firm had acquired and received title to $10 billion in gold bullion. According to the announcement, Arbitrade intended to back crypto coin DIF with the gold. In reality, the gold acquisition transaction was a sham. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The action is pending. See Lit. Rel. No. 25537 (September 30, 2022).

Audit failure: In the Matter of Berkower LLC, Adm. Proc. File No. 3-21193 (September 30, 2022) is a proceeding that names as respondents: the PCAOB audit firm; partner Michael Mullen, CPA, the engagement partner; and Maurice Berkower, CPA, the engagement quality reviewer. The engagement here involved the audit for 2018 of State Finds – Enhanced Ultra-Short Duration Mutual Fund. Messrs. Mullen and Berkowere failed to exercise due professional care and skepticism, according to the Order. Specifically, they failed to adequately plan the engagement, inquire and perform procedures to assess related parties and assess relationships and related party transactions. Mr. Mullen also failed to adequately supervise the engagement. Mr. Berkower, in his role, failed to evaluate significant judgments made by the engagement team and assess its response to significant risks. Each Respondent agreed to certain undertakings. Those included the retention of an Independent Consultant who will prepare a report. Each Respondent was found to have engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii). Mr. Berkowere is censured. Mr. Mullen and Respondent Berkower were each denied the privilege of appearing or practicing before the Commission as accountants. Mr. Mullen may apply for readmission after 1 year while Mr. Berkower may request reinstatement by submitting an application. See also In the Matter of BrookWeiner, LLC, Adm. Proc. File No. 3-21192 (September 30, 2022)(proceeding naming as respondents; the PCAOB audit firm, James Schmidtt CPA, the engagement partner; and Sheldon Weiner, CPA, the quality review partner; this is with respect to their audit of the State Funds for 2017; the findings are largely identical to those above; Respondents are denied the privilege to appear before the Commission as accountants; after 2 year Mr. Schmidt may request reinstatement, Mr. Weiner after 1 year).

Real estate offering fraud: SEC v. RBF Trust LLC, Civil Action No. 0:22-cv-61831 (D. Fla. Filed September 29, 2022) is an action which names as defendants: Paulo De Bastos, a Florida real estate agent; Joao Fonseca, a resident of France; RBT Trust LLC, D3 Gestion Immobiliere LLC, and D3 Gestion Immobiliere LLC. This action centers on two defendant brothers, Messrs. De Bastos and Fonseca. Over a four-year period, beginning in April 2016, the brothers offered investors securities in the form of investment contracts. During the period they offered investments in a purported real estate venture through the Defendant firms which they own/control. Investors were told that properties would be acquired from Defendants who owned them –they did not. The plan was to renovate the real estate using Defendants’ expertise. In fact, they did not have expertise as illustrated by a ruling from a Court in Paris which ordered the liquidation of the brothers’ real estate holdings liquidate and another by a Court in North Dakota for violating state securities laws in connection with real estate transactions. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 25540 (September 30, 2022).