This Week In Securities Litigation (Week of September 23, 2024)

Last week the Commission filed a series of actions which included an offering fraud, a financial fraud, a cherry picking case, an action based on a manipulation, another action centered on AI, an insider trading case and a matter involving an unregistered broker.

The agency prevailed in a jury case following ten days at trial as noted below.

Be careful, be safe this week

SEC Enforcement – Litigated Actions

Fraudulent schemes: On September 20, 2024, the Commission prevailed in a 10 day jury trial in a case captioned SEC v. Davenport, Civil Action No. 8:21-cv-1427 (C.D. Cal). Defendants at the trial included Michael Owens, Dawson Davenport, Robert Gunton, Andrea J. Lindstrom and Julie Yale. The case involved two overlapping fraudulent schemes one of which was centered on a boiler room operation. The trial lasted for ten days. The jury only deliberated for about two hours. The verdict is discussed here. The complaint is detailed here.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 7 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Offering frauds: SEC v. Plazzo, Civil Action No. 5:24-cv-0662 (N.D. Ca. Filed Sept. 20, 2024) is an action which names as defendants: Nicholas Palazzo, a graduate of Harvard who stayed in touch with friends and controlled each entity defendant; 4TA Sports, Inc., NP Ventures Holdings, LLC; and Play Caller Sports Gaming, LLC. Beginning in October 2019, and continuing for about four years, Defendant Plazzo, a former Harvard football player, operated two schemes. One involved 4TA Sports and the other Play Caller and NP Ventures. In each scheme Defendant Palazzo targeted specific individuals, convinced them to invest based on his false statements. The investor funds were then misappropriated. One scheme, called, called STACK Scheme, raised about $900,000. The other, called the Play Caller Scheme, raised about $2.1 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a). See Lit. Rel. No. 2024 (Sept. 20, 2024).

Financial fraud: SEC v. Bowerman, Civil Action No. 1:24-cv-12282 (D.Mass. Filed Sept. 5, 2024) is an action which names as defendant Nicholas Bowerman, a UK resident. It centers on his relationship with CIRCOR International, Inc., formerly a publicly traded entity on the NYSE. During the matters involved here, Defendant was the finance director of CIRCOR. During the period io this case, 2019 – 2021, Defendant circumvented CIRCOR’s internal accounting controls and carried out a fraud by making unsupported and unauthorized journal entries to the Pipeline’s records. His goal was to make the firm appear more profitable than it was. As a result of this conduct CIRCOR’s Form 10-K for 2021 overstated its income by $7.2 million or 24%, understated its 2020 operating loss by $34.5 million and understated its nine-month revenue loss for 2021 by $12.5 million or 120%. In July 2022 the firm restated its financial statements for 2019 and 2020. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2), and 13(b)(5). See Lit. Rel. No. 26116 (Sept. 20, 2024).

Manipulation: SEC v. DiScala, Civil Action No. 1:14-cv-04346 (E.D.N.Y.) is a previously filed action in which the court entered final judgment against Defendant Abrazas DiScala based on a manipulation of penny stock shares. The judgment is based on Securities Act Sections 5 and 17(a) and Exchange Act Sections 9(a) and 10(b). According to the complaint, Defendant was president of a purported merchant baking firm. Working with others, he inflated the share price of CodeSmart, Inc., stock in 2013. Defendant and others also obtained a block of company shares which supposedly were registered but were not. Eventually the share price of CodeSmart crashed after Defendants’ henchmen dumped their shares. See Lit. Rel. No. 26115 (Sept. 20, 2024).

Cherry picking scheme: SEC v. DiMjuro, Civil Action No. 2:24-cv-02477 (D. Az. Filed Sept 18, 2024) is an action which names as defendant Raymond J. DiMjuro, an investment adviser representative and principal of Your Source Financial, PLC. From 2019 through January 2022 Defendant conducted a cherry-picking scheme. He did this by placing the trades through a block trading account. At the end of the day the profitable trades were allocated to his account and others to firm clients. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1) & (2). See Lit. Rel. No. 26114 (Sept. 20, 2024).

Manipulation: SEC v. Leon, Civil Action No. 2:24-cv-09214 (D.N.J. Filed Sept. 17, 20924) is an action which names as defendants Joel Leon and Shmuel Sherr, respectively, a resident of Israel and a student. The two defendants worked together to manipulate stocks. Mr. Leon was previously barred from several brokerage firms for spoofing, a form of manipulative trading. In this instance, beginning in July 2022, and continuing for several months, Mr. Leon traded in accounts opened by Defendant Sherr. Trading through those accounts he would, for example, trade one stock in a manner designed to depress the stock price and then acquire shares. Subsequently, he would trade the same stock in a manner designed to push-up the share price of the stock at which point the shares would be sold. By repeating these steps Defendants were able to amass over $415,000 in trading profits from 50 stocks which were split 90% for Mr. Leon and 10% for Mr. Sherr. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Sections 9(b) and 10(b). See Lit. Rel. No. 25109 (Sept. 17, 2024).

AI: SEC v. Roberts, Civil Action No. 24-cv-6990 (S.D.N.Y. Filed Sept. 16, 2024). Defendant Paul Roberts is the former president of Kubient Inc. The firm, and Defendant Roberts, marketed a product known as KAI, claimed to be Artificial Intelligence. The product supposedly detects real-time fraud during digital advertising auctions. It has not generated any significant revenue for the company. Defendant, however, fabricated an analysis for two customers. The customers were told that the analyses were prepared by KAI. Defendant Roberts then claimed that Kubient received over $1.3 million in revenue for analyzing the customers’ data. In fact, Kubient never performed the analysis. Mr. Roberts subsequently lied to Kubient’s independent auditor regarding the revenue. The point was to have revenue for the firm prior to a planned IPO. There was none. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and 13(b)(5) as well as the related rules. The U.S. Attorneys’ Office filed parallel criminal charges against Mr. Roberts. See also SEC v. Weiss, Civil Action 24-cv-06988 (S.D.N.Y. Filed Sept. 16, 2024)(action against Joshua Weiss and Grainne Coen, a former officer and board member of Kubient who learned that the firm had not produced significant revenue but took no steps to investigate and made false statements at the time of a secondary offering; complaint alleges violations of Securities Act Section 20(b) and Exchange Act Section 21(d). See SEC v. Weiss, Civil Action No. 24-cv-06988 (S.D.N.Y. Filed See Lit. Rel. No. 26107 (Sept. 16, 2024)(action naming as defendants Joshua Weiss, former CFO, and Grainne Coen, former director for their role in AI scheme above). See also Lit. Rel. No. 26107 (Sept. 16, 2024). See Lit. Rel. No. 26109 (Sept. 17, 2024).

Romantic scams: SEC v. CoinW6, Civil Action No. 2:24-cv-0724 (C.D. Cal. Filed Sept. 17, 2024) is an action centered on a romantic scam. Defendant is a fake online crypto trading platform which uses a variety of names. Investors are solicited to trade on this platform through social media. Promises are offered quick and significant profits. Once the relationship is established investors are convinced to invest their cash. While claims about substantial profits are made, none are paid out. During the period July 2022 through December 2023 at least 11 investors put up about $2.2 million to engage in the trading. The complaint alleges violations of Securities Act Sections 17(a) and Exchange Act Sections 10(b). See Lit. Rel. No. 26111 (Sept. 17, 2024). See also SEC v. NanoBit Ltd, Civil Action No. 2:24-cv-06517 (E.D.N.Y. Filed Sept. 17)(four entities and three individuals are charged with relationship fraud per the case above). See Lit. Rel. No. 26110 (Sept. 17, 2024).

Insider trading: SEC v. Nanini, Civil Action No. 1:24 cv- 213531 (S,D, Fla. Filed Sept. 13, 2024). Named as defendants are: Federico Nannini, an employee of Consulting Firm from July 2021 to January 2023; Mauro Nannini, Frederico’s father; Alejandro Thermiotis, a high school friend of Federico Nannini; and Francisco Tonarely, a close friend of Mr. Thermiotis.

Fredrico Nannini was an associate of Consulting Firm in Miami, Florida. That firm was retained by MacTech, Inc. to conduct buy-side due diligence. The work was being done in connection with the firm’s proposed acquisition of Infrastructure and Energy Alternatives Inc. or IEA prior to the projected public announcement of the deal on July 25, 2022. Prior to the deal announcement, and after obtaining inside information about the deal, Defendant Fredrico Nannini purchased shares of IEA. He also shared text messages about the deal with Mauro Nannini and Defendant Thermiotis who in turn shared them with Defendant Tonarely. Each man traded prior to the deal announcement. Following the deal announcement the share price of IEA securities increased over 31%. Each Defendant sold his stares. Collectively, Defendants had trading profits of about $1.1 million. The complaint alleges violations of Exchange Act Sections 10(b) and Rule 10(b) – 5 thereunder. See Lit. Rel. N. 26108 (Sept. 16, 2024).

Unregistered broker: SEC v. Hollender, Civil Action No. 1:23-cv-02456 (S.D.N.Y.) is a previously filed action which named as defendants Scott Hollender, Gabrfiel F. Migliano, Jr. and Frank Vecchio. The Court entered a final judgment by consent against Frank Vecchio on September 10, 2024. The complaint alleged that over a period of several months, beginning August 2018, Defendant Vecchio provided investors with marketing materials for investments in funds that supposedly held pre-IPO shares. Mr. Vecchio marketed the shares, raising about $2.7 million from 21 investors. He was paid over $479,000 in transaction-based compensation. The final judgment prohibits future violations of Securities Act Section 17(a) and Exchange Act Section 10(b)and 15(a). The Order also directed the payment of $479.821.84 in disgorgement, $64,427.92 in prejudge ment interest and a penalty of $90,000. The litigation in this matter is on-going. See Lit. Rel. No. 26106 (Sept. 13, 2024).

FinCEN

Reporting: The Financial Crimes Enforcement Network issued another resource to assist small business owners with beneficial ownership reporting requirements (here). It is called the Beneficial Ownership Reporting Outreach and Education Toolkit. It is available here.

Australia

Guide: The Australian Securities and Investment Commission Reissued its Regulatory Guide 121 on doing financial services business in Australia on September 20, 2024 (here).

BaFin

Release: The Federal Financial Supervisory Authority published an article titled “Letting go of familiar ways on September 19, 2024. The release is designed to assist financial entities with preparation for DORA, the Digital Operational Resilience Act, that is designed to strengthen the financial sector’s digital resilience. The Act applies to 21 types of financial institutions (here).

Hong Kong

Remarks: Julia Leung, member of the Securities and Futures Commission of Hong Kong, delivered remarks at Hong Kong Chartered Governance Institute’s 14 Biennial Corporate Governance Conference on September 20, 2024. The remarks are part of her efforts to position Hong Kong as a crypto hub (here).

Singapore

Remarks: Chee Hong Tat, Minister for Transport and Second Minister for Finance and Deputy Chairman of the Monetary Authority of Singapore, delivered remarks at the Securities Investors Association Singapore 25^th Anniversary Conference on September 16, 2024. His remarks focused on strengthening the supply of good companies and creating a strong financial ecosystem to support growth (here).