This Week In Securities Litigation (Week of September 30, 2024)
As the Government fiscal year draws to a close today, the Commission blitzed to the conclusion by filing a large number of new actions last week. Those cases include one based on a hack-to-trade scheme, another involving Reg B-I, a financial fraud, one centered on false statements, another keyed to a market manipulation, a case involving cherry-picking a scheme, an action centered on insider trading, a Ponzi scheme case and another based on a crypto offering.
Be careful, be safe this week
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 20 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Hack-to-trade: SEC v. Westbrook. Civil Action No. 2:24-cv-09497 (D. N.J. filed Sept. 27, 2024) is an action which names as defendant Robert Westbrook, a U.K. citizen. Beginning in January 2019, and continuing until August 2020, Defendant hacked into the computer systems of five U.S. public companies. Through this process he obtained inside information about each firm which he used to trade. Prior to the hacks, Defendant established option positions in the securities of the firms involved. After using the information obtained from the hacks, Defendant had trading profit of about $3.75 million. The complaint alleges violations of Exchange Act Section 10(b). See Lit. Rel. No. 26141 (Sept. 27, 2024).
Sale unregistered crypto assets: SEC v. Mango Labs, LLC, Civil Action no. 24-civ-07334 (S.D.N.Y. filed Sept. 27, 2024) names as defendants: Mango Labs, LLC, Mango DAO and Blockworks Foundation. Mango Labs has operated since August of 2021. Mango Markets offers services to investors such as trading which includes crypto assets. Blockworks Foundation and Mano Labs are responsible for the development of Mango Markets. Mango DAO represents that it is the governing organization of Mango Markets. In August 2021 Mango DAO and Blockworks Foundation offered and sold 50 million crypto assets called MNGO to hundreds of investors worldwide. No registration statement was in effect. The Foundation also performed typical market functions similar to those of a broker for securities, although the firm was not registered. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and Exchange Act Section 15(a). Defendants resolved the action, each consenting to the entry of permanent injunctions based on the Sections cited and agreeing to pay, collectively, nearly $700,000 in penalties. They also agreed to destroy the tokens and to request that any remaining be removed from platforms and not used in solicitations. See Lit. Rel. No. 26140 (Sept. 27, 2024).
Reg. BI: SEC v. Vance, Civil Action No. 1:24-cv-01150 (E.D. Cal. Filed Sept. 27, 2024) is an action which names as defendant Robert M. Vance. Defendant Vance is a former registered representative at a brokerage firm. Beginning in June 2020, and continuing through mid-January 2022, defendant recommended to certain clients that they invest in corporate bonds offered by GWG Holdings, Inc. known as L Bonds. The bonds were, according to the issuer, high risk and “may be considered speculative.” They were suitable only for investors who could risk perhaps losing their entire investment. Nevertheless, Defendant recommended the purchase of the bonds to at least four retail customers. In making the recommendation he failed to assess if the purchase was suitable for the particular customer. At least 50 clients purchased the bond for a total of $4.3 million based on the recommendation of Defendant Vance. Many of the customers were at or near retirement age and had moderate risk tolerance. The complaint alleges violations of Reg. BI’s General Obligations. See Lit. Rel. No. 26139 (Sept. 27, 2024).
Financial fraud: SEC v. Ignite International Brands, Ltd, Civil Action No. 1:24-cv-97331 (S.D.N.Y. filed Sept. 27, 2024) is an action which names as defendants: the company which sells disposable vape pens and similar products; Paul Bilzerian, a recidivist and the controller of the firm; Paul Dowdall; Scott Rohleder; John Schaeffer; International Investments, Ltd. (also controlled by Defendant Bilzerian); Accell Audit & Compliance, Pa; and Christopher Hiestand. The complaint centers on the period late 2020 to 2021. In January the firm reported fourth quarter 2020 financial information which reflected in part revenue that exceeded the amount for the prior three quarters. Most of that revenue was reflected the total for two invoices for product which had not been ordered, shipped or sold. During a subsequent audit in early 2021, the revenue numbers could not be confirmed. Defendant Bilzerian had International Investments nominally “purchase” the product at issue. Nevertheless, the firm did not restate the financial statements despite the fact that the disputed invoices could not be confirmed — the International Investment documents were backdated. Defendants Dowall, CFO of Ignites, Rohleder, CFO of International Investments, and Schaefer, each worked to further the scheme. Defendant Hiestand, Accell’s engagement partner on the audit of the firm, made no inquiry regarding the failure to confirm the invoices connected to the revenue recognized by the firm. The financial statements for the period, certified by Defendant Dowdall, were filed with the Ontario Securities Commission. They included a false note stating that International Investments had supposedly purchased CAD $5,879, 244 of product in December 2020 – the amount by which Ignite’s revenue was overstated. Those statements included a report that contained an opinion by Defendant Accell which opined that the financial statements presented fairly. The report was false. The complaint alleges violations of Exchange Act Sections 10(b) and 20(a). See Lit. Rel. No. 26138 (Sept. 27, 2024).
False statements: SEC v. Selwood Jr., Civil Action No. 2:24-cv-08336 (C.D. Cal. Filed Sept. 27, 2024) is an action which names as defendant Lionel Selwood, Jr., the CEO of Romeo Systems which merged with a SPAC named RMG Acquisition Corp. in December 2020. Romeo is a manufacturer of battery packs and modules comprised of multiple battery cells, marketed to commercial electric vehicle manufactures. In the materials for the merger, and subsequently, Defendant disclosed projections that RMG would post-merger generate about $139 million in revenue for 2021. The documents also disclosed that a possible, but uncertain risk associated with the deal, focused on the delivery of sufficient numbers of cells to Romeo. At the time of the deal, however, Defendant knew, or should have known, that in fact there was a shortage. This information was not disclosed by Defendant. Following the merger the shortage became more acute. About two months after the merger, Defendant finally disclosed the shortage. The stock price dropped about 19.7% on heavy trading. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Section 14(a). To resolve the matter Defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. He also agreed to pay a penalty of $150,000 and to the entry of an officer/director bar for a period of three years. See Lit. Rel. No. 26137 (Sept. 27, 2024).
Manipulation: SEC v. Babini, Civil Action No. 15-cv-1334B (D. Mass.) is a previously filed action in which Defendant Marco Babini was charged with manipulating the shares of Endeavor Power Corp. along with those of others. The court entered a final judgment against Mr. Babini, a Canadian citizen, following an extradition battle. That judgment precludes future violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Sections 9(a)(2) and 10(b). It also prohibits him from participating in any penny stock offering. The underlying complaint alleged that Defendant attempted to manipulate the shares of Endeavor by artificially inflating the price. In the parallel criminal action, Defendant pleaded guilty to one count of conspiracy to commit securities fraud and wire fraud. See also U.S. v. Babini, 1:15-cr-10261 (D. Mass.). See Lit. Rel. No. 26136 (Sept. 27, 2024).
Cherry- picking: SEC v. Carlton, Civil Action No. 2:24-cv-01542 (W.D. Wash. Filed Sept. 27, 2024) is one of two cherry picking cases filed simultaneously (see below for second case). One case occurred on the West Coast and the second on the East Coast. Defendant William Carlton is a former investment adviser who conducted a cherry-picking scheme between 2015 and 2022. Essentially, the Defendant placed trades, held them until later, and then allocated the stock to his account if profitable and to a client account if not. By engaged in this conduct, Defendant obtained about $5.3 million in first-day profits. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). See also SEC v. Hernandez, Civil Action No. 3:24-cv-09487 (D.N.J. Filed Sept. 27, 2024)(similar scheme conducted between July 2020 and February 2022); it yielded over $1 million in illicit first-day profits). See Lit. Rel. No. 26135 (Sept. 27, 2024).
False statements: SEC v. Kamboj, Civil Action No. 1:24-cv-07319 (S.D.N.Y. Filed Sept. 27, 2024) is an action which names two brothers as defendants, Akshay Kamboj and Dev Kamboj. The brothers are the founders and operators of investment fund Crawford Ventures IM, LLC. Beginning in April 2022 the brothers provided fake financial data about the success of the Fund to potential investors. Based on that data, investors were told the Fund was the “World’s #1 Performing Fund.” Forged audit reports were also provided to potential investors. As losses mounted, by December the Fund announced plans to liquidate. Investors lost about $4.1 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26134 (Sept. 27, 2024).
Insider trading: SEC v. McMillan, Civil Action No. 4:24-cv-00919 N.D. Tex. Filed Sept. 26, 2024). This action centers on the acquisition of Apollo Endosurgery, Inc. by another company in a deal announced on November 28, 2022. Prior to the deal announcement, Defendant learned about the proposed deal from Jane Doe, his domestic partner and an employee of Apollo. Defendant immediately purchased shares in Apollo. Following the deal announcement the share price increased 67%. Defendant had trading profits of about $81,000. The complaint alleges violations of Exchange Act Section 10(b). See Lit. Rel. No. 26133 (Sept. 26, 2024).
False statements: SEC v. Cassava Sciences, Inc., Civil Action No. 24-cv-1150 (W.D. Tx. Filed Sept. 26, 2024) is an action which names as defendants the company and two of its then officers, Remi Barbier, the company founder and former Chairman, and Dr. Lindsay Burns, its former Senior Vice President. The complaint alleges that false statements were made regarding the drug trial for the firm’s PTI-125 product for Alzheimer’s disease. First, Cassava claimed the trials were blinded when they were not. Second, there was no disclosure that the bioanalyses performed by Dr. Wang, who was the co-inventor of the product and a member of the company. Third, there was no disclosure of the fact that Dr. Wang’s lab was found “unacceptable” and temporarily not qualified to provide the biomarker analysis and research. Fourth, there was no disclosure of the fact that the Dr. Burns removed a large portion of patients from the reported data. Finally, there was no disclosure of the circumstances surrounding the decision by the company and Dr. Burns to disclose the spatial working memory measurement reported as showing cognitive improvement which was determined only after the tests were unblinded. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Section 13(a). To resolve the matter, Defendants each consented to the entry of permanent injunctions based on the Sections cited in the complaint. Each also agreed to pay penalties in the amounts of $40 million, $175,000 and $85,000 respectively, for the firm and Defendants Barbier and Burns. In addition, Defendant Barbie and Burns agreed to the entry of an officer/director bar for three and five years respectively. See Lit. Rel. No. 26132 (Sept. 26, 2024).
Insider trading: SEC v. Bhardwaj, Civil Action No. 1:22-cv—06277 (S.D.N.Y.) is an insider trading case centered on the acquisition by Lumentum, Inc. of Coherent, Inc. on January 19, 2021. Prior to the deal, Defendants Dhirenkum Patel and Ramesh Chitor traded in the shares of the acquisition firm, yielding $1.6 million in gains. The trading was initiated by a tip from their friend Amit Bhardwaj, a former Lumentum employee. Defendants Patel and Chitor each pleaded guilty in the parallel criminal cases, U.S. v. Patel, 22 Cr. 369 (S.D.N.Y.) and U.S. v. Chitor, 22 Cr. 370 (S.D.N.Y.). The final judgments prohibit future violations of Exchange Act Section 10(b) and require Defendants Patel and Chitor to pay disgorgement in the amounts of $423,074 and $1,244,801 respectively. The payments are deemed satisfied by the forfeiture orders entered in the parallel criminal case. See Lit. Rel. No. 26131 (Sept. 25, 2024).
Offering frauds: SEC v. Blanchard, Civil Action No. 2:24:cv-02437 (D. Ka. Filed Sept. 23, 2024). Named as defendants are: Anthem Hayek Blanchard and Anthem Holdings Co. Mr. Blanchard founded defendant company in 2019. He serves as its CEO. The company was in the software development business and based in Oklahoma. Defendants conducted two offerings of securities to raise funds for the company. The first was known as the “Series A” offering. It was conducted in 2020 and 2021. To solicit investors Defendants used significantly inflated revenue projections for the firm. Investors were told that the projections were based on financial models. They were supposedly tied to company contracts that had been developed over time. This process resulted in $5 million of investments for the software company from 200 investors. The representations made to investors about the firm were false. The second offering was called “Pre-Series B.” It was a convertible note offering conducted in 2021 and 2022. To solicit investors different pitches were used. For example, some were told about supposedly existing clients. Other investors were told that the company was close to securing another group of investors. The claims were false. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). See Lit. Rel. No. 26121 (Sept. 23, 2024).
Ponzi schemes: SEC v. Fernandez, Civil Action No. 0:24-cv-61774 (S.D. Fla. Sept. 24, 2024) is one of 5 actions centered on a Ponzi scheme operated by Karina N. Fernandez, an attorney, with assistance from Marco A. Rosas, Bryant Guayara, Erick M. Ruiz and Leonella M. Durant. The group raised about $196 million from investors. The scheme was based on solicitations made on zoom. Ms. Fernandez personally raised at least $891,000 from 89 investors. In addition, $362,000 in commission payments were obtained. Ms. Fernandez is alleged to have made misrepresentations in two tapes used for the solicitations. Specifically, she claimed that MJ Capital, the issuer involved, was not running a Ponzi scheme – an incorrect statement. Defendants Rosas, Guayara, Ruiz and Durarte, four of the top selling agents, sold at least $18 million in MJ Capital’s unregistered securities to 1,427 investors. Defendants are alleged to have made millions of dollars. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). See Lit. Rel. No. 26130 (Sept. 26, 2024).
Ponzi scheme: SEC v. Rhew III, Civil Action No. 1:24-cv-00771 (M.D.N.C. Sept. 25, 2024). Named as Defendant is William Rhew, a resident of North Carolina and the sole owner of Chadley Capital. He is also the president of Chadley Capital LLC. The firm recently consented to an involuntary bankruptcy. It is not registered with the Commission. Chadley Management Inc., d/b/a Spartan Safe, operates retail stores in several states. It specialized in selling gun safes.
Beginning in November 2017 Defendant solicited investments using notes called “Subordinated Debt Offerings,” issued by Chadley Capital. Investors were guaranteed they would earn 18% to 24% returns. The funds would supposedly be generated from private investments in manufacturing debts. In fact, Chadey did not hold any interests in manufacturing firms. Defendant operated the program essentially as a Ponzi scheme/offering fraud. As investor capital was generated, Defendant took the funds out. Investor money was used to purchase personal items for Mr. Rhew rather than make the promise investments. Nevertheless, investors were provided with account statements depicting their interests in the firm. The statements also supposedly reflected the increasing value of the so-called investments. Unfortunately for the investors, the account statements were fictitious, as were the investments. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26129 (Sept. 25, 2024).
False statements: SEC v. CanaFarma Hemp Products Corp., Civil Action No. 21-cv-8211(S.D.N.Y.) is a previously filed action in which the court entered final judgment by consent. Named as defendants are the firm and Vitaly Fargesen. In 2019 and 2020 CanaFarma Hemp Products raised millions of dollars from investors. The firm claimed that it was an integrated company that was processing hemp from its farm. The claim was false. The complaint also alleges that Mr. Fargesen misappropriated portions of the investor capital. Earlier Defendant Fargesen consented to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). An officer/director bar was imposed. Here the Court ordered Mr. Fargesen to pay disgorgement of $828,287 and prejudgment interest of $144,542.81. Those sums will be satisfied by the amended restitution order in the parallel criminal case. Defendant also agreed to be barred from participating in any penny stock offering. See Lit. Rel. No. 26128 (Sept. 25, 2024).
False statements: SEC v. Beals, Civil Action No. 2:24-cv-08215 (C.D.Ca. Filed Sept. 24, 2024) is an action which names as defendants Christopher Beals and Arden Lee, respectively the CEO of WM Technologies, Inc. and the CFO of the company, an on-line market place for connecting cannabis users with cannabis businesses. The firm became publicly traded as part of a de-SPAC transaction in June 2021. When the company reports results it focuses on the number of unique users opening the WM Technology mobile app or accessing the WM Technology website. It determines the number of users by counting the total number engaged with the company website during the final calendar month of the period. The company claims this metric is key. During the period the firm has repeatedly reported continued growth in this metric. Contrary to this assertion, the number declined. While Defendants were aware of this fact, they did not correct it. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Section 14(a). Defendants resolved the matter. Each consented to the entry of an officer director bar and to a civil penalty of $175,000. An administrative proceeding was also instituted and settled with the entry of a cease-and-desist order based on the same Securities Act Sections as in the action above and, in addition, Exchange Act Sections 13(a) and 14(a) and the related Rules. The firm consented to the entry of a cease-and-desist order based on the Sections and Rules cited plus the payment of a $1.5 million penalty. See Lit. Rel. No. 26127 (Sept. 25, 2024.
Crypto offering: SEC v. Truecoin LLC, Civil Action No. 3:24-cv-06684 (N.D. Ca. Filed Sept. 24, 2024) is an action which names as defendant TrueCoin and Trustoken, Inc. Neither entity is registered. Beginning in April 2023 Defendants began selling interests in TrueUSD, an investment firm tied to crypto assets. Defendants claimed that the securities were backed on a one-to-one basis by U.S. Dollars. While a portion of the assets were invested, they were in an offshore, high risk commodity fund. In December 2020 TrueCoin sold the TUST operations to an offshore affiliate, although the firm remained involved. Links were provided on the TrustToken website to the Offshore TUSD Entity’s accounts which included reports that misleadingly indicated that the TUST reserves exceeded the amount of TUSD outstanding. The risks of the investments were not disclosed. By fall 2022 TrueCoin and TrustToken became aware of redemption problems at the commodity fund. The two entities terminated their relationship with the Offshore TUSD Entity in July 2023. TUSD continued to make offers to the public. A series of redemptions resulted in over 99% of the assets being in the risky Commodity Fund. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3). Defendants TrueCoin and TrustToken resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, each firm agreed to pay a penalty of $163,766. TrueCoin agreed to pay disgorgement of $340,930 and pejudgment interest of $31,538. See Lit. Rel. No. 26126 (Sept. 25, 2024).
BaFin
Paper: A paper discussing the impact of artificial intelligence, machine learning and the resulting opportunities, is available here.
Hong Kong
Consultation: The Securities and Futures Commission of Hong Kong completed a consultation with the Hong Kong Monetary Authority on September 26, 2024. The Commission issued a joint paper regarding the meetings and agreements reached. The paper is available here.
Singapore
Remarks: Chee, Hong Tat, Minister for Transportation and Second Minister for Finance and Deputy Chairman of Monetary Authority of Singapore delivered remarks focused on improving the position of Singapore in the global market place at Global Asian Family Office Summit, Sept. 16, 2024 (here).