This Week In Securities Litigation (Week of June 17, 2024)
Last week the Commission filed five new cases: Three were offering fraud actions; one centered on a boiler room; and the final case involved insider trading.
Be careful, be safe this week.
SEC
Decision: National Association of Private Fund Managers v. SEC, No. 23-60471 (5th Cir. Decision June 5, 2024). The Circuit Court vacated the Final Rule enacted by the agency regarding additional disclosure obligations for private funds.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 5 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Insider trading: SEC v. Bhardwaj, Civil Action No. 1:22-cv-06277 (S.D.N.Y.) is a previously filed action which named as defendants Amit Bhardwaj and two friends, Srinivasa Kakkera and Abbas Saeed. The complaint claimed that each defendant traded ahead of two corporate acquisitions announced by Mr. Bhardwaj’s then employer, Lumentum Holdings, Inc. where he was the Chief Securities Officer. Collectively, the traders had profits of over $3.6 million. Mr. Bhardwaj learned about Lumentum’s plans to first acquire Coherent, Inc. and later NeoPhotonics Corporation through his work position. The case originated from the Commission’s Market Abuse Unit Analysis and Detection Center from market analysis tools. Each Defendant previously pleaded guilty in the parallel criminal case. U.S. v. Bhardwaj, No. 22 Cr. 398 (S.D.N.Y.). Each Defendant also consented to the entry of a permanent injunction based on Exchange Act Section 10(b). Each was also barred from serving as an officer or director permanently, except for Mr. Kakkera who is barred for 7.5 years. Each was also ordered to pay disgorgement and prejudgment interest as to each account with which they were involved: Mr. Bhardwaj $462,589.91; Mr. Kakera $691,104.73; and Mr. Saeedi $691,104.73. The payment of these amounts in each case is satisfied by the amounts paid in the criminal case. The claims against the relief defendants were thus dismissed. See Lit. Rel. No. 26026 (June 13, 2024). See also SEC v. Wong below.
Offering fraud: SEC v. Jensen, Civil Action No. 1:17-cv-5563 (E.D.N.Y.) is a previously filed action that centered on a scheme to defraud investors in ForceField Energy, Inc. Defendant Jensen was paid kickbacks in exchange for successfully soliciting investments in that firm between March 2013 and April 2015. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). Defendant agreed to be permanently enjoined from future violations of each Section cited in the complaint and to the entry of a penny stock bar. In the final judgment Defendant also consented to the payment of disgorgement and prejudgment interest in the amount of $284,000. Payment of that amount is deemed satisfied by the amounts paid in the parallel criminal action, U.S. v. Jensen, No. 16-86 (E.D.N.Y.). See Lit. Rel. No. 26025 (June 13, 2024).
Offering fraud: SEC v. Bentley, Civil Action No. 4:22-cv-02722 (S.D. Tx.) is an action in which the complaint claimed that Defendant Bentley orchestrated a multi-million dollar fraud and misappropriated investor funds though his control of Defendant Bellatorum Resources, LLC while serving as CEO. About $31.5 million was raised from 149 investors. Initially, the court entered a partial judgment against defendants, enjoining each from violating the antifraud provisions of the federal securities laws and imposed an officer/director bar. Subsequently, Defendants consented to the entry, on a joint and several basis, of orders requiring the payment of disgorgement in the amount of $413,131,470.00 plus prejudgment interest of $963,727.07. Those amounts are deemed satisfied by the payments in the parallel criminal case, U.S. v. Bentley, Crim. No. 4:22-cr-400 (S.D. Tex (Huston)). See Lit. Rel. No. 26025 June 13, 2024).
Manipulation: SEC v. Giguiere, Civil Action No. 18-cv-1530 (S.D. Cal.) is a previously filed action in which defendant Gannon Giguiere is alleged to have been involved in two fraudulent schemes. In the first, involving a technology company focused on the cannabis industry, he improperly issued stock to his firms and then liquidated the shares while promoting them. In the second, involving a medical device company, he profited by conducting a matched trading scheme with a broker and another person who turned out to be an FBI agent. This scheme resulted in $1.5 million in profits. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 10(b). Defendant Giguiere consented to the entry of a permanent injunction based on the Sections charged as well as an officer/director bar and a penny stock bar. He also agreed to pay disgorgement of $7,760,415.07, prejudgment interest of $2,091,439.85 and a penalty of $875,000.00. The judgments have been entered by the court. See Lit. Rel. No. 26024 (June 13, 2024).
Offering fraud: SEC v. Raz, Civil Action No. 24 civ 4466 (S.D.N.Y. Filed June 11, 2024).
Named as defendant in this action is Ilit Raz, a 39 year old citizen and resident of Israel who founded Joonke Diversity Inc., a Delaware corporation, in 2016. As CEO of the company from founding through June 2023, she was charged with overseeing the build-out of the firm’s platform. Defendant Raz was thus responsible for helping diverse and underrepresented job candidates find employment and assist companies meet their DEI goals. Central to implementing this goal was the use of AI data to identify and solve unconscious gender and racial bias issues within companies. One key to her obligations as the program evolved was the so-called silver medalist job candidates. Job candidates in this category were supposedly underrepresented but had made it to the final point of a company’s hiring process but did not get an offer. Ms. Raz claimed to use technology such as AI to connect these job candidates with a position and facilitate their job search while aiding the firm in meeting its goals. Defendant claimed she tapped into implementing the firm’s DEI goals and those of employment seekers such as those of the Silver Medalists to raise at least $21 million in equity investments from a number of investors by early 2023. The claims were false. Yet they appeared to have validity based in part on the false documents she created to support them. When the fraudulent scheme began to emerge, CEO Raz tapered off the operations of Joonke. Ultimately, she had the firm file for bankruptcy in May 2024. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). A parallel action has been filed by the U.S. Attorney’s Office for the Southern District of New York. See Lit. Rel. No. 26020 (June 11, 2024).
Bribes: SEC v. Auerbach, Civil Action No. 1:19-cv-5631 (E.D.N.Y.) is a previously filed action which centered on the payment of bribes. It named as defendant Jarret Mitchell. The complaint claimed that Mr. Mitchell entered into a so-called consulting agreement tied to his participation in an illegal kickback scheme. Beginning in July 2014, and continuing for over a year, Mr. Mitchell entered into what were called “consulting agreements” with the CEO of Nxt-ID, Inc. whose shares were publicly traded. The agreements were actually a guise to channel cash bribes from the CEO to a registered broker. That broker purchased shares of Nxt-ID in customer accounts. Defendant Mitchell was paid, according to the complaint, for his participation in arranging kickbacks to the stockbroker. The action was settled with Mr. Mitchell consenting to the entry of a final judgment which precludes future violations of Exchange Act Section 10(b). It also imposed a penny stock bar and directed that Defendant pay disgorgement of $3,000 and prejudgment interest. See Lit. Rel. No. 26018 (June 7, 2024).
Insider trading: SEC v. Witherspoon, Civil Action No. 3:24-cv-00570 (S.D. Cal.) is a previously file action which named as defendant Chase Lambert, a former minor league baseball player. It centers on the takeover of Del Taco Restaurants, Inc. by Jack in the Box Inc. in December 2021
Prior to the deal announcement in December, Defendant Jordan Oscar learned about the deal from a friend and former teammate who was working on the deal at Jack in the Box. After Mr. Oscar tipped Defendant Chase Lambert and others who purchased shares of Del Taco. Following the deal announcement Mr. Lambert had trading profits of $25,080. To resolve the action, Mr. Lambert consented to the entry of a permanent injunction based on Exchange Act Section 10(b). The order directed that Mr. Lambert pay disgorgement in the amount of his trading profits plus prejudgment interest for a total of $29,775.00. See Lit. Rel. No. 26017 (June 6, 2024).
Insider trading: SEC v. Wong, Civil Action No. 1:24-cv-04231 (S.D.N.Y. Filed June 3, 2024).
Defendant Andre Wong has been employed by NeoPhotonics Corporation for years. His most recent position is vice president of product line management. The firm is a designer and manufacturer of photonics products – devices and systems that generate, manipulate or detect light. This action centers on an announcement on November 4, 2021, stating that Mr. Wong’s employer would be acquired by Lumentum Holdings Inc. Prior to the announcement date Mr. Wong learned about the plan to acquire NeoPhotonics from a close friend employed by Lumentum. After receiving the information Defendant purchased 10,0000 shares of NeoPhotonics stock. Mr. Wong had never traded in the firm’s securities or those of other companies engaged in the same line of business. Following the deal announcement the share price of the stock increased by about 39%. This increased the value of Mr. Wong’s holdings to about $62,000. The next year an FBI met with Defendant and asked about the stock. Mr. Wong denied knowledge of the acquisition deal. He also created documents designed to conceal the meeting with his friend during which the then potential deal was discussed. The complaint alleges violations of Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 26016 (June 4, 2024). See also SEC v. Bhardwaj above.
Books/records/fraud: SEC v. Ni, Civil Action No. 1:24-cv-01632 (D.D.C. Filed June 3, 2024) is an action which names as defendants: Zhou Min Ni and Jian Ming Ni, each a former executive of HF Foods Group, Inc, a restaurant food distribution company. The case is based on a scheme to conceal hundreds of millions of dollars in liabilities of the firm. Defendant Jhou Min N is charged with violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(a) and the related rules and Section 304(a) of Sox as well as aiding-and-abetting the firm. The complaint claims that Jonathan Ni violated Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b) and aided and abetted the violations by Atlantic Acquisition Corp. of Exchange Act Section 14(a). Defendant Zhou Min Ni consented to the entry of a permanent injunction and a conduct based injunction which precludes him from exercising any control over HF Foods. It also requires him to pay disgorgement of $5,102,883.27 and prejudgment interest of $1,368,361.52. In addition, the order requires Zhou Min Nito to reimburse $963,042 to HF Foods Group in accord with Sox Section 304(a). All of this is deemed satisfied by Zhou Min Nito reimbursing $963,042 to HF Foods under Section 304(a) of SOX. These payments are deemed satisfied by Zhou Min Ni’s prior payment of $9.25 million in the settlement of a related shareholder derivative lawsuit; a $300,000 civil penalty and a permanent bar from serving as an officer or director. Johnathan Ni consented to the entry of a settlement that includes a permanent injunction, an $80,000 civil penalty and a ten-year officer director bar. See Lit. Rel. No. 26023 (June 12, 2024).
Boiler room: SEC v. Gogliormella, Civil Action No. 24-cv-4348 (S.D.N.Y. Filed June 7, 2024) is an action which names as defendants individuals who were formerly involved with the StraightPath and Legend Boiler Room Operations. Those named as defendant are Mario Gogliomella, Steven Lacaj, and Karim Ibrahim. This action centers on the time period 2019 – 2022. It claims that Defendants Goplormella, Lacaj and Karim Ibrahim directed a sales force of over 50 individual callers operating a boiler room. The securities were marked up between 19% and 105%. It alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 10(b), 15(a) and Advisers Act Sections 206(1), 206(2) 206(3) and 206(4). A parallel action was filed by the U.S. Attorney’s Office for the Southern of New York. See Lit. Rel. No. 206021 (June 12, 2024).
Offering fraud: SEC v. Menard, Civil Action No. 24-cv-4149 (E.D.N.Y. Filed June 11, 2024) is a case which names as defendant Marc Henry Menard for operating a fraudulent offering scheme that defrauded over 50 people, many of whom were from the Haitian-American community. The scheme raised over $$1.65 million. Conducted during the period July 2021 through September 2023, the scheme was built on a series of false statements about the use of the proceeds raised and the rates of returns. The complaint alleges violations of Securities Act Sections 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is in litigation. See Lit. Rel. No. 26019 (June 11, 2024).
Australia
Remarks: Jow Longo, ASIC Chain, delivered the Opening Statement at the Parliamentary Joint Committee on Corporations and Financial Services, Oversight of ASIC, on June 14, 2024 (here).
Singapore
Publication: The Monetary Authority of Singapore published a blueprint co-authored with BIS Innovation Hub, titled Blueprint for a Climate Risk Platform for Financial Authorities, on June 12, 2024 (here).