The Nutter Securities Enforcement Update is a periodic summary of noteworthy recent securities enforcement activity, settlements, decisions, and charges. For more information on these cases or about how they may impact you, contact your Nutter attorney.
Investment Advisers/Investment Companies
In the Matter of Eagan Capital Management, LLC, Rel. IA-6491 (Dec. 1, 2023) – In a settled matter, an RIA was charged with violating the custody rule as to two private real estate operating company Funds that it advised. According to the SEC, the RIA had custody of clients’ membership interests in the Funds and custody of the cash and securities held by the Funds, but failed to comply with the custody rule’s independent auditor examination requirements. Charges under Advisers Act Section 206(4) and Rules 206(4)-2 and 206(4)-7. Remedies included undertaking to retain independent compliance consultant, cease-and-desist, censure, and a $50k civil monetary penalty.
In the Matter of Credit Suisse Securities (USA) LLC, et al. Rel. 34-99158, IA-6504, IC-35067 (Dec. 13, 2023) – In a settled matter, the respondents were charged with acting as an investment adviser or principal underwriter to registered investment companies while ineligible to do so. On October 24, 2022, a New Jersey state court entered a consent order against Credit Suisse Securities to resolve charges that the company had violated the New Jersey Uniform Securities Act in connection with its role as underwriter of certain mortgage-backed securities. This order made the respondents ineligible to act as an investment adviser or underwriter to registered investment companies without exemptive relief under section 9(a) of the Investment Company Act. The respondents and their successors at UBS Group did not obtain such relief until June 7, 2023. Charges under Investment Company Act Section 9(a). Remedies included censure, cease-and-desist, and disgorgement, prejudgment interest, and civil penalties totaling just over $10m.
In the Matter of OEP Capital Advisors, LP, Rel. IA-6514 (Dec. 26, 2023) – In a settled matter, a registered investment adviser to private equity funds was charged with failing to maintain and enforce policies reasonably designed to prevent misuse of material nonpublic information, and specifically with failing to prevent senior personnel from failing to comply with the firm’s policies in disclosing merger-related MNPI to investors, potential investors, and industry contacts. In addition, the firm was charged with violating performance advertising rules, by using asset valuations that had not been approved by the firm’s valuation committee. Charges under Advisers Act Sections 204A and 206(4), and Rule 206(4)-7. Remedies included censure, cease-and-desist, and a $4m penalty.
Issuer Reporting/Audit and Accounting/Directors and Officers/Compliance
SEC v. CanaFarma Hemp Products Corp., et al., Lit. Rel. 25906 (Dec. 5, 2023) – In a litigated matter, the SEC obtained consent judgments against Frank Barone and Kirill Chumenko, former executives of CanaFarma Hemp Products Corp., in connection with an approximately $15 million marketing fraud. The defendants allegedly made misrepresentations to investors and made unsupported changes to the company’s financial model to disguise payments to the co-founders of the company. The cofounders allegedly misappropriated at least $4 million. Charges under Securities Act Section 17(a), Exchange Act Section 10(b), Rule 10b-5 thereunder. Remedies included officer-and-director bar, and disgorgement, prejudgment interest, and civil penalties to be determined by the court.
SEC v. Perryman, Lit. Rel. 25916 (Dec. 19, 2023) – In a litigated matter, the former CEO and co-founder of a medical device company was charged with defrauding investors in a $41 million private offering by making false and misleading statements about one of the company’s key medical device products. According to the SEC’s complaint, the medical device comprised several components, one of which was a fake, non-functional component that was implanted into patients’ bodies. The defendant was also charged with making false and misleading statements to investors about historical revenues, revenue projections, and business model. Charges under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Remedies sought include injunctive relief, disgorgement plus prejudgment interest, a civil penalty, and an officer-and-director bar. A parallel criminal matter is ongoing.
In the Matter of Brooge Energy Limited, et al., Rel. 33-11260, 34-99228, AAER 4480 (Dec. 22, 2023) – In a settled matter, an oil storage services company, its CEO, and its Chief Strategy Officer were charged in connection with an accounting and offering fraud. The company, which had gone public in a SPAC transaction and later completed a $200 million bond offering, allegedly included unsupported transactions making up 30% to 80% of total revenue in its financial statements. The transactions allegedly involved creating false invoices reflecting higher charges than were actually paid by customers and invoices to a related entity that did not store any oil with the company, as well as related misstatements to auditors and SEC staff. Charges under Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and 14(a) and Rules 10b-5, 12b-20, 13a-1, 13a-16 and 14a-9 thereunder. Remedies included cease-and-desist and penalties of $5m for the company and $100k each for the CEO and CSO.
Market Manipulation/Free Riding
SEC v. DiScala et al., Lit. Rel. 25905 (Dec. 5, 2023) – In a litigated matter, the SEC obtained a final judgment against defendant Marc Wexler, who was allegedly involved in a promotional campaign to artificially inflate the price of securities of CodeSmart Holdings, Inc. In connection with the alleged pump and dump scheme, Wexler allegedly profited over $2 million by selling his shares into the market while working with two brokers who were purchasing shares on behalf of their clients. Charges under Securities Act Sections 5(a), 5(c), 17(a), Exchange Act Section 9(a), 10(b). Remedies included permanent injunction, penny stock bar, officer-and-director bar, and disgorgement of $2.2m deemed satisfied by the restitution order in a parallel criminal proceeding.
SEC v. Andrew M. Komarow, Lit. Rel. 25908 (Dec. 8, 2023) – In a litigated matter, the SEC charged Andrew Komarow with conducting a fraudulent free-riding scheme in which he attempted to profit by purchasing and selling securities without paying for them. The complaint alleges that from October 2022 to January 2023, the defendant engaged in a pattern of making unfunded electronic transfers from various accounts to at least four broker-dealers, knowing that he did not have sufficient funds in the bank accounts to cover the transfers. The defendant allegedly made deposits totaling over $6.9 million. The defendant consented to the entry of a partial judgment, which leaves to a later decision by the court whether to order disgorgement and a civil monetary penalty. Charges under Exchange Act Section 10(b), Rule 10b-5 thereunder. Remedies included permanent injunction, bar from opening brokerage accounts without providing a copy of the judgment, and potential for disgorgement and civil monetary penalty to be decided by the court.
Securities Offerings
SEC v. Pirrello, Jr., et al., Lit. Rel. 25907 (Dec. 7, 2023) – In a litigated matter, the SEC charged five individuals and their companies for making fraudulent offerings relating to investments in pre-initial IPO companies. According to the complaint, the defendants employed a nationwide network of unregistered sales agents to raise at least $528 million in unregistered offerings of pre-IPO securities from more than 4,000 investors around the world. The SEC alleges that the defendants made false promises of no upfront fees when they siphoned off tens of millions from such undisclosed fees. Charges under Securities Act Section 17(a), Exchange Act Sections 5(a), 5(c), 15(a), 15(b), 10(b), Rule 10b-5 thereunder. Remedies sought include permanent injunctive relief, disgorgement with pre-judgment interest, civil penalties, and officer-and-director bars.
In the Matter of BarnBridge DAO, Rel. 33-11262, IC-35079, and In the Matter of Tyler Ward and Troy Murray, Rel. 33-11261, IC-35078 (Dec. 22, 2023) – In settled matters, Barnbridge, an unincorporated “decentralized autonomous organization” of holders of a crypto asset called $BOND, and its co-founders were charged with unregistered securities offerings. The respondents allegedly offered and sold structured crypto asset securities called SMART Yield bonds. The bonds were issued in Senior (guaranteed return) or Junior (variable return) tranches of SMART Yield investment pools that held crypto assets issued by third-party lending platforms. Charges under Securities Act Section 5 and Investment Company Act Section 7(a). Remedies included cease-and-desist, disgorgement of approximately $1.5m for the DAO, and penalties of $125k each for the individuals.
SEC v. Terraform Labs, et al., No. 1:23-cv-01346-JSR (S.D.N.Y. Dec. 28, 2023) – In ongoing litigation, the court granted summary judgment for the SEC on its charges that the defendants conducted unregistered public offerings of securities, but ruled that the SEC’s accompanying fraud charges raised issues of fact for trial. Following up on its earlier denial of the defendants’ motion to dismiss on the ground that the crypto assets in question were not securities, the court found that there was “no genuine dispute that the elements of the [Supreme Court’s] Howey test – ‘(i) investment of money (ii) in a common enterprise (iii) with profits to be derived solely from the efforts of others’ – have been met . . .”
Insider Trading
US v. Levoff, No. 2:19-cr-00780 (D.N.J. Dec. 7, 2023) – The former director of corporate law at Apple Inc. was sentenced to four years probation and 2,000 hours of community service, fined $30,000 and ordered to pay $604,000 in restitution on insider trading charges to which he had previously pled guilty. According to prosecutors, between February 2011 and April 2016, the defendant was corporate secretary and co-chairman of Apple’s Disclosure Committee, which reviewed drafts of the tech giant's quarterly and yearly earnings reports and SEC filings; he was also responsible for enforcing Apple's own ban on insider trading. Levoff used information from the draft earnings reports to trade in Apple stock ahead of the earnings public announcements.
(NSEU 24-01)
