The Nutter Securities Enforcement Update is a periodic summary of noteworthy recent securities enforcement activity, settlements, decisions, and charges.
Investment Advisers/Investment Companies
SEC v. Mintz, Lit. Rel. 25746 (June 14, 2023) – In a litigated matter, a registered investment adviser and its managing partner were charged with illegal “naked short selling” of securities by knowingly or recklessly failing to borrow or locate the securities and failing to make timely delivery of the shares. Charges under Exchange Act Section 10(b) and Rules 10b-5 and 10b-21, and Advisers Act Sections 204 and 206(4) and Rules 204-2 and 206(4)-7.
In the Matter of Pacific Investment Management Company, Rel. IA-6328 and In the Matter of Pacific Investment Management Company, Rel. IA-6329, IC-34943 (both June 16, 2023) – In the first of two simultaneous settled matters, PIMCO was charged with failing to accurately waive advisory fees on a mutual fund that operates as a fund-of-funds in accordance with contractual requirements. PIMCO was credited with prompt remedial efforts, including fee reimbursements, after discovery of the error. Charges under Advisers Act Section 206(4) and 206(4)-7. Remedies included cease-and-desist, censure, and a civil penalty of $2.5m. In the second matter, PIMCO was charged with failing to adequately disclose that income from paired interest rate swaps had become a material source of distributable income from a closed-end mutual fund and that the paired swaps contributed to a decline in the fund’s NAV. Charges under Investment Company Act Section 34(b) and Investment Advisers Act Section 206(4) and 206(4)-8. Remedies included cease-and-desist, censure, and a civil penalty of $6.5m.
SEC v Infinity Q Capital Management, Lit. Rel. 25750 (June 16, 2023) – In a settled matter, a registered investment adviser was charged with falsely inflating the NAV of a public mutual fund and a private fund over a four-year period. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, Advisers Act Sections 204(a), 206(1), 206(2), 206(4) and 207, and Rules 204-2(a), 206(4)-7, and 206(4)-8, and Investment Company Act Section 34(b) and Rule 22c-1. The firm’s chief investment officer was previously charged by the SEC and pleaded guilty to securities fraud charges and was sentenced to 180 months imprisonment. Under the settlement, the RIA agreed to injunctive relief and the appointment of a monitor to oversee the return of remaining funds to harmed private fund investors (a special master had previously been appointed for the mutual fund).
In re Insight Venture Management, LLC, Rel. IA-6332, (June 20, 2023) – In a settled matter, a private equity fund adviser was charged with charging excess management fees by misapplying the standards by which a portfolio investment would be deemed “impaired” when it assessed impairment at the “portfolio company” rather than the “portfolio investment” level, which allowed impaired portfolio investments to be ignored if other investments in the portfolio company were not impaired. Charges under Advisers Act Section 206(2) and 206(4) and Rules 206(4)-7 and 206(4)-8. The respondent’s remedial efforts, including reimbursement of some fees, were considered by the Commission. Remedies included cease-and-desist, disgorgement of approximately $775,000 plus interest, and a civil penalty of $1.5m.
In re Benecke, Rel. 34-97828, IC-34954 (June 30, 2023) – In a settled matter, an unregistered municipal securities consultant was charged with engaging in municipal advisory activity in connection with eight municipal bond offerings without registering with the SEC and MSRB, and related disclosure failures. Charges under Exchange Act Section 15B(a)(1)(B) and MSRB Rules A-12 and G-17. Remedies included cease-and-desist, association bars, and a civil penalty of $60k.
Broker-Dealers
SEC v. Auctus Fund Management, LLC, Lit. Rel. 25741 (June 1, 2023) – In a litigated matter, Auctus Fund Management LLC and its Massachusetts-based owners, Alfred Sollami and Louis Posner, were charged with buying and selling billions of newly-issued shares of microcap securities without registering as dealers or associating with a registered dealer. The complaint alleges that Auctus, Sollami, and Posner purchased convertible notes and associated warrants from microcap issues, converting the notes into shares of stock at a large discount from the market price, and generating over $100 million in profits after selling those shares into the market. Charges under Exchange Act Sections 15(a)(1), 20(b). Remedies sought include permanent injunctions, disgorgement with prejudgment interest, civil penalties, penny stock bars, and other equitable relief.
SEC v. BHP Capital NY, Lit Rel. 25749 (June 16, 2023) – In a settlement of a litigated matter, the defendants were charged with acting as an unregistered dealer when they provided convertible debt financing more than 100 times to microcap issuers, then converted the notes to newly issued shares and sold them at a profit. Charges under Exchange Act 15(a)(1). Subject to court approval, the settlement provides for injunctive relief, a five-year penny stock bar, disgorgement and interest of approximately $2.4m, and surrender of outstanding conversion rights, unsold shares, and unexercised warrants.
In re JP Morgan Securities, LLC, Rel. 97787 (June 22, 2023) – In a settled matter, JPMorgan was charged with deleting approximately 47 million electronic communications that were still subject to the 36-month retention requirement, based on erroneous representations from an archiving vendor that required messages had been coded to prevent permanent deletion. Charges under Exchange Act Section 17(a) and Rule 17a-4(b)(4). Remedies included cease-and-desist, censure, and a $4m civil penalty.
Issuer Reporting/Audit and Accounting/Directors and Officers/Compliance
In the Matter of Michael K. Lawlor, Rel. 33-11200, 34-97649, AAER-4415, In the Matter of Maeve Duska, Rel. 33-11201, 34-97650, AAER-4416 and In the Matter of Cantaloupe, Inc. Rel. 33-11202, 34-97651, AAER-4417 (all June 5, 2023) – In settled matters, a public company, its chief services officer, and a vp for sales and marketing were charged with improper revenue recognition practices by USAT, a predecessor of Cantaloupe, Inc. The SEC charged that USAT overstated its revenue through improper use of “bill and hold” sales transactions that had not been completed in accordance with GAAP and corporate revenue recognition policies. Charges under Securities Act Sections 17(a)(2) and (a)(3), and Exchange Act Sections 12, 13(a), and 13(b)(2)(A) and (B), and Rules 12b-20, 13a-1, 13a-11 and 13a-13, Remedies included cease-and-desist, disgorgement of approximately $10k plus interest (Duska), and civil penalties of $1.5m (corporation), $75k (Lawlor), and $15k (Duska).
In the Matter of Daniel V. Martinez, Rel. 33-11203, 34-97677 (June 8, 2023) – In a settled matter, an attorney was charged with carrying out an undisclosed agreement to hold and sell shares of two publicly-traded companies, which were beneficially owned by the former chair of the company, and with aiding and abetting the failure to make required Schedule 13D and other filings regarding those sales. Charges under Securities Act Sections 5(a), 5(c) and 17(a); Exchange Act Sections 10(b), 13(d) and 16(a) and Rules 10b-5, 13d-1 and 16a-3; and SEC Rule 102(e). Remedies included cease-and-desist, a penny stock bar, a bar from practicing law before the Commission, and disgorgement of approximately $150k plus interest.
In the Matter of Boyle CPA, LLC and Robert Allan Boyle, Rel. 34-97685, AAER-4418 (June 9, 2023) – In a settled matter, a public accounting firm and its sole owner were charged with violating PCAOB auditing standards in the audits of several public companies. The respondents were charged with failing to communicate with clients’ boards of directors and with clients’ predecessor auditors, complete and maintain adequate audit documentation, adequately audit inventory, and perform adequate and timely engagement quality reviews. Charges under Exchange Act Sections 4C, 13(a), 15(d) and Rules 13a-1 and 15d-1, Rule 2-02(b)(1) of Regulation S-X and Rule 102(e) of the Commission’s Rules of Practice. Remedies included cease-and-desist, accounting practice bar, disgorgement of approximately $167k plus interest, and a civil penalty of $50k.
In the Matter of David Dickson and Stuart Andrew Spence, Rel. 34-97740, AAER-4419, (June 16, 2023) – In a settled matter, the former CEO and CFO of McDermott International were charged with approving an understatement of a loss forecast on a major construction contract in a quarterly report and 8-K press release. Charges under Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-11, 13a-13, and 13b2-1. Remedies included cease-and-desist and civil penalties of $100k and $40k, respectively.
In re Stanley Black & Decker, Inc., Rel. 34-97761, AAER-4422, and In re Ansell, Rel. 34-97760, AAER-4421 (both June 20, 2023) – In related settled matters, Stanley Black & Decker and a former executive were charged with failing to disclose in definitive proxy statements approximately $1.3 million in benefits to four executives and one director, including use of corporate aircraft. The company was charged under Exchange Act Sections 13(a) and 14(a) and Rules 12b-20, 13a-1 and 14a-3. Citing the company’s cooperation and remedial efforts, the remedies included a cease-and-desist order but no civil penalty. Respondent Ansell, a former executive vice president, was charged with causing the company’s disclosure failures by failing to completely identify undisclosed perquisites and personal benefits. Charges under Exchange Act Sections 13(b)(2)(A) and 14(a); remedies included cease-and-desist and a civil penalty of $75k. (The respondent had previously reimbursed the company for personal expenses.)
In re Marcum LLP, Rel. 34-97773, AAER-4423 (June 21, 2023) – In a settled matter, a public accounting firm was charged with “systemic quality control failures and violations of audit standards” in connection with audit work for special purpose acquisition companies (“SPACs”). These charges related to client acceptance, risk assessments, audit committee communications, audit documentation, quality reviews, technical consultations, and engagement partner supervision and review. Charges under Exchange Act Section 4C, Reg S-X Rule 2-02(b)(1), and SEC Rules of Practice 102(e)(1)(ii) and (iv)(B). Remedies included limitations on new audit client acceptance, cease-and-desist, censure, and a $10m civil penalty.
SEC v. Casutto and SEC v. Drexler, Lit. Rel. 25757 (June 28, 2023) – In one settled and one ongoing litigated matter, the SEC alleged that former executives of MusclePharm Corporation engaged in improper revenue recognition practices by prematurely recognizing revenue from orders that remained in the company’s control and by misclassifying customer credits as advertising expenses rather than revenue reductions. Separately, the SEC alleged that the CEO misled investors about the impact of the company’s default with institutional noteholders and falsely certified that he evaluated the company’s internal controls. In the settled matters, three executives were variously charged under Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b) and 14(a) and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-15(a), 13b2-1, 14a-3 and 14a-9. Remedies included injunctive relief, disgorgement of $15k, $80k, and an amount to be determined, and civil penalties of $50k, $207k, and an amount to be determined. In the ongoing litigation, the CEO is charged with violating Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b) and 14(a) and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13a-15(a) - (c), 13b2-1, 14a-3 and 14a-9, and the SEC is seeking to invoke the clawback provision of Sarbanes Oxley Section 304(a).
Securities Offerings
Slack Technologies, LLC, et al. v. Pirani, No. 22-200 (S. Ct. June 1, 2023) – In a private securities class action suit under Securities Act Section 11, the Court held that a plaintiff must plead and prove that he purchased shares traceable to the allegedly defective registration statement. The defendant corporation (petitioner) had conducted a “direct listing” of its shares on the New York Stock Exchange – rather than a traditional initial public offering – and filed a registration statement offering 118 million registered shares. At the same time, an additional 165 million unregistered shares (shares previously issued to employees and early-stage investors) became immediately eligible for trading on the exchange. The plaintiff did not allege whether he had purchased shares traceable to the registration statement or unregistered shares unconnected to the registration statement. The district court and the Ninth Circuit had denied the petitioner’s motion to dismiss the complaint, and the Supreme Court reversed and remanded the case for further proceedings.
In the Matter of DF Growth REIT II, LLC, Rel 33-11204, (June 9, 2023) – In a settled matter, the Commission found that an issuer failed to comply with two conditions of Regulation A: failing to commence its qualified continuous offering within two days of its qualification order as required by Rule 251(d)(3)(i)(F), and raising its maximum offering amount by filing and offering circular supplement rather than a new offering statement or post-qualification amendment as required by Rule 253(b). The respondent’s exemption from registrations under Reg A was permanently suspended. Commissioner Uyeda issued a statement cautioning that the order should only be viewed as requiring the commencement of an offering within two days of the qualification date, not actual sales or the commencement of operations.
SEC v. Rubin, Lit. Rel. 25756 (June 27, 2023) – In settlements of litigated matters, the defendants consented to judgments on charges related to the sale of restricted shares to the public. One defendant, a disbarred former lawyer, had issued 128 legal opinion letters supporting such stock sales; the other, an attorney, was charged with signing about 30 opinion letters falsely stating that he had performed substantive work. Both had pleaded guilty in prior criminal actions. The defendants were charged under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Remedies included injunctive relief and penny stock bars.
Insider Trading
SEC v. Garelick, Press Release 2023-121 (June 29, 2023) – In a litigated matter, three individuals and a venture capital firm were charged with insider trading in the securities of DWAC, a special purpose acquisition company, in advance of an announcement of DWAC’s plans to merge with Trump Media and Technology Group. An employee of the VC firm served as a former board member of DWAC, and allegedly tipped the firm and its CEO, who allegedly tipped the CEO’s brother. Charges under Securities Act Section 17(a)(2) Exchange Act Section 10(b) and Rule 10b-5; the director was also charged under Exchange Act Section 16 and Rule 16a-3.
SEC v. DuPont, Press Release 2023-122 (June 29, 2023) – In a litigated matter, the SEC charged five individuals, including a police chief, with insider trading in advance of a tender offer by Alexion Pharmaceuticals to acquire Portola Pharmaceuticals in May 2020. Defendant DuPont, a vice president at Alexion, allegedly tipped the police chief of Dighton, Massachusetts, who allegedly tipped others. Charges under Exchange Act Section 10(b) and Rule 10b-5.
SEC v. Dagar, Press Release 2023-123 (June 29, 2023) – In a litigated matter, a former Pfizer senior statistician and his friend were charged with trading in advance of Pfizer’s announcement that its randomized, double-blind study of Paxlovid was successful. Charges under Exchange Act Section 10(b) and Rule 10b-5.
SEC v. Meadow, Press Release 2023-124 (June 29, 2023) – In a litigated matter, a registered representative of a broker-dealer and the CCO of an international payment processing company were charged with trading based on nonpublic information about upcoming public company mergers and acquisitions. The CCO allegedly obtained the information from the laptop of his girlfriend, who was employed at a prominent investment bank, when she was working from home during the COVID-19 pandemic. Charges under Exchange Act Section 10(b) and Rule 10b-5.
SEC v. Bhardwaj, Rel. 34-97820 (June 29, 2023) – In a settlement of a litigated matter, a trader was charged with insider trading in the securities of Coherent, Inc., in advance of the announcement that it would be acquired by Lumentum Holdings, Inc., based on information received from the trader’s brother, a Lumentum executive. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included cease-and-desist, disgorgement, and a civil penalty of approximately $9k each.
SEC v. Roman, Lit. Rel. 25762 (June 30, 2023) – In a settled matter, a marketing director at Acceleron Pharma, Inc., was charged with trading in Acceleron based on nonpublic information about positive results related to two of the company’s drugs in development. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included injunctive relief, disgorgement, and a civil penalty of approximately $100k each.
Penalties
SEC v. Husain, No. 21-55859 (9th Cir., June 13, 2023) – In a 2-1 ruling, the appeals court reversed and remanded the summary judgment ruling granting the SEC’s requested penalty amount. The court held that in determining “gross pecuniary gain,” for purposes of a 2d tier penalty under Securities Act Section 20(d)(2)(B) and Exchange Act 21(d)(3)(B)(ii), the district court erred in assuming that the receipt of proceeds by a company controlled by defendant was the same as receipt by the defendant himself. This was relevant because the entity paid several hundred thousand dollars in legal fees, but it is a separate analysis from the “net income” test for a disgorgement remedy under SEC v. Liu. The court also held that the district court erred in deciding the scienter and contrition elements of the 9th Circuit penalty test on summary judgment, finding that the defendant had raised a factual dispute on these subjective points.
(NSEU 23-08)
