This Week In Securities Litigation

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Dorsey & Whitney LLP

Chairman Jay Clayton testified on Capitol Hill this week, requesting an increase in the budget for fiscal 2020. Additional funds are necessary, the Chairman noted, to increase the size of the staff which currently stands at about 4,500 members.

Enforcement filed five actions this week. One, based on a financial fraud, focused on dumping inflated assets off the books of a firm while two alleged inside trading, one of which was against a person who misappropriated material corporate information from a friend to either trade or tip others but did not obtain any trading profits. A third action centered on a financial fraud by an Apple Inc. supplier who tried to conceal the fact that it failed to produce the iPhone component required by its contract with the tech giant. Finally, an FCPA books and records and internal controls case was brought against Brazil’s telephone firm based on its failure to maintain the proper books and records when providing tickets and hospitality to dozens of government officials at the World Cup and another conference.


Remarks: Commissioner Hester Peirce delivered remarks titled How We Howey at the Securities Enforcement Forum, East Palo Alto, California (May 9, 2019). Her remarks focused on issues related to digital assets, a recent staff no action letter in that area and related issues (here).

Testimony: Chairman Jay Clayton testified before the Financial Services and General Government Subcommittee of the U.S. Senate on Appropriations (May 8, 2019). His testimony focused on the budget for fiscal 2020, requesting an increase to hire additional staff and reviewed key events from the prior year (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 3 civil injunctive action and 2 administrative proceeding this week, exclusive of 12j and tag-along actions.

Financial fraud: SEC v. Williams, Civil Action No. 19-cv-01878 (S.D. Ind. May 9, 2019) is an action which names as a defendant Danny Williams, the president of Quality Companies, LLC. Over a two year period beginning in 2016 Mr. Williams participated in a fraudulent scheme which enabled trucking firm Celadon Group, Inc. to conceal certain losses. Specifically, Celadon Group, Inc. had over one thousand trucks on its books at inflated prices. Mr. Williams participated in a series of transactions which appeared to be unrelated but together permitted the old trucks to be removed from Celadon’s books in exchange for different trucks from the same parties at similar prices. While the Celadon board and auditors thought the sales were at current market prices and unrelated, in fact that was not true. Eventually the new trucks were moved off-book at inflated values. Celadon filed inaccurate financial statements with the Commission at the conclusion of the transactions. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 20(e). This case is related to the action brought by the Commission against Celadon Group. The case is pending. Mr. Williams has pleaded guilty in a parallel criminal action brought by the U.S. Attorney’s Office for the Southern District of Indiana and the Department of Justice. See Lit. Rel. No. 24466 (May 9, 2019).

Insider trading: SEC v. Schumann, Civil Action No. 24465 (W.D. Tenn. May 9, 2019) is an action which names as defendants Lloyd Schuman and Dane Janes, two friends who were internal auditors at, respectively, Verso Corporation and Ashford Hospitality Trust and Ashford Hospitality Prime. In the fall of 2013 Mr. Schuman learned that his employer was about to acquire NewPage Holdings Inc. Prior to the deal announcement he purchased shares and tipped a relative. Following the deal announcement on January 6, 2014 the share price for Verso closed up 393%. Mr. Schuman sold all of his shares for a profit of $107,000. His relative had profits of about $2,500. Later in 2014 when Dean Janes learned information about three material nonpublic events concerning AHT and AHP, Mr. Schuman was informed and traded. Ultimately, he had profits of about $15,000. The complaint alleges violations of Exchange Act Section 10(b). To resolve the action each Defendant consented to the entry of a permanent injunction based on the section cited in the complaint. In addition, Mr. Schuman will pay $122,574 in disgorgement, $21,341 in prejudgment interest and a penalty of $15,150. See Lit. Rel. No. 24465 (May 9, 2019).

Insider trading: SEC v. Fettner, Civil Action No. 9:19-cv-80613 (S.D. Fla. Filed May 7, 2019). Defendant Brian Fettner is a long-time friend of the General Counsel of Cintas Corporation, a Cincinnati based firm. The two men had been friends since high school and frequently stayed at one another’s homes. On June 14, 2016, Mr. Fettner traveled to Cincinnati to play in a charity golf tournament with General Counsel. He stayed at the home of his friend. At the time Cintas was in merger discussions with G&K Services, Inc., a firm engaged in a similar line of business. By mid-June the discussions had progressed. G&K provided General Counsel with a draft nondisclosure and standstill agreement for review. General Counsel took the papers home in a folder that included other documents pertinent to the transaction. He put the folder in the office/den in his home. On June 15, 2016 Mr. Fettner went into the office/den to put on his golf shoes. While in the room he saw the documents regarding the then under discussion transaction. Mr. Fettner did not mention the materials to his friend. Rather, the two men left the house to play golf. Later that day Mr. Fettner purchased shares of G&K common stock through the account of his ex-wife. Subsequently, he persuaded his girlfriend and father to buy stock while purchasing additional shares in the account of a former girlfriend and again in his ex-wife’s account. When the acquisition was announced on August 16, 2016, the share price rose about 17.7%. Collectively the accounts of ex-wife, girlfriend, former girlfriend and father had profits of at least $250,000. Mr. Fettner did not obtain any of the trading profits. The complaint alleges violations of Exchange Act Section 10(b). To resolve the case Mr. Fettner consented to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to pay a penalty in the amount of $252,000. The ex-wife and former girlfriend were named as relief defendants.

Overcharging: SEC v. Gennity, Civil Action No. 17-cv-7424 (S.D.N.Y.) is a previously filed action against, among others, broker Rocco Roveccio. The Court entered a final judgment by consent, imposing permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, the order required the payment of $147,115 in disgorgement, $17,499 in prejudgment interest and a civil penalty of $160,000. In a separate administrative proceeding Mr. Roveccio was barred from the securities business. The Commission’s complaint alleged that over a two-year period, beginning in 2012, Mr. Roveccio and others recommended to seven customers a course of high cost in-and-out trading that ran-up substantial fees while largely depleting the customer account. See Lit. Rel. No. 24464 (May 6, 2019).

Financial fraud: In the Matter of GT Advanced Technologies Inc., Adm. Proc. File No. 3-19156 (May 3, 2019) centers on the efforts of a manufacturer to conceal is failures under a contact with Apple Inc. GT Advanced is a manufacturer and supplier of sapphire glass, used by Apple as a cover for its next generation iPhone. In October 2013 the company secured a contract with Apple to supply the product. The agreement had two key components. One component set performance standards under which GT would supply the iPhone component over a period of time and meet certain milestones. The other component stipulated that Apple would make quarterly advances to the company to facilitate the process. Virtually from the beginning, GT had difficulty complying with the contract specifications as CEO Thomas Gutierrez and other officials knew. In April 2014 Apple made another payment. Yet the next month an Apple supply executive warned Mr. Gutierrez in a text message that the low quantity of sapphire produced was a “major problem.” Apple advised the firm in July 2014 that it would not use sapphire glass for its iPhone 6 launch. While Apple rejected a request to revisit the schedule, GT missed the fourth milestone in the contract, giving Apple the right to accelerate repayment of the advances. Although GT did not seek a waiver of its obligations, the firm it did falsely claim that Apple was in breach of the contract. In early August Mr. Gutierrez held an analyst call. During the call he stated that Apple was expected to make the fourth installment payment in October 2014. Several days later the claims were reiterated. Those claims were also reflected in the second quarter financial disclosures regarding sources of cash, liquidity, backlog and EPS projections included unsupported sales projections for sapphire glass furnaces. The projections assumed sales despite the fact that Apple had refused. Eight weeks after the second quarter filing containing these statements, GT filed for Chapter 11 bankruptcy. The Order alleges violations Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings GT consented to the entry of a cease and desist order based on the sections cited in the Order. See also In the Matter of Thomas Gutierrez, Adm. Proc. File No. 85768 (May 3, 2019)(Proceeding against GT CEO based on same factual allegations; resolved with a similar cease and desist order excluding Section 13(b)(2)(B), and the payment of disgorgement of $15,510.00, prejudgment interest of $2,993.91 and a penalty of $125,000).


In the Matter of Telefonica Brasil S.A., Adm. Proc. File No. 3-19162 (May 9, 2019) is a proceeding which names the firm as a Respondent. It is the largest telecommunications company in Brazil whose ADRs are registered with the Commission. In connection with the 2014 World Cup Respondent furnished tickets and related hospitality to 93 government officials. The prior year, in connection with the 2013 Confederations Cup, the firm provided tickets and related hospitality to about 34 government officials. The books and records of the firm did not accurately reflect these transactions. Respondent also did not have adequate internal controls. Accordingly, the Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, Respondent will pay a penalty of $4,125,000.

Criminal cases

Offering fraud: U.S. v. Bennett (N.D. Cal. Filed May 3, 2019) is an action which charges John Bennett with six counts of wire fraud, two counts of money laundering and one count of aggravated identity theft. The charges are based on a year long scheme that began in August 2017 in which Mr. Bennett is alleged to have defrauded investors into purchasing shares of Relatively Research. Defendant falsely claimed that the firm had a $10 million capital investment, seven offices world wide, over 15 thousand employees, gross revenue of over $36 billion in the fourth quarter of 2016 and profits of almost $30 million in the same quarter. In addition he falsely claimed that the firm’s shares were about to be listed on NASDAQ Private Market. The investor funds were either spent by Mr. Bennett or transferred to his overseas bank account, that of his mother or of his girlfriend.


Digital currency: The Monetary Authority of Singapore stated in response to questions from the legislature regarding digital currency that it had authority to regulate tokens under the Payment Services Act passed in January 2019. Under that Act there is a distinction between e-money and digital payment tokens, both of which can be used for payments. E-money is denominated in or pegged by the issuer to a national currency. Digital payment tokens are not. The regulator’s response details other provisions of the Act here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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