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08.01.2023 | Legal Update

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 Monroe Capital Management Advisors, LLC, Rel. 34-97957 (July 20, 2023) – In a settled matter, a registered investment adviser was charged with failure to timely disclose conflicts of interest, adopt certain required procedures and policies, and timely file disclosures concerning changes to beneficial ownerships of certain stocks. The complaint alleges that the RIA failed to advise clients of material conflicts of interest of personnel with ownership interests in the sponsors of three SPACs and that it failed to adopt and implement written policies and procedures to adequately address these conflicts. It further alleges that the RIA failed to timely file required Schedule 13G amendments reflecting changes in its and affiliates’ beneficial ownership of stocks of a public company formed through a SPAC business combination. Charges under Advisers Act Sections 206(2) and 206(4)-7 and Exchange Act Section 13(d) and Rule 13d-2. Remedies included cease-and-desist, censure, and civil penalties of $1m.

In the Matter of Murray A. Huberfeld, Rel. IA-6358, IC-34977 and In the Matter of Moshe aka “Mark” Feuer and Scott A. Taylor, Rel. IA-6359, IC-34978 (both July 31, 2023) – In settled matters, investment advisers and their client were charged in a scheme in which advisory client assets were allegedly used to provide liquidity to private funds managed by a related investment adviser. The advisers were also charged with failing to disclose conflicts of interest, and failing to supervise a portfolio manager who had previously been convicted of securities and wire fraud. Charges against one respondent under Advisers Act Sections 206(1), (2), (3), (4), and Rule 206(4)-8; remedies included cease-and-desist, professional bars, disgorgement of approximately $1.5m plus interest and a civil penalty of $180,000. Charges against the others included violations of Advisers Act Section 206(2); remedies included cease-and-desist, professional bars, disgorgement of approximately $400,000 and $350,000, plus interest, respectively, and civil penalties of $125,000 and $100,000, respectively.

Broker-Dealers

In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated; and BAC North America Holding Co., Rel. 34-97872 (July 11, 2023) – In a settled matter, Merrill Lynch and its parent company were charged with violating the books and records provisions of the Exchange Act by failing to file Suspicious Activity Reports (“SARs”). The complaint alleges that during a 10-year period, Merrill Lynch used a $25,000, rather than the required $5,000, threshold to determine when it filed SARs on transactions or attempted transactions it suspected of facilitating criminal activity where there was no identifiable suspect. Charges under Exchange Act Section 17(a) and Rule 17a-8. Remedial efforts, including reporting the issue to regulators and retroactively filing SARs, were considered by the Commission. Remedies included cease-and-desist, censure, and civil penalties of $6m.

In the Matter of RSE Markets, Inc., Rel. 34-97878 (July 12, 2023) – In a settled matter, an unregistered entity was charged with operating an unregistered securities exchange, the Rally Platform, for investors to purchase and sell equity interests in collectible assets, such as valuable cars and watches. Charges under Exchange Act Section 5. Remedies included cease-and-desist and a civil monetary penalty of $350,000.

In the Matter of Cantor Fitzgerald & Co., Rel. 34-97906 (July 14, 2023) – In a settled matter, broker-dealer Cantor Fitzgerald was charged with failure to identify and report large traders and make required filings. The SEC alleges that over a ten-year period, Cantor Fitzgerald failed to file Forms 13H, or filed inaccurate or incomplete Forms 13H, identifying large transactions in national market system securities. It further alleges that Cantor Fitzgerald failed to conduct regular reviews of large trader activity and failed to report required information regarding unidentified large traders. Charges under Exchange Act Section 13(h) and Rules 13h-1(b), 13h-1(d) and 13h-1(e). Remedies included cease-and-desist, censure, and civil penalties of $1.4m.

SEC v. James P. Anglim, Lit. Rel. 25780 (July 17, 2023) – In a settled matter, a New Jersey-based broker-dealer registered representative was charged with facilitating the illegal sale of stock into the public markets, violating disclosure requirements. The complaint alleges that the broker assisted individuals who controlled large blocks of stock in five public companies to sell short shares of those stocks, at prices dictated by those individuals, and concealing their involvement in the sales. Charges under Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b) and Rules 10b-5(a) and (c). Remedies included injunctive relief, a penny stock bar, and disgorgement and interest of $488,000.

In the Matter of Fifth Third Securities, Inc., Rel. 34-97937, IA-6350 (July 18, 2023) – In a settled matter, a broker-dealer was charged with failing to comply with Exchange Act Rule 15c2-12 when participating as an underwriter of municipal securities. The Rule requires underwriters to reasonably determine that the municipal issuers have agreed to provide ongoing disclosures to the Municipal Securities Rulemaking Board (MSRB) and has an exemption for offerings in authorized denominations of $100,000 or more, if such securities are sold to no more than 35 sophisticated investors who are not reselling or purchasing for the accounts of others. The broker-dealer was charged with selling to other broker-dealers or investment advisors without a reasonable belief that the purchasers were not buying on behalf of clients. Charges under Exchange Act Section 15B-(c)(1) and Rule 15c2-12, and MSRB Rule G-27; remedies included censure, cease-and-desist, disgorgement of $442,465.59 plus prejudgment interest, and a civil penalty of $200,000.

Issuer Reporting/Audit and Accounting/Directors and Officers/Compliance

In the Matter of View, Inc., Rel. 33-11208, 34-97830 (July 3, 2023) – In a settled matter, respondent, a publicly traded manufacturer of “smart” windows, was charged with understating its estimated warranty liability by failing to include shipment and installation cost for replacement windows, and related policy and recordkeeping violations. Charges under Sections 17(a)(2) and 17(a)(3) of the Securities Act as well as Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-11, 13a-13, 13a-15(a), and 14a-9 thereunder. Remedies included a cease-and-desist. In consideration of the company’s cooperation, the SEC determined not to impose a civil penalty.

In the Matter of Future FinTech Group, Inc., Rel. 33-11206, 34-97829, AAER 4425 (July 3, 2023) – In a settled matter, a producer and seller of fruit juices and other products was charged with misrepresentations in its financial statements by failing to recognize losses in its Chinese operating subsidiaries. Charges under Securities Act Sections 17(a)(2) and 17(a)(3), and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13a-15(a), and 14a-9 thereunder. Remedies included cease-and-desist and a civil money penalty of $1.65m.

In the Matter of Co-Diagnostics, Inc., Rel. 33-11209, 34-97836, AAER-4428; In the Matter of Dwight Egan, Rel. 33-11210, 34-97837, AAER-4429; In the Matter of Reed Benson, CPA, Rel. 34-97835, AAER-4427; and In the Matter of Andrew Benson, Rel. 34-97834 (all July 5, 2023) – In settled matters, Co-Diagnostics was charged with making misleading statements in early 2020 that its COVID-19 screening test could be used by consumers, when it was not then be sold for clinical diagnostic purposes. The company was also charged with failing to report related party transactions, in the form of compensation to relatives of executive officers and a consulting contract with a company co-owned by the CFO. Charges against the company and CEO under Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a),13(b)(2)(A), and 14(a) and Rules 12b-20, 13a-1, 13a-15(a), and 14a-3. Charges against the CFO under Exchange Act Sections 13(a) and 13(b)(2)(A) and Rules 13a-1, 13a-14 and 12b-20. Charges against the Head of Corporate Communications under Securities Act Sections 17(a)(2) and 17(a)(3). Remedies included cease-and-desist orders and civil penalties of $250,000 (company), $75,000 (CEO), $40,000 (CFO) and $40,000 (Head of Corporate Communications).

In the Matter of Digital World Acquisition Corp., Rel. 33-11213 (July 20, 2023) – In a settled matter, Digital World Acquisition Corp. (“DWAC”), was charged with making materially false and misleading statements and omissions. The complaint alleges that, in advance of its initial public offering, DWAC, a SPAC, filed an amended Form S-1 that falsely stated it had not engaged in any discussions with potential target companies, though it had allegedly identified Trump Media & Technology Group Corp. (“TMTG”) for a potential merger. It further alleges that following the initial public offering, DWAC filed a Form S-4 containing inadequate and misleading disclosures regarding its interactions with TMTG, and that it failed to disclose a potential conflict of interest of its CEO and Chairman. Charges under Exchange Act Section 10(b) and Rule 10b-5(b) and Securities Act Section 17(a)(2). Remedies included cease-and-desist, an undertaking to file any amended Forms S-4 completely and accurately, and civil penalties of $18m.

Securities Offerings

SEC v. Ripple Labs, et al., No. 20-cv-10832 (S.D.N.Y. July 13, 2023) – In a litigated matter involving alleged distribution of the crypto asset XRP without registration in violation of Securities Act Section 5, the court granted partial summary judgment to both sides. The court ruled for the SEC with respect to defendants’ direct solicitation of institutional investors. These sales met the Howey definition of security because, among other factors, the investors were led to “have a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” On the other hand, the court ruled for the defendants with respect to secondary market or “programmatic” sales to public buyers. The buyers did not have the same expectation of profits resulting from the efforts of others. Both sides are expected to appeal.

SEC v. Celsius Network Limited, et al., Lit. Rel. 25779 (July 14, 2023) - In a litigated matter, the SEC charged Celsius and its former CEO with failing to register securities and making false and misleading statements to investors regarding their Earn Interest Program. In this program, investors tendered their crypto assets to Celsius in exchange for interest payments. The SEC alleges that the Earn Interest Program constituted the offer and sale of securities without registration, and that defendants misrepresented their trading and business strategies, financial health and success and the safety of customer assets. The SEC further alleges that defendants manipulated the market for their own crypto asset security with their own trading. Charges under Securities Act Sections 5(a), 5(c), and 17(a) and Exchange Act Sections 9(a)(2) and 10(b) and Rule 10b-5 thereunder. Celsius is cooperating with the SEC and has consented to the requested injunctive relief.

In the Matter of Quantstamp, Inc., Rel. 33-11215 (July 21, 2023) – In a settled matter, respondent was charged with offering and selling unregistered crypto asset securities called “QSP.” Charges under Securities Act Sections 5(a), 5(c). Remedies included cease-and-desist, an undertaking to transfer QSP in its control to a Fund Administrator for destruction, disgorgement of approximately $2m plus prejudgment interest and a civil penalty of $1m.

SEC v. Terraform Labs Pte., Ltd., et al., No. 23-cv-1346 (S.D.N.Y. July 31, 2023) – In ongoing litigation involving claims that defendants made unregistered securities offerings and committed fraud in connection with the distribution of crypto assets, Judge Rakoff denied the defendants’ motion to dismiss. In doing so, the court found that the SEC had adequately alleged that the crypto assets were securities. The court rejected the approach recently taken in SEC v. Ripple by another judge in the same district, finding that the Howey test did not distinguish between initial and secondary market purchasers for purposes of determining whether an asset is a security.

Insider Trading

In the Matter of Nirdosh Jagota, Rel. 34-97915 (July 17, 2023) – In a settled matter, a former Vice President of Global Regulatory Affairs at Merck & Co. was charged with trading in the stock of Pandion Therapeutics, Inc. in advance of the public announcement of Merck’s agreement to acquire Pandion. Respondent had alleged participated in Merck’s due diligence related to the acquisition. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included injunctive relief, disgorgement of approximately $40,000 plus interest, and a civil penalty of approximately $40,000.

Market Manipulation

SEC v. Costello et al., Lit. Rel. 25773 (July 11, 2023) – In an ongoing litigated matter, judgment was entered against a microcap stock trader. The SEC alleged that the trader’s co-defendant promoted microcap stocks owned by promoter on Twitter, and then the promoter sold shares of those stocks as their prices rose and shared his profits with his co-defendant. Charges under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Remedies included injunctive relief, a penny stock bar, and disgorgement and interest of $154,430.

(NSEU 23-09)

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the Rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.