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12.01.2023 | 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

SEC v. Brite Advisors USA, Inc., Lit. Rel. 25900 (Nov. 21, 2023) – In a litigated matter, a New York-based RIA was charged with custody rule violations and failure to disclose material risks and conflicts of interest in recommending that clients use a related Australian firm as custodian. According to the complaint, among other things, the Australian firm used client assets as collateral to provide operational funding to related companies. Charges under Advisers Act Sections 206(2), 206(4) and Rule 206(4)-2. The complaint seeks injunctive relief and civil penalties.

Broker-Dealers/NRSROs

In the Matter of Laidlaw and Company (UK) Ltd., Rel. 34-98983 (Nov. 20, 2023) – In a settled matter, a broker-dealer was charged with Reg BI violations and failing to supervise two registered representatives who had engaged in excessive trading in nine customer accounts. Charges under Exchange Act Section 15(b)(4)(E), and Rules 15l-1(a)(2)(ii)(C), 15l-1(a)(1) and 15l-1(a)(2)(iv). Remedies included censure, cease-and-desist, disgorgement of approximately $550k plus prejudgment interest, and a civil penalty of approximately $225k.

SEC v. Payward, Inc., et al., Lit. Rel. 25896 (Nov. 21, 2023) – In a litigated matter, the SEC charged two entities doing business under the name Kraken with operating an unregistered digital asset securities exchange and acting as a broker, dealer, and clearing agency for digital assets without registration. The SEC further alleges that Kraken commingled customers’ cash and digital assets with its own and had deficient internal controls and recordkeeping practices. Charges under Exchange Act Sections 5, 15(a) and 17A. The filing comes after a February 2023 settlement in which Kraken agreed to cease its digital asset staking program and pay a $30 million civil penalty.

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

SEC v. SafeMoon LLC, et al., Lit. Rel. 25888 (Nov. 1, 2023) – In a litigated matter, a digital asset creator and certain senior officers were charged with fraud in the unregistered sale of a digital asset security, SafeMoon. The SEC charged that the defendants made assurances that investor funds were safely “locked” in SafeMoon’s liquidity pool and could not be withdrawn by anyone, when in fact large portions of the pool were not locked, and the defendants misappropriated millions of dollars for personal use. After a runup in price, the value of the digital asset allegedly plummeted after public disclosure that the liquidity pool was not as locked as claimed. Charges under Securities Act Sections 5 and 17(a), and Exchange Act Sections 9(a)(2) and 10(b), and Rule 10b-5.

In the Matter of Royal Bank of Canada, Rel. 34-98849, AAER-4473 (Nov. 2, 2023) – In a settled matter, RBC was charged with internal accounting control deficiencies related to cost capitalization of internally developed software. The respondent allegedly applied a single capitalization rate to some projects without a process to determine which capitalization rate to apply, resulting in capitalization of costs that were not eligible for such treatment. Charges under Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Remedies included cease-and-desist and a $6m penalty.

In the Matter of Charter Communications, Inc., Rel. 34-98923 (Nov. 14, 2023) – In a settled matter, the respondent was charged with internal controls failures in connection with its stock buyback program. The SEC charged that the company’s board authorized repurchases during Charter’s closed trading windows only under Rule 10b5-1 trading plans, and that from 2017 to 2021, many of Charter’s trading plans did not comport with the requirements of Rule 10b5-1. These plans contained “accordion” provisions which gave Charter the ability to increase its trading activity after adoption of the plans. Charges under Exchange Act Section 13(b)(2)(B). Remedies included cease-and-desist and a $25m penalty. Commissioners Peirce and Uyeda dissented, stating that the failure to monitor Rule 10b5-1 compliance was not an internal accounting control failure that violated Section 13(b)(2)(B) because the board had authorized the financial terms of the share buybacks.

SEC v. Rio Tinto plc et al., Lit. Rel. 25898 (Nov. 21, 2023) – In a partial settlement of a litigated matter, Rio Tinto and its former CEO resolved charges that the company’s public filings contained misleading statements about the value of Mozambican coal assets. Charges under Exchange Act Sections 13(a) and 13(b)(2)(A) and Rules 12b-20, 13a-16 and 13b2-1. Remedies included injunctive relief, civil penalties of $28m (company) and $50k (CEO), and agreements to cooperate in ongoing litigation against the company’s former CFO.

SEC v SAExploration Holdings, Inc., et al., Lit. Rel. 25902, AAER-4474 (Nov. 22, 2023) – In a partial settlement of a litigated matter, a former CEO/COO settled charges that he and his co-defendants caused the company to file misleading public statements about seismic data acquisition contracts with a purportedly unrelated company controlled by two co-defendants. In addition, the defendants were charged with misappropriating funds from the company and using some of those funds to create the impression that the contracts were being paid. Charges under Securities Act Section 17(a); Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, 13b2-2, and 13a-14; and Section 304(a) of the Sarbanes-Oxley Act of 2002 (“SOX”). Remedies included disgorgement of $219,940 plus prejudgment interest, and reimbursement of $441,995 to SAE pursuant to Section 304(a) of SOX.

In the Matter of Mallinckrodt plc, Rel. 33-11256, 34-99058, AAER-4476 (Nov. 30, 2023) – In a settled matter, a pharmaceutical company was charged with failing to disclose a material loss contingency stemming from a claim for as much as $500 million by the federal Centers for Medicare and Medicaid Services that the company had overcharged Medicaid for its flagship drug. Charges under Securities Act Sections 17(a)(2) and 17(a)(3), and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-13 and 13a-15(a). Remedies included cease-and-desist and compliance undertakings. The Commission determined not to impose a $40 million civil penalty based on the company’s financial condition and undertakings.

Private Funds

SEC v. Premium Point Investments LP et al., Lit. Rel. 25890 (Nov. 8, 2023) – In a settlement of a litigated matter, a final judgment was entered against a trader for a private fund advised by now-defunct Premium Point Investments LP. According to the SEC’s complaint, from at least September 2015 through March 2016, Premium Point received inflated broker quotes for mortgage-backed securities in exchange for sending trades to a broker-dealer, which further inflated the value of securities. Charges under Exchange Act Section 10(b) and Rules 10b-5(a) and (c), Securities Act Sections 17(a)(1) and (3), as well as with aiding and abetting violations of Advisers Act Sections 206(1), (2), and (4), and Rule 206(4)-8(a)(2) thereunder. Relief included permanent injunction. The court did not impose a penalty based on the defendant’s sworn representations about his financial condition.

Securities Offerings

SEC v. Jake Soberal, et al., Press Rel. 2023-233 (Nov. 9, 2023) – In a litigated action, the SEC filed charges against Jake Soberal and Irma Olguin, Jr., the co-CEOs of private technology services startup Bitwise Industries, Inc. The SEC’s complaint alleges that the defendants made material misrepresentations about Bitwise’s finances while raising approximately $70 million from investors in 2022. The defendants allegedly created and provided investors with false bank records and a fake audit report. In a parallel action, criminal charges were announced against Soberal and Olguin. Charges include Exchange Act Section 10(b) and Rule 10b-5 thereunder, Securities Act Section 17(a). Remedies sought include permanent injunctions, officer-and-director bar, disgorgement, and civil monetary penalty.

Insider Trading

SEC v. Panuwat, Case No. 3:21-cv-06322-WHO (N.D. Cal.) (Nov. 20, 2023) – In ongoing litigation involving the novel theory of “shadow trading,” the court denied the defendant’s motion for summary judgment. The SEC charged that the defendant learned confidential information about an upcoming buyout of his employer, a midsize biopharma company, and used that information to buy options in the securities of another midsize biopharma company. The court found that the timing and type of trading, the company’s confidentiality policies, and third-party analysts’ coverage of the two companies were sufficient to create triable issues of fact concerning the elements of materiality, misappropriation, and scienter.

(NSEU 23-14)

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.