Trending publication

03.01.2024 | Legal Update

The Nutter Securities Enforcement Update is a periodic update of noteworthy recent securities enforcement activity, settlements, decisions, and charges. We provide brief summaries that highlight recent enforcement action filings and developments to help identify enforcement trends, changes in the law, new theories, and new areas of enforcement focus. 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 Aon Investments USA, Inc., et al., Rel. IA-6536 and In the Matter of Claire P. Shaughnessy, Rel. IA-6535 (both Jan. 25, 2024) – In settled matters, Aon and an individual investment adviser representative were charged with failing to adequately investigate and with making misrepresentations to their public pension plan client about the calculation of an important performance metric that determined the level of required contributions to the pension plan. Charges under Advisers Act Section 206(2). Remedies included censure, cease-and-desist, disgorgement of about $500k plus interest (company), and penalties of $1m (company) and $30,000 (IAR).         

In the Matter of David Bodner, Rel. IA-6540 (Feb. 2, 2024) – In a settled matter, a principal of two related investment advisers was charged with failing to disclose his ownership interests in the advisory firms and in funds and portfolio companies in which client funds were invested. The advisor was also charged with failing to disclose that some related party transactions were executed to provide liquidity and pay debt service for one set of funds. Charges under Advisers Act Sections 206(1), 206(2) and 206(4) and Rule 206(4)-8. Remedies included cease-and-desist, a three-year securities industry bar, disgorgement of approximately $2m plus prejudgment interest, and a $180k penalty.

Sixteen Firms Settle SEC Electronic Records Recordkeeping Charges, Press Rel. 2024-18 (Feb. 9, 2024) – In settled matters, five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers were charged with failure to maintain text messages and other “off-channel” communications as business records in compliance with Exchange Act and Advisers Act Rules. Charges under Exchange Act Section 17(a) and Rule 17a-4(b)(4) and Advisers Act Section 204 and Rule 204-2(a)(7). Remedies included censure, cease-and-desist, compliance undertakings, and penalties ranging from $1.25m to $16.5m.

In the Matter of Van Eck Associates Corporation, Rel. IC-35132, IA-6560 (Feb. 16, 2024) – In a settled matter, Van Eck Associates Corporation agreed to settle charges alleging it failed to disclose a social media influencer’s role in the launch of its new exchange-traded fund (ETF). According to the SEC, in March 2021, Van Eck launched its ETF, which tracked an index based on social media sentiment. The index provider planned to use an influencer to promote the fund, with their fees increasing as the fund grew. However, the SEC alleged that Van Eck failed to disclose this influencer involvement and the fee structure to the ETF's board when seeking approval for the launch and fees. Charges under Investment Company Act 15(c), Advisers Act Sections 206(2) and (4), and Rule 206(4)-7. Remedies include a $1.75m civil penalty.

Institutional Shareholder Services, Inc. v. SEC, (D.D.C., Feb. 23, 2024) – In a litigated challenge to the SEC’s rules governing proxy advisory firms, which were first adopted during the Trump administration and later modified, the district court struck down Rule 14a-1(l)(1)(iii)(A), holding that providing advice to shareholders (including mutual funds and other institutions) about how to vote corporate proxies did not constitute “solicitation” of proxy votes subject to Section 14 of the Exchange Act. The court reached this conclusion based on predominant dictionary definitions of “solicit” that did not encompass communications by a person who did not seek to promote a specific objective. In addition, the court found that the legislative purpose of Section 14 was to prevent interested parties from using deceptive means to obtain a proxy vote, and that applying Section 14 to financially disinterested advisors would not advance this purpose.

Broker-Dealers

In the Matter of Morgan Stanley & Co. LLC, Rel. 34-99336 (Jan. 12, 2024) and In the Matter of Pawan Kumar Passi, Rel. No. 34-99337 (Jan. 12, 2024) – In a settled matter, Morgan Stanley & Co. LLC and its former head of its equity syndicate desk were charged with a multi-year fraud involving the disclosure of confidential information about the sale of large quantities of stock known as “block trades.” Morgan Stanley was also charged with failing to enforce its policies on the misuse of material non-public information related to block trades. According to the SEC, the former head of the equity syndicate desk and a subordinate disclosed non-public information to select buy-side investors, enabling them to take advantageous positions. The SEC alleged the disclosed information was potentially market-moving and intended to be used by investors to “pre-position” themselves by taking significant short positions in the stock that was the subject of the upcoming block trade. The strategy aimed to reduce Morgan Stanley's risk in purchasing block trades. The SEC also accused Morgan Stanley of failing to enforce information barriers to prevent the disclosure of material non-public information from the equity syndicate desk to a trading division on the public side of the firm, hindering scrutiny of trades based on confidential information. Charges for Morgan Stanley under Exchange Act Sections 10(b), 15(g), and Rule 10b-5(b). Remedies include censures, $138m in disgorgement, $28m in prejudgment interest, and $83m in civil penalties. In parallel action by the U.S. Attorney’s Office for the Southern District of New York, the SEC’s ordered disgorgement and prejudgment interest for Morgan Stanley will be deemed partially satisfied by the forfeiture and restitution paid by the firm pursuant to its criminal resolution. Remedies against the former head of Morgan Stanley’s equity syndicate desk include $250k civil penalty and associational, penny stock, and supervisory bars.

In the Matter of Robinhood Financial LLC, Mass. Securities Division Docket E-2020-0047 (Jan. 18, 2024) – In a Consent Order, Robinhood settled Massachusetts Securities Division administrative charges that it violated the Massachusetts Uniform Securities Act and regulations by marketing itself to individual investors via an app and other promotional campaigns and by failing “to maintain the infrastructure and procedures necessary to meet the demands of its customer base.” A separate administrative charge arising out of a 2021 data breach incident was also settled. Charges under the “unethical or dishonest conduct or practices” and failure to supervise sections of the Massachusetts Uniform Securities Act, M.G.L. c. 110A, § 204(a)(2)(G) and (a)(2)(J). Remedies included censure, cease-and-desist, a $7.5m administrative penalty, and specific changes to the firm’s customer platform, including additional disclosures and the removal of features like emojis, confetti, push notifications, and “features that mimic games of chance.” This settlement also ends the company’s challenge to the Massachusetts broker-dealer fiduciary rule, after the Massachusetts Supreme Judicial Court upheld the rule late last year.

In the Matter of TIAA-CREF Individual & Institutional Services, LLC, Rel. 34-99549 (Feb. 16, 2024) – In a Consent Order, TIAA-CREF Individual & Institutional Services LLC settled charges alleging it failed to comply with Regulation Best Interest (Reg BI) in connection with recommendations to retail customers. According to the SEC, TIAA failed to inform customers about a lower-cost investment option within their IRAs, violating Reg BI’s General Obligation, Disclosure, Care, and Compliance Obligations, which requires them to act in their clients' best interests. The SEC alleged that nearly 6,000 customers paid more than $900,000 more than they needed to. Penalties include cease-and-desist, censures, disgorgement of $936,714 plus prejudgment interest of $103,424.91, and a civil penalty of $1.25m.

Issuer Disclosure/Audit and Accounting

In the Matter of Edward F. Hackert, CPA, Rel. 33-11267, 34-99384, AAER-4483 (Jan. 18, 2024) – In an ongoing administrative proceeding, an engagement partner at Marcum LLP for at least 240 public company audits, including over 150 SPAC audits, was charged with improper professional conduct in many of these audits. The SEC charged that the partner failed to properly supervise numerous audit engagements and to ensure that the engagements were performed in accordance with PCAOB standards, principally by failing to assemble final audit documentation by the completion date and failing to review the work of audit team members. Charges under Exchange Act Section 4C(a)(2), Rule 2-02(b)(1) of Reg S-X, and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. The engagement partner subsequently filed an action in federal court asserting several constitutional challenges to the SEC’s administrative proceeding.

In the Matter of Northern Star Investment Corp. II, Rel. 33-11266 (Jan. 25, 2024) – In a settled matter, a special purpose acquisition company (SPAC) was charged with failing to disclose in public statements and SEC filings prior to its IPO that it had engaged in discussions with an acquisition target and its controlling shareholder. Charges under Securities Act Section 17(a)(2). Remedies included cease-and-desist and a penalty of $1.5m.

SEC v. Rosenberger, et al., Lit. Rel. 25934 (Jan. 30, 2024) – In an ongoing litigated matter, the federal district court granted partial summary judgment to the SEC against the former CFO and Controller of publicly-traded Synchronoss Technologies. In one transaction, the court held that the CFO had violated Exchange Act Section 10(b) and Rule 10b-5, and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(5) and Rules 13b2-1,13b2-2 and 13a-14, and aided and abetted the company’s similar violations, in connection with improper recognition of revenue from an asset sale in a quarter before the transaction was finally priced and executed. In a second, the court found that both defendants violated Exchange Act Section 13(b)(2)(A) and Rule 13b2-1 by falsifying records, separating two transactions that were part of a single multiple-element arrangement, resulting in an over-reporting of revenue because one the transactions was expected to result in a net loss. The CEO was also ordered to reimburse approximately $430,000 in incentive-based compensation under Section 304 of the Sarbanes-Oxley Act.

In the Matter of Cloopen Group Holding, Limited, Rel. 34-99483 (Feb. 6, 2024) – In a settled matter, a Chinese company whose ADSs are traded in the United States was charged with prematurely recognizing revenue on service contracts for which the company had either not completed work or, in some instances, not started work. Charges under Exchange Act Sections 10(b),13(a), 13(b)(2)(A), and 13(b)(2)(B) Act, and Rules 10b-5, 12b-20, 13a-1, and 13a-16. Remedies included a cease-and-desist order; because of the company’s self-reporting and cooperation, the SEC did not impose a civil penalty.

SEC v. Pereira, Lit Rel. 25944 (Feb. 27, 2024) – In a litigated matter, the SEC charged the former CEO of a publicly traded advertising technology company with making misleading statements about the company’s revenues to boost its share price, including through the use of a pseudonym on social media. Charges under Securities Act Sections 17(a)(1) and (a)(3) and Exchange Act Section 10(b) and Rule 10b-5. Remedies sought include an injunction, an officer-and-director bar, and a civil penalty.

In the Matter of Lordstown Motors Corp., Rel. 33-11274, 34-99637, AAER-4490 (Feb. 29, 2024) – In a settled matter, an electric truck manufacturing company was charged with making misleading statements in SEC filings and other public statements during the course of its merger with a SPAC and thereafter. The statements had to do with the true nature of pre-orders for their full-size electric pickup truck, the company’s access to key parts, and the timing of delivery. In addition, the company was charged with filing financial statements audited by a accounting firm that had provided bookkeeping and financial statement preparations services in violation of auditor independence rules. Charges under Securities Act Sections 17(a)(2) and (a)(3), and Exchange Act Sections 13(a) and 14(a) and Rules 12b-20, 13a-11 and 14a-3. Remedies included cease-and-desist and disgorgement of $25.5m which would be deemed satisfied upon the completion of certain settlement payments to resolve investor claims in the company’s bankruptcy proceedings.

In the Matter of Clark Schaefer Hackett & Co., Rel. 34-99638, AAER-4491 (Feb. 29, 2024) – In a settled matter, an accounting firm was charged with violating SEC auditor independence rules in connection with audits of Lordstown Motors (see above). The order states that the firm provided non-audit services including bookkeeping and financial statement preparation during the period being audited, and therefore was not independent. Charges under Exchange Act Sections 13(a) and 14(a) and Rules 13a-1 and 14a-3, and Exchange Act Section 4C and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. Remedies included censure, cease-and-desist, disgorgement of approximately $28k plus interest, and a civil penalty of $50k.

Securities Offerings

In the Matter of TradeStation Crypto, Inc., Rel. 33-11269 (Feb. 7, 2024) – In a settled matter, a crypto asset business was charged with offering unregistered securities in the form of crypto asset accounts with an “Interest Feature.” According to the SEC, customers deposited crypto assets in exchange for the company’s promise to pay a variable interest rate, and the company pooled those assets and loaned them to institutional borrowers. Charges under Securities Act Sections 5(a) and 5(c). Remedies included cease-and-desist and a $1.5m penalty.

Market Manipulation and Abuse

SEC v. Shanchun Huang, Lit. Rel. 25924 (Jan. 11, 2024) – In a litigated matter, the CEO of Future FinTech was charged manipulating trading in Future FinTech’s stock in late 2019 and early 2020, just before he was named CEO. The SEC alleges that when Future FinTech’s stock was at risk of being delisted due to its price, the CEO made manipulative trades that did not make economic sense for an investor seeking to buy the stock at the lowest available price, intending to bolster the company’s stock price. The CEO was also charged with failing to disclose his beneficial ownership and his transactions in the stock. Charges against the CEO under Exchange Act Sections 9(a)(2), 10(b), and 16(a) and Rules 10b-5(a) and (c) and 16a-3. Remedies sought include permanent injunctions, civil penalties, and an officer-and-director bar.

SEC v. Farber, et al., Lit. Rel. 25926 (Jan. 16, 2024) – In a litigated matter, the SEC charged three individuals with gaining control of a microcap issuer and attracting retail investor interest by engaging in artificial trading and making promotional announcements, while concealing their control and involvement in the company’s management. Charges under Securities Act Sections 5 and 17(a), Exchange Act Sections 9(a)(2) and 10(b) and Rule 10b-5. Remedies sought include injunctive relief, disgorgement, civil penalties, and penny stock and officer-and-director bars.

In the Matter of Christian Fernandez, Rel. 33-11271, 34-9959 (Feb. 20, 2024) – In a settled matter, a stock promoter was charged in a cease-and-desist proceeding with engaging in a scheme to deceive investors by concealing undisclosed compensation paid by two issuers in exchange for purportedly independent recommendations from Palm Beach Venture, an investment newsletter. In 2022, the SEC filed a related action against the promoter in federal court, alleging that he acted as a middleman for a promotional scheme involving Palm Beach Venture. Charges under Exchange Act Section 10(b), Rule 10b-5, Securities Act Section 17(b). Remedies included cease-and-desist, disgorgement of $332k, and prejudgment interest of $30k.

In the Matter of Contrarian Capital Management, L.L.C., Rel. 34-99578 (Feb. 21, 2024) – In a settled matter, Contrarian Capital Management L.L.C. was charged with violating Rule 105 of Regulation M when it purchased stock in two public offerings of securities for advisory clients after effecting short sales in the same stock. Rule 105 prohibits short selling an equity security during a restricted period (generally five business days before a covered public offering) and then purchasing the same security in the offering, absent an exception. The SEC's order states that Contrarian has undertaken remedial steps, including revising its Rule 105 policies and procedures. Charges under Rule 105 of Regulation M under the Exchange Act. Remedies included disgorgement of $352k, prejudgment interest of $30k, and civil penalty of $140k.

Public Finance

SEC v. Comer Capital Group and Brandon L. Comer, Lit. Rel. 25935 (Jan. 31, 2024) – In a litigated matter, a municipal advisor and its managing partner consented to judgment on charges that they failed to provide their client, a Library District, with advice about the qualifications of the underwriter for the Library District bond offering. The SEC also alleged that the defendants failed to provide the Library District with information and advice to determine whether the pricing of the bonds was fair and reasonable. As a result, according to the complaint, the Library District will have to pay more than $500,000 in additional interest over the life of the bonds. Charges under Exchange Act Section 15B(c)(1). Remedies included disgorgement of $25k plus prejudgment interest and civil penalties of $30k (firm) and $20k (individual).

Insider Trading

SEC v. David Schottenstein, et al., Lit. Rel. 25924 (Jan. 11, 2024) – In a settlement of a litigated matter, the U.S. District Court for the District of Massachusetts entered a final judgment against a Florida resident charged with receiving information and trading in advance of a DSW Inc. earnings announcement and a tender offer to acquire Aphria Inc., and with receiving information and trading in advance of a merger agreement between Albertsons Companies, Inc. and Rite Aid. According to the complaint, Schottenstein obtained the information from a cousin who had insider knowledge of each transaction. In addition to trading for his own personal gain, the complaint alleges that Schottenstein tipped two friends who traded ahead of these announcements. Charges under Exchange Act Sections 10(b) and 14(e) and Rules 10b-5 and 14e-3. Penalties include permanent injunction and disgorgement.

US v. Lewis, No. 23-cr-370-JGLC (S.D.N.Y. Jan. 17, 2024) – In a plea bargain, the head of a British private equity firm agreed to plead guilty to criminal charges of conspiracy and securities fraud. The government charged the executive with providing material non-public information to close associates with the intent that they trade on it and making false statements to the SEC of his beneficial ownership interest in Mirati Therapeutics. Charges under 18 USC 371, Exchange Act Section 10(b), 13(d) and Rule 10b-5. The defendant’s firm agreed to forfeit approximately $34.4m and pay a $15.6m fine; sentencing will be determined by the court. Parallel SEC litigation is ongoing.

In the Matter of Tian (“Tony”) Tian, Rel. 34-99410 (Jan. 22, 2024) – In a settled matter, an individual was charged with insider trading in the securities of a special purpose acquisition company (SPAC). The trader was a consultant for an investment firm that was an early stage investor in Velodyne, who allegedly learned about the SPAC’s upcoming merger with Velodyne and traded on this information in violation of his duty to the investment firm. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included cease-and-desist, a director-and-officer bar, disgorgement of approximately $72k plus interest, and a penalty of approximately $72k.

FCPA

In the Matter of SAP SE, Rel. 34-99308 (Jan. 10, 2024) – In a settled matter, SAP SE was charged with violations of the anti-bribery, books and records, and internal accounting controls provisions of the FCPA. The SEC alleged that from at least December 2014 through December 2018, SAP employed third parties to make improper payments to government officials in order to obtain and retain business in South Africa, Greater Africa, and Indonesia. Additionally, an SAP employee provided improper gifts to a government official in order to obtain and retain business in Azerbaijan in January 2022. The bribes were inaccurately recorded as legitimate business expenses in SAP’s books and records. In determining to accept the offer of settlement, the SEC considered SAP’s self-reporting and cooperation. The SEC did not impose a civil monetary penalty based on the imposition of a $118.8 million criminal fine as part of SAP’s resolution with the Department of Justice. Charges under Exchange Act Sections 30A and 13(b)(2)(A) and (B). Remedies included cease-and-desist, disgorgement of $85m, and prejudgment interest of $13m, with an offset of up to $59m based on payments made pursuant to a settlement agreement with the Government of South Africa.

Whistleblower Protection

In the Matter of J.P. Morgan Securities LLC, Press Rel. 2024-7 (Jan. 16, 2024) – In a settled matter, the SEC charged that, from March 2020 through July 2023, J.P. Morgan Securities LLC (“JPMS”) regularly asked retail clients to sign confidential release agreements if they had been issued a credit or settlement from the firm of more than $1,000. The agreements required the clients to keep confidential the settlement, all underlying facts relating to the settlement, and all information relating to the account at issue. In addition, even though the agreements permitted clients to respond to SEC inquiries, they did not permit clients to voluntarily contact the SEC. Charges under Exchange Act Rule 21F-17(a). Remedies included cease-and-desist, censure, and a civil monetary penalty of $18m.

Remedies

SEC v Crowd Machine, Inc., et al., Lit. Rel. 25932 (Jan. 23, 2024) – In a bifurcated litigated matter, in which crypto asset issuers had previously consented to judgment on registration and antifraud violations but litigated monetary relief, the federal district court ordered the defendants to disgorge approximately $19.7 million in issuance proceeds net of expenses. The court allowed deductions of approximately $13.7 million in uncontested business expenses and approximately $105,000 in legal fees incurred in connection with transactional advice about the token sales. The court rejected the defendants’ request to deduct crypto asset marketing expenses, legal fees connected to the defense of the investor and regulatory complaints, and the subsequent price depreciation of the crypto assets. The court also ordered the two corporate defendants to pay $600,000 each in civil penalties, less than the amount requested by the SEC.

(NSEU 24-03)

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.