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10.14.2024 | 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.

Administrative Law

SEC v. Jarksey, 603 U.S.     (June 27, 2024) – The U.S. Supreme Court held that the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties for securities fraud. The SEC brought an enforcement action before an administrative law judge against a private fund manager seeking civil penalties for alleged violations of fraud-based statutes: Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Section 206. Because these claims “replicate common law fraud,” the Court found that the Seventh Amendment requires them to be tried before a jury, not an ALJ. Notably, the Court did not overrule a prior case involving violations of technical rules of the Occupational Safety and Health Administration, leaving open the possibility that certain matters could still be tried in administrative proceedings.

Loper Bright Enterprises v. Raimondo, 603 U.S.     (June 28, 2024) – In a case that does not directly involve the SEC, the U.S. Supreme Court expressly overruled the Chevron doctrine, which required courts to give deference to a formal administrative agency interpretation of an ambiguous statute, and held that “courts need not and under the [federal Administrative Procedure Act] may not defer to an agency interpretation of the law simply because a statute is ambiguous.” Prior judicial decisions that relied on the Chevron doctrine in holding agency actions lawful were not overruled, however, and are still valid precedents.

Remedies

SEC v. Commonwealth Equity Services, LLC (D. Mass., March 29, 2024) – In a litigated matter, the court allowed almost the entirety of the SEC’s requested disgorgement amount. The court previously granted summary judgment for the SEC on charges that the firm, a registered investment adviser (RIA), failed to adequately disclose potential conflicts of interest for receiving revenue sharing payments on mutual fund NTF share classes that had higher expenses compared to other share classes of the same funds. On disgorgement, the court rejected the advisor’s argument that there was no causal connection between the violations and the claimed unjust enrichment – accepting instead the SEC’s position that, had clients known that lower cost shares of the same fund were available, the clients would have had a “clear economic incentive” to switch. The court also rejected the firm’s request to deduct overhead costs as legitimate business expenses, finding that all of the additional revenue sharing was “ill-gotten gains.” Final remedies included disgorgement of approximately $65 million plus prejudgment interest, and a second-tier penalty of $6.5 million. The SEC’s request for a permanent injunction was denied, taking into account the size of the penalty and the firm’s recent record of regulatory compliance. The firm has appealed to the First Circuit.

SEC v. Ripple Labs, Inc. (S.D.N.Y., August 7, 2024) – In ongoing litigation on charges that Ripple Labs sold unregistered digital securities in violation of Securities Act Section 5, the court granted the SEC’s requested injunctive relief but rejected its request for disgorgement. The court previously granted summary judgment for the SEC with respect to institutional sales but not over the counter sales. The court granted injunctive relief against future similar violations, noting Ripple’s “willingness to push the boundaries of the [summary judgment] Order. . .”. However, relying on the recent Second Circuit ruling in Govil, the court denied the SEC’s disgorgement request on the ground that the SEC had not shown any harm resulting to investors. The court also awarded $125 million in penalties, about $100,000 per transaction, which was less than the SEC requested but more than the Ripple had suggested. Although a “recurrent, highly lucrative violation of Section 5 is a serious offense,” the court found no allegations of fraud, misappropriation, or other more culpable conduct.

Investment Advisers/Investment Companies

In the Matters of Gea Sphere, LLC, Rel IA-6585; InSight Securities, Inc., Rel. IA-6586; Monex Asset Management, Inc., Rel. IA-6587; Credicorp Capital Advisors LLC, Rel. IA-6588; and Bradesco Global Advisors Inc., Rel IA-6589 (all April 12, 2024) – In settled matters, five RIAs were charged with violating the Advisers Act marketing rule. The firms allegedly advertised hypothetical investment performance without having policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the financial situation and investment objectives of the intended audience. One firm was also charged with making false and misleading claims about its performance, failing to present net performance information alongside gross performance, being unable to substantiate performance claims, failing to enter into written agreements with persons giving compensated endorsements, and related recordkeeping and compliance review failure. Charges under Advisers Act Section 206(4) and Rule 206(4)-1. Remedies included censure, cease-and-desist, and penalties ranging from 20k to $100k.

In the Matter of Wayzata Investment Partners, LLC, Rel. IA-6590 (April 15, 2024) – In a settled matter, an RIA firm was charged with violating the Advisers Act pay-to-play rule. According to the order, a covered associate of the firm made a campaign contribution to a candidate for a Minnesota office that had influence over the selection of investment advisers for a state investment board, and within two years the firm provided investment advisory services for compensation to the same board. Charges under Advisers Act Section 206(4) and Rule 206(4)-5. Remedies included censure, cease-and-desist, and a $60k penalty. Commissioner Peirce dissented on the grounds that the order did not allege any link between the donation and the investments, and therefore the rule as enforced impedes political participation.

In the Matter of Raymond Lawrence Lent, Rel. 34-100183 (May 20, 2024) – In a settled matter, a sole proprietor investment adviser was charged with failing to disclose conflicts of interest. The adviser allegedly recommended variable annuities that paid upfront commissions without considering whether clients would benefit from choosing versions of the same insurers’ products that had lower expenses and no commission payments. The adviser allegedly waived his asset-based advisory fee for the first 12 months after purchase, after which clients could opt to pay an asset-based fee of up to 1% per year. The adviser also allegedly recommended cash sweep products that paid revenue sharing even though less expensive non-revenue sharing sweep products were available. Charges under Advisers Act Section 206(2) and 206(4)-7. Remedies included censure, cease-and-desist, disgorgement of approximately $700k plus interest, and a $175k penalty.

SEC Charges 11 Institutional Investment Managers with Failing to Report Certain Securities Holdings, Rels. 34-6698 to 34-6707 (Sept. 17, 2024) – In settled matters, eleven institutional investment managers were charged with failing to file Forms 13F, which they were required to file whenever they have discretion over more than $100 million in securities on the SEC’s Section 13(f) Official List (primarily exchange traded securities). Two firms were additionally charged with failing to file Forms 13H, which were required for large traders to trade significant amounts of exchange-listed securities. Charges under Exchange Act Sections 13(f) and 13(h) and Rules 13f-1 and 13h-1. Remedies included censure and cease-and-desist. Three firms that self-reported avoided civil penalties on the self-reported violations. The other firms received penalties ranging from $175k to $725k.

Broker-Dealers

SEC v. Coinbase (S.D.N.Y., March 27, 2024) – In a litigated matter, the court mostly denied the Coinbase’s motion for judgment on the pleadings. The SEC alleges that Coinbase acts as an unregistered broker, exchange, and clearing agency for crypto assets. Coinbase’s motion did not contest the allegations regarding its business model, and argued only that the SEC had not adequately alleged that the thirteen crypto assets at issue were securities. The court found that “the challenged transactions fall comfortably within the framework that courts have used to identify securities for eighty years.” The court further found that the SEC adequately alleged that Coinbase’s crypto asset staking program involved the unregistered offer and sale of securities, but that the “Wallet” program did not involve brokerage services because Coinbase did not effect transactions for customers in that service. 

SEC v. GEL Direct Trust, et al. (S.D.N.Y., March 31, 2024) – In a litigated matter involving claims that the GEL entities and their principals acted as unregistered brokers, the court denied the SEC’s motion for summary judgment. The court found that material issues of fact remained on three of the seven factors cited by the SEC: whether the GEL parties earned transaction-based compensation, whether they solicited business beyond merely holding themselves out and contacting referred clients, and whether they participated in the order-taking and order-routing process or merely relayed client instructions. Despite this interim victory, the GEL parties later consented to judgment, without admitting or denying the SEC’s charges. On August 27, 2024, the court entered judgment enjoining the GEL parties from future violations of Exchange Act Section 15(a)’s registration requirements, barred from participating in penny stock offerings, and ordered to pay a total of $946k in civil penalties. 

SEC v. Keener (11th Circuit, May 29, 2024) – In this appeal of a litigated matter, the court affirmed summary judgment in favor of the SEC on charges that a convertible note investor acted as an unregistered dealer in violation of Exchange Act Section 15(a). The court relied on findings that the investor purchased convertible notes from over 100 microcap issuers, converted notes to common shares at large discounts, and sold the shares in high volumes. It also noted that the investor employed as many as 25 people and held himself out as being in the business of buying and selling securities. The court rejected the argument that the Exchange Act definition of dealer requires that an individual or firm act on behalf of customers, rather than solely for the person’s own account. In the court’s view, the statute only requires that dealers be “in the business of buying and selling securities.” Remedies included injunctive relief and approximately $7.8m in disgorgement.

Cybersecurity

In the Matter of Intercontinental Exchange Inc., et al., Rel. 34-100206 (May 22, 2024) – In a settled matter, the securities and futures exchange operator ICE and its exchange subsidiaries were charged with failure to timely notify the SEC of a systems intrusion as required by Regulation SCI. According to the order, the intrusion exploited a previously unknown “zero-day” vulnerability in one of ICE’s virtual private network concentrators. Four days after discovery of the event, the company determined that the event would have a de minimis impact on operations. The SEC, which learned of the event through a subsequent inquiry, charged that this conduct violated the rule requiring immediate notification and 24 hour written notification once responsible personnel for a covered entity (including national securities exchanges) have a reasonable basis to believe that an intrusion has occurred. Charges under Exchange Act Rules 1002(b)(1) and (b)(2). Remedies included cease-and-desist and a $10m civil penalty. Commissioners Peirce and Uyeda wrote separately to object to the size of the penalty, calling it “an overreaction.”

In the Matter of R.R. Donnelly & Sons Co., Rel. 34-100365 (June 18, 2024) – In a settled matter, the printing and communications firm RR Donnelly was charged with failing to design effective disclosure controls and procedures related to the disclosure of cybersecurity risks and incidents, and failing to devise and maintain a system of cybersecurity-related internal accounting controls sufficient to provide reasonable assurances that access to company assets – its information technology systems and networks, which contained sensitive business and client data – was permitted only with management’s authorization. As a result, according to the order, the company failed to execute a timely response to a ransomware network intrusion that culminated in encryption of computers, exfiltration of data, and business service disruptions. Charges under Exchange Act Section 13(b)(2)(B) and Rule 13a-15(a). The company’s cooperation and remedial efforts were acknowledged. Remedies included cease-and-desist and a $2.125m civil penalty. Commissioners Peirce and Uyeda dissented on the grounds that Section 13(b)(2)(B) was designed to establish controls over corporate transactions, not corporate assets.

SEC v. SolarWinds Corp., et al. (S.D.N.Y., July 18, 2024) – In ongoing litigation, the district court granted “in large part” the information technology company SolarWinds’ motion to dismiss. The SEC alleged that SolarWinds, the victim of a series of cyberattacks, violated Exchange Act Section 10(b) and Rule 10b-5 by making misleading statements about its cybersecurity practices and the cyberattacks themselves, and violated Exchange Act Rules on internal controls. The court allowed the SEC claim to proceed with respect to pre-attack representations about cybersecurity practices, and dismissed claims based on post-attack statements. Notably, the court also dismissed the claims that SolarWinds violated Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) requiring internal accounting controls, holding that those rules applied only to controls over financial systems and did not extend to controls over cybersecurity systems.

Recordkeeping and Off-Channel Communications

SEC Chargers 12 Municipal Advisors With Recordkeeping Violations (Sept. 17, 2024) – In settled actions, twelve municipal advisors were charged with failing to maintain and preserve electronic communications, including text messages. The firms admitted the facts set forth in their respective orders, acknowledging that they failed to preserve electronic communications sent and/or received by their personnel regarding municipal advisory activity, which were required to be maintained, in violation of Exchange Act Sections 15B(c)(1) and 17(a), Rule 15Ba1-8, and MSRB Rules G-8, G-9 and G-44. Remedies included censures, cease-and-desist orders, and civil penalties ranging from $40k to $324k.     

Eleven Firms to Pay More Than $88 Million Combined to Settle SEC's Charges for Widespread Recordkeeping Failures (Sept. 24, 2024) – In settled actions, eleven firms comprising broker-dealers, investment advisers, and one dually-registered firm were charged with failing to maintain and preserve so-called “off-channel” electronic communications regarding their securities businesses, including text messages, in violation of recordkeeping provisions of the Securities Exchange Act, Investment Advisers Act, or both. In the SEC orders, the firms admitted that their personnel sent and received off-channel communications and that the firms had failed to preserve those communications in violation of Exchange Act Sections 15(b)(4)(E) and 17(a) and Rule 17a-4(b)(4), and Advisers Act Section 204 and Rule 204-2(a)(7). The firms agreed to censure, cease-and-desist, and civil penalties ranging from $325k to $35m. Of note in the SEC’s release on these matters was that one firm received a no-penalty resolution because it took substantial steps to comply with recordkeeping requirements, self-reported its conduct, and took appropriate remedial actions.

Issuer Disclosure/Audit and Accounting

SEC v. Volkswagen Aktiengesellschaft et al., Lit. Rel. 25969 (N.D. Cal., April 5, 2024) – In a litigated matter, the SEC obtained a final judgment against Volkswagen Group of America Finance, LLC alleging that Volkswagen made false and misleading statements in connection with its 2014 and 2015 offerings of corporate bonds. According to the SEC, Volkswagen issued more than $8 billion in bonds when senior executives knew that more than 500,000 of their vehicles in the U.S. exceeded legal emission limits. Volkswagen also made false and misleading statements to investors and underwriters about vehicle quality, environmental compliance, and Volkswagen’s financial standing, according to the SEC’s complaint. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5. Remedies include cease-and-desist, $34.35m in disgorgement, and $14.4m in prejudgment interest.

In the Matter of Keurig Dr. Pepper Inc., Rel. 34-100984 (Sept. 10, 2024) – In a settled matter, the SEC charged a company with making inaccurate statements regarding the recyclability of its single-use beverage pods in annual reports filed in 2019 and 2020. According to the order, those reports stated that the company had validated its single-use beverage pods could be effectively recycled, but allegedly failed to disclose that two of the largest recycling companies in the U.S. had expressed significant concerns to the company about the feasibility of curbside recycling and did not intend to accept the single-use beverage pods for recycling. Charges included violations of Exchange Act section 13(a) and rule 13a-1 thereunder. Remedies included cease-and-desist and civil penalty of $1.5m.

SEC v. Prager Metis CPAs, LLC, and Prager Metis CPAs LLP (S.D. Fla., Sept. 17, 2024) – In a settled matter, the accounting firms were charged with violating SEC auditor independence rules and aiding and abetting violations of federal securities laws by bankrupt digital asset trading platform FTX. According to the SEC’s unopposed motion for entry of final judgments, the firms improperly included indemnification provisions in engagement letters for hundreds of audits, reviews, and exams, and as a result were not independent from their clients as required under the securities laws. Charges under Exchange Act Rules 2-02(b) of Regulation S-X and Rule 17a-5(i); and for aiding and abetting violations of Exchange Act Sections 13(a), 15(d), and 17(a) and Rules 13a-1, 13a-11, 13a-13, 15d-1, 15d-13, and 17a-5, and Advisers Act Section 206(4) and Rule 206(4)-2. The final judgment provides for censures, permanent injunctions, civil penalties of $1m, and disgorgement with prejudgment interest of $205k.

Securities Offerings

In the Matter of Flyfish Club, LLC, Rel. 34-11305 (Sept. 16, 2024) – In a settled matter, the organizer of a members-only restaurant was charged with conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs) that raised approximately $14.8 million from investors to finance the construction of a private members-only restaurant, in violation of Securities Act Sections 5(a) and 5(c). Remedies included cease-and-desist and $750k civil penalty. Commissioners Peirce and Uyeda issued a dissent arguing that the company’s NFTs were simply membership interests in a private restaurant, posed no threat to investors, and said the enforcement action undermines trust in the SEC.

Whistleblowers

In the Matter of Nationwide Planning Associates, Inc. et al., Rel. 34-100908 (Sept. 4, 2024) – In a settled matter, a registered broker-dealer and two affiliated registered investment advisory firms were charged with impeding brokerage customers and advisory clients from reporting securities laws violations to the SEC. According to the order, the firms asked certain retail clients to sign confidentiality agreements in connection with payments made by the entities to the clients’ investment accounts intended to compensate the clients for losses caused by the firms’ breaches of securities laws. The agreements signed by retail clients impeded the clients’ ability to report to the SEC, including by permitting communications only where the SEC first inquired and in certain instances requiring the clients to represent they had not reported the underlying dispute to the SEC and would permanently refrain from such reporting. Remedies included censure, cease-and-desist, and civil penalties based on their relative size and financial condition in a combined amount of $240k.

Insider Trading

SEC v. Panuwat, Lit. Rel. 25970 (N.D. Cal., April 8, 2024) – After an eight-day civil trial, a jury found that a manager at a biotechnology company had engaged in insider trading. The SEC had alleged that the individual used nonpublic information about the acquisition of his employer to trade in the securities of another firm in the same field. Although media coverage widely reported that the case involved a novel theory of “shadow trading,” SEC Enforcement Division Director Gurbir Grewal issued a statement that there was “nothing novel about this matter. Defendant used highly confidential information [of his employer] . . . to trade ahead of the news for his own enrichment.” The judgment is on appeal.

In the Matters of: Anthony Manna, Rel. 34-99926; Michael Sapraicone, Rel. 34-99927; and Joseph Young, Rel. 34-99928 (all April 9, 2024) – In settled matters, two individual investors were charged with trading on material nonpublic information about pending corporate mergers, which their friend had improperly obtained from the laptop of his girlfriend, an executive assistant at a prominent investment bank, while she was working from home during the COVID-19 pandemic. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included cease-and-desist, disgorgement of approximately $3500, $14k and $17k respectively, prejudgment interest and penalties in the same amounts as the disgorgements.

U.S. v. Peizer, No. 2:23-cr-00089, (C.D. Cal., June 21, 2024) – In a first-of-its-kind criminal proceeding, a federal jury found the former CEO of Ontrak Inc. guilty of insider trading based on his use of a Rule 10b5-1 trading plan. Rule 10b5-1 provides a safe harbor for corporate insiders to set up planned future sales of the company’s shares provided that, among other things, they are not in possession of material nonpublic information at the time they set up the plans. In this case, the government had alleged that the former CEO had established two 10b5-1 plans shortly after learning the nonpublic information that Ontrak’s largest customer was likely to terminate its relationship, and avoided over $12 million in losses by making stock sales under the plans. Charges under Exchange Act Section 10(b) and Rule 10b-5, and 28 USC Section 2(b).

Market Manipulation

In the Matter of Meta Materials, Inc., Rel. 33-11292 (June 25, 2025) – In a settled matter, a publicly-traded company was charged with conducting a “short squeeze” in order to artificially inflate the value of its common stock immediately before an at-the-market offering of shares. According to the order, the company structured a merger between its predecessor entities to include a dividend of preferred stock and made misleading statements about the value of the preferred stock. In addition, the company selectively disseminated information to market participants its theory that the preferred dividend would drive up the stock price by forcing short sellers to cover their positions, because the short sellers would be unable to meet their obligations to deliver the dividend to their lenders. Charges under Securities Act section 17(a)(2), Exchange Act sections 10(b), 13(a) and 14(a) and rules 10b-5(a) and (c), 12b-20, 13a-11 and 14a-9. Remedies included cease-and-desist and $1m civil penalty.

(NSEU 24-11)

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.