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01.14.2025 | 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.

Remedies

SEC v. Walczak, No. 20-cv-75-wmc, 20-cv-76-wmc (E.D. Wisc., Nov. 15, 2024) – Following a jury verdict against a mutual fund portfolio manager solely on negligence-based charges under Securities Act Sections 17(a)(2) and 17(a)(3) and Advisers Act Sections 206(2) and 206(4), the court ruled on the SEC’s requests for remedies. The portfolio manager was charged with making misrepresentations that he employed certain loss-limiting strategies, but in the absence of these measures, the fund subsequently lost over $700 million during a market movement. The court rejected the portfolio manager’s arguments that the requested disgorgement was improperly punitive for a negligence verdict and that the SEC had failed to identify victims. The portfolio manager was ordered to pay $7.7 million in net advisory fees personally earned by the portfolio manager during the three most critical months, after deducting marketing expenses and an assistant’s salary, plus prejudgment interest. The court also ordered a second-tier civil penalty of $1.6 million, less than requested by the SEC, and enjoined the defendant from managing or advising third parties on securities or commodities investments for five years from the date of the jury verdict.

Investment Advisers/Investment Companies

In the Matter of WisdomTree Asset Management, Inc., Rel. IA-6573, IC-35364 (Oct. 21, 2024) – In a settled matter, an investment advisor to three exchange-traded funds was charged with making misleading statements to the funds’ board and investors that the funds would not invest in companies that were involved with fossil fuels and tobacco. The firm’s investment model and vendors were not able to capture necessary information, and as a result, the ESG funds invested in securities that were involved in the designated activities. Charges under Advisers Act Sections 206(2) and 206(4) and Rules 206(4)-7 and 206(4)-8. Remedies included censure, cease-and-desist, and a $4m penalty.

In the Matter of Wahed Invest, LLC, Rel. IA-6763 (Nov. 1, 2024) – In a settled matter, an investment advisor was charged with failing to comply with the Advisers Act marketing rule by (a) advertising endorsements by prominent athletes without disclosing that the endorsers were not current clients and were being compensated for their endorsements; and (b) advertising hypothetical performance, in this case backtested performance, to a mass audience rather than limiting disclosure to likely financial situations of the target audience as required by the rule. Charges under Advisers Act Section 206(4) and Rules 206(4)-1(b) and (d). Remedies included censure, cease-and-desist, and a $250k penalty.

In the Matter of Invesco Advisers, Inc., Rel. IA-6770 (Nov. 8, 2024) – In a settled matter, an investment advisory firm was charged with making misleading statements about the percentage of assets under management that were “ESG integrated,” and related policy and procedure deficiencies. The firm allegedly included passive strategies, including a large index fund, as ESG-integrated assets even though these strategies did not follow an ESG-related index. Charges under Advisers Act Sections 206(2) and 206(4) and Rules 206(4)-1, 206(4)-7 and 206(4)-8. Remedies included censure, cease-and-desist, and a $17.5m penalty.

In the Matters of Greenhaven Road Investment Management, LP, Rel. IA-6789; GSSG Solar, LLC, Rel. IA-6790; Kudu Investment Holdings, LLC Rel. IA-6791; The Catalyst Capital Group Inc., Rel. IA-6792; Longpoint Partners LP, Rel. IA-6793; NFC Investments, LLC, Rel. IA-6794; and WPAM Advisers LLC, Rel. IA-6795 (all Dec. 13, 2024) – In settled matters, seven private fund advisors with at least $150 million in private fund assets under management settled charges that they failed to file Form PF for several years in violation of the reporting requirements of Advisers Act Rule 204(b)-1. Remedies included censure, cease-and-desist, and civil penalties ranging from $90k to $150k.

SEC v. Silver Point Capital, LP, Lit Rel. 26202 (Dec. 20, 2024) – In a litigated matter, the SEC charged a registered investment adviser with failing to establish, implement, and enforce policies designed to prevent misuse of material nonpublic information. The SEC charged that a since-deceased consultant for the RIA participated on distressed company creditors’ committees on the firm’s behalf, including in connection with the restructuring of Puerto Rico municipal bonds, and shared confidential information with the firm’s trading desk while it was purchasing Puerto Rico bonds, creating a substantial risk that the information may have been misused. Charges under Advisers Act Sections 204A and 206(4) and Rule 206(4)(7).

Broker-Dealers

United States v. TD Bank, No. 2:24-cr-00667-ES (D.N.J., Oct. 10, 2024) – In criminal and civil matters, TD Bank settled charges that it willfully failed to maintain an adequate anti-money laundering (AML) program over a 10-year period, failed to file accurate currency transaction reports with respect to certain money-laundering schemes, and employed individuals who provided material assistance to one of these schemes. Charges under 31 U.S.C. 5318(h), 5322(b) and (e), 5313 and 5324. Remedies included penalties of approximately $3.1b and asset caps on U.S. banking operations. The SEC also settled charges of AML noncompliance against several broker-dealers and one AML compliance officer this quarter. In the Matter of Webull Financial, Rel, 34-101707, In the Matter of Paulson Investment Company, Rel. 34-101706 and In the Matter of Lightspeed Financial Services Group, Rel. 34-101705 (all Nov. 22, 2024); In the Matter of SogoTrade, Inc., Rel. 34-101936 and In the Matter of David Chong Kyi, Rel. 34-101937 (both Dec. 17, 2024); In the Matter of Deutsche Bank Securities Inc., Rel. 34-102011 (Dec. 20, 2024).]

In the Matter of J.P. Morgan Investment Management, Rel. IC-35373; In the Matter of J.P. Morgan Investment Management, Rel. IA-6761; In the Matter of J.P. Morgan Securities, Rel. 34-101493; In the Matter of J.P. Morgan Securities, Rel. 34-101494; In the Matter of J.P. Morgan Securities, Rel. 34-10495 (all Oct. 31, 2024) – In settled matters, the J.P. Morgan entities settled charges of:

(1) structuring transactions involving its domestic money market funds and foreign money market fund to provide liquidity for the foreign fund which was not eligible for a COVID pandemic liquidity facility, in violation of Investment Company Act Section 17(d) and Rule 17d-1; remedies included cease-and-desist and a $5m civil penalty;

(2) engaging in principal trades with managed money market mutual funds that did not comply with Investment Company Act Section 17(a)(1); remedies included censure, cease-and-desist, and a $1m penalty;

(3) recommending more expensive “Clone Mutual Funds” to brokerage customers when less expensive “Clone ETFs” were available; remedies included censure and cease-and-desist; no penalty was imposed in recognition of the firm’s self-reporting, remediation, and cooperation;

(4) failing to adequately disclose conflicts of interest of itself and certain of its financial advisors to recommend a proprietary portfolio management program over programs that used third-party portfolio managers, in violation of Advisers Act Sections 206(2) and 206(4) and Rule 206(4)-7; remedies included censure, cease-and-desist, and a penalty of $45m; and

(5) exercising undisclosed investment discretion over the sale of post-IPO shares distributed from private equity investments, resulting in significant market losses, in violation of Securities Act Sections 17(a)(2) and 17(a)(3); remedies included censure, cease-and-desist, a $10m civil penalty, and a $90m voluntary payment to investors.

In the Matter of LPL Financial LLC, Rel. 34-102008, IA-6799; In the Matter of Wells Fargo Clearing Services, LLC, Rel. 34-102009, IA-6800 (both Dec. 20, 2024) – In settled matters, LPL and Wells Fargo were each charged with making inaccurate electronic blue sheet (EBS) reports in response to Commission requests, in violation of Exchange Act Section 17(a)(1) and Rules 17a-4(j) and 17a-25. Remedies included censure, cease-and-desist, and penalties of $900k each.

Cybersecurity

In the Matters of Avaya Holdings Corp., Rel. 33-11320, Rel. 34-101398; Check Point Software Technologies Ltd., Rel. 33-11321, Rel 34-101399; Mimecast Limited, Rel. 33-11322; Rel. 34-101400; Unisys Corporation, Rel. 33-11323, Rel. 34-101401 (all Oct. 22, 2024) – In settled matters, four publicly traded companies were charged with making misleading statements or omissions about a cybersecurity breach related to its use of malware-infected software from Solar Winds. The statements allegedly minimized the extent of the security compromise and omitted material information regarding the scope and potential impact of the incidents. Unisys was also charged regarding an unrelated later breach and charged with disclosure controls and procedures violations. Charges under Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Section 13(a) and Rule 12b-20 and one or more of Rules 13a-1, 13a-11, 13a-13 or 13a-15(a). Remedies included cease-and-desist and penalties of $4m (Unisys) and $990k to $1m for the others. Commissioners Peirce and Uyeda dissented, noting that the penalties were being imposed upon victims of the attack on SolarWinds, and stating that the Commission was “playing Monday morning quarterback” in second-guessing the companies’ disclosures and citing immaterial, undisclosed details to support its charges.

Issuer Disclosure/Audit and Accounting

In the Matter of United Parcel Service, Inc., Rel. 33-11328, Rel. 34-101702, AAER-4542 (Nov. 22, 2024) – In a settled matter, the SEC charged UPS with misrepresenting on its balance sheet the value of its UPS Freight business unit, valuing it at $1.4 billion in 2019 including goodwill, when an internal analysis and a 2020 sale of the unit valued it at about $650 million. Charges under Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Rules 13a-1, 13a-11, 13a-13, 13a-15 and 12b-20. Remedies included cease-and-desist and a $45m penalty.

In the Matter of Becton, Dickinson and Company, Rel. 33-11344, Rel. 34-101931, AAER-4547 (Dec. 16, 2024) – In a settled matter, the SEC charged a medical device maker with failing to disclose that a major product, its Alaris infusion pump, required renewed FDA approval due to changes to the device, and with making subsequent misrepresentations about the status of FDA review, which eventually led to a suspension of sales for the product. Charges under Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Rules 13a-1, 13a-11, 13a-13, 13a-15 and 12b-20. Remedies included cease-and-desist, compliance undertakings, and a $175m penalty.

Securities Offerings

In the Matter of Cantor Fitzgerald, L.P., Rel. 33-11339, Rel. 34-101898 (Dec. 12, 2024) – In a settled matter, the SEC charged a global financial services firm with making misleading statements in registration statements of two special purpose acquisition vehicles (SPACs), that the entities had not initiated substantive discussions with any acquisition targets, when such discussions had in fact taken place. Charges under Securities Act Section 17(a)(2) and 17(a)(3) and Exchange Act Section 14(a) and Rule 14a-3. Remedies included cease-and-desist and a $6.75m penalty. Commissioner Uyeda dissented on the grounds that the alleged misstatements were not material in the case of a SPAC, which unlike an operating company is formed for the purpose of acquiring another company, and that there was no showing of investor harm.

Insider Trading

SEC v. Thompson, Lit. Rel. 26172 (Nov. 8, 2024) – In a litigated matter, the SEC charged a bank examiner with the Federal Reserve Bank of Richmond with using nonpublic information about upcoming earnings announcements by banks in his supervisory portfolio to trade in stocks and options of those banks’ stocks. Charges under Exchange Act Section 10(b) and Rule 10b-5.

SEC v. Chappell, et al., Lit. Rel. 26206 (Dec. 30, 2024) – In a litigated matter, the SEC charged the CEO and Chief Scientific Officer of biopharmaceutical company Humanigen, Inc. with selling Humanigen stock while in possession of material nonpublic information that the FDA was unlikely to approve Emergency Use Authorization for the company’s COVID-19 drug. The defendants allegedly avoided $38 million in losses through their trading. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5. Parallel criminal charges against the CSO were announced by the Department of Justice on December 23.

Market Manipulation

SEC v. CLS Global, et al.; SEC v. Gotbit Consulting, LLC, et al.; SEC v. Pham; SEC v. Armand, et al.; SEC v. ZM Quant Investment, Ltd., (D. Mass.) Lit. Rel. 2024-166 (all Oct. 9, 2024) – In separate litigated matters, the SEC charged defendant crypto asset promoters with hiring defendant crypto asset market makers to engage in “market-manipulation-as-a-service,” including generating artificial trade volume and manipulating prices of crypto assets sold to retail investors. One of the crypto assets was created at the direction of the FBI as part of a parallel investigation. Charges for misrepresentation and manipulation under Securities Act Section 17(a), Exchange Act Sections 9(a)(2) and 10(b) and Rule 10b-5. Charges for unregistered securities offerings under Securities Act Sections 5(a) and 5(c). The U.S. Attorney’s Office announced parallel criminal actions.

(NSEU 25-01)

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.