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 Two Point Capital Management, Inc. et al., Rel. IA-6199 (Dec. 5, 2022) – In a settled matter, an RIA and its CEO were charged with failing to adopt and implement reasonably designed compliance policies and procedures when they adopted an industry compliance handbook as their compliance manual without any modifications and they did not conduct any compliance training, conduct annual reviews, or timely file or post Form CRS. The SEC considered the firm’s remedial acts of hiring a new CCO and retaining a third-party compliance consulting firm to advise on its overall compliance program. Violations of Advisers Act Sections 206(4) and Rule 206(4)-7(a), (b). Remedies included censure and a civil monetary penalty ($75,000 to RIA and $25,000 to CEO).
SEC v. J.H. Darbie & Co., Lit Rel. No. 25590 (Dec. 13, 2022) – In a litigated matter, a registered broker-dealer was charged with failing to file Suspicious Activity Reports (SARs) with the U.S. Treasury Department’s FinCEN unit, with respect to numerous transactions which raised red flags recognized in the company’s anti-money laundering policies and procedures. According to the complaint, transactions by the company’s customers in low-priced securities raised red flags for market manipulation or unregistered stock distributions, among others. Charges under Securities Act Section 17(a) and Rule 17a-8 thereunder.
SEC v. Keener, No. 1:20-cv-21254 (S.D. Fla., Judgment Dec. 20, 2022) – In a litigated matter, the district court entered a final judgment on charges that the defendant engaged in a business as a dealer without registration. The court had previously granted summary judgment on the issue of whether the defendant’s practice of making convertible loans to penny stock issuers and then converting and selling shares under Securities Act Rule 144, was a business of buying and selling securities requiring registration. Charge under Exchange Act Section 15(a). Remedies included disgorgement of approximately $7.8m, a civil penalty of approximately $1m, and injunctive relief.
In the Matter of PNC Capital Markets, LLC, Rel. 34-96558 (Dec. 21, 2022) – In a settled matter, a registered broker-dealer was charged with violating Municipal Securities Rulemaking Board rules while acting as an underwriter of limited offerings of municipal securities. PNC Capital Markets allegedly sold securities in these limited offerings to other broker-dealers and investment advisers without a reasonable belief that the buyers were purchasing the securities for their own investment purposes and not for distribution to their 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 $81,000 plus interest, and a penalty of $100,000.
SEC v. Joseph R. Earle Jr., et al., Lit. Rel. No. 25585 (Dec. 5, 2022) – In a litigated matter, the SEC charged five individuals and two companies with allegedly artificially inflating the price and trading in Upper Street Marketing (“UPPR”) securities by disseminating purportedly positive information about the company that was in actuality false and misleading. The pump-and-dump scheme resulted in the defendants and others receiving over $1 million in proceeds and it required the SEC to temporarily suspend trading in UPPR’s stock. Charges under Securities Act Sections 5, 17, Exchange Act Section 10(b), 15(a), Rule 10b-5. Remedies sought include permanent injunctions, disgorgement with prejudgment interest, civil penalties, and officer-and-director and penny stock bars.
SEC v. Eric T. Landis et al., Lit. Rel. No. 25587 (Dec. 6. 2022) – In a litigated matter, the defendant consented to a final judgment in an alleged scheme to manipulate trading in 97 microcap stocks. In a parallel criminal action, the defendant was sentenced in January 2020 to six months in prison and two years of supervised release and ordered to pay a $50,000 fine. That court later ordered the defendant to pay forfeiture of $2,505,488. Final judgment remedies included permanent injunction from violating Securities Act Section 17(a) and Exchange Act Sections 9(a), 10(b), Rule 10b-5 and disgorgement of $2,505,488, which the court deemed satisfied by the order of forfeiture against Landis in the related criminal proceeding.
SEC v. Constantin, Lit. Rel. No. 25591 (Dec. 13, 2022) – In a litigated matter, the SEC charged seven individuals with using Twitter and stock trading chatrooms on Discord to promote the stocks that they owned, by signaling price targets and indicating that they were buying, holding, or adding to their positions. The defendants then allegedly sold their shares without having disclosed their plans to sell. An eighth defendant was changed with co-hosting a podcast promoting the other defendants as expert traders and trading in concert with them. Charges under Exchange Act Section 10(b) and Rule 10b-5, and Securities Act Section 17(a).
SEC v. Knox, et al., Lit. Rel. No. 25600 (Dec. 21, 2022) – In a settled litigation matter, the SEC obtained a final judgment against the defendants for aiding large shareholders of microcap stocks in concealing their ownership in order to sell their shares in U.S. markets in violation of registration and disclosure requirements. Charges under Securities Act Sections 5 and 17(a), Exchange Act Section 15(a). Remedies included injunctive relief, a penny stock bar, disgorgement of approximately $5.9m plus prejudgment interest, deemed satisfied by prior payments, and $6.1m forfeiture order in a parallel criminal matter.
Issuer Reporting/Audit and Accounting/Directors and Officers/Compliance
In the Matter of Exela Technologies, et al., Rel. 34-96535, File 3-21256 (Dec. 19, 2022) – In a settled matter, respondent Exela and its former CFO were charged with accounting and financial reporting violations related to an appraisal action filed by minority shareholders. While Exela had disclosed the existence of the appraisal action, it failed to accrue estimated payments it might have to make on the ground that the liability was not probable and estimable. As subsequently determined with its outside auditor, the company should have accrued an estimated liability for the fair market value of the dissenting shareholders’ shares when the action was filed, even though it could not predict the outcome of the action. Separate instances of failing to properly account for certain related party transactions were also cited. The company was charged under Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 13a-1, 13a-13, 13a-15(a) and 12b-20 thereunder; the CFO was charged with causing violations of Section 13(a) and Rules 13a-1 and 12b-20 thereunder.
SEC v. Thor Technologies, et al., Lit. Rel. No. 25599 (Dec. 21, 2022) – In litigated matters, one of which has settled, the defendants were charged with conducting an unregistered offering of securities through an initial coin offering. According to the complaint, the defendants marketed the tokens as an investment opportunity, and there was no place to use the tokens for non-investment purposes at the time of the offering. Charges under Securities Act Sections 5(a) and 5(c). The firm’s CTO entered into a consent judgment including injunctive relief, disgorgement of approximately $400,000 plus interest, and a civil penalty of $95,000. Litigation against the firm and its CEO is ongoing.
In the Matter of Vincent Issier, Rel. 34-96457 (Dec. 6, 2022) – In a settled matter, a project manager engaged in insider trading in the stock of a company imminently merging with his employer. The project manager was part of the due diligence team for the merger and obtained material nonpublic information about the acquisition negotiations. Violations of Exchange Act Section 10(b), Rule 10b-5. Remedies included cease-and-desist, disgorgement ($6,295.89) and prejudgment interest, and civil monetary penalty ($6,295.89).
SEC v. Billimek, et al., Lit. Rel. No. 25595 (Dec. 20, 2022) – In a litigated matter, the SEC charged a trader at a major U.S. asset management firm with tipping the other defendant in advance of, or before completion of, market-moving trades placed by the firm. The other defendant allegedly made over $47 million from the trading, some of which was allegedly shared with the tipper. Charges under Exchange Act Section 10(b) and Rule 10b-5, and Securities Act Section 17(a).
SEC v. Pourhassan, et al., Lit. Rel. No. 25596 (Dec. 20, 2022) – In a litigated matter, the SEC charged the former CEO of biotech company CytoDyn and the CEO of a firm that interfaced with the FDA on CytoDyn’s behalf with selling shares of CytoDyn after a false announcement regarding a COVID treatment. According to the complaint, the company announced that it had filed a completed Biologics License Application with the FDA in April 2020 but failed to notify shareholders that the FDA had promptly notified the company about deficiencies in the application. Charges under Exchange Act Section 10(b) and Rule 10b-5, and Securities Act Section 17(a).
SEC v. Bruce Conway et al., Lit. Rel. No. 25585 (Dec. 2, 2022) – In a rare subpoena enforcement action, the SEC filed an application to show cause and for an order compelling compliance with investigative subpoenas against Bruce Conway and two others. The SEC is investigating potential insider trading in the securities of Cancer Genetics, Inc. The SEC application seeks Conway’s testimony regarding, among other things, his trading in Cancer Genetics securities in the month before and immediately following a merger announcement. The SEC also seeks documents from the three individuals related to trading in Cancer Genetics securities in their accounts.