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This Week In Securities Litigation

Two weeks ago, the Securities and Exchange Commission (SEC) initiated an eye-popping 50-plus new enforcement actions. In stark contrast, last week saw only three such actions. Although the quantity decreased, the agency nonetheless put forth quality actions that could have significant implications. This week’s edition focuses on the ongoing CBSG microcap fraud scheme, a microcap offering fraud case, and some high-profile matters, including the latest subpoena enforcement action against Elon Musk.

Latest Action in Ongoing CBSG Microcap Fraud Matter

The SEC filed another complaint this week in its ongoing series of enforcement actions related to the CBSG microcap fraud scheme. In SEC v. Westhead, the SEC brought fraud charges against several “agent fund managers” who allegedly worked together to improperly funnel investor money to CBSG in exchange for promissory notes.

Defendants include Shannon Westhead, Alec Vagnozzi, Albert Vagnozzi, and Michael Tierney. The SEC alleges they operated various “agent funds” to solicit investors and transmit funds to CBSG as part of an orchestrated $500 million securities offering – despite the fact that the CBSG notes were not properly registered. The complaint states that even after the SEC brought its initial charges in July 2020, these agent fund managers continued their schemes by issuing their own promissory notes to investors with less favorable terms.

This latest case demonstrates the SEC’s commitment to uprooting complex microcap fraud schemes involving networks of connected players. The Commission already pursuing several other actions related to CBSG, underscoring the sweeping extent of the alleged violative conduct.

Alleged Offering Fraud Against Zera Financial and its CEO

In another case filed this week, the SEC charged Zera Financial LLC and its CEO Luis Romero with securities offering fraud. According to the complaint, since 2021 the defendants raised over $2.2 million from around 170 investors by touting monthly returns of 3% and falsely claiming the investments were FDIC insured.

The SEC alleges that investor money was deposited into crypto asset accounts and misappropriated by Romero for personal expenses. The classic warning signs were all there: promises of guaranteed high returns with no risk, misuse of funds, and misrepresentations about insurance. This matter exemplifies the SEC's ongoing crackdown on offering frauds that take advantage of investors through false promises.

Subpoena Enforcement Against Elon Musk

The SEC flexed its subpoena power this week, filing an action to enforce investigative subpoenas served on Elon Musk relating to his acquisition of Twitter, now known as X. The Commission is utilizing its formal order authority to investigate potential securities laws violations by Musk and others in connection with his 2022 purchase of Twitter stock and his subsequent statements in SEC filings.

Musk has already testified twice this year in July 2022, but the SEC claims it has received thousands of new documents since then necessitating additional testimony. The SEC and Musk’s counsel worked out a schedule for a third testimony session on September 15th in San Francisco. However, just two days prior, Musk refused to appear, raising various objections including to the venue. The SEC subsequently offered to change venues to its Fort Worth office near Musk’s Texas residence and proposed several alternative dates, but Musk rejected each proposal.

This aggressive subpoena enforcement action demonstrates the SEC’s resolve in investigating Musk’s high-profile Twitter deal and associated statements and disclosures. While Musk is a bold and unconventional business figure, the SEC signaled that it will utilize the full extent of its powers to ensure accountability regarding disclosure obligations tied to his acquisition of such an influential social media platform. Stay tuned, as this saga may very well continue if Musk resists the subpoena.

Conclusion

Despite a dip in overall cases, the SEC is keeping up its litigation efforts in headline-grabbing matters like Twitter, and focusing on microcap matters such as CBSG Zera. Lucosky Brookman will continue monitoring these and other critical cases, so check back next week for another securities litigation update.