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This Week In Securities Litigation (Week of September 25, 2023)

As we approach the end of the Government fiscal year, the Securities and Exchange Commission (SEC) has been particularly active. This week alone, the Commission filed a myriad of cases touching on a broad spectrum of issues, from offering frauds and insider trading to crypto assets and related party transactions. Let's delve into the details.

SEC Enforcement – Filed and Settled Actions

Statistics

This week, the SEC filed 14 civil injunctive actions and 6 administrative proceedings. This excludes tag-along actions and those that present a conflict for the author.

Microcap Markets Highlight: SARs

The SEC v. J.H.Darbie & Co. case is particularly relevant to those interested in microcap markets. The broker-dealer was alleged to have failed to file Suspicious Activity Reports (SARs) regarding suspicious activity involving penny stocks. The defendant resolved the action by agreeing to retain an anti-money laundering consultant and pay a penalty of $125,000.

Offering Fraud Cases

Two notable cases in this category are SEC v. Fernandez and SEC v. Empirex Capital, LLC. In the Fernandez case, a Ponzi scheme was at the heart of the allegations. The defendants, Steven A. Fernandez and Monica O’Mealia, allegedly acted as brokers without registering and made $1.96 million paid out of investor assets. The case was resolved with the defendants agreeing to pay disgorgement and prejudgment interest of $755,017, along with a penalty of $75,000 each.

In the Empirex Capital case, Rafael Alberto Vargas Gonzalez and his firm were accused of raising about $6.6 million from 162 investors through a series of misrepresentations. This case is still in litigation.

Cross Trades and Short Sales

In In the Matter of Elsa M. Doyle, the portfolio manager was accused of engaging in 27 unlawful prearranged cross trades involving five money market funds. She agreed to pay a penalty of $30,000 to resolve the proceedings.

In the Matter of Citadel Securities, LLC involved allegations of mismarking certain sell orders and failing to comply with Regulation SHO. The firm agreed to pay a penalty of $7 million.

Breach of Duty and Related Party Transactions

In the Matter of American Infrastructure Funds, LLC involved a registered investment adviser breaching its fiduciary duty in multiple ways, including undisclosed related party transactions. The firm agreed to pay a penalty of $1,645,460.

In the Matter of Lyft, Inc. also involved a failure to disclose a related party transaction. Lyft agreed to pay a penalty of $10 million.

Crypto Assets

In the Matter of James Michael Wines involved the sale of crypto assets that were considered securities. The respondent cooperated in the investigation and no penalty was imposed.

Insider Trading

Two cases, SEC v. Backer and SEC v. Ferrie, involved allegations of insider trading. Both cases are still in litigation.

False Statements

In the Matter of Kandi Technologies Group, Inc. involved false statements made by the firm in 2019 and 2020. The firm was ordered to pay a penalty of $710,000.

Registration Issues

SEC v. Concord Management LLC involved a firm that had billions of dollars under management but was not registered as required by the Advisers Act. The case is still in litigation.

Conclusion

This week has been a whirlwind of activity in the securities litigation landscape. From offering frauds to insider trading, the SEC has been vigilant in its enforcement actions. Those involved in the microcap markets should pay particular attention to the J.H.Darbie & Co. case, as it underscores the importance of compliance with SARs requirements.

As we near the end of the fiscal year, it's clear that the SEC is not slowing down. Whether you're an investor, a legal practitioner, or just someone interested in the world of securities, keeping an eye on these developments is crucial.

Please contact the attorneys at Lucosky Brookman if we can assist with securities regulatory and enforcement matters or evaluating the adequacy of internal controls. We stay abreast of SEC developments to best position clients for success when operating in the microcap space.