Articles Posted in Securities Fraud

Early this month, the United States Department of Justice (DOJ) announced the indictment of five defendants, each of whom have been charged in connection with an $8.4 million “boiler room” and money laundering scheme. [1] In addition to the DOJ’s criminal indictment of the group, the Securities and Exchange Commission also filed a civil case seeking injunctions and civil penalties. [2]

“Boiler room” operations are fraudulent schemes in which high-pressure, coercive sales tactics are used to induce clients into purchasing stocks or other investments. [3] Often, these operations consist of groups of salespeople working from offices in foreign countries who cold-call clients in an attempt to defraud them. [3] The salespeople involved in boiler room schemes are rarely licensed brokers, and the stocks they purport to sell may not exist at all. [3]

In the instant case, the DOJ alleges that the defendants conspired to commit securities fraud when they engaged in a boiler room scheme involving fake investment firms and shell companies used to mislead investors. [1] The alleged scheme operated from approximately June 2019 until August 2021, and defrauded English-speaking investors across the globe of more than $8 million. [4]

Electric automaker, Tesla, and its CEO, Elon Musk, made headlines once again this week in connection with a 2018 Twitter post. The tweet in question, posted by Elon Musk, read simply: “Am considering taking Tesla private at $420. Funding secured.”[1]

At the time the tweet was posted in 2018, the SEC swiftly charged both Tesla and Musk with securities fraud, over which the parties eventually settled. [1] Now more than three years later, the public has learned of a new subpoena from the SEC relating to the tweet, though the subpoena’s impact and strategic aim are still to be seen.

As evidenced by this series of events, Tesla and the SEC share a turbulent, history. Following the 2018 “funding secured” tweet, the SEC alleged that Musk violated Section 10(b) of the Securities Exchange Act of 1934 along with rule 10b-5.[2] These allegations were based upon the SEC’s contention that the tweet constituted a materially false and misleading statement because despite Musk’s confident tone, he had neither discussed nor confirmed the terms of such a deal with any potential funding source. [2]

In the SEC’s pursuit of their mission to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation,” access to information about potential unlawful activity is of unique importance and interest. [1] Without access to such information, the SEC faces a much steeper battle in holding bad actors accountable and protecting both investors and the market.

In support of this broad mission, the SEC established a whistleblower program and a corresponding Office of the Whistleblower to administer the program in 2012. The whistleblower program was established under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 21F to the Securities Exchange Act of 1924 (“the Exchange Act”). [2]

Through this statutory addition, the SEC gained authorization to make monetary awards to “eligible whistleblowers.” These “eligible whistleblowers” are individuals who voluntarily come forward to the SEC with original information about a potential federal securities law violation, which ultimately leads to a successful SEC enforcement action imposing a monetary sanction of over $1 million. [3] Importantly, the Dodd Frank Act protects the confidentiality of all SEC whistleblowers, and no identifying information that could potentially reveal a whistleblower’s identity is released to the public. [4]

Last week, the Securities and Exchange Commission (“SEC”) released its long-awaited report formally debriefing the events that transpired during the January and February 2021 meme stock craze. The 44-page report, titled “Staff Report on Equity and Options Market Structure Conditions in Early 2021” provides SEC staff’s analysis of the mechanisms behind the meme stock phenomenon, ultimately debunking a few theories made popular over social media and other media outlets as the events unfolded.

By way of a brief overview, in January 2021 a group of about 100 stocks experienced monumental price and trading volume fluctuations. These stocks, many of which were consumer-centered companies with high brand awareness, gained rapid attention over social media platforms like Reddit and YouTube.

While the SEC’s report addresses the events and impacts of the meme stock phenomenon broadly, it focuses the bulk of its analysis around GameStop Corp (“GME”), arguably the most famous of the meme stocks.

On September 27th, 2021, the Securities and Exchange Commission (“SEC”) announced affinity fraud charges against a Miami payday lender, Sky Group USA LLC (“Sky Group”), and its CEO, Efrain Betancourt. [1] The SEC’s complaint lists eight violations of federal securities law centering on allegations of material misrepresentations and omissions regarding Sky Group’s use of investor funds, its profitability, and the safety and security of the promissory notes it sold. [2]

According to the SEC’s complaint, Sky Group ran its fraudulent scheme from at least January 2016 through March 2020. During this time, Sky Group raised approximately $66 million through the sale of promissory notes while representing itself as a payday lender soliciting investors to fund its business. [2]

In particular, Sky Group targeted Venezuelan-American investors in South Florida, who in turn often spread information about the investment opportunity by word-of-mouth. Betancourt specifically pitched Sky Group investments as “a great opportunity for members of the Venezuelan immigrant community to generate investment income,” touting its supposed $70 million loan portfolio as evidence of the investment’s safety.

On Tuesday, September 14th, the Securities and Exchange Commission (“SEC”) announced its first enforcement action against an alternative data provider, charging the company App Annie Inc. with securities fraud. App Annie and Bertrand Schmitt, its co-founder and former CEO and Chairman, have agreed to pay more than $10 million in a settlement with the SEC on these charges. [1]

While this marks the SEC’s first enforcement action against an alternative data provider, it likely will not be its last, as the use of alternative data in the financial and investment sphere continues to rise. [2] Alternative data (“alt-data”) is data which goes beyond that of traditional corporate financial statements and helps guide investment strategies. [3] Examples of alt-data include mobile device data, credit card transactions, satellite imagery data, product reviews, and even social media activity. [4]

This type of data can be instrumental in making sound investment decisions when it is paired with traditional data from corporate sources, because it provides a broader view of a company’s financial viability. [4] However, it is notoriously difficult to aggregate and analyze given its vast breadth – it’s estimated that the world produces at least 2.5 quintillion bytes of such data daily. [4] This is where companies like App Annie come in.

The recent announcement of securities fraud charges against Trevor Milton, the former CEO of Nikola Corporation, may prove to be the first in a line of similar cases involving electric vehicle (“EV”) companies, and more broadly, companies that go public via SPACs. This situation highlights the importance of careful investment decision making, particularly in the EV and other rapidly growing, highly complex industries.

At the heart of the civil and criminal complaints against Nikola are allegations that as its CEO, Trevor Milton, regularly spread false and misleading information about the progress of Nikola’s EV products and technologies. Nikola’s focus is on manufacturing low- and zero-emissions trucks, and the complaints allege in part that under Milton, Nikola published a promotional video of a prototype truck which did not actually work, but appeared to only because the truck was set in neutral and rolled down a hill.  [1]

Promotional videos like that one, along with Milton’s enthusiastic social media posts and numerous podcast and television appearances, all painted a picture of exciting and impressive forward progress at Nikola, which Federal prosecutors and SEC regulators allege was nothing more than an illusion. [2]

On June 30, 2021, FINRA ordered an approximately $70 Million financial penalty against Robinhood Financial LLC, the highest such penalty ever levied by the regulatory organization.[1] Through its investigation of the firm, FINRA charged Robinhood with numerous violations which had resulted in significant losses to their customers. While Robinhood neither confirmed nor denied the validity of FINRA’s charges, they ultimately agreed to settle with these massive sanctions. [1]

FINRA noted three major violations from its investigation into Robinhood’s conduct and operations as a stock-trading app, each of which merited its own penalties.

First, FINRA found that Robinhood has pervasively and negligently provided false or misleading information to its customers. [1] This false information was circulated in spite of Robinhood’s core mission to “de-mystify finance for all” and “democratize finance,” and ranged from misrepresenting customer account balances and buying power, to erroneous communication about customers facing margin calls. [2]

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