July 2021 Update of the SEC’s Covered Actions for Potential Whistleblower Claims

On July 30, 2021, the SEC posted 14 Notices of Covered Actions, after which individuals have 90 calendar days to apply for a whistleblower award.  As discussed in our prior post, the SEC publishes these Notices for cases in which the final judgment or order, either by itself or together with other prior judgments or orders in the same action issued after July 21, 2010, results in monetary sanctions exceeding $1 million.

In this post, we briefly survey the 14 Notices of Covered Actions from July 2021.  (See our previous post on the SEC’s Notices of Covered Actions from June 2021.)  Several of the alleged misconducts in the 14 Covered Actions also resulted in parallel criminal actions.

2021-062: In the Matter of Gateway One Lending & Finance, LLC

On June 24, 2021, the SEC entered an order with Gateway One Lending & Finance, LLC based on an Offer of Settlement and findings of false and misleading statements regarding loan performance under Section 17 of the Securities Act of 1933.  According to the order, Gateway, an auto loan originator, securitizer, and servicer, understated the historic losses of its auto loans and overstated the projected future performance for six auto loan-backed securitizations between July 2014 and December 2016 by excluding important liquidation expenses. Without admitting or denying the findings in the SEC’s order, Gateway agreed to pay $6.5 million for disgorgement, prejudgment interest, and civil penalties.

2021-063: SEC v. The Legacy Group, Inc.; Colorado Ventures I, LLC; Radiant Holdings, LLC; Randy R. King; Matthew B. King; and Andrea S. Trout

On June 11, 2021, final judgments were entered against Colorado and Florida residents Randy R. King, Matthew B. King, and Andrea S. Trout and three entities they operated, The Legacy Group, Inc., Colorado Ventures I, LLC, and Radiant Holdings, LLC, stemming from alleged violations of Section 17(a) and Section 5 of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934.  The SEC’s charges asserted the defendants conducted fraudulent, unregistered securities offerings related to investment opportunities in “fix-and-flip” residential real estate properties in high-end markets.  The SEC alleged the defendants misused investor funds, made material misrepresentations about the value of certain properties and the amount of equity and liabilities tied to certain properties, and materially misstated the risks of certain investments.  The defendants also allegedly took undisclosed compensation, contrary to the business plan presented to the investors.  The defendants, without admitting or denying the allegations, consented to judgments and injunctions, which, among other things, resulted in orders of disgorgement, prejudgment interest, and civil penalties totaling more than $1.2 million.

2021-064: SEC v. Sethi Petroleum, LLC and Sameer P. Sethi

On June 24, 2021, a final judgment was entered against defendant Sethi Petroleum, LLC, ordering it to pay disgorgement and prejudgment interest of $3.2 million for violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act.  The case stemmed from an emergency civil action filed by the SEC on May 14, 2015, against Sethi Petroleum and its president, Sameer P. Sethi, for offering fraudulent oil and gas investments.  The SEC alleged that the defendants used the proceeds of joint venture securities offerings on undisclosed and unapproved expenditures, contrary to the stated purpose in the offering materials and diverted funds to defendants and other individuals.  The SEC also alleged that defendants made other misrepresentations (including false claims of partnering directly with large public oil and gas companies) misled investors about the company’s assets and expected returns, and failed to adequately disclose prior enforcement actions against the company and its affiliates (including the prior criminal conviction and incarceration of Sameer Sethi).  In response to these allegations, the U.S. District Court for the Eastern District of Texas found Mr. Sethi had violated the federal securities laws and ordered disgorgement, prejudgment and civil penalties of more than $4.5 million, less any amounts returned to investors.  Mr. Sethi’s appeal was denied and the district court’s judgment was affirmed by the Fifth Circuit, which resulted in this final judgment being entered.

2021-065: SEC v. Emil Botvinnik

On May 20, 2021, a final judgment was entered by the United States District Court for the Southern District of New York ordering Emil Botvinnik to pay $1.5 million for disgorgement, prejudgment interest, and civil penalties.  The SEC’s 2018 complaint alleged Botvinnik engaged in a fraud involving frequent, short-term trades for his customers with costly commissions and fees that made almost certain that his customers would lose money.  Botvinnik also engaged in unauthorized trading and concealment of material information from his customers regarding transaction costs.  The SEC charged Botvinnik with violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

2021-066: SEC v. The Owings Group, LLC, Owings-1, LLC, Owings Capital Group, LLG, Owings Capital Funds, LLC, Mark Johnson, Kevin Drost, Brian Koslow, David Waltzer

On May 12, 2021, the United States District Court for the District of Maryland issued a memorandum opinion and corresponding final judgments against Mark Johnson, Kevin Drost, Brian Koslow, David Waltzer, and their associated entities.  The SEC’s July 2018 complaint charged the defendants with multiple violations, including Section 10(b) of the Exchange Act, Sections 5 and 17(a) of the Securities Act, and Section 206(4) of the Investment Advisers Act of 1940.  These violations were based on an alleged fraudulent scheme surrounding an untested, and ultimately unsuccessful, method devised by the defendants to take a company public.  The defendants allegedly used various fraudulent methods to attract investors, including making fake escrow accounts and shell companies, and issuing false and misleading statements.  According to the SEC, the defendants lost all investor funds except for payments made to early investors using new investors’ money.  The court ordered varying judgment amounts against the defendants, each ranging from $172,774 to $1,480,648, some of which include jointly and severally liable amounts.  Most of the individual defendants had consented to judgments in 2019, but in June 2021, one individual defendant (Mark Johnson) filed an appeal to the Fourth Circuit regarding the amount of disgorgement and penalty ordered against him, which remains pending.

2021-067: In the Matter of Loci, Inc. and John Wise

On June 22, 2021, the SEC settled charges with Loci Inc. and its CEO John Wise for making materially false and misleading statements relating to an unregistered offer and sale of digital asset securities.  The order found that the digital tokens, called “LOCIcoins,” constituted securities and that defendants made numerous materially false statements in connection with the tokens relating to the company’s revenues, number of employees, and user base of its software platform.  Without admitting or denying the findings of the SEC’s order, the defendants consented to a civil money penalty of $7.6 million, disgorgement of $38,163 and prejudgment interest of $6,209.

2021-068: SEC. Eric Pulier

On May 20, 2021, the United States District Court for the Central District of California issued a final judgment against Eric Pulier, who, without admitting or denying the allegations, consented to a judgment of $4.8 million.  According to the SEC’s complaint filed in September 2017, Pulier, a former executive at Computer Sciences Corporation (“CSC”) and co-founder of ServiceMesh, Inc., defrauded CSC out of over $98 million in connection with its November 2013 acquisition of ServiceMesh.  He allegedly paid approximately $2.5 million in bribes to third parties to assist with his scheme, made material misrepresentations to CSC and its auditors, and circumvented CSC’s internal accounting controls.

A parallel criminal case, no. 17-CR-00599, was filed in September 2017 but was dismissed in December 2018 upon the U.S. Government’s ex parte application to dismiss the indictment in the case with prejudice.

 2021-069: In the Matter of Centaurus Financial, Inc.

On June 2, 2021, the SEC settled charges with Centaurus Financial, Inc., a dually-registered investment adviser and broker-dealer, regarding breaches of fiduciary duty in connection with its receipt of third-party compensation from client investments without fully and fairly disclosing its conflicts of interest.  The order found violations of Sections 206(2) and 206(4) of the Advisers Act.  The SEC also alleged Centaurus had breached its duty to seek best execution despite a more favorable value present at the time of the investment transactions, and that it had failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these violations.  Without admitting or denying the findings of the SEC’s order, Centaurus consented to pay $1.3 million.

2021-070: In the Matter of Crown Capital Securities, L.P. 

On June 24, 2021, the SEC settled charges of violations of Sections 206(2) and 206(4) of the Advisers Act with Crown Capital Securities, L.P., a dually-registered investment adviser and broker-dealer, regarding disclosure failures concerning investment advice on mutual funds and cash sweep money market funds.  The SEC’s order found Crown Capital had breached its fiduciary duties in connection with its receipt of third-party compensation from client investments without fully and fairly disclosing its conflicts of interest, its failure to seek best execution despite a more favorable value present at the time of the investment transactions, and its failure to adopt and implement written compliance policies and procedures reasonably designed to prevent these violations.  Without admitting or denying the findings of the SEC’s order, Crown Capital consented to pay $1.6 million.

 2021-071: SEC v. Savraj Gata-Aura (a/k/a Samuel Aura a/k/a Sam Aura) and Core Agents, Ltd. (d/b/a Core Agents International, Ltd.)

On June 22, 2021, the United States District Court for the Southern District of New York issued a final judgment against Savraj Gata-Aura and Core Agents, Ltd. for $3.7 million, which is to be offset by an amount equal to the order of restitution and the forfeiture amount set forth in the parallel criminal case.  In that proceeding, Aura had pleaded guilty to one count of conspiracy to commit wire fraud under 18 U.S.C. § 1349.  The SEC’s allegations and Aura’s admissions in the criminal case set forth that Aura recruited a network of sales agents to sell fraudulent investments in co-working spaces Bar Works, Inc. and Bar Works 7th Avenue, Inc., using false and misleading offering materials, including false statements regarding the identity and background of Bar Works’ purported CEO, “Jonathan Black,” a pseudonym for a defendant in a related case, Renwick Haddow.

In July 2020, Aura was sentenced to 48 months in prison, supervised release for 3 years, and forfeiture of $3.0 million.  In December 2020, an order of restitution was entered against Aura for $40.0 million, for which he is jointly and severally liable with any other defendant in that matter, defendants in related matters, as well as any defendants who have not yet been charged.

 2021-072: SEC v. Joseph Andrew Paul, John D. Ellis, Jr., James S. Quay, a/k/a “Stephen Jameson,” and Donald H. Ellison

On May 27, 2021, the United States District Court for the Eastern District of Pennsylvania issued a final judgment as to John D. Ellis, Jr. for payment of $1.3 million, which is to deemed satisfied by the entry of a restitution order in a parallel criminal case.

In April 2016, the SEC alleged Josepha Andrew Paul and John D. Ellis, Jr. created fraudulent marketing materials about the historical performance of their investment advisory firm, Paul Ellis Investment Associates.  According to the SEC, Paul and Ellis recruited James S. Quay and Donald H. Ellison to find and mislead potential investors.  Quay, who was previously convicted of tax fraud in 2005 and found liable for securities fraud in 2012, allegedly used an alias to conceal his true identity.  A final judgment against Ellison, including an amount of $83,118 for disgorgement, prejudgment interest and civil penalties, was entered in October 2017 with Ellison’s consent.

In 2017, defendants Paul, Ellis, and Quay were charged in the parallel criminal action, in which all three individuals pled guilty.  Paul was sentenced to 34 months imprisonment, 5 years supervised release, and payment of $1.5 million in restitution.  Quay was sentenced to 125 months imprisonment, 3 years supervised release, and payment of $1.3 million in restitution.  Ellis was again charged with fraud in a separate case, filed in April 2021.  Sentencing in both cases against Ellis is set for October 2021.

2021-073: In the Matter of Maxwell Drever

On May 5, 2021, the SEC settled charges of violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act with Maxwell Drever, a real-estate developer.  According to the SEC’s order, Drever raised approximately $53 million to purchase and redevelop a commercial building in Texas but failed to disclose his receipt of $10.2 million in fees charged to investors in connection with the purchase and redevelopment. Drever also invested $9 million of the undisclosed fees he received to take an equity stake in the project for himself and falsely told certain investors that the investment had come from his own funds.  Without admitting or denying the findings of the SEC’s order, Drever consented to pay $1.6 million for disgorgement, prejudgment interest and civil penalties, and cancel the equity stake in the project he received in exchange for the $9 million investment.

 2021-074: In the Matter of Gurprit Chandhoke and VII Peaks Capital, LLC

On June 4, 2021, the SEC settled charges against investment adviser VII Peaks Capital, LLC and its co-owner, co-principal, and managing member, Gurprit Chandhoke, for breaches of fiduciary duty.  The SEC found that from late 2015 through 2017, VII Peaks and Chandhoke engaged in transactions that were not disclosed to or approved by the board of directors of the client, VII Peaks Co-Optivist Income BDC II, Inc.  These transactions included over $700,000 in due diligence fees collected by VII Peaks for loans made by the BDC to portfolio companies, an undisclosed $400,000 payment by a portfolio company for technology services to a company which Chandhoke partially owned and served as CEO, and an undisclosed $250,000 personal loan to Chandhoke from a company owned and controlled by a portfolio company’s CEO.  The SEC also alleged that the transactions with Chandhoke violated the Investment Company Act for failure to obtain approval from the Commission for the affiliated person transactions, and that VII Peaks failed to implement its own valuation policies and procedures in valuing two portfolio companies of the BDC in 2018.  Without admitting or denying the findings of the SEC’s order, VII Peaks agreed to pay $1.0 million for disgorgement, prejudgment interest and civil penalties, and Chanhoke agreed to a payment of $194,357 as well as an association suspension, investment company prohibition, and penny stock suspension, all for 12 months.

A related settlement was entered into with Michelle E. MacDonald, the CFO of the BDC, for causing VII Peaks’ violations under Section 206(2) of the Advisers Act and for a $20,000 penalty.

 2021-075: SEC v. Hemp, Inc.; Bruce J. Perlowin; Barry K. Epling; Jed M. Perlowin; Ferris Holdings, Inc.; Hobbes Equities Inc.; Diversified Investments LLC; and Quantum Economic Protocols LLC

On May 31, 2021, the United States District Court for the District of Nevada issued final judgment as to defendants Hemp, Inc., Bruce J. Perlowin, Barry K. Epling, Ferris Holding, Inc., and Hobbes Equities Inc., on consent from each defendant.

In its June 2016 complaint, the SEC charged Hemp, Inc., its CEO Bruce Perlowin, Perlowin’s friend Barry Epling, Perlowin’s brother Jed Perlowin, and private companies owned by Epling or Jed Perlowin with violations of Section 5 of the Securities Act and Section 10(b) of the Exchange Act for engaging in a long-running fraudulent scheme to evade registration requirements.  The defendants allegedly sold hundreds of millions of unregistered and purportedly unrestricted Hemp shares to public investors through the use of, among other things, purported gifts and consulting agreements, nominee companies, and fraudulent statements made to registered broker-dealers.

The final judgments entered on May 31 ordered, among other things, civil penalties of $300,000 from Hemp Inc., $1.7 million from Bruce Perlowin, and $8 million from Epling, respectively.  On August 23, 2021, the remaining defendants also submitted stipulations and consents for entry of final judgments, proposing, among other things, a civil penalty of $150,000 for Jed Perlowin.

SEC Alleges Employer’s Compliance Manual Violates Rule 21F-17

On June 23, 2021, the SEC announced that Guggenheim Securities, LLC (“Company”) agreed to settle charges that it violated Rule 21F-17 by including language in its compliance manual and training materials that allegedly prohibited employees from contacting regulators without prior Company approval.  Without admitting or denying the findings in the SEC’s order, the Company consented to a cease-and-desist order, a censure, and a civil penalty of $208,912.

Rule 21F-17, which was adopted by the SEC after the passage of the Dodd-Frank Act in 2010, prohibits actions that impede individuals from reporting a possible securities law violation to the SEC.

The SEC alleged that from 2016-2020, the Company’s compliance manual stated that:

Employees are also strictly prohibited from initiating contact with any Regulator without prior approval from the Legal or Compliance Department.  This prohibition applies to any subject matter that might be discussed with a Regulator, including an individual’s registration status with FINRA.  Any employee that violates this policy may be subject to disciplinary action by the Firm.

According to the order, the compliance manual was updated annually and employees were required to sign an acknowledgement that they would adhere to its policies.  The SEC further alleged that in 2018 and 2019, the Company provided annual compliance trainings that included similar language.

Notably, the SEC stated that it was unaware of any instances in which an employee was prevented from communicating with SEC staff about potential violations or in which the Company took action to enforce the compliance manual’s restriction or prevent communications.  After being contacted by the SEC, the Company removed the language quoted above and added a provision notifying employees of their right to report violations and to participate, assist, or testify in any investigation by a governmental agency.

As we previously reported (see here and here), the SEC brought multiple actions to enforce Rule 21F-17 during the Obama administration, focusing primarily on allegedly restrictive language in severance agreements, but only one such action during the Trump administration (see here and here).  This recent action may signal renewed scrutiny by the SEC under the Biden administration of companies’ compliance with Rule 21F-17.

CA Federal Court Dismisses Whistleblower Claims After Bench Trial

On July 26, 2021, the United States District Court for the Northern District of California held, after a bench trial, that Plaintiff Botta failed to prove that Defendant PricewaterhouseCoopers LLP (“PwC”) terminated his employment in retaliation for his filing of a complaint with the SEC, and dismissed his whistleblower claims brought under SOX and California law.  Botta v. PricewaterhouseCoopers LLP, No. 18-cv-02615.

Background

Plaintiff was an auditor at PwC for nearly two decades.  In 2016, he filed a whistleblower complaint with the SEC, alleging that PwC supervisors willingly overlooked accounting errors and internal-control deficiencies in order to retain business.  The SEC investigated, but chose not to take action against PwC.

In August 2017, PwC terminated Plaintiff’s employment.  Plaintiff claimed the termination, as well as certain other employment actions, were taken in retaliation for his complaint to the SEC.  Plaintiff subsequently sued PwC, alleging violations of SOX, supplemental whistleblower claims under California law, and breach of his employment contract.  The court held a bench trial using Zoom.

Ruling

In its Findings of Fact and Conclusions of Law, the court ruled that PwC was justified in terminating Plaintiff’s employment, and that Plaintiff had not established that PwC retaliated against him.  Although Plaintiff focused on the timing of his termination (four months after the SEC opened an investigation into his whistleblower complaint), the court held that the temporal proximity “wasn’t bolstered by other evidence,” and PwC had “offered a different, persuasive side of the story.”  PwC asserted at trial that Plaintiff’s employment had been terminated because he “fabricated an internal control or lied about doing so,” which was a violation of PwC internal standards.  The court ultimately found that “[Plaintiff], in the end, simply didn’t put forward enough evidence to prove that his SEC complaint contributed to PwC’s decision to fire him.  The temporal proximity between his complaint and his termination generated suspicion, but at trial that suspicion wasn’t confirmed.”  PwC representatives also testified persuasively that they had not even known Plaintiff had filed a whistleblower complaint.

The court also found that Plaintiff was removed from other client engagements for legitimate reasons, including his “lack of rapport,” “bedside manner,” and lack of “sensitivity.”  Therefore, the court held that Plaintiff had not proven that his protected activity was a “contributing factor” to the adverse actions taken against him.  For the same reasons, Plaintiff had not established a causal link between his protected activity and any adverse employment action as required under California law.

Implications

This case demonstrates that temporal proximity between a whistleblower complaint and an adverse employment action likely will not, standing alone, establish retaliation.  Instead, the factfinder considers all of the evidence and makes a context-specific determination regarding whether an adverse employment action was motivated by retaliatory animus.

SDNY: SOX Whistleblower Protections Extend to Investors

On July 21, 2021, the U.S. District Court for the Southern District of New York held that the whistleblower protections established in SOX are not restricted to employee whistleblowers, but also extend to shareholders.  SEC v. Collector’s Coffee Inc., No. 19-cv-4355.

Background

As we previously reported, in 2019 the SEC sued online auction portal Collectors Coffee and its CEO, alleging in an amended complaint that the CEO attempted to prevent investors from communicating with the SEC in violation of Rule 21F-17.  Rule 21F-17, which was adopted by the SEC after the passage of the Dodd-Frank Act, prohibits company actions that impede individuals from reporting a possible securities law violation to the SEC.  Although the Obama-era SEC brought multiple enforcement actions to enforce Rule 21F-17, this action was notable as it was the SEC’s first public attempt to enforce Rule 21F-17 during the Trump administration.

The SEC alleged in its lawsuit that the CEO and Collectors Coffee attempted to enforce a settlement agreement they had reached with two investors who had accused the CEO of making material misrepresentations and omissions, which contained a provision prohibiting communications with regulatory agencies like the SEC.

On June 26, 2020, Defendants filed a motion to dismiss, and on May 17, 2021, Magistrate Judge Gabriel Gorenstein issued a Report & Recommendation recommending that the District Court deny their motion because SOX is not restricted to employee whistleblowers.  Collectors Coffee and the CEO objected to the Magistrate Judge’s Report, arguing that the SEC exceeded its rulemaking authority in promulgating Rule 21F-17, and that the Rule violates the First Amendment of the United States Constitution.

Ruling

District Judge Victor Marrero adopted the Magistrate Judge’s Report and Recommendation in its entirety.  Defendants argued that Rule 21F-17 exceeded the SEC’s rulemaking authority because Rule 21F-17 applies to any “person,” while Section 21F of the Exchange Act applies only to whistleblower-employees.  The court rejected this argument, holding that the broad definition of the term “whistleblower” in Section 21F—which includes “any individual who provides … information relating to a violation of the securities laws to the [SEC]”—is not restricted to the employer-employee context.  The court also relied on the Congressional intent behind Section 21F, which was to encourage whistleblowing activity and protect whistleblowers generally.

The court also rejected Defendants’ First Amendment argument, holding that because the contractual provisions they sought to enforce would be illegal and unenforceable under Rule 21F-17, no First Amendment right was abridged.

Implications

This decision provides for a broad reach of Rule 21F-17.  Companies should ensure that their internal investigation protocols and settlement agreements include language making clear that whistleblowers may report concerns to the SEC.

June 2021 Update of the SEC’s Covered Actions for Potential Whistleblower Claims

On June 30, 2021, the SEC posted six Notices of Covered Actions, for which individuals have 90 calendar days to apply for a whistleblower award.  As discussed in our prior post, the SEC publishes Notices for cases in which the final judgment or order, by itself or together with other prior judgments or orders in the same action issued after July 21, 2010, results in monetary sanctions exceeding $1 million.

In this post, we briefly survey the six June 2021 Notices of Covered Actions.

2021-056: In the Matter of Under Armour, Inc.

On May 3, 2021, the SEC entered an order with Under Armour Inc. based on an Offer of Settlement and findings of misleading statements regarding revenue growths.  According to the order, Under Armour “pulled forward” existing orders that customers had requested be shipped in future quarters, in order to close the gap between the company’s internal forecasts and analysts’ revenue estimates.  According to the SEC, Under Armour misleadingly attributed its revenue growth during this period to various factors without disclosing its pull forward practices.  Without admitting or denying the findings in the SEC’s order, Under Armour agreed to pay a $9 million penalty, as well as to cease and desist from any further violations.

2021-057: SEC v. CapSource, Inc., Stephen J. Byrne, and Gregory P. Herlean

On May 5, 2021, final judgment was entered against two principals of CapSource, Inc., Stephen J. Byrne and Gregory P. Herlean, for fraud and registration violations in connection with multiple related securities offerings.  On December 21, 2020, the SEC had alleged the defendants knew, or were reckless in not knowing, that CapSource’s largest client, Michael B. Zipprich, was diverting millions of dollars of proceeds raised through CapSource for various other projects managed by the client, in contrast to the representations made to the investors.  The SEC alleged that the defendants further assisted Zipprich in defrauding investors and raising millions of dollars in subsequent offerings to improperly shore up the finances and replace the previous diversion shortfalls.  CapSource, Byrne, and Herlean consented to entry of judgment that, among other things, orders Byrne and Herlean to pay $1.9 million and $1 million respectively for disgorgement, pre-judgment interest, and civil penalties.

2021-058: In the Matter of GWFS Equities, Inc.

On May 12, 2021, the SEC settled with GWFS Equities, Inc., a registered broker-dealer, for charges of federal securities law violations relating to Suspicious Activity Report (“SAR”) filings.  The SEC alleged that from September 2015 through October 2018, GWFS, which provides services to employer-sponsored retirement plans, began detecting increasing numbers of attempts by bad actors to gain unauthorized access to the retirement accounts of individual plan participants and the funds therein.  According to the SEC, GWFS failed to implement its anti-money laundering program consistently in response to these attempts, which resulted in it not filing approximately 130 SARs and omitting required information from the 297 SARS it did file.  The SEC’s announcement of the settlement stated that GWFS agreed to a civil monetary penalty of $1.5 million, along with undertaking  significant remedial measures (including implementing new SAR-related policies, procedures, standards, and trainings, and retaining an outside AML consulting firm) and  providing substantial cooperation during the SEC’s investigation.

2021-059: SEC v. Onix Capital LLC, and Ablerto Chang-Rajii

On April 21, 2021, a final judgment was entered by the United States District Court for the Southern District of Florida ordering Onix Capital LLC to pay $9.8 million, comprising $8.0 million in disgorgement and $1.8 million in prejudgment interest.  The SEC’s complaint had alleged Onix Capital, an asset management company based in Miami, made  material misrepresentations regarding investments it offered, its use of the funds, and the background and financial success of Onix’s owner Alberto Chang-Rajii.  The SEC alleged that the defendants raised $7.4 million by, among other things, improperly guaranteeing annual returns of 12 to 19 percent on promissory notes, providing false depictions of Chang, and promising to use funds to invest in companies such as Uber, Snapchat, and Square, when the funds were instead diverted to Chang and other investors.  Onix consented to the final judgment without admitting or denying the complaint’s allegations.

2021-060: SEC v. Kai Christian Petersen; Gil Beserglik; and Raz Beserglik

On April 21, 2021, a final judgment was entered by the United States District Court for the Central District of California against three foreign individuals, Kai Christian Petersen, Gil Beserglik, and Raz Beserglik for the payment of disgorgement, prejudgment interest, and civil penalties.  In 2019, the SEC’s complaint alleged the three individuals engaged in the fraudulent and illegal offering and sale of more than $100 million of securities called “binary options” between 2014 and 2017.  The SEC alleged the defendants and related entities, who were not registered broker-dealers, used high pressure sales tactics to offer and sell these securities to vulnerable investors, including lying to potential investors about their trading expertise and telling investors that the brokers would only earn money if the investors made money, when in reality, the brokers earned money on investor losses.  The SEC also alleged the defendants misappropriated millions of dollars of investor deposits, by, among other things, sending investor money to entities owned and controlled by themselves.  Without admitting or denying the allegations of the SEC’s complaint, Gil Beserglik, Raz Beserglik, and Petersen consented to judgment of $2.6 million, $2.6 million, and $300,000, respectively.

2021-061: In the Matter of S&P Dow Jones Indices LLC

On May 17, 2021, the SEC settled charges with S&P Dow Jones Indices LLC for failures relating to a previously undisclosed quality control feature of one of its volatility-related indices, which led to publication of stale index values. Without admitting or denying the findings of the SEC’s order, S&P DJI consented to a civil money penalty of $9 million.  The SEC found that one of the indexes published by S&P DJI remained static due to an undisclosed “auto hold” feature during certain intervals between 4:00 pm and 5:08 pm on February 5, 2018, despite an unprecedented spike and market volatility that day.  Notwithstanding the monetary penalty, the SEC recognized prompt remedial acts and undertaken by the company and its cooperation with the Commission.

OSHA’s COVID-19 Emergency Temporary Standard Contains Anti-Retaliation Provision

On June 21, 2021, OSHA’s much-anticipated Emergency Temporary Standard (“ETS”) on COVID-19 protections went into effect.  While Proskauer’s Law and the Workplace blog covered the ETS in detail here, this post focuses on the anti-retaliation provision in the ETS.

Anti-Retaliation Provision

The ETS, which applies only to the health-care sector, contains an anti-retaliation provision prohibiting employers from discharging or discriminating against employees for exercising their rights and obligations relating to the COVID-19 pandemic.  This includes disclosing a positive test and/or COVID-19 symptoms, quarantining after testing positive for COVID-19, or notifying an employer of hazardous COVID-19 related conditions at the workplace (such as insufficient PPE or failure to implement enhanced cleaning and ventilation procedures).  Employers must also inform employees of the requirements of the ETS and that they are protected against retaliation.  Employers have discretion in how to provide the information, and may do so verbally, in writing, or by incorporating it into COVID-related trainings.

OSHA explained that the anti-retaliation provision was critical due to the “central role employee participation plays in effectuating the ETS’s purpose.”  For example, employees who test positive for COVID-19 must not hesitate to inform their employers of their condition out of fear of retaliation, so that they can be removed from the workplace and close contacts can be identified.  Similarly, employees must feel free to notify employers of COVID-related violations, such as co-workers refusing PPE or wearing PPE improperly, so that employers become aware of such conditions and can promptly address them.

OSHA noted that the anti-retaliation provision in the ETS partially overlaps with the statutory bar on retaliation found in Section 11(c) of the OSH Act (which we discussed here).  However, in addition to improving employee awareness of its protections, the ETS anti-retaliation provision also provides additional remedies.  Under Section 11(c), employees have only 30 days to report retaliation to OSHA, after which the agency may file a complaint against the employer in U.S. District Court on the employee’s behalf.  In contrast, under the ETS, OSHA has up to six months from the date of the alleged retaliation to issue a citation, which may include remedies such as back-pay and reinstatement.  In addition, OSHA can address retaliation directly and relatively quickly by issuing a citation, whereas litigation in court under Section 11(c) is a much slower process.  That said, the ETS does not limit an employee’s options—they may file a complaint under Section 11(c) regardless of whether OSHA is investigating a violation of the ETS for the same underlying conduct.

Implications

As significant steps toward reopening are already underway, many employers may welcome OSHA’s decision to limit application of the ETS to healthcare settings.  Even there, healthcare employers will likely find that many of the ETS’s requirements overlap with the protocols and preventative measures they have already taken under prior CDC, state, or local guidelines.  However, particularly given the substantial increase in retaliation complaints observed during the pandemic, all employers are reminded that they remain subject to the requirements of the OSH Act, including its General Duty Clause and Section 11(c)’s anti-retaliation provision.

Review of the SEC Whistleblower Program: At the Crossroads of Securities Law and Whistleblower Protection

Fiscal year 2020 marked the ten-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act establishing the Securities and Exchange Commission’s whistleblower program.  Since its inception through the end of FY2020, the SEC has awarded approximately $562 million to 106 individuals.  Even a decade after it was created, the whistleblower program continues to break its own records; in 2020, the SEC issued several awards landing in the top 10 whistleblower awards of all time:

 Source: SEC’s 2020 Annual Report to Congress on the Dodd-Frank Whistleblower Program

We can already tell that FY2021 will be another record-breaking year.  In the first 8 months of FY2021, the SEC has granted an additional $339 million to 57 individuals.  This represents more than a third of the total $901 million awarded to 163 separate individuals since the SEC issued its first award pursuant to this program in 2012.  This includes an award of $114 million in October 2020, the largest single award in the program’s history, which was covered in this recent post.

It’s sometimes difficult to get a sense of what warrants these large awards.  Typically, publicly available orders relating to whistleblower awards are heavily redacted, especially the subject matter underlying the whistleblower tip and alleged misconduct.  However, at the end of each month, the SEC publishes Notices of Covered Action (“NoCA”) for every SEC enforcement action that results in monetary sanctions of over $1 million by a final judgment or order, by itself or together with other judgments or orders in the same action.  Individuals seeking a whistleblower award have 90 calendar days from the date that the NoCA is posted to apply.

Although a NoCA does not indicate whether a whistleblower tip, complaint, or referral led the SEC to open an investigation or file an action, a survey of the monthly NoCA postings will provide helpful insight into the types of actions and issues that have been the subject of recent SEC enforcement actions, some of which may be the basis for future whistleblower award.

In light of the ongoing growth of the SEC whistleblower program, Proskauer’s Whistleblower Defense and Corporate Dispute and Defense blogs will provide a periodic coverage of the program, including a monthly review of the NoCA postings.

 

 

SEC Awards Four Whistleblowers More Than $31 Million

On May 17, 2021, the SEC announced payment of more than $31 million to four whistleblowers who provided the SEC with information that resulted in the return of tens of millions of dollars to harmed investors.  The largest of the awards, totaling almost $27 million, was awarded to two joint whistleblowers who provided the SEC with new information and assisted with an existing investigation.  The second order included awards of approximately $3.75 million and $750,000 to two additional whistleblowers who independently provided information that assisted the SEC with an ongoing investigation.  (The orders granting the respective awards can be accessed here and here.)

Emily Pasquinelli, Acting Chief of the SEC’s Office of the Whistleblower, stated that “[w]histleblowers play a critical role in an investigation, whether at the outset or during the course of an investigation.”  She added that “[t]oday’s awards demonstrate that whistleblowers with specific, credible information who significantly contribute to the success of an existing investigation may be eligible for an award.”

Since the inception of the whistleblower program in 2011, the SEC has awarded approximately $873 million to 162 individuals, including over a quarter of a billion dollars in the first eight months of this fiscal year alone.

M.D. Pennsylvania Grants Summary Judgment on SOX Retaliation Claim

On April 12, 2021, the U.S. District Court for the Middle District of Pennsylvania granted a defendant-employer’s motion for summary judgment on a SOX whistleblower retaliation claim, holding that the company demonstrated that it would have terminated Plaintiff’s employment even in the absence of any alleged protected activity as part of a broad reduction-in-force (RIF).  Wickens v. Rite Aid Hdqtrs. Corp., No. 19-cv-02021.

Background

Plaintiff, a former in-house attorney at the company, allegedly learned in early 2017 that several vice presidents sold their stock in the company shortly before a merger with a competitor was publicly announced, and internally reported his concern that they had engaged in insider trading.  The company terminated Plaintiff’s employment in January 2018 and Plaintiff subsequently filed suit, alleging that his employment was terminated in retaliation for his report, in violation of Section 806 of SOX.

Ruling

The court granted the company’s motion for summary judgment and dismissed Plaintiff’s SOX claim.  Notably, the court did not consider whether Plaintiff had adequately established a prima facie case.  Instead, the court focused on its conclusion that the company had established that it would have terminated Plaintiff in the absence of any protected activity as part of a RIF that resulted in the elimination of over 80 positions.

Implications

This decision strengthens defendants’ ability to prevail on causation grounds where a purported whistleblower’s employment was terminated in connection with a RIF.

SEC Awards $22 Million to Two Whistleblowers

On May 10, 2021, the SEC’s Office of the Whistleblower announced multi-million dollar awards to two whistleblowers who provided the SEC with information that assisted the agency in bringing a successful enforcement action against a financial services firm.  (The order granting the awards can be accessed here.)  The larger of the two awards, $18 million, was awarded to the whistleblower who was the initial source of the information that prompted the SEC’s investigation.  The second award of $4 million was given to a second whistleblower who submitted additional information after the investigation was already underway.

Emily Pasquinelli, Acting Chief of the SEC’s Office of the Whistleblower, said in a press release that “[t]he reporting of credible information by these whistleblowers and their subsequent cooperation with the staff’s investigation allowed the Commission to better understand complex transactions related to the matters under investigation.”

Since the inception of the whistleblower program in 2011, the SEC has awarded approximately $838 million to 156 individuals.

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