The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer

October 1, 2018

In a Complaints filed in the United States District Court for the Southern District of New York against Elon Musk and Tesla, Inc., the SEC alleged:

In the "Summary" portion of the Musk Complaint:

1. This case involves a series of false and misleading statements made by Elon Musk, the Chief Executive Officer of Tesla, Inc. ("Tesla"), on August 7, 2018, regarding taking Tesla, a publicly traded company, private. Musk's statements, disseminated via Twitter, falsely indicated that, should he so choose, it was virtually certain that he could take Tesla private at a purchase price that reflected a substantial premium over Tesla stock's then-current share price, that funding for this multi-billion dollar transaction had been secured, and that the only contingency was a shareholder vote. In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source.

2. At approximately 12:48 p.m. EDT on August 7, 2018, during trading hours, Musk tweeted to his over 22 million Twitter followers, "Am considering taking Tesla private at $420. Funding secured." This statement was false and misleading. Over the next three hours, Musk made a series of additional materially false and misleading statements via Twitter including: 
  • "My hope is *all* current investors remain with Tesla even if we're private. Would create special purpose fund enabling anyone to stay with Tesla."
  • "Shareholders could either to [sic] sell at 420 or hold shares & go private." 
  • "Investor support is confirmed. Only reason why this is not certain is that it's contingent on a shareholder vote." 
3. Musk knew or was reckless in not knowing that each of these statements was false and/or misleading because he did not have an adequate basis in fact for his assertions. When he made these statements, Musk knew that he had never discussed a going-private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a "special purpose fund," and had not confirmed support of Tesla's investors for a potential goingprivate transaction. He also knew that he had not satisfied numerous additional contingencies, the resolution of which was highly uncertain, when he unequivocally declared, "Only reason why this is not certain is that it's contingent on a shareholder vote." Musk's public statements and omissions created the misleading impression that taking Tesla private was subject only to Musk choosing to do so and a shareholder vote. 

4. Investors reacted to Musk's August 7 tweets. From the time of Musk's first tweet that day until the close of trading on August 7, Tesla's stock price increased by more than 6% on significantly increased volume and closed up 10.98% from the previous day. 

5. Musk's false and misleading public statements and omissions caused significant confusion and disruption in the market for Tesla's stock and resulting harm to investors. 

6. By engaging in the conduct alleged in this Complaint, Musk violated, and unless restrained and enjoined will violate again, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder. 

In the Tesla Complaint: 

1. This case involves the failure of Tesla, Inc. ("Tesla") to implement disclosure controls or procedures to assess whether information disseminated by its Chief Executive Officer, Elon Musk, via his Twitter account was required to be disclosed in reports Tesla files pursuant to the Securities Exchange Act of 1934 ("Exchange Act") within the time periods specified in the Commission's rules and forms. 

2. On November 5, 2013, Tesla publicly filed a Form 8-K with the Commission stating that it intended to use Musk's Twitter account as a means of announcing material information to the public about Tesla and its products and services and has encouraged investors to review the information about Tesla published by Musk via his Twitter account. 

3. Since that time, Musk has used his Twitter account to distribute material information about Tesla, including company financial projections and key non-financial metrics. Tesla, however, did not have disclosure controls or procedures in place to assess whether the information Musk disseminated via his Twitter account was required to be disclosed in reports Tesla files pursuant to the Exchange Act within the time periods specified in the Commission's rules and forms. Nor did it have sufficient processes in place to ensure the information Musk published via his Twitter account was accurate or complete. 

4. By engaging in the conduct, Tesla violated, and unless restrained and enjoined will violate again, Rule 13a-15 [17 C.F.R. § 240.13a-15] of the Exchange Act [15 U.S.C. § 78a, et seq.]. 

Without adsmitting or denying the allegations, Musk and Tesla have agreed to settlements, which will provide, in part, that:
  • Musk will step down as Tesla's Chairman and be replaced by an independent Chairman.  Musk will be ineligible to be re-elected Chairman for three years; 
  • Tesla will appoint a total of two new independent directors to its board;
  • Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk's communications;
  • Musk and Tesla will each pay a separate $20 million penalty.  The $40 million in penalties will be distributed to harmed investors under a court-approved process. 
READ the FULL TEXT COMPLAINTS:
Tesla http://www.sec.gov/litigation/complaints/2018/comp-pr2018-226.pdf
Elon Musk http://www.sec.gov/litigation/complaints/2018/comp-pr2018-219.pdf

 Without admitting or denying the findings in an SEC order, Credit Suisse Securities (USA) LLC agreed to settle charges brought by the SEC and the Office of the New York Attorney General regarding material misrepresentations and omissions made in connection with its now-closed Retail Execution Services (RES) business' handling of certain customer orders.  The settlements require Credit Suisse to pay $5 million to the SEC and $5 million to the NYAG for a total of $10 million., In addition to imposing the penalty, the SEC's order censures Credit Suisse and requires that it cease and desist from further violations. The SEC Order found that although Credit Suisse touted "robust" and "enhanced" price improvement on orders, RES's computer code treated orders for which execution quality is required to be publicly reported differently from orders for which execution quality is not publicly reported, thus depriving retail customers of price improvement for non-reportable orders. The SEC's order also finds that RES disproportionately used a routing tactic that provided an opportunity to profit from its execution of the final portions of those customer orders internally.
READ the FULL TEXT SEC Order https://www.sec.gov/litigation/admin/2018/33-10565.pdf

http://www.brokeandbroker.com/4210/LPL-Expungement/
A disgruntled customer alleges $633,000 in damages in a FINRA Arbitration complaint. She says she received bad advice about her home refinancing and various unsuitable investments. The stockbroker says he did absolutely nothing wrong and points with pride to the account's performance during the Great Recession. The broker-dealer makes an apparent business decision and settles for about 20% of the damages sought. The stockbroker does not contribute a penny towards settlement. About five years later, still stewing in his own juices, the stockbroker files his own FINRA Arbitration in an effort to clear his name and rid his record of what he views as a scurrilous customer complaint. READ today's BrokeAndBroker.com Blog to see how it all turns out.

https://www.sec.gov/litigation/litreleases/2018/lr24296.htm
In a Complaint filed in the United States District Court for the Western District of Texas, the SEC charged charges former Texas state senator Carlos I. Uresti and Stanley P. Bates with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, the registration provisions of Sections 5(a) and 5(c) of the Securities Act, and the broker-dealer registration provisions of Section 15(a) of the Exchange Act. Bates has agreed to settle the Commission's action against him and consented to a final judgment that permanently enjoins him from violating the aforementioned provisions of the federal securities laws, imposes a conduct-based injunction and officer and director bar, and deems his disgorgement satisfied by the restitution ordered against him in the criminal matter described below. Bates also agreed to settle the proposed administrative proceeding by consenting to associational and penny stock bars. The Complaint alleges that Bates founded and served as the Chief Executive Officer of FWLL, LLC (a/k/a Fourwinds Logistics Laredo) ("FWLL") to buy and sell sand used in hydraulic fracking to produce oil. Uresti, then a licensed attorney and Texas state senator, allegedly served as FWLL's counsel, broker, and escrow agent. The Complaint alleges taht Uresti and Bates raised over $11 million by misrepresenting the profitability and safety of investments in the FWLL venture, including presenting a doctored bank statement to investors showing that FWLL had over $18 million in cash, when in reality the company had less than $100,000. The Complaint alleges that Uresti convinced one of his legal clients, a purportedly financially unsophisticated single mother, to invest $900,000, which came from a wrongful death settlement that Uresti had secured on her behalf after the death of two of her children. Uresti allegedly received large, undisclosed commissions for his solicitations, and Bates spent most of the investors' money on lavish and improper payments and expenses. In related criminal proceedings Uresti was found guilty by a federal jury on 11 felony counts, including two counts of securities fraud, while Bates pleaded guilty to eight felony counts, including securities fraud. Uresti and Bates were both sentenced to serve terms of imprisonment of 12 and 15 years, respectively, and both were ordered to pay a total of $6.3 million in restitution.READ the FULL TEXT Complaint https://www.sec.gov/litigation/complaints/2018/comp24296.pdf

https://www.sec.gov/litigation/litreleases/2018/lr24291.htm
Securities and Exchange Commission v. Goldsky Asset Management, LLC and Kenneth Grace, No. 18-civ-8870 (S.D.N.Y., filed September 27, 2018)
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged investment adviser Goldsky Asset Management, LLC and its owner Kenneth Grace with violating the antifraud provisions of Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, Sections 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, or in the alternative, that Grace aided and abetted Goldsky's violations. The SEC is seeking a judgment ordering permanent injunctive relief and civil monetary penalties against Goldsky and Grace.The Complaint alleged that Goldsky's 2016 and 2017 Forms ADV, which Grace signed, stated that its hedge fund, Goldsky Global Alpha Fund, LP, had an auditor, a prime broker and custodian, and an administrator. In addition, in its Forms ADV and Forms ADV Part 2A, Goldsky stated that it managed over $100 million in discretionary assets under management. Further, Goldsky's website claimed that Goldsky Fund earned: 19.45% compounded annual returns since inception, 70.33% compounded monthly returns since inception, and 25.30% returns for the year ended September 30, 2017. The SEC alleges that Goldsky, Grace and Goldsky Fund had no agreements with service providers, Goldsky and Grace did not manage $100 million of assets, and Goldsky Fund did not have any investment returns as it never had any assets.READ the FULL TEXT Complaint https://www.sec.gov/litigation/complaints/2018/comp24291.pdf

In a Complaint filed in the United States District Court for the Southern District of California, the SEC charged 
NL Technology, Jonny Ngo and Donato "Mick" Baca, Jr.,with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as the registration provisions of Sections 5(a) and 5(c) of the Securities Act. The Complaint seeks injunctive relief, disgorgement plus pre-judgment interest, and civil penalties. The Complaint alleges that Jonny Ngo and Donato "Mick" Baca, Jr., raised over $61 million from over 350 investors for Ngo's company, NL Technology LLC, purportedly a wholesale technology import business Investors were allegedly promised 5% to 15% returns over a period of two weeks to 45 days. IThe Complaint alleges that no such wholesale business existed; and that Ngo and Baca used the money to pay prior investors a la Ponzi and for personal uses such as gambling and purchasing luxury cars, watches, and homes. In order to conceal the alleged fraud, the Complaint alleges that Ngo fabricated bank statements, financial records, and other documents, and impersonated third parties in order to conceal the fraud, and that Baca disseminated some of those fabricated documents to investors.
Without admitting or denying the allegations in the Complaint, Ngo and NL Technology consented to the entry of final judgments enjoining them from violating the above provisions of the federal securities laws.; and Ngo is prohibited from soliciting, accepting, or depositing any monies from actual or prospective investors in connection with any offering of securities, and he will disgorge $4.5 million of ill-gotten gains along with $245,726 in prejudgment interest and pay a $480,000 civil penalty.READ the FULL TEXT Complaint https://www.sec.gov/litigation/complaints/2018/comp24293.pdf

SEC Charges Florida Microcap Company, CEO and Consultant with Fraud (SEC Litigation Release No. 24295)
https://www.sec.gov/litigation/litreleases/2018/lr24295.htm
In a Complaint filed in the United States District Court for the Eastern District of New York, the SEC charged  Nutra Pharma Corp. with violations of the antifraud, registration, and reporting provisions of Sections 5(a) and (c) and 17(a)(2) of the Securities Act of 1933, and Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5(b), 13a-11, and 13a-13 thereunder. The Complaint charges Nutra Pharma's Chief Executive Officer Rik Deitsch with violations of the antifraud, anti-manipulation, beneficial ownership disclosure, registration, and reporting provisions of Sections 5(a) and (c) and 17(a)(2) of the Securities Act, and Sections 9(a)(2), 10(b), 13(a), 13(d), and 16(a) of the Exchange Act and Rules 10b-5, 13a-14, 13d-2, and 16a-3 thereunder, and aiding and abetting Nutra Pharma's violations of Section 17(a)(2) of the Securities Act and Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5(b), 13a-11 and 13a-13 thereunder. Finally, the Complaint charges consultant Sean McManus with violations of the antifraud and broker-dealer registration provisions of Section 17(a)(2) of the Securities Act, Sections 10(b) and 15(a) of the Exchange Act, and Rule 10b-5(b) thereunder. The SEC seeks a permanent injunction, disgorgement, and civil penalties against all defendants, a penny stock bar against Deitsch and McManus, and an officer and director bar against Deitsch. The Complaint alleges that Nutra Pharma, characterized as a microcap issuer that purports to make pain relief drugs with cobra venom, and Deitsch, issued or posted press releases that implied, among other things, that Nutra Pharma was engaged in international distribution and sales of its product, when it was not, and that Nutra Pharma had upgraded its cobra farm facilities, when Nutra Pharma had no cobras, had no cobra farm, and had never produced cobra venom. Also, Deitsch allegedly engaged in manipulative trading designed to "walk up" Nutra Pharma's stock price and create the appearance of active trading in Nutra Pharma. Further, Nutra Pharma and Deitsch allegedly failed to make numerous required filings about Deitsch's beneficial ownership of the company's securities. Finally, McManus allegeldy made numerous misstatements while soliciting investors in Nutra Pharma; and he allegedly acted as an unregistered broker, despite being permanently barred in 2001 by the NASD (now FINRA) from associating with NASD member firms. READ the FULL TEXT Complaint https://www.sec.gov/litigation/complaints/2018/comp24295.pdf

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