The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

July 8, 2021


SEC Charges Company and Two Executives for Misleading COVID-19 Disclosures (SEC Release)





In the world of employment litigation, courts often cite the time-honored legal doctrine of "woulda, coulda, shoulda" when dismissing a disgruntled employee's claims. In some cases, the hiring of a lawyer woulda, coulda, shoulda avoided the belated filing or the inarticulate pleading, but, then again, many a pro se litigant will explain that they woulda hired a lawyer if they coulda afforded the fees and shoulda done so but for the fact that they lacked the means. A recent employment lawsuit against JP Morgan / Chase brings all of this into focus.

https://www.sec.gov/news/press-release/2021-120
In a Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2021/comp-pr2021-120.pdf, the SEC alleged that alleges that Parallax Health Sciences Inc. and its Chief Executive Officer Paul Arena violated Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and that the firm's Chief Technology Officer Nathaniel Bradley violated Section 17(a)(3) of the Securities Act.  Without admitting or denying the SEC's allegations, Parallax, Arena, and Bradley consented to judgments permanently enjoining them from future violations of the charged provisions and requiring them to pay penalties of $100,000, $45,000, and $40,000, respectively; and Arena agreed to be prohibited for five years from acting as a public company officer or director and from participating in an offering of penny stock; and Bradley, who assisted Arena in drafting two of the misleading press releases, agreed to be prohibited for three years from participating in an offering of penny stock. As alleged in part in the SEC Release:

[P]arallax issued a series of press releases in March and April 2020 falsely claiming that its purported COVID-19 screening test would be "available soon" and that it had medical and personal protective equipment (PPE) for "immediate sale."  The complaint alleges that Parallax's insolvency prevented it from developing the screening test, and that the company's projections showed that even if the company had the funds, it would take more than a year to develop the test.  The complaint also alleges that Parallax never had the medical equipment or PPE it offered for sale and that several factors prevented the company from acquiring the equipment, including that it did not have enough money to purchase the equipment and that it lacked the Food and Drug Administration registrations required to import and sell the equipment.  Additionally, the complaint alleges that Arena drafted the misleading press releases to boost Parallax's declining stock price, and that the company's stock price increased after they were disseminated.   

https://www.sec.gov/litigation/litreleases/2021/lr25138.htm

On July 6, 2021, a federal district court in Connecticut entered final judgments against investment adviser Westport Capital Markets, LLC and its sole owner, Christopher E. McClure. The judgments order that Westport Capital and McClure are jointly and severally liable for disgorgement of $632,954, along with $187,807 in prejudgment interest, for a total disgorgement and prejudgment interest amount of $820,761. In addition, Westport is ordered to pay a civil penalty of $500,000, and McClure is ordered to pay a civil penalty of $200,000.

The judgments follow a March 16, 2020 jury verdict finding that Westport Capital and McClure defrauded their advisory clients by repeatedly purchasing securities that generated significant undisclosed compensation, thereby enriching themselves at their clients' expense. The jury found that defendants acted intentionally, knowingly, or recklessly under Section 206(1) of the Investment Advisers Act, and that defendants willfully violated Section 207 of the Advisers Act. The court previously granted the SEC partial summary judgment, holding that, in violation of Sections 206(2) and 206(3) of the Advisers Act, Westport Capital and McClure acted at least negligently in failing to disclose these conflicts of interest.

Securities and Exchange Commission, Plaintiff, v. Westport Capital Markets, LLC and Christopher McClure, Defendants (Order Granting in Part and Denying in Part Motion for Entry of Final Judgments, United States District Court for the District of Connecticut, 17-CV-02064)
https://www.govinfo.gov/content/pkg/USCOURTS-ctd-3_17-cv-02064/pdf/USCOURTS-ctd-3_17-cv-02064-4.pdf As set forth in the DCT's "Syllabus":

This case is a long-running civil enforcement action brought by the U.S. Securities and
Exchange Commission against Westport Capital Markets, LLC, and its owner and chief
executive officer, Christopher E. McClure, for failing to comply with their disclosure obligations under the Investment Advisers Act. The case has proceeded through summary judgment and trial. I granted summary judgment in favor of the SEC on three of its claims, and the jury at trial returned a verdict for the SEC on the two remaining claims.

The SEC now moves for the entry of final judgments, seeking a permanent injunction
against defendants from future violations of the securities laws, disgorgement of $632,954 along with prejudgment interest, and civil penalties of $1,100,000 against Westport and $225,000 against McClure. I will deny the SEC's motion to the extent that it seeks injunctive relief, but I will grant the SEC's full disgorgement request and will grant in part the SEC's request for civil penalties by imposing civil penalties of $500,000 against Westport and $200,000 against McClure. Final judgment shall enter against Westport in the amount of $1,320,761 and against McClure in the amount of $1,020,761.

I commend the reading of the DCT Order to industry professionals because of its thorough and thoughtful discussion and analysis the bases for imposing (or not) disgorgement, civil penalties, and injunctions. In part, the Court observed that:

I also find McClure to be sincere when he discusses the dramatic impact that the SEC's enforcement action and the revelation of his unlawful practices have had on him, both financially and emotionally. Westport has lost millions of dollars in business, and McClure's financial circumstances have fallen sharply. I conclude that, under the circumstances in this case, the severe consequences that defendants have already faced for their misconduct weigh against a finding that they are reasonably likely to violate the securities laws in the future.
. . .

I must also consider the adverse effect that entry of a permanent injunction would have upon defendants. "[T]he collateral consequences of an injunction can be very grave." SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 99 (2d Cir. 1978); see also Gentile, 939 F.3d at 566 (same). Here, the impact on McClure would be severe because it would facilitate administrative sanctions that would very likely end McClure's career. Of course, such a finding may nonetheless be appropriate to protect the public interest if there is a reasonable likelihood that a defendant would commit future violations of the securities laws. See, e.g., Fowler, 440 F. Supp. 3d at 302. But absent such a showing in this case, entry of an injunction would improperly serve punitive rather than deterrent purposes. Accordingly, for all these reasons and in light of my consideration of all the Cavanagh factors, I will deny the SEC's motion to the extent that it seeks injunctive relief. 

at Pages 12 - 13 of the DCT Order

https://www.justice.gov/usao-ndca/pr/former-ceo-and-coo-jhl-biotech-charged-conspiracy-steal-trade-secrets-and-commit-wire
In an Indictment filed in the United States District Court for the Northern District of California
https://www.justice.gov/usao-ndca/press-release/file/1409851/download,  Raco Ivanov Jordanov a/k/a "Racho" Jordanov and Rose Lin a/k/a Rose Sweihorn Tong with violations of conspiracy to commit trade secret theft and wire fraud, international money laundering, conspiracy to obstruct justice, theft of trade secrets (Jordanov only), and false statements (Lin only).  As alleged in part in the DOJ Release, Jordanov and Lin:

are alleged to have co-founded JHL Biotech, Inc., a biopharmaceutical start-up headquartered in Zhubei, Taiwan, with offices in Wuhan, China, and Rancho Santa Fe, Calif.  JHL Biotech is now known as Eden Biologics, Inc. and Chime Biologics (Wuhan), Ltd.  The indictment alleges that Jordanov and Lin, beginning as early as 2008, engaged in a fraudulent scheme to steal thousands of confidential and proprietary documents from Genentech that eventually helped JHL Biotech secretly accelerate its development and production of "biosimilars," or generic versions of Genentech biologics.  Some of the confidential documents stolen from Genentech and obtained by Jordanov and Lin allegedly contained trade secrets.

The indictment alleges that, starting in 2009, Lin recruited an experienced and accomplished scientist then working at Genentech and her husband to work as a team to purloin confidential information from within Genentech.  Beginning in 2013, Lin and Jordanov allegedly used confidential information from the husband and wife team and other sources to help JHL Biotech cut corners, reduce costs, solve problems, save time, and otherwise accelerate product development timelines, secretly using Genentech's high-quality, confidential, intellectual property.

In 2014, as alleged in the indictment, Jordanov and Lin supervised and managed a so-called "conversion" project whereby JHL employees converted confidential Genentech standard operating procedures or "SOPs" into JHL Biotech SOPs.  For example, JHL employees engaged in the wholesale cutting and pasting of logos from the confidential documents by simply cutting out Genentech logos and pasting in JHL Biotech logos to make the Genentech SOPs appear, falsely, to be JHL Biotech SOPs.  JHL Biotech employees allegedly drafted approximately ninety (90) different SOPs using Genentech documents, many of which were confidential and proprietary.  JHL Biotech employees maintained a spreadsheet in which they identified Genentech SOPs that JHL Biotech possessed and tracked the progress to convert these into JHL Biotech SOPs.  The widespread use of the stolen Genentech SOPs allegedly saved JHL Biotech thousands of dollars.

To profit from the trove of stolen confidential, proprietary, and trade secret information, Jordanov and Lin, according to the indictment, then carried out a scheme to defraud JHL Biotech's potential investors and strategic partners.  To induce investment, and obtain money for JHL Biotech and themselves, Jordanov and Lin allegedly defrauded investors by concealing the extent to which JHL Biotech used stolen intellectual property to start, accelerate, and conduct its business.  The indictment alleges that, in late 2016, JHL Biotech entered a strategic partnership with Sanofi S.A., a French multinational pharmaceutical company headquartered in Paris, France, to manufacture and distribute biosimilars in China.  As part of the agreement, in December 2016, Sanofi allegedly paid $101 million to JHL Biotech, using foreign and interstate wires to carry out the corporate transaction.  This cash payment allegedly was part of a strategic relationship worth potentially $337 million to JHL Biotech.  To induce Sanofi's payment of $101 million in cash, Jordanov allegedly signed representations and warranties that falsely stated that JHL Biotech's knowledge, research, development, use, and manufacture, of certain biosimilars had been conducted without infringing or misappropriating intellectual property from any third party.  Jordanov also allegedly made false and misleading statements about consultants used by JHL Biotech and otherwise concealed from Sanofi the secret work of the Genentech insider for JHL Biotech.  In 2019, following the public disclosure of some of the alleged criminal conduct, the value of JHL Biotech, once as high as approximately $916 million, allegedly crashed. 

https://www.sec.gov/news/public-statement/gensler-amac-2021-07-07
Among SEC Chair Gensler's remarks:

Which data and criteria are asset managers using to ensure they're meeting investors' targets - the people to whom they've marketed themselves as "sustainable" or "green"?

I think investors should be able to drill down to see what's under the hood of these funds.

As there's not a standardized meaning of these sustainability-related terms, I've asked staff to consider recommendations about whether fund managers should disclose the criteria and underlying data they use.  

This work takes place in concert with the agency's ongoing efforts to update the public company disclosure regimes on climate risk and human capital.

https://www.sec.gov/news/public-statement/peirce-amac-remarks-070721
Among SEC Commissioner Peirce's remarks:

I also ask the Committee to work through some of the practical issues that would arise were we to adopt such mandates. How should the SEC define diversity, a point that is not clear in the proposed recommendation? How would the American with Chinese, Ethiopian, Finnish, Irish, and Mexican roots be categorized? What should an asset manager do if an employee or board member prefers not to identify her ethnicity or gender? How, if at all, can the Commission verify the accuracy of firms' statements regarding the racial, ethnic, and gender make-up of the firm? What are the consequences if the firms' statements prove to be incorrect? What are the implications for the SEC in setting disclosure mandates based on the draft's determinations that materiality and public interest have evolved? If we require the recommended disclosures, what principle limits other disclosures the Commission can mandate? How would the Commission go about deciding whether an asset manager, in the words of the draft recommendation, was "discriminat[ing] under the 'guise' of fulfilling one's fiduciary duty"?

Finally, I urge the Committee to think carefully about the wording of the recommendations and accompanying discussion, some of which seems to foreclose debate. I urge the Committee to seek out diverse ideas about how to make the asset management industry work better and be a better place to work for all Americans. Men and women of good conscience should be able to come to this discussion with a multitude of ideas and impressions, without fear of recrimination. Unfortunately, the document as submitted largely shuts down such a free sharing of ideas with statements declaring that those with differing views are "on the wrong side of history," or that asset managers' diligence checklists are motivated by discriminatory, rather than fiduciary, intent. Again, good intentions animate the production of this report, but an opportunity has been missed to elicit the full range of approaches for the fantastic opportunity we have to expand the talent pool from which the asset management industry draws. I hope that AMAC will continue to be open to further exploration of possible solutions and points of view. Thank you, and I look forward to the discussions today.

http://www.brokeandbroker.com/5941/finra-sanctuary-etf/
Once upon a time in Wall Street Regulationland we had so-called "leveraged and inverse" ETFs; now, we have Non-Traditional Exchange Trade Funds (NT-ETFs), which have become FINRA's unloved stepchild. Because of the risks and the complexity of these exotic ETFs, FINRA deems them unsuitable for most retail investors when the investment is held beyond one trading day. Somewhat lost in FINRA's hostility seems to be a recognition, grudging as it might be, that NT-ETFs are legal, approved, and regularly traded. If I want to hold an NT-ETF for two or more trading days, what's it to you? Sometimes I even drink what's in a container of milk beyond the printed expiration date.

http://www.brokeandbroker.com/5940/byrd-valmark-finra/
Sometime in 2012, Houston Byrd Jr. engaged Wayne Farnsworth, Jr., Brad D. Farnsworth, and Valmark Securities, Inc. to provide him with financial advice and investment services; and in furtherance of that relationship, Byrd wound up purchasing an AIG variable annuity in his Individual Retirement Account. Sadly, the relationship among the parties became contentious and on April 28, 2017, Byrd was informed that no further investments services would be rendered to him and, in essence: Take your business elsewhere. That elsewhere was FINRA's Ombudsman's Office and federal court.

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