SECURITIES CORNER

SEC CONTINUES TO CRACK DOWN ON COMPANIES MISLEADING INVESTORS

Securities and Exchange Commission v. Stephen Scotts Burns, No. 1:24-cv-00838 (D.D.C. March 22, 2024). 

Following a recent sweep by the SEC of EV startups that went public via mergers with blank-check companies, the SEC settled with the founder and former CEO of a bankrupt EV startup (the “Company”).

 

The Company went public via a merger with a SPAC and had a significant market value. The Company continued to receive sizable funds from its investors due in large part to the former CEO revealing that it had received enough pre-orders to make it through the entire first year of production. Through public statements and SEC filings, the former CEO and the Company made a series of materially inaccurate statements regarding the Company’s pre-orders of the all-electric truck. The SEC determined these statements were misleading because they created an unrealistic and inaccurate depiction of demand for the truck.  

AS PART OF AN SEC SWEEP, TWO INVESTMENT FIRMS SETTLE ACTIONS FOLLOWING ALLEGATIONS OF PUBLICALLY MISCHARACTERIZING THEIR USE OF ARTIFICIAL INTELLIGENCE (“AI”)

As part of the SEC’s ongoing AI sweep targeting investment advisers and how they characterize their use of AI, the SEC has commenced two first-of-their kind enforcement actions. These actions have been brought against two investment firms (the “firms”) who made false statements and misled the public about how they used AI. Specifically, these firms lied when they advised clients that they were going to utilize AI by using a “predictive algorithmic model” to manage portfolios and make better investment decisions.

 

The SEC discovered that these firms never actually employed the predictive algorithmic model and had disseminated false statements about its use of AI in its regulatory filings, various advertisements, and even social media. Such misstatements were found to be violations of the Advisers Act and the Amended Marketing Rule. The firms agreed to settle these charges with the SEC and were required to pay a fine for these violations.

 

The SEC urges these participants to exercise extreme caution when disclosing their use of AI to clients, investors, and the general public. To avoid this recent SEC crack-down, firms and other market participants should ensure that their public disclosures are consistent with their actual business practices.

SEC CONTINUES TO PENALIZE INVESTMENT ADVISERS THAT FAIL TO DISCLOSE MATERIAL CONFLICTS OF INTEREST

Securities and Exchange Commission v. Commonwealth Equity Services, LLC d/b/a Commonwealth Financial Network, 1:19-cv-11655-IT (March 29, 2024). 

Recently, a Massachusetts federal judge found that a privately held Registered Investment Adviser (the “Company”) negligently failed to disclose material conflicts of interest to its advisory clients and failed to adopt and implement policies and procedures as required by the Advisers Acts.

 

The Company had a contract with a clearing broker which provided the Company’s clients access to a mutual fund supermarket where clients were able to purchase, sell, or exchange mutual fund shares. The SEC asked the court to find that the Company violated the Advisers Act by not disclosing that the Company had an agreement to steer clients to certain mutual funds for the Company to receive portions of the fees received; that the mutual fund shares for which the Company received those fees were more expensive for clients than shares of the same funds that did not generate fees for the Company; and that the Company failed to disclose the revenue it generated from the higher-cost shares.

 

The Company argued that the SEC failed to demonstrate that the Company profited from the alleged disclosure failures, stating that no testimony had been provided by clients who said they would have made different investment decisions if they had known. The court disagreed and stated that the clients did not know and, therefore, were unable to give informed consent to the Company’s investment decisions. According to the court, had the clients known that they were invested in high-cost shares of funds for which lower-cost shares existed, and that the higher cost resulted in greater profit for the Company, there was reason to believe that at least some of those clients would have elected to move their money to the lower-cost funds. Thus, the court ordered the Company to disgorge the amount that the SEC said represented the difference between the revenue it earned from the clearing broker arrangement and what it would have earned if those clients had invested in lower-cost shares of the same funds. 

MARCH 2024 NOTEWORTHY ENFORCEMENT ACTIONS FILED

 Director/Officer

 Role

 Company

 Roy Cook

 Director

 Tallgrass Energy LP

 Stephen Scott Burns

 Founder/ CEO

 Lordstown Motors Corp.

 Andreas Bechtolsheim

 Founder

 Arista Networks, Inc.


 Director/Officer

 Role

 Company

 Paul A. Pereira

 Former   CEO/Founder

 Alfi, Inc.

MARCH 2024 NOTEWORTHY SETTLEMENTS AND JUDGMENTS

 Amount

 Director/Officer

 Role

 Company

 $46,831

 Imran Parekh

 Director

 Evoqua Water Technologies   Corp.

 $441,024.16

 Bernard Finley

 CFO

 Hailtron, Inc.

 Amount

 Director/Officer

 Role

 Company

 $1,825,318

 Brian Sewell

 Founder

 Rockwell Capital   Management

 $2,101,939.51

 John Feloni

 CEO

 Stock Squirrel,   Inc.

 $14,099,645

 L. Rose, S. Shelby,   and K, Dirden

 Directors

 SHE Beverage   Company, Inc.

 $2,000,431

 Jatinder Bhogal

 COO

 RenovaCare, Inc.