The United States Securities and Exchange Commission recently charged two individuals— Florida residents, Suyun Gu, and his friend, Yong Lee—for their involvement in allegedly fraudulent wash sales involving out-of-the-money options in “meme stocks.” So-called “meme stocks” [1] are stocks that were being actively promoted on social media in early 2021. Continue Reading SEC Charges Case Featuring Alleged Wash Sales Involving Options of “Meme Stocks”

Today the SEC [1] and the DOJ [2] announced civil and criminal charges involving an alleged brazen $8 million insider-trading scheme.   The trader, Dayakar Mallu, allegedly traded ahead of four public announcements by his former employer, Mylan N.V., between October 3, 2017, and July 29, 2019.  He allegedly obtained material nonpublic information from a friend who still worked at Mylar at the time.  The tipper is described only as a “Mylan insider” in the SEC press release, but the DOJ press release calls him an unnamed co-conspirator.

Mallu’s alleged insider trading enabled him to generate gains and avoid losses totaling over $8 million through well-timed options trades.  The SEC’s complaint maintains that Mallu obtained material nonpublic information about Mylan’s unannounced earnings, drug approvals by the FDA, and impending merger with another company.  According to the SEC, he then shared a portion of his trading profits with the tipper by making cash payments abroad.

The SEC alleges that Mallu attempted to conceal his trading scheme by using secure messaging apps and foreign cash payments.    The SEC press release said that these attempts failed because of “the agency’s ability to use sophisticated data analysis to detect suspicious trading pattern and identify the traders behind them.”

Mallu has consented to the entry of an injunction against further violations of Section 10(b) of the Securities Exchange Act and Exchange Act Rule 10b-5 and a bar from serving as an officer or director of a public company.  In the parallel criminal case, Mallu pleaded guilty to insider trading and aiding in the preparation of a false tax return.  He is scheduled to be sentenced on January 24, 2022.  There is no word yet as to charges facing the tipper/unnamed coconspirator.

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[1] SEC Announcement | SEC Charges Former Pharmaceutical Global IT Manager in $8 Million Insider Trading Scheme

[2] DOJ Announcement  |  Former Information Technology Executive Pleads Guilty to Insider Trading and Aiding in the Preparation of a False Tax Return

On August 16, 2021, the financial thresholds specified in the definition of “qualified client” under Rule 205‑3 of the Investment Advisers Act of 1940 (“Advisers Act”) will increase (i) from $1 million to $1.1 million (assets under management test), and (ii) from $2.1 million to $2.2 million (net worth test).  Contracts entered into prior to August 16, 2021 will be “grandfathered” in and will not be subject to the adjusted dollar amounts, unless a client who was not a party to such contract becomes a party following this effective date.  Investment advisers and fund managers should consider whether their agreements must be updated to reflect the new thresholds.

Continue Reading SEC Increases Financial Thresholds for Qualified Clients

Reuters reported today that the SEC is investigating last year’s hack of SolarWinds, focusing on whether SEC registrants failed to disclose that they had been impacted by the cyber breach.[1]   According to the article, the SEC sent voluntary requests for information to “a number of public issuers and investment firms…”  The SEC is reportedly investigating whether SolarWinds customers had been victims of the hack and failed to adequately disclose that fact.

As is customary in these investigations, the SEC is reportedly inquiring whether such hacking victims had suffered from internal-controls deficiencies.  The SEC is also looking for unusual or opportunistic trading patterns suggestive of potential insider trading.  And of course the SEC is inquiring into potential violations of Reg SP to determine whether the companies have policies designed to protect customer information and data privacy.

If the hacking victims respond to the SEC by disclosing information about the breaches, they could avoid facing enforcement action “relating to historical failures,” according to the article.

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[1] The article can be accessed at: U.S. SEC probing SolarWinds clients over cyber breach disclosures -sources | Reuters

“Naked short selling” is often claimed by struggling public companies to be the source of their woes.  But there have been relatively few cases addressing naked short selling.  Recently, however, on   May 19, 2021, the SEC charged a broker-dealer (“BD”) with violating the order-making and locate provisions of Regulation SHO.[1]  Regulation SHO regulates short sales of securities and, broadly speaking, is aimed at minimizing naked short selling, failures to deliver, and other practices.

What is Short Selling?
According to the SEC’s Complaint, “[s]hort selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money.”[2]  Thus, short sellers profit from a decline in the price of a security.  This is in contrast to “long” investors, who profit from an increase in the price of a security.  Short selling is very risky: losses are unlimited because the price of a security can always increase.

What is Regulation SHO?
Regulation SHO, enacted in 2005, established “locate” and “close-out” requirements.  Rule 200(g) of Regulation SHO requires BDs to mark all orders to sell stock as “long,” “short,” or “short-exempt.”[3] Continue Reading SEC Brings “Naked Short Selling” Case

On April 1, 2021, the Texas State Securities Board (TSSB) announced the entry of a Consent Order against an SEC registered investment adviser named Independent Financial Group, LLC (“Independent”). The TSSB’s action may represent a large shift in investment adviser regulation and enforcement considerations for SEC-registered investment advisers. (Emphasis on “may.”) Continue Reading SEC Investment Advisers: Texas says “April Fools!” to Federal Preemption?

Capital raising through Special-Purpose Acquisition Companies (“SPACs”) has gone through the roof in the last two years.  Last year was by far the single highest deal value for SPACs, and the first quarter of 2021 has already surpassed last year’s total deal value.[1]  Given the explosion of SPAC transactions, often backed by celebrities, it is a safe bet that the SEC will increase its scrutiny of SPACs.

In fact, on March 25, 2021, Reuters reported that the SEC has requested voluntary information from Wall Street banks on SPAC deals.[2]  Whether this inquiry broadens into a full-scale industry sweep remains to be seen, but it is clear that the hotbed of SPAC activity has captured regulatory attention.  Also notable is that the plaintiffs’ bar has been filing lots of cases arising from SPAC transactions, which can be a harbinger of SEC inquiries.  For these reasons, it is important to understand the regulatory risks of these deals.

Continue Reading SPACs in the Spotlight: Skyrocketing Deal Volume Invites Regulatory Scrutiny

As we discussed in our recent post “What to Expect from the SEC Under the Biden Administration,” market participants can expect a more vigorous SEC enforcement program under the new administration.  President Biden’s nominee to chair the SEC, Gary Gensler, was known as a tough enforcer while serving as chairman of the CFTC during the financial crisis.  If confirmed as SEC Chairman by the Senate, Mr. Gensler is sure to bring an assertive approach to SEC enforcement. Continue Reading What Investment Advisers and Fund Managers can Expect from the SEC Under the Biden Administration

The dust has settled on the 2020 election, and the Biden administration has begun pressing forward with its policy objectives. Critical to achieving such objectives is the Democrats’ control of both the House of Representatives and the Senate, albeit by the narrowest of margins after the Democratic senatorial candidates won their run-off elections in Georgia. As a result of the Georgia elections, Vice President Harris will be able to cast the tie-breaking vote in the case of a deadlock in the Senate. What does the change in administrations mean for SEC enforcement? Continue Reading What to Expect from the SEC Under the Biden Administration