General Counsel & D&O

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On April 5, the Public Company Accounting Oversight Board levied a $100,000 fine against Scott Marcello, the former Vice Chair of Audit at KPMG.  The penalty is noteworthy for two reasons: (1) it’s the largest monetary penalty ever levied by the PCAOB in a case settled with an individual; and (2) it’s the first matter in which the PCAOB has sanctioned someone for failure to reasonably supervise, despite being authorized to impose sanctions on this basis under the Sarbanes-Oxley Act of 2002 (SOX).  See Section 105(c) of the Sarbanes-Oxley Act of 2002 (SOX).
Continue Reading The PCAOB Brings First Failure-To-Supervise Case

On March 16, the SEC filed a municipal bond fraud case against Crosby Independent School District and its former CFO in a $20 million bond offering.[1]  Crosby is a suburb of Houston, Texas.  The SEC also charged the district’s outside auditor with improper professional conduct and suspended her from appearing or practicing before the Commission with a right to reapply after three years.
Continue Reading SEC Settles Municipal Bond Fraud Case Against Texas School District and Former CFO, and Suspends External Auditor

There has been lots of breathless commentary in the financial press and the blogosphere over the SEC’s August 2021 filing of an insider-trading case involving so-called “shadow trading.” Shadow trading as defined in a 2020 academic paper occurs when someone possessing material, nonpublic information (“MNPI”) obtained from his or her employer uses it to trade in the securities of a competitor or economically-linked public company.[1]  This is in contrast to the more usual insider trading, in which the stock being traded is that of the subject company. In Panuwat, the defendant is charged with misappropriating MNPI from his employer and using it to trade in a competitor’s securities.[2]  Earlier this week, a district court in the Northern District of California denied a motion to dismiss the SEC’s complaint, allowing the enforcement action to proceed.[3]
Continue Reading SEC Complaint Upheld in Rare – But Not Unprecedented – Shadow Trading Case

On December 20, 2021, the SEC[1] and DOJ[2] each announced fraud charges against five Russian nationals. The five defendants are charged with a multiyear scheme of hacking into service providers that help public companies make quarterly and annual filings with the SEC through the EDGAR filing system.  By hacking the service providers, the defendants allegedly obtained material nonpublic information (MNPI) regarding earnings releases before those releases were made public.  The defendants then allegedly traded ahead of the release of the MNPI, reaping profits of some $82 million in the process.
Continue Reading SEC and DOJ Bring Parallel Civil and Criminal Charges Against Five Russians for $82 Million Hack-And-Trade Scheme

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.
Continue Reading SEC and DOJ Bring Parallel Cases Alleging $8 Million Serial Insider-Trading Scheme

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.
Continue Reading SEC Conducts Sweep of Customers Impacted by SolarWinds Cyber Breach

“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?