Securities Industry Commentator by Bill Singer Esq

It's A Schottenstein Family Affair In FINRA Arbitration (BrokeAndBroker.com Blog)

SEC Issues Multiple Whistleblower Awards Totaling Over $3.6 Million (SEC Release)

Former registered broker admits to involvement in options trading scheme (DOJ Release)

SEC Charges Former Day Trader with Market Manipulation Scheme (SEC Release)

CEO of Medical Device Company Charged in COVID-19 Related Securities Fraud Scheme (DOJ Release)

SEC Charges Biotech Company and CEO With Fraud Concerning COVID-19 Blood Testing Device (SEC Release)

SEC Obtains Final Judgment Against Seismic Data Company (SEC Release)

In the first Order (Release No. 90718; Whistleblower Award Proc. File No. 2021-16 / December 18, 2020) https://www.sec.gov/rules/other/2020/34-90718.pdf, the SEC awarded over $1.8 million to a whistleblower, who purportedly took immediate steps to mitigate the harm to investors, and provided substantial assistance to the staff, including providing testimony, key documents, and other information that saved SEC time and resources and contributed to an enforcement action that resulted in the return of millions of dollars to harmed investors.

In the second Order (Release No. 90720; Whistleblower Award Proc. File No. 2021-17 / December 18, 2020 (Release No. 90720; Whistleblower Award Proc. File No. 2021-17 / December 18, 2020)

https://www.sec.gov/rules/other/2020/34-90720.pdf, the SEC awarded over $1.2 million to a whistleblower, who provided information that led to a successful enforcement action; however, the whistleblower's culpability and unreasonable delay impacted the award amount. The Order notes in part that the SEC "negatively assessed that Claimant was culpable for actively participating in and financially benefitting from the fraudulent scheme at the Company and that Claimant unreasonably delayed reporting to the Commission even as Claimant became more fully aware of the scheme's illegality."

In the third Order (Release No. 90721; Whistleblower Award Proc. File No. 2021-18 / December 18, 2020) https://www.sec.gov/rules/other/2020/34-90721.pdf, the SEC awarded over $500,000 to a whistleblower, who provided significant information and ongoing assistance that led to the success of an enforcement action. In issuing the award, the SEC waived the TCR filing requirement based on the unique facts and circumstances of the case. In waiving the TCR filing requirement, the SEC noted that it considered the following facts:

Specifically: (1) beginning in early REDACTED , Claimant provided information regarding the violations underlying the Covered Action to another individual, who was acting as Claimant's attorney at the time ("Attorney");(2) the Attorney subsequently used that information, without Claimant's fully informed consent, to support a REDACTED TCR submission to the Commission, with Attorney as the whistleblower; and (3) thereafter, Claimant provided substantial additional information to assist the Enforcement staff's investigation, all the while reasonably believing that the Attorney was continuing to represent Claimant and had acted on Claimant's behalf in submitting the TCR. . . .

[B]etween approximately February 2017 and January 2020, Ross and at least four other individuals conspired to execute a scheme in which they traded securities-primarily short-term call options-in large, publicly traded companies (often Fortune 500 companies) based on materially false rumors about those companies that they themselves generated and disseminated. These materially false rumors were intended to drive up the price of the securities (both the underlying stock and options).

Call options are essentially a contract that gives the options' holder the right, but not the obligation, to buy shares of the underlying stock at a set price per share-the option's strike price-on or before a set future date (the option's expiration date). Generally, the holder of a call option benefits when the price of the underlying stock increases. Short-term call options are ones that generally expire within a week.

Ross, who was formerly registered as a broker with the Financial Industry Regulatory Authority ("FINRA"), and the co-conspirators generated the rumors. They would frequently exchange drafts of a proposed rumor among themselves using the Trillian instant messaging application. After a rumor was formulated and finalized, one of the co-conspirators, identified as Individual-1 in the criminal information, was responsible for disseminating the rumor via Trillian to multiple accounts, which would in turn, result in the false rumor being disseminated over one or more market subscription services, including Trade The News, TradeXchange, and Benzinga, as well as various Twitter accounts.

Before Individual-1 disseminated the rumor, Ross and the other co-conspirators would acquire a position in the publicly traded company that was the subject of the materially false rumor. The co-conspirators typically purchased short-term call options before (sometimes just minutes or seconds before) Individual-1 disseminated the rumor. The conspirators often (but not always) purchased short-term call options because the price of such options is more sensitive than the price of the underlying stock. It was therefore possible for Ross and the others to earn a greater percentage return by trading short-term call options rather than the underlying stock. Ross and the conspirators profited from their scheme by selling the options (or other securities) after they increased in price. They would typically sell off their positions shortly after the rumor was disseminated (and after the price of the option or underlying stock had increased).

Ross executed approximately 49 trades based on the generation and dissemination of false rumors, including in March and April 2018, when Ross traded short-term call options in Disney and Ben Franklin Resources, respectively. Overall, Ross earned approximately $35,000 in profits from the scheme.

[R]oss and several other individuals created false rumors about purported market-moving events, such as corporate mergers or acquisitions, involving publicly-traded companies. As alleged, the false rumors were then shared with other individuals who disseminated the false rumors through real-time financial news services, financial chat rooms, and message boards, causing the prices of the subject companies' securities to rise temporarily. Between February 1, 2018 and January 2020, Ross allegedly created and traded around the false rumors at least 49 times, generating nearly $36,000 in illicit profits. The other scheme participants also traded around the false rumors, generating significant profits.

[F]rom February through December 2020, Berman engaged in a scheme to defraud investors by falsely claiming DECN had developed a 15-second test to detect COVID-19 in a finger prick sample of blood.  In truth, Berman knew his test was merely an idea and not a validated method of accurately detecting COVID-19, much less an actual product ready for manufacture and sale.  According to the indictment, Berman and DECN were in precarious financial condition in the lead up to the pandemic, and Berman wrote in internal emails that he needed a "new story" to "raise millions." 

The indictment further alleges that Berman falsely told investors that the Food and Drug Administration (FDA) was on the verge of approving DECN's request for emergency use authorization of its new COVID-19 test.  In truth, Berman knew that the company lacked the financial resources and insurance necessary to conduct the clinical testing required by the FDA to complete the application process, but concealed these material facts from and misled investors.  In an effort to exert political pressure on the FDA and obtain approval of the DECN COVID-19 test without conducting the necessary clinical testing, Berman hired a political consultant to lobby Members of Congress, telling Members of Congress in talking points that the FDA had "moth-balled" the company's submission and that it remained "stuck in limbo" at or around the same time that Berman was telling investors that the test was on the verge of approval.  Between early March and April 23, 2020, DECN's stock price rose by over 1,500 percent.   

The indictment further alleges that, as part of the alleged scheme, Berman used an alias, "plutoniumimplosion," to repeat false and misleading statements to investors on Internet message boards, and lull suspecting investors into inaction by refuting allegations of fraud and threatening potential whistleblowers with civil or criminal sanctions.  Berman, using his alias, also projected that demand for the DECN test would be "close to 3 billion [test] kits" and claimed that DECN "is in the forefront no matter how loud the naysayers are . . . But then again the 5-6 message board posters [claiming the DECN test was fraudulent] may be right and Mr. Berman will find himself in prison."  The indictment charges that Berman, in sworn testimony to the SEC, made false statements in which he denied ever posting on the message board.

[D]ecision Diagnostics and Berman seized upon the global pandemic through a series of press releases that falsely claimed Decision Diagnostics had developed a finger prick blood test that could detect Covid-19 in less than a minute. According to the complaint, from March 2020 to at least June 2020, Decision Diagnostics and Berman made false and misleading statements about the existence of Decision Diagnostics' Covid-19 device and progress towards FDA emergency use authorization. As alleged, at the time of these claims, Decision Diagnostics lacked a proven method for detecting the virus and had no physical testing device. Further, its advisors had warned that the testing kit they were trying to manufacture would not work as Decision Diagnostics had described. The complaint also alleges that the statements created the misleading impression that the test was soon to be introduced to the market and led to surges in the price and trading volume of Decision Diagnostics' stock.

Without admitting or denying the allegations, SAE consented to the entry of final judgment enjoining it from 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; the reporting provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and the books and records and internal accounting controls provisions of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The litigation against the former executives is ongoing.

In reaching this resolution, the SEC acknowledges remedial acts undertaken by SAE and cooperation afforded the SEC from August 2019 to the present after a special committee of SAE's Board of Directors conducted an independent investigation. SAE's remediation and cooperation included removing the former executives engaged in the misconduct at issue, implementing enhancements to its internal policies and procedures, and timely providing SEC staff with facts developed during the internal investigation.

• Securities Industry Commentator
• Bill Singer