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Client Alert

SEC Enforcement: A Review of 3Q21

November 3, 2021

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Introduction

The new Director of the Enforcement Division, Gurbir Grewal, assumed his position during the Third Quarter of 2021.  Even if he hits the ground running it typically takes time to adjust to the environment.  Mr. Grewal brings a substantial amount of experience to the position, having served as the Attorney General of New Jersey and as an Assistant U.S. Attorney in the Eastern District of New York. At the same time, the Commission is not a prosecutor, it is a regulator, a very different function.

In his first public remarks Mr. Grewal focused on key points for crafting an effective enforcement program that trace to the earliest days of the Division:  Corporate responsibility; gatekeeper accountability; and effective remedies.  Each point has been a theme running through the program since the creation of the Division in the early 1970s first under Irv Pollock and then Stan Sporkin.  These comments reflect a thoughtful approach.

Other points in the new Director’s comments, however, suggest what may become a more hard-edged approach.  For example, the statement that the Division will return to the practice of requiring admissions and expand the use of officer/director bars may suggest a harsher approach than has been used in recent years.  The blend of those points with key themes from the history of the Division, however, will ultimately be key.

The Statistics

During the third quarter of 2021 – the final quarter of the government fiscal year – the Division significantly picked up the pace at which new cases were filed. During the quarter 144 new actions were filed.  That compares to a total of 123 for the first two quarters of 2021.

The overall mix of cases filed in the third quarter differed significantly from earlier periods.  The mix was much more diverse.  While a few categories of actions constitute the largest groups of cases, they were much smaller than in the past.  The following table depicts the largest groups of cases and shows the percentage each group represents of the total number of actions.

Investment advisers5%

Insider trading4.8%

Microcap fraud4.8%

Unregistered brokers3.4%

These numbers contrast sharply with those from the second quarter. During the latter period 31% of the cases were offering frauds and 18% involved investment advisers. Yet during the third quarter the Division filed a much larger number of cases – 144 in the third quarter compared to the 75 new cases filed in the second quarter. 

The difference reflects the fact that a larger array of cases were filed in the third quarter.  During that period, for example, actions were initiated involving conflicts, false statements, financial fraud, investment controls, municipal bonds, the short tender rule, crypto rules, auditor independence and the safeguard rule, among others. While this suggests that the Division may be expanding its reach and presence in the market-place which should facilitate investor confidence in the markets, the longer term effect will have to be carefully evaluated.

Below is a selection of cases filed during the quarter.  The first group centers on actions that fall into the largest groupings cited above.  A second group of significant actions follows.

Select cases from leading categories

Investment adviser

Actions involving investment advisers have been one of the leading categories of cases brought by the division in recent years.  The action below centered on one of the key charges involved, a failure to properly implement policies and procedures.  Another key area involves undisclosed conflicts.  The case also reflects a current concern of the agency – the use of complex products that may not be fully understood.

In the Matter of UBS Financial Services Inc., Adm. Proc. File No. 3-20401 (July 19, 2021) is an action which names as a respondent the dual registered broker-dealer investment adviser. These proceedings center on the failure of the firm to properly implement policies and procedures with respect to the VXX product as used in its discretionary Portfolio Management Program or PMP. Beginning in 2016 firm financial advisers put clients involved in the PMP program into the VXX. This product is typically built on short term futures products. Here the firm had policies and procedures in place to effectively prevent holding the VXX for long periods. Those policies and procedures did not, however, apply to the PMP program. When financial advisers put PMP clients into the VXX they failed to ensure that it was only held for the short term. Indeed, about 1,882 clients were involved with the product that was in hundreds of accounts. Those accounts held the product beyond the short term – many held the VXX for over a year. Accordingly, clients suffered losses. In resolving this matter, the firm took remedial steps. The Order alleges violations of Advisers Act Section 206(4) and Rule 206(4)-7. Respondent resolved the proceedings, consenting to the entry of a cease-and-desist order based on the Section and Rule cited in the Order and to a censure. The firm will also pay disgorgement of $96,344, prejudgment interest of $15,15,930 and a penalty of $8 million. A fair fund will be established.

Insider trading

Insider trading has long been a key focus for the Division.  This case reflects a current approach used in settling many of these settling – not seeking disgorgement in favor of a penalty that is two times the amount of the trading profits, adopted after the Supreme Court’s decision in Liu v. SEC, 581 U.S. – June 22, 2020). 

In the Matter of Zorayr Mikael Manukyan-Zakaryan, Adm. Proc. File No. 3-20457 (August 10, 2021) is an action which ultimately involved trading in the stock of AveXs, Inc. prior to an April 9, 2018 announcement that the firm had agreed to be acquired by Novartis AG. Respondent was Senior Director, Biostatistics for Pfizer, Inc. AveXis initially was in discussions about a potential deal with Novartis and Pfizer. During discussions Respondent was asked to participate in the transaction by reviewing certain research. During that work he learned of the discussions. The Pfizer transaction was not completed. After that, however, the AveXis – Novartis deal was consummated. Prior to the deal announcement Respondent traded in the shares of AveXis, reaping over $20,000 in trading profits. The Order alleges violations of Exchange Act Section 10(b). To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. He also agreed to pay a penalty in the amount of $40,997.26.

Conflicts

Undisclosed conflicts of interest are a key area of focus for market professionals such as the dual registered investment adviser and broker-dealer here. It is also a key area for the Division of Inspections.

In the Matter of TIAA-Cref Individual & Institutional Services, LLC, Adm. Proc. File No. 3-20392 (July 13, 2021) is a proceeding which names the registered investment adviser and broker-dealer as Respondent. The proceedings center on a failure to adequately disclose conflicts of interest and the distribution of false statements in connection with recommendations that clients invest in Teachers Insurance and Annuity Association of America (TIAA) record-kept employer-sponsored retirement plans or ESP roll over retirement assets into a managed account program called Portfolio Advisor. Over a five-year period, beginning in January 2013, Respondent created positive incentives and negative pressures for its Wealth Management Advisors to roll over ESP assets into Portfolio Advisor. In connection with this process Respondent and WMAs also made misleading statements to induce clients to execute the rollover. Respondent also failed to properly disclose related conflicts resulting from incentive compensation and failed to properly implement its applicable policies and procedures. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). In resolving the matter Respondent took certain remedial acts. The firm also consented to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. In addition, Respondent will pay disgorgement of $73,985,572, prejudgment interest of $14,014,428 and a penalty of $9 million. A fair fund is created for the penalties. The Order also states that the disgorgement and prejudgment interest does not exceed Respondent’s net profits from the violations.

Additional select cases

Crypto

While this is an area that is much talked about, only two cases were brought during the period.  The second action, however, is the first DiFi case. 

SEC v. Uulala, Inc., Civil Action No. 5:21-cv-01307 (C.D. Ca. Filed August 4, 2021) is an action against the firm and its co-founders, defendants Oscar Garcia and Matthew Loughran. Beginning in December 2017, and continuing for the next two years, Defendants raised over $9 million from over one thousand investors through a ICO using a coin called the Uulala. The tokens were sold as securities which were not registered. The white paper used to solicit investors contained claims about the technology underlying the coins, alleging it was patented and had proprietary micro-credit algorithms. The claims were false. Beginning in 2019 Defendants Uulala, Inc. and Garcia raised an additional $500,000 from four U.S. investors through the sale of its Convertible Notes. A slide deck was used to affect the sales that contained false financial information about the Uulala. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). Each Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, the coins will be disabled and the company will pay a penalty of $300,000 while Mr. Garcia will pay $192,768 and Mr. Loughran will pay $50,000. See Lit Rel. No. 25157 (August 4, 2021).

In the Matter of Blockchain Credit Partners, Adm. Proc. File No. 3-20453 (August 6, 2021). The action names as Respondents the firm, also known as DeFi Money Market or DMM which owned DMG tokens when they were created and obtained the proceeds from sales; Gregory Keough, a founder of DMM and owner of 50% of Blockchain Credit Partners; and Derek Acree, also a founder of Blockchain Partners and 50% owner of Blockchain Credit. Over a period of about one year, beginning in early 2020, Messrs. Keough and Acree, along with Blockchain Credit, operated DeFi Money Market. DMM offered investors 6.2% interest on digital assets. The funds were to come from what were called “real world assets” otherwise known as car loans. Two types of digital assets were available, the mToken and the DMG token. The former paid 5.25% interest. The latter were marked as “governance tokens.” Those tokens gave purchasers certain voting rights, a share of excess profits and the ability to profit from DMG resales in the secondary market. Overall, in excess of $17million in mTokens were sold and $13.9 million in DMG tokens. The DMM business was built by programmers who created the architecture underlying the smart contracts and tokens. They also identified assets that could generate interest for mTokens and surplus profits for the DMG token holders. The mTokens were securities, according to the Order. In fact, they were notes offered and sold as investment contracts. Purchasers were led to believe that the profits they would receive would come from the efforts of Respondents from managing DMM. That included the auto loans which were purchased. While those assets were acquired, they remained in a separate entity – ownership was not transferred. The DMG tokens were also securities. They were offered and sold as investment contracts. The reasonable expectation of profits came from the claim that DMG would use the proceeds to operate and develop the business and then share the profits with investors. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the matter, Respondents agreed to certain undertakings. Those included an agreement to assist mToken holders with redemption. In addition, Respondents Keough and Acree will refrain for five years from directly or indirectly participating in an offering of a digital asset security, excluding any personal transactions. Respondent DMM will also refrain from participating in any offering of digital assets. Respondents consented to the entry of cease-and-desist orders based on the Sections cited in the Order. In addition, Messrs. Keough and Acree will be prohibited for five years from serving as an officer or director of any issuer. Respondents will also pay disgorgement of $12,849,354, and prejudgment interest of $258,052. Respondents Keough and Acree will each pay a penalty of $125,000.

False statements

False statements is a long standing, traditional area of focus for enforcement.  The case below is a typical example of these actions.

SEC v. Prallax Health Sciences, Inc., Civil Action No. 1:22-cv-05812 (S.D.N.Y. Filed July 7, 2021) is an action which names as defendants the firm, Paul R. Arena, its CEO, and Nathaniel T. Bradley, its CTO. In a period of approximately one month, beginning on March 11, 2020, the health care company issued a series of press releases to capitalize on the COVID pandemic. The releases claimed, for example, that the firm was developing a screening test that would be available shortly and had other medical equipment available such as ventilators. The firm’s CEO oversaw the preparation of the releases which were primarily penned by its CTO. In fact, the claims were false. The company was nearly bankrupt and did not have the FDA registrations required to support such products. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). Defendants resolved the matter by each consenting to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, the company, along with CEO Arena and CTO Bradley will pay penalties in the amount of $100,000, $45,000 and $40,000 respectively. Finally, Messrs. Arena and Bradley each consented to the entry of a penny stock bar for, respectively, five years and three years. See Lit. Rel. No. 25137 July 7, 2021).

Financial fraud

Financial fraud is another long-standing area of focus for the Division.  Below are examples of the cases brought during the last quarter.  These examples also suggest that the Division is keying in this area and may in some instances be using data analytics to identify cases, a trend that traces to perhaps this time last year.

SEC v. Palleschi, Civil Action No. 2:21-cv-00530 (M.D. Fla. Filed July 15, 2021) is an action which names as defendants Michael Palleschi and David Lethem. Each defendant is a senior executive at FTE Networks, Inc., a Naples-based public company that provides network infrastructure to the technology and telecommunications industries. Over a three-year period, beginning in 2016, the two executives engaged in three fraudulent schemes. First, they issued about $22.7 million in complex convertible notes. Since the conversion feature which permitted the notes to convert to stock was so complex, Defendants concealed it. Second, Defendant inflated FTE’s revenues by inventing about $12.5 million in revenue purportedly from completed construction projects that had not yet been billed but for with the company supposedly had completed the work. The claims were false since the work had not been done. Third, Defendants misappropriated about $5.4 million form the company for their personal use. Eventually the fraudulent acts were uncovered by an independent director. FTE was required to restate its financial statements. The complaint alleges violations of each provision of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)-5, 14(a) and SOX Section 304 along with related rules. The case is pending. See Lit. Rel. No. 25141 (July 15, 2021).

In the Matter of Paul L. Chancey, Jr. CPA, Adm. Proc. File No. 4225 (July 13, 2021) is a proceeding which names as a respondent Mr. Chancey, a certified public accountant, and a partner in the Georgia firm of Cherry Bekaert, LLP. During the audits of MiMedxGroup, Inc. for 2015 and 2016 Respondent became aware that portions of the firm’s revenue was contingent. For 2015 Respondent also learned from the controller that revenue was recognized prematurely; for 2016 he learned the same fact with regard to the revenue from a vendor. In both instances Mr. Chancey ignored the warnings. His opinion incorrectly stated that the audits had been done in accord with PCAOB standards. The Order alleges violations of Rule 102(e). The proceedings will be set for hearing.

In the Matter of Tandy Leather Factory, Inc., Adm. Proc. File No. 3-20403 (July 21, 2021). Tandy is the world’s largest specialty leather firm. Also named as a Respondent is Shannon Greene, CPA, the firm’s CFO. Beginning in 2016 the firm failed to implement and maintain proper internal and disclosure controls. First, its inventory system failed to properly implement the firm’s FIFO inventory controls. When prices were changed, for example, it failed to maintain the historical costs for earlier purchases. This resulted from inadequate controls. Second, the firm also failed to properly implement its disclosure controls. Ultimately these failures resulted in a multi-year restatement. The firm did undertake remedial efforts. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings each Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm will pay a penalty of $200,000. Respondent Greene will pay a penalty of $25,000.

In the Matter of The Kraft Heinz Co., Adm. Proc. File No. 3-20523 (September 3, 2021). The proceeding names as respondents the firm, a well-known Chicago based food and beverage firm, and Eduardo Pelleissone, then the firm’s Global Head of Operations and Chief Operating Officer. This proceeding centers on a scheme to inflate reported pre-EBITDA revenue (earnings before interest, taxes, depreciation and amortization) beginning in the last quarter of 2014 and continuing through the end of 2018. During that period the firm negotiated upfront cash payments and discounts in exchange for future commitments to be undertaken by the company. Those payments were not properly documented, causing the firm to overstate its pre-EBITDA earnings over the period. Under GAAP, if upfront cash and discounts are tied to future commitments, the savings must be recognized over the period the obligations are satisfied. The procurement personnel for Kraft, however, negotiated and maintained false supplier contracts which made it appear that the expense savings were provided in exchange for past or same-year events performed by the company. In reality, the payments were tied to future performance.

During the period 59 transactions were improperly documented and recorded. If the items were properly accounted for, the cost of goods sold for Kraft would have been about $50 million higher. The improper practices ultimately led to a restatement in 2019. That restatement involved the financial statements for years 2015 through 2018. It corrected a total of $208 million in cost savings from 295 transactions. Mr. Pelleissone was presented with several warning signs indicating that expenses were being managed through the manipulation of supplier agreements. Similarly, an executive that reported to Mr. Pellewissone, and who managed the procurement section, approved certain contracts and suppliers. That executive also had sub-certification responsibilities in 2018 was confronted with several signs that should have alerted him to the issue. They did not. The Order alleges violations of Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and the related rules. To resolve the proceedings the firm consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm will also pay a penalty of $62 million. Mr. Pellessone consented to the entry of a cease-and-desist order based on the same Sections and, in addition, Exchange Act Section 13b-5. He also agreed to pay disgorgement in the amount of $12,500, prejudgment interest in the amount of $1,711.31 and a penalty of $300,000. See also SEC v. Hofmann, Civil Action No. 1:21-cv-07407 (S.D.N.Y. Filed September 3, 2021)(action against Klaus Hofmann, then global head of procurement and chief procurement officer of Kraft based on essentially the same allegations as above; the case is in litigation). See Lit. No. 25199 (September 8, 2021).

Misrepresentations

The action below is typical of cases brought in this area during the last quarter.

In the Matter of App Annie Inc., Adm. Proc. File No. 3-20549 (September 14, 2021) is an action which names as respondents the firm and Bertrand Schmitt, respectively, a leading provider of data on apps and its founder. App Annie is one of the largest sellers of market data on how apps on mobile devices perform. Trading firms call the data Alternative Data. Many trading firms pay for subscriptions and use it to make investment decisions. App Annie provides a free analytics product called Connect to companies that offer apps. It enables those firms to track how their apps are performing. App Annie assured users it aggregates the data and uses only an anonymized form to generate its estimates. Those representations were false. The firm also assured users it had comprehensive compliance policies and procedures to make sure the data collected was used properly. Those procedures, like the representations about data use, facilitated sales. The claims were false. The Order alleges violations of Exchange Act Section 10(b). To resolve the proceedings Respondents consented to the entry of a cease-and-desist order based on the Section cited in the Order. The firm will also pay a $10 million penalty. Mr. Schmitt will pay a penalty in the amount of $300,000.

Muni bonds

Muni bonds appears to be another area of focus for the Division.  In recent months another of actions have been brought in this area.

In the Matter of Hiltop Securities, Inc., Adm. Proc. File No. 3-20389 (July 9, 2021) is a proceeding which names as respondents the firm, a registered broker-dealer, investment adviser and municipal advisor, and Daniel Tracy, a registered representative at the firm. The proceeding centered on violations of rules of the Municipal Securities Rulemaking Board regarding priorities in muni bond offerings and Hilltop’s supervisory failures. Specifically, over a two year period, beginning in 2016, the firm failed to give first priority to retail orders as required by the rules and permitted “stock” orders – those from the firms that are rarely filled — to obtain bonds. While Mr. Tracy knew that Hilltop and other stock orders did not qualify to be filled, but in fact they were. This resulted in violations of MSRB Rule G-17. To resolve the matter Respondent Hilltop took certain remedial steps and consented to the entry of a cease-and-desist order based on Exchange Act Section 15B(c)(1) and MSRB Rules G-17 and 27 and to a censure. Mr. Tracy’s activities were limited in certain specific maters tied to future offerings. The firm will pay disgorgement of $206,606, prejudgment interest of $48,587 and a penalty of $85,000. Mr. Tracy will pay a penalty of $25,000.

Manipulation

The action below is a variation of the kind of cases typically brought in this area which usually center on pump-and-dump cases involving microcap issuers.

SEC v. Fassari, Civil Action No. 8:21-cv-0403 (C.D. Cal.) is a previously filed action which named as defendant Andrew Fassari. Defendant is alleged to have posted false statements on Twitter and another social media site while buying and selling securities. Specifically, Mr. Fassari began purchasing over 41 million shares of Arcis Resources securities shortly before tweeting false information about the company. The share price skyrocketed, rising over 400%. To resolve the action, Mr. Fassari consented to the entry of permanent injunctions based on Exchange Act Section 10(b) and Securities Act Section 17(a). In addition, he will pay disgorgement of $457,110, prejudgment interest of $8,007 and a penalty of $195,047. Defendant also agreed to the entry of a penny stock bar. See Lit. Rel. No. 25185 (August 27, 2021).

Safeguard rule

The Safeguard rule, with its focus on privacy and security of client data may well become a focus of the Division in the future along with cybersecurity actions.  The case below is a good illustration.

In the Matter of Cetera Advisors Networks, LLC, Adm. Proc. File No. 3-20490 (August 30, 2021) is a proceeding which names the registered investment advisor and broker-dealer, along with four of its affiliates that are wholly owned and controlled subsidiaries as respondents. Those firms are Cetera Advisor Networks LLC, Cetera Investment Services LLC, Cetera Financial Specialists LLC, Cetera Advisors LLC and Cetera Investment Advisers LLC. The case centers on a failure to properly implement the Safeguard Rule. That Rule has three purposes: 1) To protect the security and confidentiality of client information; 2) to protect customer information against hazards; and 3) to protect against hacks. Over a three-year period, beginning in 2017, about 60 Cetera Entities’ personnel were taken over by unauthorized third parties resulting in the exposure of over four thousand customers. At the time none of the accounts had multi-factor authentication turned on, although firm policy did require it whenever possible. None of the accounts appear to have engaged in unauthorized transactions. The firm failed to properly implement the Rule. During the period Respondents had in place policies and procedures regarding certain aspects of the Rule, but they were not reasonably designed and properly implemented. The firm also had a number of tools available to it to implement controls that would mitigate higher risks. The Order alleges violations of Advisers Act Section 206(4). In resolving the matter, Respondents undertook remedial acts. They also consented to the entry of cease-and-desist orders based on the Section cited in the Order and the related Rule and to a censure. Respondents will pay a civil penalty of $300,000. See also In the Matter of Cambridge Investment Research, Adm. Proc. File No. 3-20496 (August 30, 2021)(names the firm and an affiliate as respondents; also based on the Safeguard Rule on similar facts; resolved with a cease-and-desist order to same Section and Rule cited above, a censure, and the payment of a $250,000 penalty); In the Matter of KMS Financial Services, Inc., Adm. Proc. File No. 3-20495 (August 30, 2021)(action naming the firm, a registered investment adviser and broker-dealer as a Respondent; based on similar facts as the cases cited above; resolved with a consent to the entry of a cease-and-desist order based on the same sections and a censure; also a penalty in the amount of $200,000).

Conclusion

The cases cited above provide a good overview of the work by the Enforcement Division over the last quarter.  Not only were more cases brought during that quarter than in the first half of 2021, collectively they are very diverse and not concentrated in just a few areas. Collectively, the cases also represent the dedication of the Division staff, working under difficult circumstances through the pandemic and without any permanent Director since last year. 

Finally, the cases provide insight into the potential path of enforcement.  For example, the increased diversity of the cases brought during the period clearly suggests that the Division is taking a broader view of areas in which to focus.  Nevertheless, investment advisers and  conflicts which arise in that area, continue to be key.  In addition, a new settlement approach is clearly emerging in insider trading cases where the agency appears to be focusing solely on penalties and dropping claims for disgorgement.  This approach may fit well with the new Division director’s comments on sanctions as part of an effort to bolster confidence in the markets.  And, the Safeguard rule, with its focus on privacy is a ready complement to the focus on cybersecurity that has emerged recently, suggesting areas that investment advisers, brokers and dealers as well as others should carefully review to ensure effective and fully implemented policies and procedures are in place. 

 

Firm Highlights

Event/Resource

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Materials Symposium Agenda Sessions 8:30 am - 9:30 am CT Session A: The Corporate Compass: Finding True North When Ethical Duties Conflict Philip Kaplan, Senior Legal Counsel, Howden Re Lucia Suljic, Vice President, Corporate Legal, Canon USA Nicole Stanton, Partner & Deputy General Counsel, Dorsey & Whitney LLP This panel addresses ethical obligations of in-house counsel, including balancing obligations and duties that may conflict with each other. How should a responsible in-house lawyer deal with those challenging situations? Rather than stick to an academic discussion, this panel will revolve around a series of practical scenarios that are designed to be realistic and timely, including situations where counsel is asked to represent both the company and an individual, how and when to disclose uncomfortable facts and inconvenient documents, issues involving changing firms and companies, and multijurisdictional practice. The panel will feature discussion from two experienced in-house lawyers and Dorsey’s Deputy General Counsel. Session B: Managing Rapid Regulatory Change in International Trade and Cross-Border Investment Nathan Brower, Executive Vice President, General Counsel, Nature’s Sunshine Greg Ogunsanya, Senior Vice President, General Counsel and Corporate Secretary, H.B. Fuller Kathryn Wood, Senior Vice President & General Counsel, DecoPac, Inc. Dave Townsend and Lawrence Ward, Dorsey & Whitney LLP This program is designed for attorneys advising on cross-border transactions, international trade, regulatory compliance, and corporate governance matters. Panelists will examine recent developments in U.S. trade and investment law and policy, as well as their impact on international collaborations, corporate compliance, and mergers and acquisitions. The discussion will explore how general counsel and in-house legal teams assess and manage evolving trade-related risks within their organizations. Particular focus will be given to developments during the first two years of the second Trump Administration, including changes in tariff policy, tariff refunds, export controls, economic sanctions, and national security reviews of foreign investment. Through a discussion of regulatory trends and practical case studies, attendees will gain a deeper understanding of the legal risks and compliance obligations associated with cross-border business activities, and hear about practical strategies for advising clients and managing compliance obligations in a rapidly changing trade and investment environment. 9:45 am - 10:45 am CT Session A: The Elon Musk Cases: What Tesla and Twitter Can Teach Your Board of Directors Loren Unterseher, Managing Partner, Oxbow Industries, LLC Shulamite White, Chief Legal Officer and Head of People, Motive Technologies Kirsten Schubert, Tom Swigert, and Jonathan Van Horn, Dorsey & Whitney LLP Recent cases involving Elon Musk and his businesses have had significant impact on principles governing board of directors’ fiduciary duties and corporate processes. This panel will examine recent litigation involving Elon Musk, Tesla, and Twitter, and its effects on the law governing the duties of directors and executives, including the executive compensation and director compensation processes, conflicts that may arise when a single executive has control over multiple businesses, and the ramifications of tweets or other public statements by an executive. Session B: All Eyes on DEI: Managing Diversity Efforts Amid Regulatory Scrutiny and Potential Litigation Maggie Dalton, Senior Commercial Attorney, Cargill; Board Co-Chair, Twin Cities Diversity in Practice Laura A. Vannelli, Legal Counsel, Mayo Clinic Susan Lorenc and Jack Sullivan, Dorsey & Whitney LLP The legal and regulatory landscape surrounding diversity, equity, and inclusion (DEI) initiatives has changed dramatically over the past two years. Law firms and legal departments are continuing to grapple with how to recruit, retain, and develop talent from a wide range of personal backgrounds, in a world where previously accepted recruiting and employment practices are facing increased scrutiny and litigation. This program will provide a practical overview of the current legal regime, including recent federal enforcement actions and litigation trends associated with DEI initiatives. Panelists will discuss practical ways in which organizations can pursue and retain legal talent and increase inclusion while minimizing legal, business, and reputational risk. 11:00 am - 12:00 pm CT Session A: Governance in an Age of Increasing Unpredictability James Chosy, Senior Executive Vice President and General Counsel, U.S. Bancorp Todd Hartman, Executive Vice President and Chief Legal and Risk Officer, Best Buy Co., Inc. Alan Rosselot, Associate General Counsel & Assistant Secretary, Delta Air Lines, Inc. Cam Hoang and Robert Rosenbaum, Dorsey & Whitney LLP More than ever, ensuring that boards are well-informed and forward-thinking is critical to a company’s success. Join our panel of corporate governance experts as they share their experiences advising boards through crisis and unpredictable events; capitalizing on, but also checking, disruptive technologies; and positioning the company to succeed in an environment of shifting government priorities. 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This panel will feature two in-house counsel who are navigating these issues, utilizing a hypothetical case study, with the support of two Dorsey attorneys helping to develop a roadmap for meeting business objectives and minimizing the risk of claims. 12:00 pm - 1:15 pm CT Keynote Address Dr. Rebecca Heiss, Stress Physiologist Dr. Rebecca Heiss is a stress physiologist, author, and sought-after speaker who helps audiences transform fear and stress into fuel for greater performance and resilience. Her research has been recognized as “transformative” by the National Science Foundation, and she is the author of two books, Springboard and Instinct. Through her Fear(less) message, Rebecca inspires audiences with practical, science-based strategies to train our brains to work for us – not against us – and navigate change and uncertainty with greater confidence.

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Dorsey & Whitney Advises Beijing Xunzhong on Two Consecutive H Share Placings Raising HK$418.5 Million

International law firm Dorsey & Whitney LLP acted as Hong Kong legal advisors to Beijing Xunzhong Communication Technology Co., Ltd. (“Xunzhong”) as to Hong Kong law in connection with two consecutive placings of new H shares under general mandate (the “First Placing” and the “Second Placing”, respectively, and together, the “Placings”). Xunzhong’s H shares are listed on the Main Board of the Hong Kong Stock Exchange (Stock Code: 2597). Winbull Securities International (Hong Kong) Limited acted as sole overall coordinator and placing agent on both Placings. The First Placing of 11,190,000 new H shares at HK$28.20 each was completed on September 17, 2026, followed by the Second Placing of 3,550,000 new H shares at HK$29.00 each on October 30, 2026. The Placings raised approximately HK$315.56 million and HK$102.95 million in gross proceeds, respectively, or approximately HK$418.51 million in aggregate (approximately HK$415.96 million in aggregate net proceeds). Both Placings were conducted under the same general mandate granted by shareholders at Xunzhong’s 2025 annual general meeting, and each was completed within one week of the signing of its placing agreement. Completing placings in consecutive months is relatively uncommon in the Hong Kong market, and doing so called on the technical depth of Dorsey’s Hong Kong Capital Markets team. Working closely with Xunzhong to understand its business needs and prepare the transaction documents, the team addressed in quick succession the remaining capacity under the general mandate, disclosure of the use of proceeds and the maintenance of Xunzhong’s public float, enabling both Placings to be completed seamlessly. “We are pleased to have advised Xunzhong on both Placings,” said Rachel Han, Partner and Co-Head of Dorsey’s Asia Capital Markets practice. “We appreciate the trust placed in our team and the close collaboration among all parties involved. We look forward to supporting Xunzhong as it continues to execute its growth strategy and pursue future capital markets opportunities.” Xunzhong is principally engaged in cloud-based communications services and enterprise digitalization services in the PRC. As disclosed in its announcements, the net proceeds of the First Placing are allocated to developing Xunzhong’s new computing power operation services business, while those of the Second Placing will be used to integrate model-as-a-service (MaaS) and AI agent capabilities into its existing cloud communications platform-as-a-service (PaaS) platform and software-as-a-service (SaaS) products. Approximately 55% of the net proceeds of the Second Placing will be used for computing power equipment upgrades for the MaaS system, approximately 35% for MaaS, PaaS and SaaS platform upgrades, and approximately 10% for working capital and general corporate purposes. With a single MaaS platform and shared computing power supporting its PaaS and SaaS offerings, Xunzhong intends for its MaaS, PaaS and SaaS capabilities to complement and reinforce one another, and to address customer needs from multiple angles, from embedding AI in customer communications and business workflows to maintaining stable performance at scale and keeping customer data within controlled environments. Partner and Co-Head of Dorsey’s Asia Capital Markets practice Rachel Han and Of Counsel in the Capital Markets and Corporate Compliance group Carlton Ng, along with Associate Kristy Ting, led the Dorsey Hong Kong Capital Markets & Corporate Compliance group in advising Xunzhong on both Placings.

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Minnesota Consumer-Fraud Enforcement: Disclaimers Won’t Cure Deception, and Penalties Can Add Up

Misleading advertising claims can lead to costly consequences. In State of Minnesota ex rel. Ellison v. Wall & Associates, Inc., No. A25-2064, 2026 WL 3118291 (Minn. App. Oct. 19, 2026), the Minnesota Court of Appeals recently affirmed a bench trial verdict against a tax-relief company and two executives for violations of the Minnesota Consumer Fraud Act (“MCFA”) and the Minnesota Deceptive Trade Practices Act (“MDTPA”). The decision, which affirmed a substantial restitution and civil penalty judgment, underscores the broad power of the Minnesota Attorney General to act against deceptive sales practices. The decision also offers practical lessons for businesses seeking to reduce liability risks in consumer-facing communications. Background Wall & Associates (“W&A”), a Virginia-based tax-relief company, marketed assistance to taxpayers seeking relief from outstanding federal and state tax liabilities, often with offers in compromise—agreements to settle tax liabilities for less than the amount owed. In its extensive advertising campaigns, W&A represented that its average client received a 90% reduction in their tax debt, that it was a local company with Minnesota offices, that it provided legal services, and that it would “Solve ALL Tax Problems.” In reality, W&A’s promises bore little resemblance to what many clients received. Most of W&A’s clients saw just a 9.5% reduction in federal tax debt and 1.2% in state tax debt. W&A had no permanent Minnesota offices. And W&A provided neither legal representation nor assistance with filing tax returns—those services required referrals to separate firms for an additional fee. All the while, W&A clients paid upfront and recurring fees, including during periods when W&A did no work on their cases. Minnesota Attorney General Keith Ellison sued W&A, its founder and owner Ernest Kenneth Wall, and its president and CEO Patrick Mark Yates, alleging violations of, among other laws, the MCFA and the MDTPA. Following a 12-day bench trial, the district court determined that W&A violated the MCFA and MDTPA through its false and embellished advertising. The district court also held Wall and Yates individually liable for those violations because they directed, participated in, and acquiesced in the violations. The district court ordered injunctive relief, $2.7 million in restitution (with Wall and Yates jointly and severally liable for $1.3 million), and civil penalties of $786,517 against W&A, $415,500 against Wall, and $207,750 against Yates. The district court also awarded over $2.5 million in attorneys’ fees and costs to the state. W&A, Wall, and Yates appealed to the Minnesota Court of Appeals, which affirmed the district court’s decision on October 19, 2026. Although W&A, Wall, and Yates challenged the judgment on numerous grounds, several highlights of the decision provide important takeaways for consumer-facing businesses. Individual Reliance Is Not Required for Statutory Liability W&A argued that Attorney General Ellison had to prove a causal nexus between each violation of the MCFA and MDTPA and the injury to a particular consumer to establish liability. In W&A’s view, this required proof that each injured consumer had personally relied on W&A’s false representation. The Court of Appeals rejected this argument based on the MCFA’s and MDTPA’s plain language, which requires no proof of actual deception or confusion by consumers. The Court of Appeals finally pointed to the Minnesota Supreme Court’s decision in State v. Minnesota School of Business, Inc., which held that when a defendant’s misrepresentations are directed at and affected “a broad group of consumers, proof of direct individual reliance is not required to establish a causal nexus between MCFA violations and the harm suffered by consumers.” 935 N.W.2d 124, 135 (Minn. 2019). The Court of Appeals affirmed, however, that a causal nexus is necessary to support an award of damages under the MCFA and MDTPA. In making that determination, district courts look to various factors, including whether the misrepresentations were “longstanding, pervasive, and widespread in communications directed to consumers,” whether the seller intended and understood that consumers would rely on the misrepresentations, and whether the information was of a kind on which consumers would typically rely. The Court of Appeals’ decision continues Minnesota School of Business’s broad interpretation of liability under the MCFA and the MDTPA. Coordinated marketing campaigns to a “broad group of consumers” may expose businesses to MCFA and MDTPA liability without customer-by-customer proof of injury. That said, a causal nexus remains an element of an MCFA and MDTPA claim, and businesses involved in litigation should build a clear record at trial and on appeal showing how each of the relevant factors bears on the causal-nexus inquiry. Contractual Disclaimers Are Not an Automatic Defense to a Misleading Pitch W&A next argued that disclaimers in its client contracts prevented consumers from claiming they had been misled by its advertising. Reiterating that individual reliance is not required under the MCFA and MDTPA, the Court of Appeals held that a contractual disclaimer does not necessarily defeat a claim based on a conflicting oral representation. And on the facts of this case, the Court of Appeals agreed with the district court that W&A’s contractual disclaimers were insufficient given the extensive misrepresentations by W&A and the unequal bargaining power between it and its customers. This holding confirms that contractual disclaimers are not a cure-all for misleading advertising or sales practices. Businesses should review the entire customer journey, including pre-contract representations, as those representations may survive a contractual disclaimer to the contrary. And if faced with litigation, businesses should build a strong record, both at trial and on appeal, showing why any disclaimer is effective in context. The State Has Broad Authority to Seek Restitution W&A also challenged Attorney General Ellison’s authority to seek restitution under the state’s parens patriae authority to protect residents’ collective interests, arguing that injury to only 228 Minnesotans did not affect a sufficiently substantial segment of the population. The Court of Appeals rejected a simple headcount approach, instead explaining that the state had a legitimate interest in protecting residents’ economic well-being as a whole. In any event, the Court of Appeals held that if restitution was not appropriate under the state’s parens patriae authority, then it would still be appropriate under the Attorney General’s enforcement powers under Minn. Stat. § 8.31. The decision reinforces that the broader and more sustained the deceptive advertising, the stronger the case for restitution to protect Minnesotans’ economic interests. Civil Penalties Accrue Per Violation, Not Per Defendant The Court of Appeals finally rejected W&A’s claim that the Attorney General’s enforcement powers under Minn. Stat. § 8.31 permit only civil penalties of up to $25,000 for each defendant. Rather, the Court of Appeals explained that penalties are limited to $25,000 per violation. Multiple violations can therefore produce substantially greater penalties. The Court of Appeals also rejected the argument that restitution made penalties unnecessary: repaying consumers does not eliminate the need to address gains from deceptive conduct and deter future violations. Final Takeaways Align every consumer-facing communication. Broad and extensive marketing campaigns can expose businesses to stronger enforcement standards under the MCFA and MDTPA, making it critical that consumer communications remain accurate and consistent from the first advertisement through the final sale. Plan for layered enforcement exposure. Penalties under the MCFA and MDTPA can add up quickly: W&A, Wall, and Yates ultimately faced more than $6 million in civil penalties, restitution, and attorneys’ fees. The decision continues a line of Minnesota cases recognizing the Attorney General’s broad consumer-protection authority. Details matter. Although the Attorney General’s enforcement power is broad, it is not boundless. As the Court of Appeals explained, issues of causation, the effectiveness of contractual disclaimers, and the availability of restitution and civil penalties all turn on the specific facts of the case. Effective advocacy at trial and on appeal is critical to developing the facts relevant to liability and damages.

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Observations on the SEC’s 2027 Examination Priorities

The SEC’s Division of Examinations (the “Division”) recently announced its examination priorities (“Exam Priorities”) for fiscal year 2027.1 Although many of the Division’s core areas of focus remain consistent with fiscal year 2026, the 2027 Exam Priorities include notable changes and refinements, which we discuss below, along with other key 2027 examination priorities. Dorsey Observations Renewed focus on economic conflicts of interest. After certain economic-incentive topics received less emphasis in the 2026 Exam Priorities2, the Division has again expressly identified economic conflicts as an examination focus. The 2027 Exam Priorities indicate that the Division will prioritize reviewing advisers’ fiduciary obligations relating to economic conflicts of interest raised by fee rebates, fee and expense calculations, cash management, quid pro quo arrangements, and deposits and withdrawals. Greater emphasis on private-fund practices. Building on the private-fund items in the 2026 Exam Priorities, the 2027 Exam Priorities indicate that the Division will assess private-fund disclosures and controls relating to investment allocations, leverage, affiliated service providers, and fees and expenses. The Division also identified investments in private companies through special purpose vehicles (“SPVs”) and loans provided by private funds and business development companies (“BDCs”) as products the Division will scrutinize. Advisers, particularly private-fund advisers, should evaluate whether their disclosures and compliance programs address these areas. Expanded focus on AI-related cybersecurity risks. While the 2026 Exam Priorities focused on advisers’ use of and representations regarding artificial intelligence (“AI”), the 2027 Exam Priorities specifically highlight AI-enabled cybersecurity threats, including AI-generated phishing and synthetic or “deepfake” voice and video used for social engineering. The shift signals that registrants should consider whether their cybersecurity policies and controls adequately address these evolving threats. New focus on proxy advisory firms. The 2027 Exam Priorities state that the Division will examine advisers that rely on proxy advisory firms, including how those advisers evaluate the firms’ recommendations, assess the bases for those recommendations, identify potential conflicts of interest, and determine whether that reliance satisfies applicable legal obligations. Advisers that rely on proxy advisory firms may wish to consider whether their compliance programs address these areas. Updated focus on Regulation S-P and Regulation S-ID. The 2026 Exam Priorities stated that the Division would engage firms during examinations regarding their progress in preparing incident response programs ahead of the compliance dates for the amendments to Regulation S-P and would examine compliance with the amended rule after those dates. The 2027 Exam Priorities indicate that examinations will focus on whether firms have developed, implemented, and maintained reasonably designed policies and procedures addressing administrative, technical, and physical safeguards to protect customer information and that, in accordance with the amended rule, staff will evaluate response program policies and procedures for unauthorized access to or use of customer information, including customer notification procedures and oversight of service providers. With respect to Regulation S-ID, the 2027 Exam Priorities indicate that examiners will assess whether firms are updating their Identity Theft Prevention Program to address emerging risks, such as those related to AI and stolen credentials. Advisers may wish to consider whether their compliance programs address these areas, as applicable. Summary of Other 2027 Examination Priorities Beyond the developments discussed above, many of the Division’s core examination priorities remain consistent with fiscal year 2026. These include investment adviser fiduciary obligations and compliance programs, examinations of never-examined and recently registered advisers, and cybersecurity and operational resiliency. The Exam Priorities are not exhaustive, and examinations will vary based on each registrant’s business, activities and risks. Advisers should consider the 2027 Exam Priorities in reviewing their compliance programs and preparing for potential examinations, including by: Reviewing risk disclosures and controls. The Division states that, when examining advisers to private funds, it will assess whether investment-related risk disclosures are consistent with fiduciary standards and whether compliance policies, procedures, and controls are designed to address both fund-level and investment-level risks. Reviewing disclosures on allocations, leverage, and affiliated service providers. The 2027 Exam Priorities identify disclosures related to certain investments and allocations, the use of debt and fund-level lines of credit, and the use of affiliated service providers as examples. Confirming the accuracy of fee and expense calculations. The Division states that it will assess the accuracy of fee and expense calculations at both the fund and investment levels, and it identifies fee rebates, cash management, quid pro quo arrangements, deposits, and withdrawals as areas in which economic conflicts of interest may affect the impartiality of advice. Reviewing recommendations of illiquid or hard-to-trade products. The Division states that it will prioritize advisers that recommend products that are difficult to trade, have unusual features, or are illiquid, including loans provided by private funds or BDCs and investments in private companies through SPVs. Confirming that the compliance program is implemented and reviewed. The Division states that it will review compliance program components such as marketing, valuation, and custody, as appropriate, and will typically analyze the annual compliance review. It will also focus on compliance practices when advisers have started advising new asset classes or clients or grown through mergers or acquisitions. 1 SEC Division of Examinations 2027 Examination Priorities. 2 See Dorsey’s Client Alert on the SEC’s fiscal year 2026 exam priorities.