In the Southern District of New York, the SEC filed an Amended Complaint against a CEO and his online auction portal to include allegations that the CEO unlawfully tried to "silence" investor complaints.
In the original Complaint, filed in May 2019, the SEC alleged that the CEO:
- misappropriated approximately $6.1 million to support his "lavish" lifestyle;
- misrepresented to investors (i) the use of their funds, (ii) his personal investment in the business, (iii) the number of dealers that had agreed to sell goods on the online platform and (iv) the online auction portal's interest in certain assets; and
- conducted a fraudulent $23 million securities offering.
The SEC amended the Complaint, alleging that the CEO attempted to prevent investors from communicating with the agency regarding the CEO's securities law violations - an action that violated whistleblower protection rules. According to the SEC, the CEO tried to settle investors' allegations against him by returning the investors' money under the condition that they sign a settlement agreement containing the following language: "The Shareholders . . . confirm that they are not aware of, and have not had to date, and will not initiate on a going forward basis, any communications with any regulatory agencies such as the SEC or any other Federal, State, or Local governmental agency concerning the matters related to this Agreement."
The SEC alleged that the CEO sued two investors for the alleged breach of these nondisclosure agreements. Additionally, the SEC alleged that since the May 2019 Complaint, the CEO and the company have misrepresented material facts of the case to investors.
The Amended Complaint seeks (i) preliminary and permanent injunctions, (ii) disgorgement plus prejudgment interest and (iii) penalties.
Commentary
This action demonstrates a different facet to whistleblower protection as the company at issue was trying to restrict investors from sharing information with the SEC. Typical cases of this nature concern companies who try to limit current or departing employees from becoming whistleblowers via restrictive employment or severance agreements, respectively. While the behavior in this case seems particularly egregious - the CEO publicly bragged about the fact that his company had sued investors who had violated the non-disclosure agreements - it is a strong reminder to companies that impairing anyone, not just employees, from reporting information to the SEC can have significant consequences.
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