Each month, we publish a roundup of the most important SEC enforcement developments for busy in-house lawyers and compliance professionals. This month, we examine:

• The permanent suspension of an audit firm and its owner for failure to comply with PCAOB standards;
• Charges against a public company and its executives for illegally lending $27 million to its CEO;
• A $10 million civil penalty against a securities exchange for notification failures related to cyber intrusions;
• Fraud and insider trading charges against a private company and its owner in connection with a purchase offer; and
• An insider trading case against an accountant over a friend’s tip.

1. SEC Fines and Permanently Suspends Audit Firm for PCAOB Compliance Failures

On May 3, 2024, audit firm BF Borgers CPA PC (“BF Borgers”) and its owner, Benjamin F. Borgers (“Borgers”), settled securities fraud and other charges with the SEC on a neither admit nor deny basis. The SEC accused BF Borgers of “deliberate and systematic” failures to audit and review its public company and registered broker-dealer clients’ financial statements in accordance with Public Company Accounting Oversight Board (PCAOB) standards. Those standards require, among other things, audits to be approved by an “engagement quality reviewer,” or EQR, and that audit firms supervise and review the work performed by their engagement teams to ensure proper audit documentation. The SEC alleged that BF Borgers failed to obtain an EQR for thousands of audits over a two-year period and that Borgers failed to supervise his teams, authorizing them instead to copy workpapers from previous audits. According to the SEC, despite these alleged deficiencies, BF Borgers and Borgers represented in client engagement letters that audits and reviews would be conducted under PCAOB standards.

To settle the charges, BF Borgers agreed to pay a $12 million civil penalty, while Borgers agreed to pay a $2 million civil penalty, and both respondents agreed to permanent suspensions from appearing and practicing before the Commission as accountants. In light of the suspensions, the SEC issued an exemptive order on May 20, 2024, providing additional time for BF Borgers’ clients to make periodic SEC filings.

On May 15, 2024, the SEC’s Chief Accountant, Paul Munter, released a statement encouraging audit firms to foster a healthy “tone at the top” to facilitate the maintenance of their independence and other ethical and professional responsibilities.

2. SEC Charges Fatburger’s Parent Company with Making Illegal Loans Totaling Almost $27 Million to Its CEO

On May 10, 2024, the SEC filed a complaint in federal district court against FAT Brands Inc., its founder and former CEO (Andrew Wiederhorn) and two former CFOs (Ron Roe and Rebecca Hershinger), alleging that the defendants committed securities fraud and other violations by making illegal loans to Wiederhorn, who used almost $27 million in company cash to pay for his personal expenses, including private jets, luxury vacations, mortgage and rent payments, and jewelry. With Roe’s assistance, Wiederhorn allegedly made false and misleading statements to make it appear that the millions of dollars were loans to Fog Cutter Capital Group, Inc. (FCCG), a FAT Brands affiliate also controlled by Wiederhorn, for FCCG business expenses. Wiederhorn used his control over FCCG to take the money that FCCG received from FAT Brands in the form of a personal loan, which he subsequently caused FCCG to write off. Wiederhorn also allegedly instructed his son to wire over $9 million to FAT Brands to conceal Wiederhorn’s personal use of FAT Brands’ funds and FAT Brands’ inability to pay its own bills. Meanwhile, Roe used his position as FCCG’s then-CFO to send funds from FCCG’s accounts, or those of its subsidiaries, to Wiederhorn, Wiederhorn’s family, and Wiederhorn’s personal creditors. Both Roe and Hershinger allegedly signed, certified, and disseminated false and misleading statements which failed to properly disclose Wiederhorn’s personal interest in the transactions.

FAT Brands, Wiederhorn, Hershinger, and an outside certified public accountant and attorney (William Amon) were also indicted on criminal charges in connection with the loans. According to the indictment, the group concealed Wiederhorn’s reportable compensation, allowing him to commit tax evasion, and caused FAT Brands to violate SEC rules against extending credit to CEOs of public companies. By categorizing the payments from FCCG as “shareholder loans,” Wiederhorn allegedly concealed millions of dollars of taxable income from the IRS, while his tax preparer, Amon, assisted and advised Wiederhorn to submit fraudulent filings to the IRS omitting the millions of dollars of taxable income. At the same time, Wiederhorn and Hershinger misrepresented and concealed the true nature of FAT Brands’ and FCCG’s payments and caused FAT Brands to illegally extend and maintain credit to Wiederhorn in the form of shareholder loans. Wiederhorn was also separately indicted on charges of possessing a firearm and more than fifty rounds of ammunition despite having previously been convicted of a felony following a federal investigation into shareholder loan allegations similar to the ones Wiederhorn currently faces.

3. Intercontinental Exchange and Nine Affiliates Charged with Failing to Inform SEC of a Cyber Intrusion

On May 22, 2024, the SEC settled charges, instituted pursuant to Section 21C of the Securities Exchange Act of 1934, against Intercontinental Exchange Inc. and nine of its wholly owned subsidiaries, including the New York Stock Exchange. Intercontinental Exchange agreed to pay a $10 million penalty to settle charges that it had caused its subsidiaries to fail to timely notify the SEC of a cyber intrusion as required by Regulation Systems Compliance and Integrity (“Regulation SCI”). Rules 1002(b)(1) and 1002(b)(2) of Regulation SCI require covered entities to immediately notify the SEC when they have a “reasonable basis to conclude” that they had been the subject of system disruptions, system compliance issues, or system intrusions. Although Rule 1002(b)(5) of Regulation SCI provides an exception to the immediate notification requirement if the covered entity also immediately concludes or reasonably estimates that the disruption or intrusion had, or would have had, either no impact or a de minimis impact, Intercontinental Exchange did not determine that its intrusion was a de minimis event until four days after concluding that it had been subject to the intrusion. The company’s internal Information Security personnel also failed to inform the company’s legal and compliance personnel of the intrusion until five days after being notified of the vulnerability, in violation of the company’s own internal cyber incident reporting procedures.

Intercontinental Exchange and its subsidiaries consented to the entry of the SEC’s order finding that the subsidiaries had violated Regulation SCI’s notification provisions and that Intercontinental Exchange had caused those violations. Without admitting or denying the SEC’s findings, the companies also agreed to a cease-and-desist order in addition to Intercontinental Exchange’s monetary penalty. While Intercontinental Exchange and the nine subsidiaries involved in the enforcement action are subject to particularly strict reporting requirements due to their roles as prominent financial market intermediaries, the order and penalty highlight the importance to all businesses of maintaining up-to-date cybersecurity measures and response procedures.

For more information, read our full client alert.

4. SEC Charges Trillium Capital with Fraudulent Scheme to Manipulate Getty Images Stock

On May 31, 2024, the SEC charged private company Trillium Capital LLC (“Trillium”) and its owner, Robert Scott Murray, with violating the antifraud provisions of the securities laws by announcing a phony offer by Trillium to purchase Getty Images. In its complaint, the SEC alleged that Murray attempted to increase Getty’s stock price by publishing a series of press releases urging Getty to explore a strategic sale and announcing that Murray was seeking a board seat. When the first four press releases failed to generate the desired result, Murray and Trillium issued a fifth, announcing a proposal by Trillium to buy all outstanding stock of Getty Images at a price per share that was nearly twice the stock’s closing price the prior trading day. That had the intended effect. According to the SEC, although the proposed transaction would have required nearly $4 billion in cash just to pay the shareholders, Trillium’s brokerage account had a balance of around $17.32, indicating that the buyout announcement was both false and misleading. Murray liquidated his Getty Images stock within minutes of the market opening that same day.

To resolve the SEC’s charges, Murray and Trillium agreed to a judgment permanently enjoining them from future violations of the antifraud provisions of the federal securities laws, enjoining them from participating or engaging in certain securities-related conduct, and barring Murray from serving as an officer or director of a public company. The SEC and the defendants will litigate the amount of monetary relief in federal court. Murray also pled guilty to one count of securities fraud, which provides for a sentence of up to 20 years in prison and a fine of up to $5 million.

5. Accountant Involved in Insider Trading Settles with SEC Over Friend’s ADI Tip

On May 20, 2024, a Massachusetts accountant who pled guilty to making almost $35,000 by trading on confidential information from a friend settled related civil charges lodged by the SEC in a parallel action. The civil action alleged that the accountant and his friends violated Section 10(b) of the Securities Exchange Act of 1934 by trading on material nonpublic information regarding the acquisition of Linear Technology Corp. by Analog Devices Inc. (ADI). After receiving a tip from a friend whose brother worked for ADI, the accountant and another friend purchased Linear securities in the days leading up to the announcement of the acquisition, then sold their Linear options and shares the day after the announcement, for a combined total profit of more than $90,000. In the settlement, the accountant agreed to pay a $14,750 civil fine, disgorge the $34,750 he made from the trades, and pay $14,940 in interest. The settlement also permanently enjoins the accountant from violating securities law.

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