SEC Whistleblower Lawyer Blog
In our last post, we reviewed the basics of special purpose acquisition companies (SPACs), also called “blank check companies,” to understand why the Securities and Exchange Commission is so concerned about SPACs. This form of investment that wasn’t even on people’s radar a decade ago is now an SEC enforcement priority.
As we explained, while the promises of a massive return from a SPAC may make investors’ hearts skip a beat, the very nature of SPACs should give every SEC investigator heartburn. A SPAC is, by definition, a legal shell company with no business operations or assets. The entire company is built on a promise that investors will make a fortune when the first entity (the SPAC) acquires another company.
Given the transient nature of SPACs, the SEC needs whistleblowers to come forward and help them identify when SPACs abuse the format to mislead investors and when SPACs are outright frauds.
SPACs Often Involve New Tech—But Is There Really A Company To Acquire?
Since SPACs want to acquire companies that promise big potential paydays, many SPACs are looking to high-tech fields for new technological breakthroughs with few existing competitors. Space-related SPACs are particularly popular.
While many high-tech investments are legitimate, but many exaggerate their prospects, the sheer number of tech-related SPACs concerns the SEC in the same way that the SEC frequently warns investors to be wary of cryptocurrency scams. Fraudsters count on the lack of clarity surrounding this tech to cover for their misrepresentations. They even use the pretense of secret intellectual property as a selling point for the nonexistent tech.
Representing overpromised (or nonexistent) tech in target acquisitions violates securities laws, which prohibit the sale of securities by deceptive means.
Mismanagement Of The Trust Account Violates Securities Laws
While there are no SEC-specific requirements regarding managing investors’ funds once held in a trust account, a SPAC should be forthright and accurate regarding the trust’s administration.
A SPAC should include information on the trust’s investment strategies and holdings in a prospectus, and the SPAC should act according to those statements. Therefore, it’s possible that a SPAC may violate securities law through its mismanagement of a trust account.
For example, a SPAC might falsify the trust investments’ earnings statements. Or perhaps the management’s prospectus and advertising promise one type of investment for the trust funds, but it is instead directing the funds elsewhere. Actions such as these could also violate SEC Rule 10b-5 and relevant securities law, using manipulation and deception to entice investors—even though everything else about the SPAC was above board.
Moreover, a SPAC would not avoid liability if the trust fund money was only used in exempt transactions. As the SEC explains,
All securities transactions, even exempt transactions, are subject to the antifraud provisions of the federal securities laws. This means that you and your company will be responsible for false or misleading statements that you or others on your behalf make regarding your company, the securities offered, or the offering. You and your company are responsible for any such statements, whether made by your company or on behalf of the company, and regardless of whether they are made orally or in writing.
Diversions From A Trust Leads To A Number of Violations
While it is obvious that stealing from a trust is illegal, it may be surprising to realize how many federal crimes can result from the theft. A January 2023 case illustrates the many violations that can arise from the diversion of trust funds.
In January, the SEC announced it was filing charges against Cooper Morgenthau, a CEO of a SPAC. In its complaint, the SEC alleged that Morgenthau stole from the SPAC’s trust to cover his personal expenses and purchase of crypto assets. As Morgenthau emptied the trust, he falsified bank statements and other financial records to hide the theft. Morgenthau then included these records—filled with misleading statements, material errors, and omissions—and in annual and quarterly reports filed with the SEC.
The SEC alleges that the SPAC shares and warrants are securities covered until Section 2(a)(1) of the Securities Act; therefore, he violated securities law when he falsified records, made untrue statements of material facts and omissions, and engaged in deceptive practices to defraud the investors. His use of the instrumentalities of commerce or the mail to execute the deception constituted violations of the Exchange Act, while falsifying business records, making false statements to auditors and accountants, and falsely certifying as to the veracity of the public reports were additional violations of the Exchange Act and SEC rules.
In our next post, we’ll look at a few more SPAC issues the SEC is investigating, along with some recent changes in SEC rules to address these issues. But until then, if you’re considering becoming a whistleblower, Silver Law Group and the Law Firm of David Chase have created a strategic alliance to represent SEC whistleblowers like you.
With years of experience representing SEC whistleblowers, coupled with a former SEC Enforcement lawyer on our team, we have an in-depth understanding of the SEC Whistleblower Program. We understand what the SEC is looking for. We can help you submit a tip that is more likely to result in a successful covered action. For a free, confidential consultation, contact us or call us today at (800) 975-4345.