Last week the SEC announced a settlement of fraud claims against the founder of Jumio, Inc, a private mobile payments company, for misstating the company’s financial results and using those financials to sell his company shares on the secondary market.  This case is a reminder that privately negotiated securities transactions and private, VC-funded companies are not exempt from regulatory scrutiny.  As we observed in a number of settlements last year, the SEC will pursue suspected investor fraud involving privately-held companies, whether in fundraising or sales by insiders, or even in disclosures to a company’s own employees in connection with stock options.

The SEC settlement involving Jumio alleged a variety of misconduct by the founder, such as entering into round-trip transactions designed to inflate revenue.   Interestingly, the alleged scheme was apparently designed so that the founder could sell shares on the secondary market in privately negotiated transactions, rather than in a funding round.

According to the SEC press release, Jumio’s founder agreed to a settlement ordering him to disgorge profits from the sales as well as to pay a penalty, and agreed to be barred from serving as an officer or director of a publicly traded company in the U.S.  The SEC also negotiated a settlement with Jumio’s former CFO/General Counsel for failure to exercise reasonable care in connection with the matter.  Jumio itself filed for bankruptcy in 2016 after the company restated its financial results.

Looking ahead, we see this type of case as a microcosm of what may be in store when the next economic downturn hits the current stable of unicorns.  Misconduct involving privately held companies, or even exits that are below recent valuations, may give rise to similar disputes.  Meanwhile, recent experience – most prominently with Theranos – suggests that the failure of one or more unicorns is likely to attract both regulatory scrutiny and private litigation.

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Photo of Joshua M. Newville Joshua M. Newville

Joshua M. Newville is a partner in the Litigation Department in New York and a member of Proskauer’s White Collar Defense & Investigations Group and the Asset Management Litigation team.

Josh handles securities litigation, enforcement and regulatory matters, representing corporations and senior executives in civil and criminal investigations. In addition, Josh advises registered investment advisers and private fund managers on regulatory compliance, SEC exams and related risks.

Photo of Brian Hooven Brian Hooven

Brian Hooven is an associate in the Litigation Department. He has represented a diverse client base in all phases of litigation, including trial, in both state and federal courts.

Brian also maintains an active pro bono practice, representing individual clients in criminal, family and immigration proceedings.

Prior to law school, Brian worked at the University of Michigan Center for Arrhythmia Research and co-authored Time- and frequency-domain analyses of atrial fibrillation activation rate: The optical mapping reference. (2011) Heart Rhythm.