Heart to Heart: SEC and U.S. Attorney's Office File Parallel Feb. 14 Enforcement Actions
Both Moves Allege Individual Fraud and Misappropriation
Enforcement was in the air this Valentine's Day for the New York and Fort Worth Regional offices of the SEC, who on Feb. 14, 2023, announced charges against Christopher S. Kirchner – the former CEO of supply chain logistics firm Slync – for allegedly diverting investor funds for personal use and repeatedly misrepresenting the financial status of Slync during capital raises. On the same day, the FBI reportedly executed a search warrant for Kirchner's home as the U.S. Attorney's Office (USAO) for the Northern District of Texas announced parallel criminal charges against Kirchner related to the same conduct charged in the SEC's action.
While much ink has been spilled in recent months (including by those of us here at the SECond Opinions blog) on the pace of proposed SEC rulemaking and novel enforcement theories, involving disclosure controls and procedures, crypto, insider trading and environmental, social and governance disclosures. This case serves as a simple and important reminder that SEC Enforcement staff continue to investigate and prosecute traditional cases within the heartland of Securities Act of 1933 and Securities Exchange Act of 1934 antifraud provisions while collaborating closely with criminal law enforcement to bring parallel actions asserting different charges based on the same underlying conduct.
Federal Government Moves in Parallel, but with Different Theories
The SEC's complaint alleges that Kirchner committed securities fraud in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. It also seeks permanent injunctive relief, disgorgement and prejudgment interest, civil penalties, and an officer and director bar against Kirchner and names his company, KFIM LLC, as a relief defendant. The SEC also seeks disgorgement with prejudgment interest from KFIM. In its criminal case, the USAO did not charge criminal securities fraud, which – unsurprisingly – requires proof that a security was involved in the scheme.1 Rather, prosecutors charged Kirchner with wire fraud, which requires proof only that Kirchner intentionally engaged in the alleged scheme by means of false pretenses and through the use of interstate wire communications (phone, internet, etc.). If convicted, Kirchner faces up to 20 years in federal prison. So, although the SEC must prove that a security was involved, it must do so only by a preponderance of the evidence, while the USAO must prove a set of broader elements beyond a reasonable doubt. This interplay, and juxtaposition, of prima facie charging elements and varying burdens of proof is ever-present when multiple agencies of the government file actions in parallel based on the same set of underlying facts.
The Underlying Facts
The government's actions stem from two funding campaigns Kirchner initiated and controlled in March and December of 2020. Kirchner, obviously benefitting from a time period when supply chain issues were top of mind, raised more than $67 million from investors in roughly a year when, prior to January 2020, Slync had raised only around $2 million total in seed money. The SEC contends that Kirchner raised such considerable funds through fraud. It alleges that Kirchner lured investors through:
a series of deceptions ranging from grossly inflating Slync's revenue figures, to intentionally misrepresenting the number and nature of Slync's customer contracts, to falsely claiming that investor proceeds would be used to fund product development and to support the Company's growth.2
In addition to raising millions on false pretenses, Kirchner purportedly misappropriated investor funds, including transferring $20 million to his personal bank account immediately upon receipt from an investor. To accomplish this massive transfer, Kirchner allegedly told a Slync director that he was transferring the funds to an "investment" account. Kirchner also told his bank that the transfer was a disbursement from his company, a fact that authorities say was not agreed to by Slync. Kirchner allegedly used these funds to, among other things, pay for a private jet, finance an investment account in KFIM's name where he traded equities securities and options, and attempt to purchase a European soccer team.
In announcing its own case, the FBI noted that:
Mr. Kirchner used his position as a CEO to defraud investors and the company he worked for by diverting funds for his personal benefit. He did this to fund a lavish lifestyle at the expense of those that trusted him to act responsibly and ethically […and that] [t]he FBI will remain persistent in our efforts to hold individuals accountable that commit such brazen acts of corporate greed.
To make matters worse, while Kirchner was allegedly living large, Slync was late in making employee payroll at least six times between April and June 2022. And, the SEC argues, this fell directly on Kirchner, who was responsible for timely coordinating the wire of payroll funds to Slync's outside payroll administrator and went as far as forging wire certificates to make it appear that he had moved funds.
How Facts and Law Come Together in Parallel Litigation
Kirchner intends to fight both the SEC and USAO cases. The SEC's case will be presided over by Judge Mark Pittman of the U.S. District Court for the Northern District of Texas, himself a former senior counsel in the Fort Worth Regional Office of the SEC, who will no doubt bring an experienced perspective to the case. Exactly how, and on what pace, the two actions will proceed remains to be seen.
It is often the case that when an individual is charged in – and plans to litigate – parallel SEC and criminal law enforcement actions, the criminal case will proceed first. During this period, the SEC's enforcement action will be administratively stayed pending resolution. Procedurally, staying the SEC's action while the criminal case proceeds can avoid messy discovery concerns and constitutional issues. On one hand, criminal prosecutors may want to limit the development of additional facts and issues in other litigation while, on the other, a defendant likely wants to prevent self-incrimination concerns and avoid being deposed in a civil SEC enforcement action while also under criminal prosecution (especially given the fact that a decision to assert one's Fifth Amendment right against self-incrimination can – and usually does – result in an unfavorable presumption against the individual in the SEC's action). Whether the SEC's case against Kirchner will be stayed, and how either proceeding will develop over time, remains to be seen. Other important considerations – such as the interplay of criminal restitution and civil disgorgement, along with the SEC's renewed focus on obtaining admissions from individuals – will no doubt bear on the agencies' approach to the cases.
The Holland & Knight SECond Opinions Blog will continue to monitor this space and provide updates as to future developments. If you need any additional information on this topic – or anything related to SEC enforcement or internal investigations – please contact the authors or another member of Holland & Knight's Securities Enforcement Defense Team.
1 While unlikely to have been a sticking point based on these facts, the fight over the existence of a security has taken shape in a number of crypto enforcement actions and criminal prosecutions in recent months. See, e.g., United States v. Wahi, No. 22 Crim. 392 (S.D.N.Y. filed July 21, 2022), and SEC v. Ihan Wahi, Nikhil Wahi, and Sameer Ramani, 2:22-cv01009 (W.D. Wa. filed July 21, 2022) – (parallel actions filed by the SEC and the U.S. Attorney's Office for the Southern District of New York (SDNY) alleging securities fraud (SEC) and wire fraud (SDNY) in connection with alleged insider trading in advance of certain token listing announcements on a digital asset exchange).