Top 5 SEC Enforcement Developments for October 2024

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:

• Accounting fraud charges for allegedly concealing costs;
• Penalties for alleged false claims about AI-driven trading;
• Fines for allegedly misleading ESG fund marketing practices;
• Allegations of operating as an unregistered crypto dealer; and
• Settlements over alleged bribery schemes in the aerospace industry.

As a non-enforcement development, on October 21, 2024, the SEC released its 2025 Examination Priorities, highlighting areas that it expects to target during examinations in 2025. For more details, read our client alert.

1. SEC Files Fraud Complaint Against Lovesac for Concealed Shipping Costs

On October 29, 2024, the SEC filed a complaint against the Lovesac Company (“Lovesac”) and two of its former executives, alleging a fraudulent accounting scheme involving unrecorded shipping costs. The complaint claims that Donna Dellomo, the former CFO, and Yoon Um, the former controller and vice president, concealed approximately $2.2 million in “last mile” shipping expenses to protect Lovesac’s projected gross margin. Dellomo also allegedly withheld this information from the company’s auditors, recording the expense in a subsequent quarter, and failed to implement sufficient internal controls that might have prevented the allegedly fraudulent accounting.

Lovesac settled the charges without admitting or denying the SEC’s allegations, paying a civil penalty of $1.5 million. Lovesac also agreed to improve its controls over financial reporting to prevent similar issues in the future. Dellomo and Um, however, are fighting the charges, as the SEC pursues officer-and-director bars and other penalties against the two former executives.

2. SEC Charges Rimar Capital and Executives over “AI-Washing”

On October 10, 2024, the SEC charged Rimar Capital USA, Inc., its parent company Rimar Capital LLC (collectively “Rimar”), and two of its executives—CEO Itai Liptz and board member Clifford Boro—with making misleading claims about Rimar’s use of artificial intelligence in trading. The action is the latest highlighting the SEC’s focus on “AI-washing,” whereby firms misstate their AI capabilities or use. The SEC alleged that Liptz and Boro falsely claimed that its trading platform was AI-powered, and that defendants claimed to manage between $16 million and $20 million in assets, though Rimar had less than $2 million in assets under management. The SEC also alleged that Liptz used investor funds for personal expenses, contrary to assurances that the money would support Rimar’s technology and marketing.

The defendants settled, agreeing to pay a collective $310,000 in civil penalties. Liptz agreed to a five-year industry bar and paid $250,000 in penalties and more than $213,000 in disgorgement and prejudgment interest, while Boro paid $60,000 in penalties. The SEC also censured Rimar’s parent company. As with earlier AI washing cases, the SEC’s legal theory is not particularly novel, but shows continued scrutiny by the agency on using references to AI to spark investor interest.

3. SEC Charges WisdomTree with “Green-Washing”

On October 21, 2024, WisdomTree Asset Management, Inc. (“WisdomTree”) agreed to pay $4 million to resolve SEC allegations of misrepresentations tied to its ESG-focused exchange-traded funds (ETFs). According to the SEC’s Order, from March 2020 until November 2022, WisdomTree marketed three ETFs as excluding investments in companies “involved in certain controversial products or activities,” including fossil fuels and tobacco. The SEC alleged, however, that these ESG funds held securities in companies engaged in coal mining, coal transportation, natural gas extraction and distribution, and retail tobacco sales. According to the SEC, WisdomTree was aware as early as September 2020 that its screening process did not fully exclude these industries but continued to market the funds with the exclusionary claims.

The SEC’s findings highlighted issues with the third party data on which WisdomTree relied, which only partially captured involvement in fossil fuels and tobacco. The SEC also claimed that WisdomTree lacked written policies to ensure consistent ESG screening, which the SEC argued allowed these compliance gaps to persist. WisdomTree agreed to pay a $4 million civil monetary penalty and consented to a cease-and-desist order and censure.

4. SEC Targets Cumberland DRW for Trading Crypto Without Dealer Registration

On October 10, 2024, the SEC filed a complaint against Cumberland DRW LLC (“Cumberland”), accusing the firm of unlawfully trading more than $2 billion in crypto assets classified as securities without registering as a securities dealer under Section 15(a) of the Securities Exchange Act of 1934. Cumberland allegedly operated its platform and engaged in proprietary trading on third-party exchanges while promoting itself as a major liquidity provider in the crypto market.

The SEC alleges Cumberland conducted tens of thousands of transactions facilitated by research reports and investor updates promoting crypto. These communications, coupled with Cumberland’s activities, allegedly fueled profit expectations tied to the efforts of crypto issuers. According to the SEC, crypto assets available through Cumberland are offered and sold as securities.

Cumberland signaled its intent to fight the charges, claiming it has discussed with the SEC for years about how securities laws apply to crypto assets. The firm said it attempted to register when it acquired a registered broker-dealer in 2019 but was permitted to use it for transactions involving Bitcoin and Ether. “We cannot comply with rules that do not exist,” a Cumberland spokesperson said.

5. Aerospace Companies Face SEC Scrutiny for Bribery and Internal Control Failures

Lastly, in October 2024, two aerospace firms, RTX Corporation (“RTX”) and Moog Inc. (“Moog”), settled separate SEC actions involving Foreign Corrupt Practices Act (FCPA) violations linked to international bribery schemes.

RTX, formerly Raytheon Technologies Corp., agreed to pay over $124 million to resolve allegations that it paid nearly $2 million in bribes to Qatari military officials between 2011 and 2017 to secure defense contracts. According to the SEC’s complaint, RTX also funneled over $30 million to a Qatari agent—a relative of the Qatari Emir—with no defense contracting background, raising significant corruption risks. The SEC noted that Raytheon employees raised concerns about the agent’s activities, yet the company continued the relationship without adequate oversight or documentation. RTX consented to pay $37,400,090 in disgorgement, $11,786,208 in prejudgment interest, and a $75,000,000 penalty (offset by certain payments to the Department of Justice pursuant to a separate settlement), as well as to abide by a cease-and-desist order. RTX was also required to admit to violating the FCPA’s antibribery, internal accounting controls, and books and records provisions. RTX—whose “significant cooperation” was noted, albeit after a “period of uncooperativeness”—also agreed to retain an independent compliance monitor for three years.

Meanwhile, Moog settled allegations that its Indian subsidiary, Moog Motion Controls Private Limited (MMCPL), engaged in systemic bribery to secure contracts between 2020 and 2022. According to the SEC, MMCPL employees used third-party agents and distributors to funnel bribes to officials at South Central Railway and Hindustan Aeronautics Limited. MMCPL falsely recorded these improper payments as legitimate business expenses. Moog agreed to pay a $1.1 million civil penalty and more than $583,000 in disgorgement and prejudgment interest. The SEC noted Moog’s cooperation and remediation with the SEC’s investigation, including initially reporting certain misconduct to the DOJ, providing the SEC with facts developed through the company’s internal investigation, terminating employees and third parties involved in the company’s misconduct, and strengthening its global compliance programs.

For more details on each enforcement action, or to discuss how these developments may impact your compliance program, please reach out to our team. Stay tuned for next month’s roundup, where we’ll continue to bring you the latest in SEC enforcement news and insights.