Featured Expert Contributor, White Collar Crime and Corporate Compliance
Gregory A. Brower is a Shareholder with Brownstein Hyatt Farber Schreck, LLP. He also serves on WLF’s Legal Policy Advisory Board and is a former U.S. Attorney and FBI senior executive.
Emily R. Garnett is a Shareholder practicing in the Denver, CO office of Brownstein Hyatt Farber Schreck, LLP and a former enforcement attorney at the U.S. Securities and Exchange Commission.
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On July 17, 2024, the Securities and Exchange Commission (“SEC”) filed a civil complaint against Patrick Orlando, formerly the Chief Executive Officer and Chair of Digital World Acquisition Company (“DWAC”), a special purpose acquisition company (“SPAC”) that helped take Donald Trump’s media company public. This suit follows a 2023 settlement between the SEC and DWAC concerning the same set of facts and is just the latest in a series of recent SEC enforcement actions aimed at transparency in the SPAC space.
Although the purpose of a SPAC is to identify and acquire an operating business, SEC rules provide that discussions with possible merger partners are not allowed before the SPAC goes public and SPACs are not allowed to go public with a target company already identified. Here, according to the SEC’s complaint, Orlando falsely stated that, before it went public, DWAC did not intend to merge with any specific company and had no discussions or contacts with any potential merger target when, in fact, he had personally engaged in numerous lengthy discussions with representatives of Trump Media & Technology Group Corp. (“TMTG”).
Specifically, the SEC alleges that Orlando’s misrepresentations violated both Section 10(b) of the Securities Exchange Act of 1934 and the related Rule 10b-5 and Section 17(a) of the Securities Act of 1933, and seeks disgorgement of profits, a civil monetary penalty, and Orlando’s permanent bar from acting as an officer or director of any issuer.
Although notable, this is not the first time the SEC has gone after individuals associated with SPACs. Indeed, in 2021, the SEC charged Stable Road Acquisition Company, its sponsor SRC-NI, its CEO Brian Kabot, the SPAC’s proposed merger target Momentus Inc., and Momentus’s founder and former CEO Mikhail Kokorich for misleading claims about Momentus’s technology and about national security risks associated with Kokorich. The SEC settled with the two entities and Kabot. Momentus, Stable Road, and Kabot paid civil penalties of $7 million, $1 million, and $40,000, respectively, distributed as part of a fair fund to investors.
The Stable Road Case and the DWAC case are both reminders of the need for accuracy in financial disclosures of all types, including SEC filings. Because investors rely on information in such disclosures as truthful when making investment decisions and given the recent proliferation of SPAC deals, the SEC has understandably been focused on regulatory compliance in this space.