A gavel rests on its sounding block with a several law books and a justice scale out of fucus in the background. A cool blue cast dominates the scene. (A gavel rests on its sounding block with a several law books and a justice scale out of fucus in t
iStock

The Wall Street firm headed by Howard Lutnick — who has been nominated as the next U.S. commerce secretary — is settling allegations that shell companies it controlled misled investors.

On Thursday, the U.S. Securities and Exchange Commission (SEC) settled charges against Cantor Fitzgerald, L.P., which it accused of violating securities rules when two special purpose acquisition companies (SPACs) that it controlled made misleading statements to investors before their initial public offerings (IPOs).

SPACs are shell companies that raise money from investors with the intention of using that capital to acquire an operating business.

In its order, the SEC alleged that two SPACs, which were controlled by a team of Cantor executives, made misleading statements about their potential merger prospects in their SEC filings.

According to the regulator, both companies filed disclosures indicating that they did not have substantive discussions with potential post-IPO acquisition targets, when the Cantor executives behind the offerings had actually started negotiations with a handful of potential targets — including the companies they ended up acquiring.

“Given that the purpose of a SPAC is to identify and acquire an operating business after conducting its IPO, disclosures about substantive steps a SPAC has or has not taken in furtherance of a particular acquisition would be material to a reasonable SPAC investor, who would want to know about the SPAC’s prospects with future acquisition targets,” the SEC said in its order.

“Disclosures made in a SPAC’s IPO — including as it relates to substantive pre-IPO discussions or negotiations with future acquisition targets or concerning potential business combinations — need to be clear and accurate, and cannot be materially false or misleading,” the regulator added.

The firm agreed to settle the charges, without admitting or denying the SEC’s findings. To settle the case, it agreed to pay a US$6.75-million penalty and to cease and desist from further violations.

“This enforcement action reflects the straightforward proposition that any disclosures about substantive discussions with potential targets must be materially accurate,” said Sanjay Wadhwa, acting director of the SEC’s enforcement division, in a release.