The Commission has repeatedly emphasized the main street, retail investor focus of its Enforcement Division in recent months. Earlier this week, for example, Chairman Clayton discussed the point as he gave a first ever interview from inside the Commission’s Washington headquarters and its its super safe, copper lined data room. As if to underscore the point, this week the agency has brought three new cases involving offering fraud – the kind of cases in which retail investors are often fleeced. The cases involve digital assets, nanotechnology and real estate.

ICO offering fraud: SEC v. Eyal, Civil Action No. 1:19-cv-11325 (S.D.N.Y. Filed Dec. 11, 2019) names as defendants Eran Eyal, a dual citizen of South Africa and Israel residing in Brooklyn, and his firm, Uniteddata, Inc, d/b/a “Shopin.” Over a period of about eight months, beginning in August 2017, Defendants raised about $42.5 million in digital assets. Shopin supposedly planned to create a universal shopper profile that would track customer shopping histories at online retailers that would recommend purchases. The offering, conducted in typical two stage IPO fashion using a pre-sale and a sale, was based on a series of misrepresentations. Those included claims that two successful tests of Shopin’s approach had been conducted, a claim that the firm had on-going partnerships with well-known retailers, a representation that a prominent Silicon Valley blockchain entrepreneur advised the firm and a suggestion that a successful online company had invested in the firm. Shopin never created a functional platform. The proceeds from the offering were diverted to the personal use of Mr. Eyal. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending.

Offering fraud/nanotechnology: SEC v. Nanotech Engineering, Inc., Civil Action No. 1:19-cv-03633 (D.D.C. Filed Dec. 5, 2019) names as defendants the firm, Michael Sweaney, David Sweaney and Jeffery Gange. Defendants are, respectively, a firm claimed to be developing a revolutionary solar panel, CFO Michael Sweaney, a convicted securities fraudster, CEO and nephew David Sweaney and COO Jeffery Gange. The complaint centers on the sale of private placement shares under a Reg. D notice, beginning about two years ago and which is on-going. During that period, Defendants have raised about $9.4 million from investors using a series of false representation. Those include the failure to disclose Michael Sweaney’s prior criminal conviction, a claim that Defendants would receive little of the investor cash raised and a representation about commissions. In fact, Defendants used boiler room tactics and others employing that approach to solicit investors. Portions of the investor funds were diverted to the personal use of defendant. The complaint alleges an on-going fraud and violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Commission obtained an asset freeze on filing. See Lit. Rel. No. 24688 (Dec. 11, 2019).

Offering fraud/real estate: SEC v. Palm Beach Atlantic Financial Group, LLC, Civil Action No. 9:19-cv-81652 (S.D. Fla. Filed Dec. 11, 2019) is an action which names as defendants the firm and William Smith, respectively, a manager and seller of real estate and the firm’s managing member. Over a three-year period, beginning in 2014, Defendant raised over $1 million from investors who were told that Palm Beach Atlantic was in the business of buying, remodeling and selling real estate. In fact, the funds raised were comingled with those from other ventures and used for a variety of purposes. Mr. Smith typically moved the funds through a number of accounts to support his various ventures. Defendants also falsely claimed to have a successful track record in the business. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the matter each defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. Defendants will also pay, on a joint and several basis, a penalty of $75,000. See Lit. Rel. No. 24689 (Dec. 11, 2019).

A look forward – a look back:

As the world heads into the holidays a key question may be whether there will be any action on Capitol Hill regarding the pending bills that would impact the Commission. Those include at least two bills focused on Kokesh and the statute of limitations and a third offering a definition of insider trading. The Kokesh related bills would extend the statute of limitations, which is not really the question Enforcement needs address. The later would represent the first statutory definition of insider trading. Its impact is difficult to assess the legislation appears to try and codify current law.

Last week the Commission continued to focus on main street investors, filing a number of actions focused on those investors. The agency also resolved another FCPA action and an insider trading case.

SEC Enforcement – Filed and Settled Actions

The Commission filed 6 civil injunctive actions and 2 administrative proceedings last week, exclusive of 12j and tag-along actions.

Insider trading: SEC v. Davidson, Civil Action No. 5:19-cv-1153 (W.D. Ok. Filed Dec. 12, 2109) names as a defendant Oklahoma oil and gas executive John Kenneth Davidson. Mr. Davidson learned from a friend and neighbor on the board of Covidien PLC that his firm was to be involved in a merger with a medical device company. Contrary to the directive of his friend, Mr. Davidson traded in the securities of the company prior to the deal announcement. He also told friend, John Special, who traded prior to the deal announcement on June 15, 2014. Mr. Davidson had trading profits of $19,212 while Mr. Special had illicit gains of $1.182 million. The complaint against Mr. Davidson alleged violations of Exchange Act Section 10(b). To resolve the action Mr. Davidson consented to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to pay disgorgement in the amount of his trading profits, prejudgment interest of $3,812 and a penalty equal to the amount of his trading profits. See also SEC v. Special, Civil Action No. 5:19-cv-1152 (W.D. Ok. Filed Dec. 12, 2019)(insider trading action based on the facts detailed above; resolved with the entry by consent of an injunction and an order directing the payment of disgorgement of the trading profits of $1,182,472, prejudgment interest of $$231,782 and a penalty equal to the amount of his trading profits plus the prejudgment interest). See Lit. Rel. No. 24690 (Dec. 12, 2019).

Books, records, internal controls: In the Matter of Stonemor Partners, L.P., Adm. Proc. File No. 3-19616 (Dec. 12, 2019) names as Respondents the publicly traded master limited partnership and its managing member, Stonemore GP LLC. Beginning in the fourth quarter of 2015, and continuing through the second quarter of 2016, the General Partner identified certain issues relating to customer sales and short-term borrowings which jeopardized its financial results. Nevertheless, there was no discussion of these issues in the MD&A section of the 2015 annual report or in its first two quarterly reports for 2016. In addition, beginning in early 2014, and continuing through late 2016, Stonemor filed annual and quarterly reports that had significant GAAP issues resulting from a material internal control weakness. As a result, investors did not receive timely material information. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, Stonemor GP will pay a penalty of $250,000.

ICO offering fraud: SEC v. Eyal, Civil Action No. 1:19-cv-11325 (S.D.N.Y. Filed Dec. 11, 2019) names as defendants Eran Eyal, a dual citizen of South Africa and Israel residing in Brooklyn, and his firm, Uniteddata, Inc, d/b/a “Shopin.” Over a period of about eight months, beginning in August 2017, Defendants raised about $42.5 million in digital assets. Shopin supposedly planned to create a universal shopper profile that would track customer shopping histories at online retailers which would recommend purchases. The offering, conducted in typical two stage IPO fashion using a pre-sale and a sale, was based on a series of misrepresentations. Those included claims that two successful tests of Shopin’s approach had been conducted, a claim that the firm had on-going partnerships with well-known retailers, a representation that a prominent Silicon Valley blockchain entrepreneur advised the firm and a suggestion that a successful online company had invested in the firm. Shopin never created a functional platform. The proceeds from the offering were diverted to the personal use of Mr. Eyal. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending.

Offering fraud/real estate: SEC v. Palm Beach Atlantic Financial Group, LLC, Civil Action No. 9:19-cv-81652 (S.D. Fla. Filed Dec. 11, 2019) is an action which names as defendants the firm and William Smith, respectively, a manager and seller of real estate and the firm’s managing member. Over a three-year period, beginning in 2014, Defendant raised over $1 million from investors who were told that Palm Beach Atlantic was in the business of buying, remodeling and selling real estate. In fact, the funds raised were comingled with those from other ventures and used for a variety of purposes. Mr. Smith typically moved the funds through a number of accounts to support his various ventures. Defendants also falsely claimed to have a successful track record in the business. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the matter each defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. Defendants will also pay, on a joint and several basis, a penalty of $75,000. See Lit. Rel. No. 24689 (Dec. 11, 2019).

Policies and procedures: In the Matter of Kornitzer Capital Management, Inc., Adm. Proc. File No. 3-19615 (Dec. 10, 2019) is an action which names as Respondents the registered investment adviser and its majority owner, John Kornitzer. From approximately 2011 through late 2015 the adviser purchased securities of Company A and held concentrations that ranged from about 30% to as high as 89%. Those concentrations persisted despite directives of the board members from 2016 to 2018 to reduce it to about 10%. The concentrations were reduced in late 2018. Until 2016 the firm did not have policies and procedures in place on the question. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the matter each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm also agreed to the entry of a censure. The adviser will pay disgorgement of $4,979,448 of which $4,132,132 is deemed satisfied by prior payments made to the Retirement Fixed Fund and the Retirement Equity Fund and/or investors in those funds. Remaining is an additional $846,316 in disgorgement to be paid along with $80,679 in prejudgment interest. Respondents will also pay a penalty of $2,700,000. A fair fund was created.

Touting: SEC v. Friedlander, Civil Action No. 1:18-cv-00529 (D. Colo.) is an action which named as defendants: Jeffrey Friedlander who controls the two entity defendants and previously settled a fraud action with the Commission; and his controlled entities, Global Corporate Strategies LLC and Intiva Pharma LLC. The complaint alleges that Mr. Friedlander touted the stock of OWC Pharmaceutical Research Corp., a cannabis firm, while misrepresenting his interest in it and failing to disclose that he was being paid. His stock in OWC was owned through Global and Initva. Mr. Friedlander also sold OWC shares into the market. The complaint alleges violations of each subsection of Securities Act Section 17(a), Securities Act Section 17(b) and Exchange Act Section 10(b). Each Defendant settled with the Commission, agreeing to the entry of permanent injunctions based on the sections cited in the complaint, to the entry of penny stock bars and to and order requirement the payment of disgorgement in the amount of $2.1 million plus prejudgment interest for Defendants Friedlander and Global and $20,000 for Defendant Intiva. Mr. Friedlander also agreed to pay a $2 million penalty. See Lit. Rel. No. 24684 (Dec. 9, 2019).

Insider trading: SEC v. Collins, Civil Action No. 18-cv-7128 (S.D.N.Y.); see also U.S. v. Collins, No. 18 crim 567 (S.D.N.Y.). The action centered around the announcement by Australian Pharmaceutical Company Innate Immunotherapeutics, Ltd. after the close of trading on Monday, June 26, 2017 of negative drug trial results for the firm’s only actual pharmaceutical, according to the Commission’s complaint. The share price plunged 90%. Congressman Christopher Collins, a member of the firm’s board of directors who was briefed on the trial results, tipped his son and future father-in-law in advance of the public announcement. The Congressman, his son, Cameron, and his future father-in-law, Stephen Zarsky each resolved the charges, consenting to the entry of permanent injunctions based Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Collins is also barred from serving as an officer or director of a public company. Cameron Collins and Stephen Zarsky, who avoided losses by trading. agreed to pay disgorgement and prejudgment interest of $$634,249 and $159,880 respectively. Each man previously pleaded guilty in the parallel criminal case.

Financial fraud: SEC v. Grewal, Civil Action No. 18-cv-11778 (D. Mass.) is a previously filed action which names as a defendant Harpreet Grewal, the former CFO of Constant Contact, Inc. The Commission’s complaint alleged that Mr. Grewal concealed the firm’s slowing customer growth from investors while inflating its reported subscriber base. The Court entered a final judgment based on consent enjoining him from future violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a) and 13(b)(2)(A). The order also directed that Defendant pay disgorgement and prejudgment interest of $250,000 and a penalty of $100,000. See Lit. Rel. No. 24686 (Dec. 10, 2019).

False opinion: SEC v. Dalmy, Civil Action No. 19-cv-00745 (D. Colo.) is a previously filed action in which the Commission charged attorney Diane Dalmy, listed on the prohibited attorney’s list maintained by OTC markets which precludes use of her opinions in connection with the sale of securities, evaded exchange restrictions imposed on her by having a retired divorce lawyer, Michael Woodford, front for her without doing the requisite due diligence. The court entered a judgment by default which precludes her from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The judgment also orders her to pay disgorgement and prejudgment interest of $30,236 and a penalty of $86,718. Ms. Dalmy is required to provide a copy of the court papers to clients or potential clients seeking representation on matters involving the federal securities laws. The judgment against Mr. Woodford orders him to pay disgorgement and prejudgment interest of $29,762 but waives payment based on financial condition. See Lit. Rel. No. 24685 (Dec. 9, 2019).

Offering fraud/nanotechnology: SEC v. Nanotech Engineering, Inc., Civil Action No. 1:19-cv-03633 (D.D.C. Filed Dec. 5, 2019) names as defendants: The firm, supposedly a developer of revolutionary solar panels; Michael Sweaney, a convicted securities fraudster; David Sweaney, Michael’s cousin and the CFO; and Jeffery Gange, the COO. The complaint centers on the sale of private placement shares under a Reg. D notice, beginning about two years ago and which is on-going. During that period, Defendants have raised about $9.4 million from investors using a series of false representation. Those include the failure to disclose Michael Sweaney’s prior criminal conviction, a false claim that Defendants would receive little of the investor cash raised and a misrepresentation about commissions. Defendants used boiler room tactics and others employing that approach to solicit investors. Portions of the investor funds were diverted to the personal use of defendant. The complaint alleges an on-going fraud and violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Commission obtained an asset freeze on filing. See Lit. Rel. No. 24688 (Dec. 11, 2019).

Financial reporting: In the Matter of Jatindar Kapur, CPA, Adm. Proc. File No. 3-10613 (Dec. 5, 2019) is an action which names as a Respondent the Senior Vice President, Finance and Corporate Controller for Hertz Global Holdings, Inc. Over a two-year period, beginning in 2008, Hertz Holdings and its wholly owned subsidiary, the Hertz Corporation, materially overstated pretax income by $235 million because of accounting errors in a number of units that resulted in a 2015 restatement. The errors primarily tied to the accrual of expenses related to “wrecks,” the amortization periods for Hertz vehicle licenses and registrations and an allowance for uncollectible amounts offsetting potential recoveries from third parties for rental related damages. Mr. Kapur approved accounting changes in the areas that tied to the errors. The Order alleges violations of Securities Act Sections 17a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and 15(d). Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. He is also denied the privilege of appearing and practicing before the Commission as an accountant with a right to submit an application to again appear after two years. In addition, he was directed to pay disgorgement in the amount of $18,610.67, prejudgment interest of $3,997.64 and a penalty of $75,000.

FCPA/Anticorruption

SEC v. Telefronaktiebolaget LM Ericsson, Civil Action No. 1:19-cv-11214 (S.D.N.Y. Filed Dec. 6, 2019). Defendant is a multinational networking and telecommunications equipment and services company based in Sweden. During a six year period beginning in 2011, the firm paid bribes through third parties in Djibouiti, Saudi Arabia and China to secure profits of about $427 million. In Vietnam and Indonesia, the firm used subsidiaries and consultants to create slush funds of about $56 million. The ultimate payees are unknown but served only as intermediaries. In China subsidiaries made about $31.5 million in payments to sham service provides, contrary to firm policies. In Qatar Defendant made a payment of $450,000 through a subsidiary to a consulting company that was contrary to firm internal controls. The illicit payments were improperly characterized on the books and record of the financial statements as legitimate expenses and consolidated into those of the parent. The complaint alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter with the Commission the firm agreed to pay disgorgement and prejudgment interest of over $530 million.

In the parallel criminal case, the company entered into a deferred prosecution agreement. Its Egyptian subsidiary pleaded guilty to conspiracy to violate the anti-bribery provisions of the FCPA. The firm also agreed to retain an independent compliance monitor for three years. The company will pay a criminal penalty of $520 million.

p>As the Commission focuses on retail investors, offering fraud actions have proliferated. In those cases, small investors are typically defraud by being induced to enter into what appears to be a very attractive deal. Later the investors learn the deal was actually a fraud.

In contrast, the Commission’s most recent investor fraud action does not center on an offering fraud. To the contrary, the wrongful scheme is conducted largely from the top, through control, by a board member and CEO. It centers on two fraudulent schemes involving REITs and BDCs. The result is the same however – the fraudster takes the investor cash. SEC v. Singal, Civil Action No. 19-cv-11452 (S.D.N.Y. Filed Dec. 13, 2019).

Defendants are Suneet Singal, First Capital Real Estate Trust Inc. or FC REIT, First Capital Real Estate Advisors, LP or FC REIT Advisors, and First Capital Real Estate Investments, LLC or FC Private. Mr. Singal is the CEO and Chairman of FC REIT, the CEO and beneficial owner of FC REIT Advisor and a minority owner of FC Private. FC REIT is a public, non-traded REIT advised by FC REIT Advisor which is beneficially owned by Mr. Singal. FC Private operates as a commercial real estate firm and the holding company for several of Mr. Singal’s businesses.

On September 15, 2015 Mr. Singal entered into a transaction with FC REIT in which he supposedly contributed over $41.7 million in real estate interests to the firm in exchange for about 3.3 million OP Units or shares of FC REIT’s common stock at a price of over $12 per unit. The properties were contributed because Mr. Singal did not have the cash to close the transaction.

The difficulty was that Mr. Singal did not actually own the properties – he did not have the authority to contribute them to the deal. To the contrary, some of the hotels involved were in bankruptcy and could not be sold. Nevertheless, they involved documents representing that Mr. Singal owned them and had “good and marketable” title. Indeed, the day after the transaction, a side letter was executed with one of the Hotel Principals listing the steps needed to close. Yet later in September Mr. Singal and FC REIT filed a Form 8-K regarding the transaction which was later amended. It stated that the deal was done – it materially misrepresented the deal as essentially having occurred.

Subsequently, Mr. Singal continued his efforts to acquire the hotel properties. By year end however, he abandoned the quest. Additional misrepresentations regarding the deal were made, however, in subsequent firm filings with the Commission. The NAV for FC REIT was also misstated and overvalued because of what was actually a sham transaction.

By the fall of 2016, Mr. Singal’s FC Private and its subsidiaries had significant cashflow issues. After acquiring ownership interests in two BDCs, Mr. Signal had them execute two lending agreements for $1.5 million each. The loans were extended to firms Defendant Singal controlled. Mr. Singal diverted about half of the funds to his personal use. Nevertheless, Mr. Somgal continued to conceal the true nature of the transactions. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(d), Advisers Act Sections 206(1) and 206(2) and Investment Company Act Sections 57(a)(3) and (4). The case is pending. See Lit. Rel. No. 24619 (Dec. 16, 2019).

Insider trading has long been a key focus of SEC Enforcement. While some cases are complex others are relatively straight-forward. For example, a recent international insider trading action involved over 3,000 securities with traders in multiple countries. The analysis of the transactions required a high degree of sophisticated data analysis.

Others are more straight forward but nevertheless, difficult to detect and prove. The Commission’s most recent case in this area is an example. There a group of friends clustered around a corporate insider traded on inside information in the firm’s securities for years before being detected, apparently by happenstance. Nevertheless, they were uncovered and named as defendants in a Commission enforcement action. SEC v. Nellore, Civil Action No. 5:19-cv-08207 (N.D. Cal. Filed Dec. 17, 2019).

Defendant Janardhan Nellore, the IT administrator of Palo Alto Networks, Inc., a cloud computing firm based in Santa Clara, was at the center of the insider trading ring. Involved as tippees, and also named as defendants, were four friends, three from working at the firm — defendant Sivannorayana Barama, a software engineer, Saver Hussain, an IT consultant who was not just a friend but had financial ties with Mr. Nellore, and Prasad Malempati. Defendant Ganapathi Kunadharaju, another Santa Clara software engineer was a friend of Mr. Nellore from college in India.

From about 2015, when Mr. Nellore received a promotion at his firm that gave him greater access to information, until about 2019 when he was arrested for identity theft when trading through the account of another, Mr. Nellore and his friends repeatedly traded on inside information he obtained through his position at work. At their peak the men had about $7 million in trading profits.

After being at Palo Alto Networks for about three years Mr. Nellore received a promotion after which the ring began trading. In 2015, for example, Mr. Kunadharaju granted his friend electronic assess to his securities trading accounts. Mr. Nellore explained that he would use the access to conceal his trading. He also agreed to furnish the inside information to his friend. The trading profits were divided such that each man kept the profits generated by the money he put in the accounts. In addition, Mr. Kunadharaju periodically withdrew sums under $10,000 from the accounts to give to his friend. Mr. Nellore entered into a similar arrangement with Mr. Hussain.

In contrast, Mr. Nellore regularly tipped Mr. Malempati in return from market information developed by his friend to inform and aid his trading. Mr. Barama, on the other hand, was gifted the inside information, according to the complaint.

The trading patterns over the years appeared to have been largely the same. Mr. Nellore would communicate the information to each of this friends who traded. Frequently, prior to a trade there would be a number of communications about the transaction. While at first the men would refer to the firm’s shares by company name, later they referred to the stock as “baby.” At Mr. Nellore’s directions, the men also traded options to maximize the profits.

An example of the trading involved the transactions executed prior to the company earnings announcement on November 21, 2016. In this instance Mr. Nellore obtained confidential information regarding the firm’s earnings and performance for the first quarter of 2016 three days prior to the announcement. The next morning Defendants Nellore, Barama and Kunadharaju began trading options. At 6:41 a.m. Mr. Barama placed an order for 72,000 put options. Two minutes later Mr. Nellore paid about $14,000 to acquire options in the account of Mr. Kunadharaju. Mr. Nellore then talked on the phone with Mr. Barama and the Mr. Kunadharaju just after 11:00 a.m.

Subsequently, the company announced disappointing earnings on November 21, 2016 at about 1:00 p.m. The share price declined about 13%. Defendants Nellore, Barama and Kunadharaju sold the options over the next two days reaping profits of over $200,000. The complaint alleges violations of Exchange Act Section 10(b) and for aiding and abetting. The case is pending. The U.S. Attorney’s Office for the Northern District of California announced parallel criminal charges against Messrs. Nellore and Barama.

A look forward – a look back:

The holidays begin this week as the shopping wraps-up and families and friends assemble for festivities and good cheer. For at least a brief period there is an atmosphere of merriment and good feelings for all.

Perhaps this year that feeling of good will toward all can extend beyond the holidays and carry through for the balance of the year – at least we can all hope and dream.

SEC

PCAOB: The Commission approved the budget for the accounting Board (Dec. 18, 2019).

Rules: The agency proposed modifications to the rules regarding the definition of accredited investors keyed largely to the question of sophistication of the investor (Dec. 18, 2019).

Rules: The Commission proposed to adopt rules that will require resource extraction issuers to disclose payments made to foreign governments or the U.S. federal government for the commercial development of oil, natural gas or minerals. The proposal follows a series of actions and proceeding on the question that stretch back to the passage of Dodd Frank when the mandate was imposed (Dec. 18, 2019).

Rules: The agency adopted a package of rule amendments, guidance and a rule to improve the framework for cross-border security-based swaps. It also adopted risk mitigation techniques for uncleared security-based swaps (Dec. 18, 2019).

SEC Enforcement – Filed and Settled Actions

The Commission filed 4 civil injunctive actions and 3 administrative proceedings last week, exclusive of 12j and tag-along actions.

Short tender rules: In the Matter of Bluefin Trading, LLC, Adm. Proc. File No. 3-19623 (Dec. 18, 2019) is an action which names as a Respondent the Commission registered, New York City based, broker-dealer. The action centers on a tender offer for shares of a major defense contractor, conducted in July 2016. In connection with that offering, Blue Fin tendered over 4.1 million shares on its behalf. The number of shares tendered exceeded the firm’s net long position by about 75,000 shares. That violates Exchange Act Rule 14e-4 which precludes such actions because when a partial tender is made that is oversubscribed, issuers accept the tenders on a pro rata basis. Tendering more shares than owned, as was done here, skews the way shares are accepted. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the rule and a censure. The firm will also pay disgorgement of $223,836, prejudgment interest of $29,802 and a penalty of $50,000. See also In the Matter of Critical Trading, LLC, Adm. Proc. File No. 3-19622 (Dec. 18, 2019)(proceeding against registered broker-dealer based on similar facts; resolved with consent to entry of a cease and desist order and a censure based on the same rule and payment of disgorgement in the amount of $149,224, prejudgment interest of $19,868 and a penalty of $50,000).

Unregistered securities/crypto: In the Matter of Blockchain of Things, Inc., Adm. Proc. File No. 3-19621 Adm. Proc. File No. 3-19621 Dec. 18, 2019) is an action which names the firm as a Respondent. The firm focuses on improving blockchain technology. Beginning in December 2017, and continuing until July 2018, the firm conducted a token sale to raise additional capital for its operations. The offering was in fact the sale of unregistered securities that fit within the definition of Howey. The Order alleges violations of Securities Act Sections 5(a) and (c). To resolve the matter Respondent agreed to implement a number of undertakings which include filing an Exchange Act registration statement and repaying investors. The firm resolved the proceedings by consenting to the entry of a cease and desist order based on the sections cited in the Order. The firm will also pay a penalty in the amount of $250,000.

Offering fraud: SEC v. Antar, Civil Action No. 1:19-cv-11527 (S.D.N.Y. Filed Dec. 17, 2019) is an action which names Sam A. Antar, a representative of a local New Jersey broker-dealer and investment adviser, as a defendant. In the first half of 2019 Mr. Antar raised about $550,000 from acquaintances in the Syrian Jewish community in Monmouth County, New Jersey. Investors were told that their funds would be used to acquire pre-IPO shares which could later be sold at a premium. The form of the investment varied but the promises were the same as were the results – the investor capital was misappropriated. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is pending. The U.S. Attorney’s Office for the District of New Jersey filed a parallel criminal action. See Lit. Rel. No. 24694 (Dec. 17, 2019).

Offering fraud: SEC v. Karmann, Civil Action No. 2:19-cv-02531 (E.D. Ca. Filed Dec. 19, 2019) is an action with names CFO Robert Karmann, who was affiliated with two firms, as a defendant. The scheme began in 2011 as an investment program in which two companies were supposedly involved in the creation of certain energy tax credits. By 2014 the scheme required certain money be transfers among a group of accounts. Those transfers were instrumental in moving the scheme forward. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Sections 17(a)(1) and (3). The case is pending. See Lit. Rel. No. 24692 (Dec. 18, 2019).

Insider trading: SEC v. Nellore, Civil Action No. 5:19-cv-08207 (N.D. Cal. Filed Dec. 17, 2019). Defendant Janardhan Nellore, the IT administrator of Palo Alto Networks, Inc., a cloud computing firm based in Santa Clara, was at the center of the insider trading ring. Involved as tippees, and also named as defendants, were four friends, three from working at the firm — defendants Sivannorayana Barama, a software engineer, Saver Hussain, an IT consultant who was not just a friend but had financial ties with Mr. Nellore, and Prasad Malempati. Defendant Ganapathi Kunadharaju, another Santa Clara software engineer, was a friend of Mr. Nellore from college in India. From about 2015, when Mr. Nellore received a promotion at his firm that gave him greater access to information, until about 2019 when he was arrested for identity theft while trading through the account of another, Mr. Nellore and his friends repeatedly traded on inside information he obtained through his position at work. At its peak the scheme yielded about $7 million in trading profits. The trading patterns over the years appeared to have been largely the same. Mr. Nellore would communicate the information to each of this friends who traded. Frequently, prior to a trade there would be a number of communications about the transaction. While at first the men would refer to the firm’s shares by company name, later they referred to the stock as “baby.” At Mr. Nellore’s directions, the men also traded options to maximize the profits. The complaint alleges violations of Exchange Act Section 10(b) and for aiding and abetting. The case is pending. The U.S. Attorney’s Office for the Northern District of California announced parallel criminal charges against Messrs. Nellore and Barama. See Lit. Rel. No. 24693 (Dec. 18, 2019).

Sham transactions: SEC v. Singal, Civil Action No. 19-cv-11452 (S.D.N.Y. Filed Dec. 13, 2019). Defendants are Suneet Singal, First Capital Real Estate Trust Inc. or FC REIT, First Capital Real Estate Advisors, LP or FC REIT Advisors, and First Capital Real Estate Investments, LLC or FC Private. Mr. Singal is the CEO and Chairman of FC REIT, the CEO and beneficial owner of FC REIT Advisor and a minority owner of FC Private. FC REIT is a public, non-traded REIT advised by FC REIT Advisor which is beneficially owned by Mr. Singal. FC Private operates as a commercial real estate firm and the holding company for several of Mr. Singal’s businesses. On September 15, 2015 Mr. Singal entered into a transaction with FC REIT in which he supposedly contributed over $41.7 million in real estate interests to the firm in exchange for about 3.3 million OP Units or shares of FC REIT’s common stock at a price of over $12 per unit. The difficulty was that Mr. Singal did not actually own the properties – he did not have the authority to contribute them to the deal. Subsequently, Mr. Singal continued his efforts to acquire the hotel properties. By year end however, he abandoned the quest. Additional misrepresentations regarding the deal were made in subsequent firm filings with the Commission. The NAV for FC REIT was also misstated and overvalued because of what was actually a sham transaction. By the fall of 2016, Mr. Singal’s FC Private and its subsidiaries had significant cashflow issues. After acquiring ownership interests in two BDCs, Mr. Signal had them execute two lending agreements for $1.5 million each. The loans were extended to firms Defendant Singal controlled. Mr. Singal diverted about half of the funds to his personal use. Nevertheless, Mr. Somgal continued to conceal the true nature of the transactions. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(d), Advisers Act Sections 206(1) and 206(2) and Investment Company Act Sections 57(a)(3) and (4). The case is pending. See Lit. Rel. No. 24619 (Dec. 16, 2019).

Australia

Findings: The Securities and Investment Commission published the findings from the 2019-2019 Regtech Initiative. The report convers observations and findings from four initiatives coordinated by the Commission over the period (Dec. 20, 2019).

Hong Kong

Regulation: The Securities and Futures Commission of Hong Kong and the China Securities Regulatory Commission jointly announced commencement of preparations for an investor identification regime for southbound trading. Technical preparations for this have been underway (Dec. 20, 2019).

A look forward – a look back:

The new year looms with a host of issues for Chairman Jay Clayton and the other Commissioners. Those range from issues keyed to enforcement such as the availability of disgorgement to challenges from a group of state AGs regarding Regulation Best Interest and consternation over the recently modified no-action process of Corporate Finance. Collectively or individually these and other issues on the horizon have the potential to rewrite the rules on how matters are governed and/or handled.

Looking back at the last year, the cases filed in recent days seem be somewhat of a microcosm of the recent past, echoing at least some of the key themes: Pay-to-play, offering frauds, insider trading and undisclosed conflicts of an investment advisor. Those issues have been important for the Enforcement Division in the recent past. Whether they will continue to be key as the agency enters a new decade and additional matters looming on the horizon come into focus is difficult to discern. In probability, the new year will bring a mix of the old, blended and altered by the new in ways that are difficult to prognosticate. It should be a very interesting ride.

SEC Enforcement – Filed and Settled Actions

The Commission filed 2 civil injunctive actions and 1 administrative proceeding last week, exclusive of 12j and tag-along actions.

Insider trading: SEC v. Waldman, Civil Action No. 17-Civ-02088 (S.D.N.Y) is a previously filed action which names as defendants James Shaoul and Roger Schaoul, among others. The action centers on the tender offer by Intel Corporation for Mobileye, N.V., an Israel based software and technology developer. Executives at that firm tipped James Shaoul who intern tipped his brother Roger and his friend Amir Waldman about the deal. Judgments were entered against Roger and James Shaoul, enjoining them from future violations of Exchange Act Sections 10(b) and 14(e). Roger Shaoul was also ordered to pay disgorgement in the amount of $925,435, prejudgment interest in the amount of $3,143.95 and a penalty equal to the amount of the disgorgement. James Shaoul was ordered to pay a civil penalty of $4,145,982. See Lit. Rel. No. 24698 (Dec. 23, 2019).

Pay-to-play: SEC v. Kang, Civil Action No. 247000 (S.D.N.Y.) is a previously filed action which named as defendants Navnoor Kang, former director of fixed income for the NY State Common Retirement Fund, Gregg Schonhorn and Deborah Kelly, each of who were registered representatives at different brokerage firms. The Commission’s complaint alleged that Mr. Kang directed up to $2.5 billion in state business to the firms’ of Defendants Schonhorn and Kelley in return for tens of thousands of dollars in personal items. The Court entered final judgments as to each defendant based on consent. Each was enjoined from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Kang is also enjoined from participating in any decisions involving investments in securities by public pensions as a trustee, officer, employee or agent. Previously, the Commission entered administrative orders regarding the other two defendants that bar them from the securities business. Defendants Kang, Schonhorn, and Kelley also agreed to pay disgorgement of $182,422, $3,598,046 and $168,721, respectively, plus prejudgment interest which is deemed satisfied by the restitution and/or forfeiture ordered in the parallel criminal actions. See Lit. Rel. No. 16-cv-9829 (Dec. 21, 2016).

Insider trading: SEC v. Wang, Civil Action No. 19-12557 (D. Mass. Filed Dec. 20, 2019) names as a defendant Songjiang or Sam Wang, the Director of Statistical Programing at Merrimack Pharmaceuticals, Inc. On two occasions, one in 2013 and a second in 2014, Mr. Wang tipped his close friend Schultz Chan about positive drug trial results. Mr. Chan traded prior to each announcement, yielding collective profits of about $245,203. Later in 2015 Mr. Wang, the Director of Biostatistics at Akebia Therapeutics, Inc., tipped his friend with information take from his firm. Mr. Wang traded prior to the public release of the information, yielding profits of over $108,000. The complaint alleged violations of Exchange Act Section 10(b). Both men were charged in parallel criminal actions brought b the U.S. Attorney’s Office for the District of Massachusetts. See also SEC v. Chan, Civil Action No. 1:16-cv-11106 (D. Mass. Filed June 14, 2016). See Lit. Rel. No. 24697 (Dec. 20, 2019).

Microcap fraud: SEC v. Kelley, Civil Action No. 2:14-cv-2827 (D.N.J.) is a previously filed action which named as a defendant S. Paul Kelley and others. The action centered on transactions in which defendants took two Chinese companies public through reverse mergers. In doing so they concealed their control over the entities through a number of off-shore vehicles, distributed unregistered shares and manipulated the share price. The Court entered an order directing that Defendant Robert Agriogianis, one of the group members, pay disgorgement of $1.3 million. The other defendants previously settled. See Lit. Rel. No. 24696 (Dec. 20, 2019).

Internal controls: In the Matter of Quantum Corporation, Adm. Proc. File No. 3-19626 (Dec. 20, 2019) is an action which names the manufacturer of hardware as a Respondent. Over about two years, beginning in 2015, the firm improperly recognized revenue from dozens of channel partners to whom it sold products. By late 2017 the firm recognized the errors and was forced to restatement its financial statements. The errors were caused by deficient internal controls. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay a penalty of $1 million.

Conflicts: SEC v. Springer, Civil Action No. 2:19-cv-02559 (E.D. CA. Filed Dec. 19, 2019) is an action which names as defendants Keith Springer and his firm, Springer Investment Management, Inc., a Commission registered investment adviser. The action traces to early 2014 when Mr. Springer and his firm began engaging in a pattern of deceptive conduct focused on retirees and near-retirees. Specifically, misstatements were made regarding Defendants compensation, conflicts of interest, expertise and Mr. Springer’s prior disciplinary history with the NYSE. The deception continued after investors became clients of the firm. Those clients were directed to investments that were focused on yielding Defendants millions of dollars in compensation. The complaint alleges violations of Advisers Act Sections 204, 206(1), 206(2), 206(4) and 207. The case is pending. See Lit. Rel. No. 24695 (Dec. 20, 2019).

CFTC

Manipulation: CFTC v. Rivoire, Civil Action No. 1:19-cv-11701 (S.D.N.Y. Filed Dec. 20, 2019) is an action which names as a defendant Christophe Rivoire, a resident of France and Head of North American Rates for the U.S. affiliate of a global investment bank. Defendant is alleged to have conducted a manipulation scheme to benefit his employer in an interest rate swap transaction with a bond issuer. The scheme took place in June and July 2012. During that period Mr. Rivoire worked with a trader under his supervision to “push the screen” regarding an upcoming U.S. dollar-denominated bond issuance with a five-year maturity, scheduled to be priced in July. Defendant was concerned about whether his employer would make money on the swap. To ensure that result, before the open on the day of the pricing, Mr. Rivoire worked with one of his traders to move the price and impact the spot in a manner that would be favorable to his firm. The complaint alleges violations of Section 6(c)(1) of the CEA. The case is pending.

Criminal cases

False broker-dealer records: U.S. v. Seidel, No. 1:19-mj-1952 (S.D.N.Y. Filed Dec. 23, 2019) is an action which names a defendants Alan Seidel and Benjamin Mekaway, with falsifying the books and records of broker dealer Seidel & Co., LLC. Those books and records were subsequently filed with the SEC and used to cover up the fact that the firm had net capital violations. Defendants are also charged with making false representations to the SEC. The scheme began in late 2016. The complaint includes one count of conspiracy, one count of falsifying required books and records of a broker-dealer and one count of falsifying records in a federal investigation. The case is pending.

Offering fraud: U.S. v. Dodson (C.D. Ca. Filed Dec. 20, 2019) charges Joe Stanton Dodson, the CEO of an energy company, with four counts of wire fraud, three counts of mail fraud and three counts of money laundering. The charges are based on a scheme that began in November 2012 and continued until May 2015 in which $15 million was raised by selling interests in three limited partnerships of oil and gas entities using a series of misrepresentations. Since the funds were comingled, expenses from one entity were paid by another. Mr. Dodson also misappropriated part of the funds from the entities. The case is pending.

Australia

Financial reporting: The Australian Securities and Investment Commission noted that The Environmental Group amended its accounting for the acquisition of two firms during the year ended June 30, 2019. The acquisition charges, which had previously been recorded as goodwill, were expensed. The amendment followed inquiries by the ASIC. The Commission noted that under the pertinent regulations, directors are primarily responsible for the quality of an entity’s financial report.

Hong Kong

Disclosure of interests: The Securities and Futures Commission reprimanded and fined Adams Asset Management (HK), a registered entity, $2.5 million for failing to ensure that the proper disclosures were made to the Exchange and the relevant listed companies regarding notifiable interests in the shares of certain Hong Kong listed firms in the portfolios it managed. This relates to 339 disclosure notices. The firm failed to properly implement the appropriate procedures to ensure that the required disclosures were made.

A look forward – a look back:

The Commission continued to propose modifications to regulations in an effort to update standards. Recently, for example, proposals were made to modify the definition of accredited investor. As the year drew to a close the agency proposed modifications to the auditor independence standards, many of which trace to the passage of the Sarbanes-Oxley Act nearly two decades ago.

Cases brought by the agency continue to focus on the retail investor. Two actions filed in the last week, for example, centered on market manipulations. One focused on a complex manipulation conducted by foreign nationals using a number of off-shore entities that is likely the product of a significant amount of data and analytical work. That action targeted unwitting investors with the sale of shares by secreting control persons in the context of a manipulation.

SEC

Auditor independence: The Commission proposed amendments to select rules regarding auditor independence. They are largely the product of the staff’s experience regarding auditor independence issues. The amendments focus on the definition of an affiliate of the audit clients, the definition of the professional engagement period, certain student loans and de minimis consumer loans and the relation to independence impairing lending relations and certain outdated transition and grandfathering situations. (Dec. 30, 2019)(here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 4 civil injunctive actions and no administrative proceedings last week, exclusive of 12j and tag-along actions.

Manipulation: SEC v. Bajic, Civil Action No. 1:20 -cv-00007 (S.D.N.Y. Filed Jan. 2, 1020) names as defendants Steve Bajic, Rajesh Taneja, Blacklight S.A. and eleven other individuals and off-shore entities. Defendant Bajic is a citizen of Canada, Mr. Taneja is a citizen of Vietnam and Blacklight is a controlled foreign corporation. Each of the other individual defendants, with one exception, is a foreign national. Each of the other entity defendants is an off-shore entity. Beginning as early as July 2015, and continuing until mid- 2019, Defendants Bajic, Taneja and others enabled control persons of certain public companies to sell their stock to retail investors. Messrs. Bajic, Traneja and others operated a scheme which essentially treated the entity defendants as a single enterprise and their assets as fungible. During the scheme various offshore nominee companies were used to disguise public company insiders so they could illegally dump their shares. To facilitate the process stock promoters were employed. About $7.7 in illegal profits were generated by the scheme. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 10(b), 13(d) and 15(a). See also SEC v. Ciapala, Civil Action No. 1:20-cv-00008 (S.D.N.Y. Filed Jan. 2, 2020)(action against two individuals who facilitated the scheme detailed above; alleges violations of violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 9(a) and 10(b)). Each case is pending.

Fraudulent offering: SEC v. Longfin Corp., Civil Action No. 19-cv-5296 (S.D.N.Y.) is a previously filed action which named as defendants the firm and Venkata Meenavalli. The action centered on claims that the firm and its CEO misrepresented the nationality of the firm in public filings and its qualifications for Reg. A+. Defendants resolved the charges by consenting to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). The injunction as to Mr. Meenavalli is also based Exchange Act Section 13(b)(5) while the orders as to the company are, in addition, based on Exchange Act Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B). Mr. Meenavalli will pay disgorgement of $150,000 (his full salary) plus prejudgment interest of $9,000 and a civil penalty of $232,000. He will surrender all of his company stock and is permanently barred from serving as an officer or director of a public company and from participating in any penny stock offering. A default judgment as to the company, entered earlier, ordered the payment $6.8 million in monetary relief. A separate action involving the company, its CEO and others, centered on allegations regarding an illegal distribution of shares, was resolved earlier. A parallel criminal action filed by the U.S. Attorney’s Office for Manhattan. See Lit. Rel. No. 24706 (Jan. 3, 2020).

Manipulation: SEC v. Debo, Civil Action No. 20-cv-6 (S.D.N.Y. Filed Jan. 2, 2020) is an action which names as a defendant Ulrik Debo, a citizen of Monaco who claims to be an investment adviser with Imali Securities Ltd.. The firm, supposedly a portfolio company in the Cayman Islands. Beginning in the Spring of 2019 Defendant orchestrated a scheme to control a microcap shell firm and manipulate its shares. A nominee CEO was installed who supposedly controlled the majority of the firm shares. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24705 (Jan. 2, 2020). The U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal action.

Insider trading: SEC v. Pinto-Thomaz, Civil Action No. 1:18-cv-05757 (S.D.N.Y.) is a previously filed action centered on the acquisition of a paint firm by the Sherwin-Williams Co. Named as defendants are Sebastian Pinto-Thomaz, an analyst at a credit ratings agency who learned about the transaction, and the two friends he tipped, Abell Oujaddou and Jeremy B. Milui, each of whom traded. To resolve the matter each Defendant consented to the entry of a permanent injunction based on Exchange Act Section 10(b). In addition, each trading Defendant agreed to disgorge the profits while Mr. Pinto-Thomaz will pay the amount he received from Defendant Oujaddou. The payments will be satisfied by the forfeiture ordered in the parallel criminal case. Defendant Pinto-Thomaz is currently serving a 14 month prison sentence. Defendants Oujaddou and Millui each pleaded guilty. Each man is currently serving a 5 month sentence. Mr. Pinto-Thomaz was also barred from association with any nationally recognized statistical rating organization. See Lit. Rel. No 24757 (Jan. 2, 2020).

Insider trading: SEC v Mazzo, Civil Action No. 12-01327 (C.D. Cal.) is a previously filed action which named as defendants James Mazzo and David Parker. The complaint alleged that Mr. Parker traded on inside information about a then pending tender offer by a medical device firm. The information traced to baseball player Douglas DeCinces who had been illegally tipped by Mr. Mazzo. Mr. Parker resolved the action, consenting to the entry of a permanent injunction based on Exchange Act Sections 10(b) and 14(e). He will also pay disgorgement of $343,954 and a civil penalty of $56,046. See Lit. Rel. No. 24703 (Jan. 2, 2020).

False statements/net capital: SEC v. Mekawy, Civil Action No. 1:19-cv-11731 (S.D.N.Y. Filed Dec. 23, 2019) names as defendants Benjamin Mekawy, an employee of registered broker-dealer, Seidel LLC and Alan Seidel, founder and part owner the brokerage firm. The two men are charged with aiding and abetting net capital violations by the brokerage firm. First, Mr. Mekay concealed a six-figure liability for back rent by eliminating it from the general ledger. He later made false representations to the person preparing the net capital reports about it. Second, Mr. Mekaway submitted forged reports showing the firm had more funds than it actually had to the person preparing the calculations. Finally, Mr. Seidel lied to the person preparing the calculations by claiming that a $1 million deposit represented a capital infusion rather than a loan. The complaint alleges violations of Exchange Act Sections 15(c)(3) and 17(a)(1). The case is pending. See Lit. Rel. No. 24702 (Jan. 2, 2020). See also U.S. v Seidel, No. 1:19-mj-1952 (S.D.N.Y. Filed Dec. 23, 2019).

Binary options: SEC v. Atkinson, Civil Action No. 18-cv-01606 (M.D. Fla.) is a previously filed action which names as a defendant Timothy J. Atkinson, his former business partner, Jay Passerino, and All in Publishing, LLC. Michael Wright is also named as a defendant. The complaint alleged that Defendants, while claiming to be “affiliate marketers,” made and disseminated videos fraudulently showing people living lavish life styles from trading binary options and gave seminars on the topic. Each Defendant settled with the Commission. The final judgments, entered by consent, as to each Defendant impose permanent injunctions prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, Defendants Atkinson and All in Publishing were ordered to pay disgorgement of $27,208,987 along with prejudgment interest of $2,824,935. The order also directs Mr. Atkinson to pay a penalty equal to the amount of the disgorgement. The amount of disgorgement is off-set by any amounts paid in a parallel CFTC enforcement action. Mr. Wright was enjoined from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He was directed to pay disgorgement of $266,353 and a penalty equal to the amount of the disgorgement. See also Lit. Rel. No. 24701 (Dec. 30, 3019).

Australia

Accounting: The Australian Securities and Investment Commission noted that The Environmental Group Ltd. amended its accounting for the acquisition of RCR Energy Services and Baltec East following an inspection by the Commission. Specifically, the firm had recorded acquisition costs as good will. After the inspection by the Commission the item was expenses.

Hong Kong

Conflicts: The Securities and Futures Commission reprimanded and fined RHB Securities Hong Kong Ltd. $6.4 million for failures related to regulatory requirements regarding conflicts of interest. The Commission concluded that the firm failed to: 1) Effectively implement its policy for avoiding actual and potential conflicts of interest involving research reports and the investment banking division; 2) adequately disclose its investment banking relationship with a client in a research report; and 3) to effectively monitor the trading activities of its research analysts. The firm also failed to adequately supervise its account executives by extending its testing and sampling procedures regarding the taping of client conversations.

Trades: The SFC censured CTIC Securities Brokerage (HK), CLSA and Beijing Enterprises Holdings Ltd. with respect to the buy-back of their shares. Specifically, each firm handled the purchases on the exchange for institutional clients as on-market transactions when in fact they were pre-arranged deals. This violates the code regarding buy backs.

As the new decade unfolds the Commission’s Enforcement Division continues to focus on offering fraud actions and, in particular, a claimed lending program called the Merchant Cash Advance. That program was operated by 1 Global Capital LLC supposedly for the benefit of firms with few credit opportunities.

According to the Commission, the only actual beneficiaries of the so-called lending program were those behind the scheme. The Commission brought its first action involving the scheme in August 2018. SEC v. 1 Global Capital LLC, Civil Action No. 0:18-cv-61991 (S.D. Fla. Filed August 23, 2018, unsealed Aug. 28). Its second was brought against the firm’s CCO director on January 6, 2020. SEC v. Schwartz, Civil Action No. 9:20-cv-80008 (S.D. Fla. Filed Jan. 6. 2020).

Global Capital is wholly owned by the Ruderman Family Trust, which had about 100 employees at the time it filed for bankruptcy. The initial action also named as a defendant Carl Ruderman, its CEO. The most recent case names Steven Schwartz as a defendant. He served as a director of the firm and also its COO. Mr. Swartz is the brother-in -law of Mr. Ruderman and a trustee of the Ruderman Family Trust.

Over a four-year period, beginning in early 2014, defendants raised over $287 million from about 3,400 investors in 25 states. Many investors who purchased the unregistered shares of the firm did so with retirement funds. Investors were told that their money would be used exclusively for cash advances through the Merchant Cash Advance program – a business to business loan program for firms that had difficulty accessing capital through conventional sources. The investments were rigorously vetted with only one of ten qualifying, according to the program promoters. The investments were safe investors were told.

In fact, the offering was run by a network of salesmen that included persons barred from the business. In reality large portions of the investor funds were diverted to other high-risk projects while portions of the investor cash was misappropriated. Investors were furnished with false statements.

Mr. Schwartz is alleged to have played a key role in the fraud. Specifically, he executed an agreement conveying ownership of 1 Global to the trust. Prior to the time the firm declared bankruptcy July 2018, Mr. Schwartz is alleged to have permitted Mr. Ruderman to use the trust to misappropriate several million dollars of investor funds for his personal use.

The complaint alleges aiding and abetting violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). This case, along with the first, is pending. The U.S. Attorney’s Office for the Southern District of Florida filed a parallel criminal action. See Lit. Rel. No. 24707 (Jan. 6, 2020).

The exam priorities of the SEC’s Office of Inspections and Compliance or OCIE, announced on January 7, 2020, are a key priority for every investment advisor and investment company. Those priorities are key not just for those who may be facing an exam this year but also for the industry. The priorities typically center on a combination of emerging issues, key risk areas for the firm, traditional areas of concern not just to the agency but the industry and current SEC priorities.

The areas identified this year are no different — they build on the past while tying those points to current Commission priorities. Those identified in the press release (here) and the glossy booklet published by the Office titled 2020 Examination Priorities, Office of Compliance Inspections and Examinations (here), are: Retail investors; market infrastructure; information security; focus areas for advisers, ICs, broker-dealers and muni advisors; AML; fintech; and FINRA and MSRB. When evaluating these points, it is however critical that they be considered in the context of the overall OCIE program.

Promoting compliance

The focus of OCIE is compliance. The exam process, and the areas selected for examination, tie directly to this goal. Exams will thus be driven the factors identified in the Exam Priorities but not delimited by them. Other factors tied to past and emerging risks as seen by the Office and the agency, and informed by new rule initiatives, may impact the exam.

OCIE also uses analytics, as does the entire agency, to identify key areas on which to focus. Those analytics are anchored in the four key pillars of the program: “promoting compliance, preventing fraud, identifying and monitoring risk, and informing policy. The risk-based approach, both in selecting registrants and examination candidates and in scoping risk areas to examine, provides OCIE with greater flexibility to cover emerging and exigent risks to investors and the marketplace as they arise,” according to the 2020 Exam Priorities.

Critical to the exam process is a review of the compliance programs of the advisory. The traditional focus is whether the policies and procedures are reasonably designed, implemented and maintained. This includes account selection, portfolio management, custody, best execution, fees and valuation.

The program results also fosters compliance. Last year the Office verified over 3.1 million investor accounts totaling over $1.5 billion. When appropriate OCIE also encourages registrants to make customer and clients whole. In addition, it issued over 2,000 deficiency notices in the last fiscal year and made over 150 referrals to the Division of Enforcement involving a range of issues.

Key exam areas for advisors

Retail investors: Retail investors are a key area of focus not just for OCIE but also the Commission. Chairman Clayton, for example, has repeatedly discussed the importance of the retail investor, and in particular, seniors.

Here, the inspections will continue to asses whether the advisory, as a fiduciary, is fulfilling its duties of care and loyalty, particularly where potential conflicts are present. As the 2020 Exam Priorities makes clear, this “will include assessing . . . whether RIAs provide advice in the best interests of their clients and eliminate, or at lease expose through full and fair disclosure, all conflicts of interest which might incline an RIA, consciously or unconsciously, to render advice which is not disinterested.” It is critical that the advisor faithfully fulfil its duties and obligations to the client.

The exams will also focus on key disclosure issues tied to the advisor’s duties and asses the recommendations and advice furnished to clients. Seniors and recommendations and advice provided to “entities and individuals targeting retirement communities . . [and] teacher and military personnel . . .” will be a focus. One example of issues in this area is certain securities products that pose elevated risks for the investors and investment advice involving such products.

Fees and compensation are also critical here since conflicts may be presented in a number of forms. For example, sharing arrangements that involve the advisor and an entity can present conflicts. Issues can also arise with mutual funds as in the share class selection cases, and with ETFs, municipal and other fixed income securities and microcap securities.

Information security: This is a critical security and risk area for virtually any enterprise. OCIE will focus on questions centered on the systems at the firm and risks presented by vendors and third parties. With respect to the enterprise, the exam will focus on six key points: 1) governance and risk management; 2) access controls; 3) data loss prevention; 4) vendor management; 5) training; and 6) incident response and resiliency. Key for the enterprise is the proper configuration of network storage, information security and retail trading security.

Issues regarding third-party and vendor risk management will also be assessed. Those include question regarding oversight, cloud-based storage, controls surrounding online access and mobile application assess to customer accounts. In addition, safeguards surrounding the proper disposal of retired hardware will be considered.

RIAs and ICs: For complex programs, OCIE typically assesses compliance in one or more core areas keyed to the appropriateness of account selection, portfolio management practices and custody issues. The Office will continue to prioritize exams of firms that are dually registered or are affiliated with broker dealers.

Additional areas will include investments in mutual funds and ETFs. In this regard the examinations “will assess industry practices and regulatory compliance in various areas which include . . . (1) RIAs that use third-party administrators to sponsor the mutual funds they advise or are affiliated with; (2) mutual funds or ETFs that have not previously been examined; and (3) RIAs to private funds that also manage a registered investment company with a similar investment strategy.” The Office will also review RIAs to private funds to assess risk compliance and controls.

AML programs: The Bank Secrecy Act requires that financial institutions, which includes broker-dealers and investment companies to establish anti-money laundering programs. The programs must include policies and procedures reasonably designed to identify customers and beneficial owners of legal entities, perform customer due diligence in accord with the Customer Due Diligence rule, monitor suspicious activity and were appropriate file SARs.

Conclusion

OCIE also conducts inspections in other areas. Those include market infrastructure for clearing agencies and national securities exchanges, transfer agents, FINRA and the MSRB. The priorities of the program are designed to assess certain risks in each of these areas as well as information gathering, all of which facilitates coordination with other regulators and agencies.

The Commission’s focus on retail investors, reflected not just in enforcement trends but also in the OCIE inspection program, is spawning interesting trends. One is the rise in enforcement actions involving investment adviser. That trend traces to before the current retail investor focus, but has been accelerated by it. The other is in offering fraud actions. The common denominator here is the victims – retail investors.

This week two enforcement actions have been brought focused on offering frauds. One – ARO Equity — involved a barred securities law recidivist. The other – Blakstad — centers on what turned out to be essentially a Ponzi scheme conducted by a man who is a corporate officer of a number of microcap issuers and is facing criminal and civil insider trading charges brought by the U.S. Attorney’s Office and the Commission.

ARO Equity: Thomas Renison is a state licensed insurance agent who was barred from the securities business by the state of Maine and from association with an investment adviser by the Commission. ARO Equity, LLC is a private investment firm that is located in the home of Timothy Allcott, a long unemployed former manager of a billiards hall and motel. Each is named as a defendant in SEC v. ARO Equity, LLC, Civil Action No. 1:20-cv-10027 (D. Mass. Filed Jan. 8, 2020).

The action centers on an offering that took place over a three-year period beginning in mid-July 2015. Over $6 million was raised from about 15 investors, largely senior citizens. Investors were solicited to purchase promissory notes in ARO Equity. The notes had a term of three to five years and paid interest of 8% to 12% annually.

Messrs. Renison and Allcott told investors the returns on the notes were superior to those available from other retirement products. Key to these claims were repeated representations regarding the safety of the investments.

Unfortunately, the notes were anything but a safe investment, according to the Commission’s complaint. While investor capital was used to fund several small businesses, none had made a profit. Two other business that obtained about $3.3 million in loans were also unprofitable. One was later sold at a loss of about $1.3 million.

Nevertheless, Mr. Renison was paid a finders fee of $580,000. Mr. Allcott was paid a salary of about $225,000. Portions of the investor capital was paid to the sons of Mr. Renison. Little was left to repay investors. The Commissions complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(a) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 24710 (Jan. 8, 2020).

Blakstad: Donald Blakstad, is a defendant along with two of his controlled entities in SEC v. Blakstad, Civil Action No. 20-CV-163 (S.D.N.Y. Filed Jan. 8, 20120). Mr. Blakstad owns, controls and holds executive officer positions in Midcontinental Petroleum, Inc., a purported oil firm, and Defendants ESI, supposedly a firm engaged in the crypto mining business, and Xact Holdings Corporation, a holding company formed to acquire another entity. In July 2019 he was charged by the DOJ and the Commission with insider trading.

Over a four-year period, beginning in mid- 2015, Mr. Blakstad raised funds through Midcontinental, ESI and Xact. Overall about $3.5 million was obtained from 14 or more investors.

Mr. Blakstad used a variety of representations to convince investors to purchase the securities of the firms. With respect to Midcontinental, investors were told that their funds would be used begin operations and for other costs related to the oil, gas and alternative energy exploration business. Those would include the acquisition of land leases and other equipment necessary for energy exploration. For ESI investors were told that their funds would be used to purchase equipment and pay start-up costs to initiate cryptocurrency mining operations. For Xact investors were told that their money would be used to purchase a Canadian firm and lease facilities in Huston, Texas.

The representations made by Mr. Blakstad as to each company were false. Rather than use the funds as represented, he used the investor capital has his “own personal piggybank” in the words of the complaint. He also used part of the funds to pay an individual used to solicit investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24711 (Jan. 8, 2020).

A look forward – a look back:

The Commission announced the initial meeting of its Asset Advisory Committee this week. The new Committee is designed to make available diverse views on the business to the Commission and provide the agency with advice. The meeting is scheduled for later this month.

OCIE announced its exam priorities this week. Those priorities are key not just for those facing exams but also in reviewing compliance systems.

Finally, the actions initiated by Enforcement continue to key on offering frauds where the focus is frequently retail investors. Actions brought by the Department of Justice this week echo those of the Commission’s enforcement program.

SEC

Exams: The exam priorities of the SEC’s Office of Inspections and Compliance or OCIE, announced on January 7, 2020, are a key priority for every investment advisor and investment company. Those priorities are critical not just for those who may be facing an exam this year but also for the industry. The priorities typically center on a combination of emerging issues, important risk areas for the firm, traditional areas of concern and current SEC priorities.

The areas identified this year are no different — they build on the past while tying those points to current Commission priorities. Those identified in the press release (here) and booklet published by the Office titled 2020 Examination Priorities, Office of Compliance Inspections and Examinations (here), are: Retail investors; market infrastructure; information security; focus areas for advisers, ICs, broker-dealers and muni advisors; AML; fintech; and FINRA and MSRB. When evaluating these points, it is critical that they be considered in the context of the overall OCIE program.

SEC Enforcement – Filed and Settled Actions

The Commission filed 3 civil injunctive actions and no administrative proceedings last week, exclusive of 12j and tag-along actions.

Offering fraud: SEC v. ARO Equity, LLC, Civil Action No. 1:20-cv-10027 (D. Mass. Filed Jan. 8, 2020). Named as defendants are: Thomas Renison, a state licensed insurance agent who was barred from the securities business by the state of Maine and from association with an investment adviser by the Commission; and ARO Equity, LLC, a private investment firm that is located in the home of Defendant Timothy Allcott, a long unemployed former manager of a billiards hall and motel. The action centers on an offering that took place over a three-year period beginning in mid-July 2015. Over $6 million was raised from about 15 investors, largely senior citizens. Investors were solicited to purchase promissory notes in ARO Equity. The notes had a term of three to five years and paid interest of 8% to 12% annually. Messrs. Renison and Allcott told investors the returns on the notes were superior to those available from other retirement products. Key to these claims were repeated representations regarding the safety of the investments. Unfortunately, the notes were anything but a safe investment, according to the Commission’s complaint. While investor capital was used to fund several small businesses, none had made a profit. Two other business that obtained about $3.3 million in loans were also unprofitable. One was later sold at a loss of about $1.3 million. Nevertheless, Mr. Renison was paid a finders fee of $580,000. Mr. Allcott was paid a salary of about $225,000. Portions of the investor capital was paid to the sons of Mr. Renison. Little was left to repay investors. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(a) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 24710 (Jan. 8, 2020).

Offering fraud: SEC v. Blakstad, Civil Action No. 20-CV-163 (S.D.N.Y. Filed Jan. 8, 20120) names as defendants Donald Blakstad, along with two of his controlled entities. Mr. Blakstad owns, controls and holds executive officer positions in Midcontinental Petroleum, Inc., a purported oil firm, and Defendants ESI, supposedly a firm engaged in the crypto mining business, and Xact Holdings Corporation, a holding company formed to acquire another entity. In July 2019 he was charged by the DOJ and the Commission with insider trading. Over a four-year period, beginning in mid- 2015, Mr. Blakstad raised funds through Midcontinental, ESI and Xact. Overall about $3.5 million was obtained from 14 or more investors. Mr. Blakstad used a variety of representations to convince investors to purchase the securities of the firms. With respect to Midcontinental, investors were told that their funds would be used to begin operations and for other costs related to the oil, gas and alternative energy exploration business. Those would include the acquisition of land leases and other equipment necessary for energy exploration. ESI investors were told that their funds would be used to purchase equipment and pay start-up costs to initiate cryptocurrency mining operations. Xact investors were told that their money would be used to purchase a Canadian firm and lease facilities in Huston, Texas. The representations made by Mr. Blakstad as to each company were false. Rather than invest the funds as represented, he used the investor capital as his “own personal piggybank” in the words of the complaint. He also used part of the funds to pay an individual used to solicit investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24711 (Jan. 8, 2020).

Offering fraud: SEC v. Kelter, Civil Action No. 3:17-cv-01441 (M.D. Tenn.) is a previously filed action against Jay Costa Kelter, a former registered representative. The Commission’s complaint alleged that Mr. Kelter defrauded three retired investment clients out of over $1.8 million. He also made misrepresentations to them, including a supposed guarantee against loss. About $1.4 million of the loss resulted from Mr. Keltere’s misappropriation of funds from the investors. To resolve the proceedings, Defendant consented to the entry of a final judgment against him prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He was also ordered to pay disgorgement of $1.4 million and prejudgment interest of $331,985, deemed satisfied by the restitution ordered in the parallel criminal case. Mr. Kelter also consented to the entry of an order barring him from the securities business. See Lit Rel. No. 24709 (Jan. 7, 2020).

Offering fraud: SEC v. Schwartz, Civil Action No. 9:20-cv-80008 (S.D. Fla. Filed Jan. 6. 2020). 1 Global Capital LLC is wholly owned by the Ruderman Family Trust, which had about 100 employees at the time it filed for bankruptcy. Carl Ruderman, a defendant in an earlier Commission action, was its CEO. Steven Schwartz, a director and COO, is named as a defendant. He is also the brother-in -law of Mr. Ruderman and a trustee of the Ruderman Family Trust. Over a four-year period, beginning in early 2014, over $287 million from about 3,400 investors in 25 states was raised. Many investors who purchased the unregistered shares of the firm did so with retirement funds. Investors were told that their money would be used exclusively for cash advances through the Merchant Cash Advance program – a business to business loan program for firms that had difficulty accessing capital through conventional sources. The investments were rigorously vetted with only one of ten qualifying, according to the program promoters. The investments were safe investors were told. In fact, the offering was run by a network of salesmen that included persons barred from the business. In reality large portions of the investor funds were diverted to other high-risk projects while portions of the investor cash was misappropriated. Investors were furnished with false statements. Mr. Schwartz is alleged to have played a key role in the fraud. Specifically, he executed an agreement conveying ownership of 1 Global to the trust. Prior to the time the firm declared bankruptcy in July 2018, Mr. Schwartz is alleged to have permitted Mr. Ruderman to use the trust to misappropriate several million dollars of investor funds for his personal use. The complaint alleges aiding and abetting violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). This case, along with the first, is pending. The U.S. Attorney’s Office for the Southern District of Florida filed a parallel criminal action. See Lit. Rel. No. 24707 (Jan. 6, 2020).

Offering fraud: SEC v. Espinal, Civil Action No. 2:19 Civ. 21616 (D.N.J. Filed Dec. 19, 2019) is an action which names as defendants Edward Espinal and his firm, Cash Flow Partners LLC. Over a three-year period, beginning in July 2016, Defendants solicited Spanish speaking investors through advertisements focused on them to invest in the firm which supposedly purchased and renovated homes. Investors were told of a guaranteed profit ranging from just a little over 1% to about 4%. In fact, the firm owned only two small parcels of real estate that were not sold. Much of the $5 million raised from 90 investors was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. (Jan. 7, 2020).

CFTC

Swap dealers: The Division of Swap Dealer and Intermediary Oversight issued an advisory regarding annual compliance report requirements for swap dealers, futures commission merchants and major swap participants. The Advisory clarifies annual compliance reporting requirements and provides recommendations regarding the manner in which reports are prepared (Jan 3, 20120)(here).

Criminal Cases

Offering fraud: U.S. v. Rhodes (S.D.N.Y. Plea Jan. 9, 2020) names Jason Rhodes as a defendant. Over a three-year period, beginning in 2013, Mr. Rhodes raised about $19.6 million from investors claiming that he would invest the funds in securities in his hedge fund, Sentinel Growth Fund Management, LLC. In fact, most of the funds were misappropriated. After investors uncovered the fraud Mr. Rhodes raised money from another investor to repay one of the initial investors. Investors were also furnished fraudulent account statements. Mr. Rhodes pleaded guilty to one count of conspiracy to commit securities fraud and wire fraud, one count of securities fraud, one count of wire fraud, and one count of investment adviser fraud. Sentencing is scheduled for April 6, 2020.

Offering fraud: U.S. v. Pagartanis, No. 18-CR-374 (E.D.N.Y. Sent. Jan. 9, 2020) named as a defendant Steven Pagartanis, a former registered investment adviser. Previously, he pleaded guilty to conspiracy to commit mail and wire fraud tied to orchestrating a securities fraud scheme that ran for about 18 years, beginning in January 2000. Mr. Pagartanis raised about $13 million from investors who were largely women. Investor funds were to be put into two publicly traded companies and pay an 8% return. Much of the investor money was misappropriated. Mr. Pagartanis was sentenced to serve 120 months in prison and directed to pay over $6. Million in restitution.

Offering fraud: U.S. v. Schwartz, No. 0:20-cr-60003 (S.D. Fla. Plea Jan. 9, 2020) named as a defendant Steven Schwartz, the former COO of 1Global Capital LLC. He pleaded guilty to a one count information alleging conspiracy to commit wire fraud and securities fraud. Over a four-year period, beginning in early 2014, he participated in a scheme which raised over $287 million from about 3,400 investors in 25 states. Many investors who purchased the unregistered shares of the firm did so with retirement funds. Investors were told that their money would be used exclusively for cash advances through the Merchant Cash Advance program – a business to business loan program for firms that had difficulty accessing capital through conventional sources. The investments were rigorously vetted with only one of ten qualifying, according to the program promoters. The investments were safe investors were told. In fact, the scheme was a fraud. Mr. Schwartz is alleged to have played a key role in the fraud. Specifically, he executed an agreement conveying ownership of 1 Global to the trust. Prior to the time the firm declared bankruptcy July 2018, Mr. Schwartz is alleged to have permitted Mr. Ruderman to use the trust to misappropriate several million dollars of investor funds for his personal use. The date for sentencing was not announced. See also SEC v. 1 Global Capital LLC, Civil Action No. 0:18-cv-61991 (S.D. Fla. Filed August 23, 2018, unsealed Aug. 28); SEC v. Schwartz, Civil Action No. 9:20-cv-80008 (S.D. Fla. Filed Jan. 6. 2020).

Insider trading: U.S. v. Cohen, No. 1:19-cr-00741 (S.D.N.Y. Plea Jan. 7, 2020) is an action in which defendant Bryan Cohen, formerly an investment banker based in New York, pleaded guilty to conspiring to commit securities fraud. Mr. Cohen was formerly employed in the investment banking division of a global investment banking advisory firm. His position gave him access to inside information on certain corporate transactions. Over a two year period, beginning in 2015, Mr. Cohen misappropriated inside information from his employer and passed it to a trader based in Switzerland. The trader used the information to trade, reaping substantial profits. In return for the information Mr. Cohen received benefits that included cash. The date for sentencing was not announced.

Offering fraud: U.S. v. Robertson, No. 3:16-cr-133 (E.D. Va. Sentencing Jan. 7, 2020). In this case a former football player at the University of Virginia and later in the NFL, Merrill Robertson, Jr., and his friend, Sherman Vaughn, were able to convince investors to entrust them with millions of dollars in investment funds. Following trial, a jury convicted Mr. Robertson of conspiracy, mail fraud, wire fraud, bank fraud and money laundering. The scheme traces to as early as 2008. When Mr. Robertson and his firms, Cavalier Union Investments LLC and Black Bull Wealth Management LLC, began marketing their investment program. Defendant Robertson identified potential targets from his years as a football player at Fort Union Military Academy, the University of Virginia and in the NFL. Mr. Vaughn worked to raise funds for their claimed investments. Investors were led to believe that Mr. Robertson was an experienced investment adviser and that his firm was a qualified custodian for retirement funds. Investment funds were supposedly deposited into individual tax-deferred retirement accounts. The investments were secured by tangible cash-producing assets owned by the company, according to the sale pitch. In fact, the investor funds were not invested. The money was not secured. To the contrary, the money was diverted to the personal use of Mr. Robertson and his co-conspirator, Sherman Vaughn. Despite having raised over $10 million over an eight-year period, by 2015 Mr. Robertson and his compatriot were out of cash. New capital could not be raised. Mr. Robertson then turned to assisting friends with obtaining loans in return for a cut of the proceeds using false documents. Mr. Robertson was sentenced to serve 40 years in prison.

Australia

The Australian Securities and Investment Commission charged Anthony K. Silver of Tasmania with five counts of criminal fraud. Mr. Silver is alleged to have used over $1.8 million in investor investment funds for a purpose not anticipated by the investors. He was released from custody on bail pending trial.

ESMA

Priorities: The European Securities and Markets Authority announced its key priorities for 2020-2022. Those include enhancing supervisory tools, investor protection and technology innovation (Jan. 9, 2020)(here).

Hong Kong

Licensing guidance: The Securities and Futures Commission issued guidance regarding the licensing obligations of private equity firms and family offices conducting business in Hong Konk (Jan. 7, 2020)(here).

Market manipulation has long been the focus of the SEC, the CFTC and other regulators. Spoofing, a particular form of market manipulation, is now a focus of the CFTC and DOJ following amendments to the CEA under Dodd-Frank. There Congress added a specific statutory provision prohibiting the trading technique. Prior that statutory amendment few spoofing cases were brought.

While it seems clear that spoofing is prohibited by the kind of general antifraud provisions contained in the CEA – a point well illustrated by the SEC’s use of Section 10(b) in recent spoofing cases – one reason for not bringing spoofing actions prior to Dodd-Frank may have been the difficulty of proof. Complex market manipulations can be difficult to prove, particularly for regulators with limited budgets. While Dodd-Frank simplified the proof issue for the CFTC, the true driver of its most recent case in this area appears to have been cooperation. In the Matter of Mirae Asset Davwoo Co., Ltd., CFYC Docket No. 30-11 (Jan. 13, 2020).

The case

Respondent Mirae Asset acquired Daewoo Securities after the trading involved here. Daewoo was a brokerage and investment firm based in the Republic of Kora which engaged in proprietary futures contract trading in the U.S.

During the period December 2014 to April 2016 Trader A, based in the Daewoo office in Seoul, Korea office, traded futures contract, including the E-Mini contract on the CME. The trader used a number of strategies; at least one involved spoofing. To employ this strategy the trader used three steps:

1) Disproportionally large orders were entered on one side of the market. These orders were intended to give a misleading impression of market liquidity. The trader intended from the beginning to cancel these orders.

2) A small order was subsequently entered on the opposite side of the market. This order benefitted from the increased activity on the opposite side of the market created by the initial order.

3) Immediately after the second order was executed the trader cancelled the initial orders.

In this case by the time Enforcement’s inquiry began Daewoo had been acquired by Mirae Asset. That firm immediately began cooperating with the enforcement investigation. The firm retained U.S. counsel to conduct an internal investigation. Mirae also retained an expert to analyze the trading activity. The results from the expedited investigation were given to the CFTC’s Division of Enforcement.

This action against the firm followed. The Order alleges violations of Section 4c(a)(5)(C) of the Act. That section makes it unlawful to engage in any trading or conduct that is known as spoofing. Since the trader engaged in that conduct Mirae, as the subsequent acquirer of Daewoo Securities, is liable for that activity, according to the Order.

To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. The firm agreed to pay a civil monetary penalty of $700,000. The amount of the penalty was reduced by an unspecified amount based on the cooperation of Respondent.

Comment

Cooperation resulted in a reduced penalty, according to the CFTC. That is because the cooperation expedited the proceeding. That is key for agencies with scarce resources.

For the company, the question of cooperation is not so much one of resources but of value – what is the cooperation worth? That point is not addressed here. Indeed, U.S. regulators typically do not address the point. That contrasts sharply with the practice in other parts of the world the amount of the discount is disclosed. At a time when many U.S. regulators are seeking cooperation to facilitate their investigations, it may be time to at least try the approach used by regulators abroad.

.

As 2019 drew to a close a father and son resolved an insider trading case with the Manhattan U.S. Attorney’s Office. The action centered on trading while in possession of inside information about a pharmaceutical company. Congressman Christopher Collins, who sat on the board of the company, tipped his son who, avoiding losses. U.S. v. Collins, No. 18 Crim 567 (S.D.N.Y.); SEC v. Collins, Civil Action No. 18-cv-7128 (S.D.N.Y.).

Yesterday another father and son insider trading case centered on events at a pharmaceutical company was at least partially resolved. Telemaque Lavidas was found guilty by a jury in Manhattan of having repeatedly tipped his friend Georgios Nikas with inside information supplied by Mr. Lavidas’ father, a director at Ariad Pharmaceuticals, Inc. U.S. v. Lavidas, No. 1:19-cr-00716 (S.D.N.Y. Verdict Jan. 15, 2020).

Mr. Lavidas is the son of a prominent Greek business man who serves as a director of Ariad. The firm, based in Cambridge, Massachusetts, developed and marketed leukemia medication Iclusig. In three instances over a two-year period Mr. Lavidas transmitted inside information about the company to friend Nikas. The first occurred in October 2013. There Mr. Lavidas learned from his father that the FDA was concerned about potential adverse health effects from the leukemia drug. The information was transmitted to Mr. Nikas who had a large position in the stock. The shares were sold and Mr. Nikas established a substantial short position. When the firm released the information about the FDA’s concerns, the share price dropped 62%. Mr. Nikas closed the short position, realizing profits of over $3.2 million. He also avoided a loss of about $800,000.

The second occurred later in the same year. In the last two months of 2013 Mr. Nikas was told by his friend, Telemaque Lavidas, that the pharmaceutical company was making good progress on returning Iclusig to market. The information had been given to Mr. Lavidas by his father. Mr. Nikas established a long position in the stock. When the company announced the drug was returning to market the share price increased. Mr. Nikas had profits of over $1.3 million.

The third happened during the summer of 2015. At that time Ariad learned that an unsolicited takeover offer from another drug firm would be made. Mr. Lavidas obtained the information from his father. He passed it on to Mr. Nikas who purchased shares. When the bid was announced Araid’s stock price rose. Mr. Nikas had profits of over $2 million.

Mr. Nikas received other tips from Mr. Lavidas. In each instance he traded. Overall, he had trading profits of over $15 million.

Mr. Lavidas was found guilty by the jury following a one-week trial. Specifically, the jury returned guilty verdicts on one count of conspiracy to commit wire and securities fraud and three counts of securities fraud. Sentencing is scheduled for April 17, 2020.

The retail investor focus of the Commission is yielding one microcap fraud case after another. Typically, the cases have been offering fraud actions that start with the sale of unregistered securities and end with those soliciting the investments pocketing chunks of the investor cash.

Despite filing numerous cases and repeated education efforts by the Office of Investor Education and Advocacy, the actions keep being filed. The Commission’s latest in this area was so successful at raising money – but not generating returns — after advertising on Sirius Satellite Radio that the Commission filed its complaint as an emergency action to halt the operations. SEC v. Todays Growth Consultant Inc., Civil Action No. 1:19c-cv-08454 (N.D. Ill. Filed Dec. 27, 2019).

Defendant Todays Growth is a private Illinois company co-owned by Defendant Kenneth Courtright and his wife. The firm does business as The Income Store. Over the last two years, beginning in 2017, Defendants raised at least $75 million from over 500 investors. Investors were solicited to purchase what was called a Consulting Performance Agreement. Under that agreement the investor paid an upfront fee and gave the Income Store passwords to websites that Defendants built to generate income.

Essentially, the solicitation was to purchase what looked like an annuity. Investors were guaranteed a minimum return on their investment, supposedly generated by the websites. Specifically, they were entitled to receive in perpetuity a month payment equal to 50% of the revenues generated by the website. The agreement contained a specified minimum amount that would be made by the investor regardless of the actual income generated. For example, while the terms varied in different agreements, in one case the upfront was $150,000. The guaranteed minimum for the investor was $2,500 per month (18% of the investor’s upfront fee divided by 12). The guarantee was backed by a contract provision representing the Income Store is debt free and in good financial condition.

Over the two-year period of the scheme, the Income Store website that generated about $9 million in revenues from the sale of third-party products. Payments to investors during that period, however, equaled at least $30 million, according to the Commission’s complaint. To cover the obvious shortfall, the Income Store had to raise more funds from selling additional agreements and diverting the funds to the earlier investors.

Beginning in October 2019 the firm added a second source of income. The revenue from that operation was comingled with funds from the Consulting Performance Agreements. In addition, Defendants also appear to have obtained funds from loans secured from firms that specialize in distressed lending. During this period Mr. Courtright used funds to pay for his personal expenses. Ultimately, by December 2019 a moratorium on investor payments was declared. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a) and Exchange Act Section 10(b). The Court entered a TRO and a freeze order shortly after the complaint was filed. See Lit. Rel. No. 24717 (Jan. 15, 2020).

A look forward – a look back:

As we pause to remember the birthday of Martin Luther King we must remember the truly significant contributions he made to this country. His vision for a better society, a better future for all, perhaps best remembered in his “I have a dream” speech, continues to inspire all to strive for a better future for everyone.

Doctor King’s vision for a better future is particularly relevant today. As we look back there seems to be no end to rancor, bickering, arguments, gridlock and more. Perhaps the best thing about looking back is to recall that people in the past also had similar views of their times tracing back to the founding fathers. We can move past those if we simply follow the dream outlined by Doctor King. The dream, the vision, the future is all there if we have the courage to believe it and reach for it.

SEC

Capital call: The Office of the Advocate for Small Business Capital Formation will make its first ever “Capital Call” – a report on its findings regarding the state of capital formation for small business along with its recommendations. The public will also be able to ask questions. The Call will be held on January 23, 2020 (here).

Commission: Commissioner Robert Jackson announced he will step-down from the Commission, effective February 14, 2020. Commissioner Jackson plans to return to teaching at NYU Law School. He has been on leave while serving at the Commission.

SEC Enforcement – Filed and Settled Actions

The Commission filed 9 civil injunctive actions and no administrative proceedings last week, exclusive of 12j and tag-along actions.

Offering fraud: SEC v. Manor, Civil Action No. 2:20-cv-00597 (D. N.J. Filed Jan. 17, 2020) is an action which names as defendants Boaz Manor, a convicted criminal, Edith Pardo, CG Blockchain, Inc. and BCT Inc. The action centers on an offering of what Defendants called BCT Tokens. Over a period of about one year $30 million was made from hundreds of investors through the ICO. In conducting the offering the identify of Mr. Manor and his conviction were concealed as was his control over key entities. Investors were told that the offering was to raise capital for the development of tech for hedge funds. The representations were false. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending.

Offering fraud: SEC v. Markel, Civil Action No. 2:20-cv-00502 (C.D. Cal. Filed Jan. 17, 2020) names as defendant Daniel Markel, the principal and founder of Sobriety & Addition Solutions LLC. In PPMs Defendant promoted his firm as having an exclusive license to use a subcutaneous implant of Naltexone to treat alcohol and opioid dependencies. What investors were not told is that for about one year, beginning in March 2015, the implants were made and imported from China which violated FDA regulations. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(2) and 17(a)(3). To resolve the matter Defendant consented to the entry of a permanent injunction prohibiting violations of the Sections cited in the complaint. In addition, he agreed to pay disgorgement of $439,678, prejudgment interest of $65,224 and a penalty of $189,427. See Lit. Rel. No. 24721 (Jan. 17, 2020).

Books and records: SEC v. Hill International, Inc., Civil Action No. 20-cv-00447 (S.D.N.Y. Filed Jan. 16, 2020) is an action which names as defendants the firm, a project and construction management company, Ronald Emma, the firm’s chief accounting officer and Nicholas Tornello, director of internal reporting. In May 2018 the firm restated its financial statements for the period May 2014 to March 2017. The action resulted from the discovery of about $5 million of errors tied to foreign currency transactions. Rather than correct the errors, Defendants chose to “bleed” the amounts in overtime to smooth the impact. This is contrary to GAAP. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). To resolve the action the company and Mr. Emma consented to the entry of permanent injunctions and agreed to pay penalties of, respectively, $500,000 and $75,000. Mr. Emma also agreed to be permanently suspended from appearing and practicing before the Commission as an accountant. See Lit. Rel. No. 24720 (Jan. 16, 2020).

Unregistered broker: SEC v. Lundervold, Civil Action No. 0:20-cv-00236 (D. Minn. Filed Jan. 16, 2020) is an action which names as a defendant, Allan Lundervold. Over a four-year period beginning in 2011 Mr. Lundervold sold the securities of ARP Wave, LLC to over 100 people. He was paid a 10% commission for the sales. Defendant was not a registered broker. The complaint alleges violations of Exchange Act Section 15(a)(1). The case is pending. See Lit. Rel. No. 24719 (Jan. 16, 2020).

Unregistered broker: SEC v. Drake, Civil Action No. 2:20-cv-00405 (C.D. Ca. Filed Jan. 15, 20202) names as defendants Gregory Drake, Stephen Grossman, Stephen Moleskli, Jason St. Amour, and David Woldfson. Each of the defendants worked in call centers to solicit investors to enable them to sell shares without significantly impacting the market. The Defendants were paid transaction-based compensation. None of the Defendants were registered brokers. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 10(b) and 15(a)(1). See also SEC v. Brooks, Civil Action No. 1:20-cv-20176 (S.D. Fla. Filed Jan. 15, 2020)(based on similar conduct but only alleging violations of Exchange Act Section 15(a)(1); SEC v. Messier, Civil Action No. 20-cv-0105 (S.D.Ca. Filed Jan. 15, 2020)(named as defendants Scott Messier and Jay Scorato; Defendants negotiated the sale of microcap shares and coordinated trades among sellers for transaction based compensation; neither is a registered broker; the complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 10(b) and 15(a)(1)). Defendants Drake, St. Amour, Brooks, Messier and Scoratow consented to the entry of permanent injunctions and conduct-based injunctions from soliciting the purchase or sale of securities. They also agreed to pay disgorgement of ill-gotten gains and civil penalties. Mr. Wolfson has consented to the entry of a permanent injunction and a conduct based injunction but reserved monetary issues for determination by the Court. Messrs. Grossman and Moleski have not settled with the Commission. See Lit. Rel. No. 24718 (Jan. 16, 2020).

Insider trading: SEC v. Carr, Civil Action No. 3:18-cv-01135 (D. Conn.) is a previously filed action which named as defendants Robert Carr and Katherine Hanratty. Mr. Carr was the CEO of Hartland Payment Systems, Inc. In July 2018 Mr. Carr gave his girlfriend, Ms. Hanratty, $1 million and a tip that his firm was about to be taken over. She traded prior to the public announcement. Ultimately, she had profits of over $250,000. On January 10, 2020 the Court entered an order directing Mr. Carr to pay a penalty of over $250,000. That order followed the entry by consent of a permanent injunction as to Mr. Carr based on Exchange Act Section 10(b). At the time of the order imposing a penalty the Court also directed that Mr. Carr be precluded from serving as an officer or director of a public company for two years. Previously, Ms. Hanratty was permanently enjoined from future violations of Exchange Act Section 10(b) and ordered to pay disgorgement in the amount of $250,628, prejudgment interest of $27,351 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 24713 (Jan. 13, 2020).

Misappropriation: SEC v. Rothenberg, Civil Action No. 3:18-cv-05080 (N.D. Cal.) is a previously filed action which names as a defendant fund adviser Michael B. Rothenberg. Mr. Rothenberg marketed his advisory firm as uniquely positioned to identify millennial entrepreneurs and invest in “frontier Technology” companies. Defendant and his firm misappropriated substantial sums from the advisory. Based on consent the Court entered judgment precluding future violations of Advisers Act Sections 206(1), 206(2) and 20(4). Defendant also agreed to be barred from the securities business with a right to reapply after five years. The Court ordered him to pay disgorgement of $18,776,800, prejudgment interest of $3,663,323 and a penalty of $9 million based on the Commission’s motion. See Lit. Rel. No. 24714 (Jan. 13, 2020).

Unregistered offering: SEC v. Ciapala, Civil Action No. 20-cv-00008 (S.D.N.Y. Filed Jan. 2, 2020) is an action which names as defendants Ken Eth Ciapala and Blacklight S.A., respectively, a co-founder of the Swiss firm and an asset management firm. Defendants are alleged to have facilitated the deposit of millions of shares of EMSF Fund, Inc. The actions coincide with a pump-and-dump scheme involving the shares in 2015. When the manipulation was winding down defendants embarked on a new scheme involving manipulative trading. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. See also SEC v. Bajic, Civil Action No. 1:20-cv-00007 (S.D.N.Y. Filed Jan. 2, 2020)(related manipulation action). See Lit. Rel. No. 24712 (Jan. 10, 2020).

Offering fraud: SEC v. Todays Growth Consultant Inc., Civil Action No. 1:19c-cv-08454 (N.D. Ill. Filed Dec. 27, 2019). Defendant Todays Growth is a private Illinois company co-owned by Defendant Kenneth Courtright and his wife. The firm does business as The Income Store. Over the last two years, beginning in 2017, Defendants raised at least $75 million from over 500 investors. Investors were solicited to purchase what was called a Consulting Performance Agreement. Under that agreement the investor paid an upfront fee and gave the Income Store passwords to websites that Defendants built to generate income. Essentially, the solicitation was to purchase what looked like an annuity. Investors were guaranteed a minimum return on their investment, supposedly generated by the websites. Specifically, they were entitled to receive in perpetuity a month payment equal to 50% of the revenues generated by the website. The agreement contained a specified minimum amount that would be paid to the investor regardless of the actual income generated. For example, while the terms varied in different agreements, in one case the upfront fee was $150,000. The guaranteed minimum for the investor was $2,500 per month (18% of the investor’s upfront fee divided by 12). The guarantee was backed by a contract provision representing that the Income Store is debt free and in good financial condition. Over the two-year period of the scheme, the Income Store website generated about $9 million in revenues from the sale of third-party products. Payments to investors during that period, however, equaled at least $30 million, according to the Commission’s complaint. To cover the obvious shortfall, the Income Store had to raise more funds by selling additional agreements and diverting the funds to the earlier investors. Beginning in October 2019 the firm added a second source of income. The revenue from that operation was comingled with funds from the Consulting Performance Agreements. In addition, Defendants also appear to have obtained funds from loans secured from firms that specialize in distressed lending. During this period Mr. Courtright used investor funds to pay for his personal expenses. Ultimately, by December 2019 a moratorium on investor payments was declared. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a) and Exchange Act Section 10(b). The Court entered a TRO and a freeze order shortly after the complaint was filed. See Lit. Rel. No. 24717 (Jan. 15, 2020).

CFTC

Manipulation: In the Matter of Mirae Asset Davwoo Co., Ltd., CFYC Docket No. 30-11 (Jan. 13, 2020). Respondent Mirae Asset acquired Daewoo Securities after the trading involved here. Daewoo was a brokerage and investment firm based in the Republic of Kora which engaged in proprietary futures contract trading in the U.S. During the period December 2014 to April 2016 Trader A, based in the Daewoo office in Seoul, Korea, traded futures contract, including the E-Mini contract on the CME. The trader used a number of strategies; at least one involved spoofing. To employ this strategy the trader took three steps: 1) Disproportionally large orders were entered on one side of the market. These orders were intended to give a misleading impression of market liquidity. The trader intended from the beginning to cancel these orders. 2) A small order was subsequently entered on the opposite side of the market. This order benefitted from the increased activity on the opposite side of the market created by the initial order. 3) Immediately after the second order was executed the trader cancelled the initial order. In this case by the time Enforcement’s inquiry began Daewoo had been acquired by Mirae Asset. That firm immediately began cooperating with the enforcement investigation. The firm retained U.S. counsel to conduct an internal investigation. Mirae also retained an expert to analyze the trading activity. The results from the expedited investigation were given to the CFTC’s Division of Enforcement. This action against the firm followed. The Order alleges violations of Section 4c(a)(5)(C) of the Act. That section makes it unlawful to engage in any trading or conduct that is known as spoofing. Since the trader engaged in that conduct Mirae, as the subsequent acquirer of Daewoo Securities, is liable for that activity, according to the Order. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order. The firm agreed to pay a civil monetary penalty of $700,000. The amount of the penalty was reduced by an unspecified amount based on the cooperation of Respondent.

Criminal Cases

Insider trading: U.S. v. Collins, No. 18 Crim 567 (S.D.N.Y.) is an action which named as a defendant former U.S. Congressman Christopher Collins. The case centered on trading in the shares of an Australian bio-tech firm following disappointing drug trials. Mr. Collins, who sat on the board, and learned of the news prior to its public disclosure and told his son and another who were shareholders. Each traded, avoiding significant losses. Previously, Mr. Collins pleaded guilty. Last week he was sentenced to serve 26 months in prison based on his participation in the scheme and for lying to law enforcement authorities. The Court also directed that the prison term be followed by one year of supervised release and that the former Congressman pay a fine of $200,000. See also SEC v. Collins, Civil Action No. 18-cv-7128 (S.D.N.Y) for a more detailed discussion of the facts (here).

Insider trading: U.S. v. Lavidas, No. 1:19-cr-00716 (S.D.N.Y. Verdict Jan. 15, 2020). Telemaque Lavidas is the son of a prominent Greek business man who serves as a director of Ariad Pharmaceuticals, Inc. The firm, based in Cambridge, Massachusetts, developed and marketed leukemia medication Iclusig. In three instances over a two-year period Mr. Lavidas transmitted inside information about the company to friend Georgios Nikas. The first occurred in October 2013. There Mr. Lavidas learned from his father that the FDA was concerned about potential adverse health effects from the leukemia drug. The information was transmitted to Mr. Nikas who had a large position in the stock. The shares were sold and Mr. Nikas established a substantial short position. When the firm released the information about the FDA’s concerns, the share price dropped 62%. Mr. Nikas closed the short position, realizing profits of over $3.2 million. He also avoided a loss of about $800,000. The second occurred later in the same year. In the last two months of 2013 Mr. Nikas was told by his friend, Telemaque Lavidas, that the pharmaceutical company was making good progress on returning Iclusig to market. The information had been given to Mr. Lavidas by his father. Mr. Nikas established a long position in the stock. When the company announced the drug was returning to market the share price increased. Mr. Nikas had profits of over $1.3 million. The third happened during the summer of 2015. At that time Ariad learned that an unsolicited takeover offer from another drug firm would be made. Mr. Lavidas obtained the information from his father. He passed it on to Mr. Nikas who purchased shares. When the bid was announced Araid’s stock price rose. Mr. Nikas had profits of over $2 million. Mr. Nikas received other tips from Mr. Lavidas. In each instance he traded. Overall, he had trading profits of over $15 million. Mr. Lavidas was found guilty by the jury following a one-week trial. Specifically, the jury returned guilty verdicts on one count of conspiracy to commit wire and securities fraud and three counts of securities fraud. Sentencing is scheduled for April 17, 2020.

Offering fraud: U.S. v. Padilla (S.D.N.Y. Plea Jan. 9, 2020) named as a defendant financial markets professional Jorge Padilla. Beginning in September 1014, and continuing for about three years, he targeted Argentine investors and solicited them to purchase shares in Dunatos Capital which he claimed was a very wealthy family office. During the period he raised about $900,000 from investors. Investors were told the office was very wealthy and monitored by U.S. financial regulators. The claims were false. The statements furnished to investors were also false. Mr. Padilla pleaded guilty to one count of wire fraud. The date for sentencing was not announced.

BaFin

Sustainability risks: The Federal Financial Supervisory Authority of Germany published an English language version of its paper on Sustainability Risks. The paper focuses on risk management and provides guidance (here).

ESMA

Securitization reporting: The European Securities and Markets Authority published a paper on its consultation regarding the use of the No Data options in securitization reporting, dated January 17, 2020 (here).

Report: ESMA issued a report on the values of EU Alternative Investment Funds. The regulator reported that the funds have a current value of about 5.8 trillion Euros. This is the second statistical report on European Union Alternative Investment Funds. It was issued on Jan. 10, 2020 (here).

Hong Kong

Report: The Securities and Futures Commission published a report on the importance of risk management for brokers and investment firms on January 20, 2020 (here).

Report: The SFC noted the publication of the annual report by the Process Review Panel for the SFC. The report is for the period 2018 to 2019. It was published on January 16, 2020 (here).

Singapore

Funds: The Monetary Authority of Singapore and the Accounting and Corporate Regulatory Authority announced on the launch of the Variable Capital Companies Framework, an alternative corporate structure that can be used for a variety of investment funds. It can be used across traditional and alternative strategies and with open-ended and closed-ended funds (here).

Despite an almost continuous stream of warnings to investors regarding due diligence on investment opportunities, week after week the Commission files another offering fraud action in which a swindle has occurred. This is particularly true when crypto, blockchain or cannabis is involved. All too frequently by the time the deceptive scheme is uncovered much if not all of the investor money is gone. Those who conducted the scheme may be held accountable, but little cash is left for investors. The Commission’s latest action is this area is typical of these cases. In this instance the lure of what many believe are quick, easy profits from marijuana was the hook. SEC v. Griffithe, Civil Action No. 8:20-cv-00124 (C.D. Cal. Filed Jan. 21, 2020).

The complaint named as defendants two individuals and three entities: Guy S. Griffithe, supposedly an executive in the motion picture industry who holds positions with defendants Renewable Technologies Solution, Inc. and Green Acres Pharms, LLC; and Robert Russell, an owner and executive with defendant SMRB LLC.

In November 2013 Defendant Russell and his wife formed SMRB in Washington State to engage in activities related to marijuana. Several months later the company filed an application with the Washington State Liquor and Cannabis Board for a license to grow and process marijuana for the recreational market. The license was issued in August 2015. Just prior to the issuance of the license, Defendants Griffithe and RTSI paid $1.5 million for a stake in SMRB. Under the terms of the transaction an interest n the license holder was conveyed along with the right to receive a percentage of the net income from SMRB. Yet un der the applicable state law, an equity interest in a licensee entity could not be conveyed without prior approval of the Washington State Board. Defendants never obtained the required pre-approval.

Nevertheless, over a two-year period, beginning the month the Board issued the license, Defendants offered and sold equity interests in SMRB to at least 25 investors in several states. Over $4.8 million was paid by those investors to Defendants.

In soliciting those investments Defendants misrepresented the nature of the interests as well as the use that would be made of the offering proceeds. Investors understood that their funds purchased them a stake in the firm, would be used to further its development and that they would be entitled to a share of the profits that would be generated from the work of others.

In fact, the securities sold to investors were fictitious. In return for their capital investors did not receive an equity interest in SMRB or any interest. Investors were not entitled to a share of the profits from the operations of that firm under its Washington state license. Investors actually did not receive any legal interest in the firm. Stated differently, they purchased nothing. Indeed, much of the investor money was used by Defendants for their own purposes. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24722 (Jan. 21, 2020).

The Commission’s focus on retail investors has resulted in a series of cases frequently called offering frauds. In those cases, as repeatedly noted in this space, investors typically get lured to part with what is often their savings and/or retirement capital by unscrupulous persons. Frequently the schemers bate investors by waving around high-profile and popular terms tied to large potential profits such as “crypto currency” or “blockchain.” The article yesterday focused on one such fraud involving marijuana. As noted in connection with that post, investors typically lose most or all of their investment.

Today is different. The Commission announced it will return over $63 million to investors tied to a real estate investment offering fraud. While regulators such as the Commission strive to secure funds that can be returned to investors, typically by the time they arrive much of the investor capital has been dissipated. Those involved may be sanctioned but the chance of recovering much investor capital for the retail investors is small at best.

SEC v. Morgan, Civil Action No. 19 Civ 661 (W.D. N.Y. Filed May 22, 2019) is the action in which the Commission’s hard work will pay off for investors. That case named as defendants Robert Morgan, a residential and commercial real estate developer, Morgan Mezzanine Fund Manager LLC, the manager of three Note Funds, and Morgan Acquisition LLC, a firm used to put properties Mr. Morgan planned to acquire under contract.

Over a five- -year period, beginning in 2013, Mr. Morgan raised over $110 million from investors through the sale of securities. About $80 million of that amount was from investors in four sets of Note Funds. Three of those funds were managed by Fund Manager and one by Morgan Acquisitions.

Investors in the Note Funds were told that their capital would be used to make unsecured subordinated loans to affiliated entities. Investors were also told that the target return for the Notes Funds managed by Fund Manager was 11 % while those managed by Morgan Acquisitions were supposedly guaranteed by Mr. Morgan personally. Over 200 investors and entities in 17 states invested. Contrary to the representations made, investor funds were used to facilitate Ponzi scheme type payments and to help pay-off prior loans. The complaint alleged violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b) along with control person liability.

When the complaint was filed the Commission obtained emergency relief, freezing assets and appointing a receiver responsible for marshalling the assets for the benefit of investors. Morgan voluntarily liquidated certain assets to generate funds for collection by the receiver. Yesterday the Court approved the receiver’s plan to distribute over $63 million to harmed investors — a true success story for investors, the Commission and the staff. Well Done!

The Commission continued to spotlight key market issues in rule making proposals and conferences. This week the agency announced a conference focused on the municipal securities markets. While the Commission has limited authority in this area, the agency can lead the way to improvements in these critical markets.

The battle over disgorgement, and whether the SEC has the authority to utilize that remedy, continues to heat-up. Certain members of Congress filed an amicus brief this week essentially arguing that disgorgement is a critical remedy for SEC enforcement. In the age of statutory interpretation delimited by the “read the statute” and “look up the words in the dictionary” approach, the obvious response to Congress is to amend the statute.

Enforcement continues to focus on retail investors. That means continuing what seems to be an endless series of offering fraud cases. The Commission did, however, score a significant victory last week, securing an order returning over $60 million to defrauded investors.

SEC

Report: The Commission published its annual report last week on credit rating agencies (Jan. 24, 2020 (here).

Municipal securities: The Commission announced a conference titled “Spotlight on transparency: A Discussion of Secondary Market Municipal Securities Disclosure Practices” to be held on March 10, 2020 at its Headquarters office (Jan. 23, 2020). The conference focuses on municipal securities (here).

Whistleblowers: The agency announced two whistleblower awards last week. The first involved information that helped shut down a fraudulent scheme. An award of $277,000 was made. The second involved an injured investor who furnished information that helped the agency uncover funds ultimately returned to investors. An award of $45,000 was made (Jan. 22, 2020).

SEC Enforcement – Filed and Settled Actions

The Commission filed 3 civil injunctive actions and 1 administrative proceeding last week, exclusive of 12j and tag-along actions.

Offering fraud: SEC v. Morgan, Civil Action No. 19 Civ 661 (W.D. N.Y.) is a previously filed action which named as defendants Robert Morgan, a residential and commercial real estate developer, Morgan Mezzanine Fund Manager LLC, the manager of three Note Funds, and Morgan Acquisition LLC, a firm used to put properties Mr. Morgan planned to acquire under contract. Over a five-year period, beginning in 2013, Mr. Morgan raised over $110 million from investors through the sale of securities. About $80 million of that amount was from investors in four Note Funds. Three of those funds were managed by Fund Manager and one was under the tutelage of Morgan Acquisitions. Investors in the Note Funds were told that their capital would be used to make unsecured subordinated loans to affiliated entities. Investors were also told that the target return for the Note Funds managed by Fund Manager was 11 % while those managed by Morgan Acquisitions were supposedly guaranteed by Mr. Morgan personally. Over 200 investors and entities in 17 states invested. Contrary to the representations made, investor funds were used to facilitate Ponzi type payments to pay down prior loans. The complaint alleged violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b) along with control person liability. When the complaint was filed the Commission obtained emergency relief, freezing assets and appointing a receiver responsible for marshalling the assets for the benefit of investors. Morgan voluntarily liquidated certain assets to generate funds for collection by the receiver. Earlier this week the Court approved the receiver’s plan to distribute over $63 million to harmed investors.

Manipulation – false opinion: In the Matter of Benjamin L. Bunker, Esq., Adm. Proc. File No. 3-19668 (Jan. 23, 2020) is an action which names as a respondent attorney Benjamin Bunker. Over a two-year period Attorney Bunker issued false attorney opinions to facilitate the distribution of shares of Greenway Design Group, Inc. that were not registered into an inflated market. Although the shares were not registered Respondent’s letters suggested that they were eligible for an exemption. They were not. The opinions facilitated the transfer and deposit of the shares into brokerage accounts. When the share price had been manipulated the securities were sold. The Order alleges violations of Securities Act Sections 5(a) and 17(a) and Exchange Act Section 10(b). To resolve the matter Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. He will also be denied the privilege of appearing and practicing before the Commission as an attorney. In addition, Respondent will pay disgorgement of $1,800 and prejudgment interest of $249.84. Those obligations are offset by the restitution order entered in the parallel criminal case.

Offering fraud – crypto: SEC v. Grybniak, Civil Action No. 1:20-cv-327 (E.D.N.Y. Filed Jan. 21, 2020) is an action which names as defendants Serghii Grybnialm and the firm he founded which is essentially his alter ego, Opporty International, Inc. Over a one year period, beginning in September 2017, Defendants conducted an ICO involving tokens called OPP Tokens. About $600,000 was raised from about 200 investors. The tokens, which are securities, were not registered. In addition, a series of misrepresentations were made in connection with the sales. Those included claims that thousands of investors were involved; false claims about small businesses supposedly involved with its platform; a representation that a major software firm was a partner; and assertions that the tokens were SEC registered and compliant. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24723 (Jan. 21, 2020).

Offering fraud: SEC v. Griffithe, Civil Action No. 8:20-cv-00124 (C.D. Cal. Filed Jan. 21, 2020). The complaint named as defendants two individuals and three entities: Guy S. Griffithe, supposedly an executive in the motion picture industry who holds positions with defendants Renewable Technologies Solution, Inc. and Green Acres Pharms, LLC; and Robert Russell, an owner and executive with defendant SMRB LLC. In November 2013 Defendant Russell and his wife formed SMRB in Washington State to engage in activities related to marijuana. After Washington state issued a license, Defendants Griffithe and RTSI paid $1.5 million for a stake in SMRB. Under the terms of the transaction an interest in the license holder was conveyed along with the right to receive a percentage of the net income from SMRB. Yet under the applicable state law, an equity interest in a licensee entity could not be conveyed without prior approval of the Washington State Board which had not been obtained. Nevertheless, over a two-year period, beginning the month the Board issued the license, Defendants offered and sold equity interests in SMRB to at least 25 investors in several states. Over $4.8 million was paid by those investors to Defendants. In soliciting those investments Defendants misrepresented the nature of the interests as well as the use that would be made of the offering proceeds. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24722 (Jan. 21, 2020).

Criminal Cases

Misappropriation: U.S. v. Geraci, No. 1:18-cr-00715 (S.D.N.Y. Sentencing Jan. 23, 2020) is an action which named as a defendant John Geraci, a principal and founder of Meridian Capital Asset Management. In February 2015 Defendant met Nicholas Mitsakos, the purported operator of Hedge Fund. Mr. Mitsakos told Defendant Geraci about the substantial returns achieved at the Hedge Fund. The two men then entered into an arrangement under which Mr. Geraci agreed to solicit money for Hedge Fund. Later the same year Mr. Geraci learned that Hedge Fund was a fraud and that Mr. Mitsakos had misappropriated substantial funds from the firm. Nevertheless, he continued to solicit investors, raising substantial sums from two investors. He also participated in a cover-up that forwarded fraudulent statements to investors. Mr. Mtsakos previously pleaded guilty. Mr. Geraci was sentenced this week to serve 24 months in prison for conspiring to commit securities fraud.

FCPA—Anticorruption

U.S v. Cevallos, No. 1:19-cr-20284 (S.D.Fla. Plea Jan. 23, 2020) is an action which named as a defendant Armengol Alfonso Cevallos Diaz, an Ecuadorian business man resident in Miami, Florida. Mr. Cevallos engaged in a three-year scheme beginning in 2012 to pay bribes of about $4.4 million to officials of PetroEcuador, the state owned oil company. He also sought to conceal the bribes by using a series of shell companies and purchasing Florida real state for government officials. Mr. Cevallos pleaded guilty to one count of conspiracy to violate the FCPA and one count of conspiracy to commit money laundering. Sentencing is scheduled for April 2, 2020.