The First Five Years
On this fifth anniversary of Greyline, instead of reflecting on our past, we find ourselves entirely focused on the future and on what’s next for Greyline. We’ve always been a goal-driven organization, and 2020 provided ample time to reflect and align as an organization on the direction of the company. Now, as we face the world on the brink of re-opening, we can hardly contain our curiosity.
Never good at sitting still, we spent our “free” time last year adapting Greyline to be more efficient and effective. We took the time we saved due to the traveling freeze and dedicated it to important initiatives including in-house and external technology builds, creating new staff training programs and playbooks, and developing new product offerings. We recently unveiled a really incredible rebrand, and through the efforts of many, we’ve already gained significant traction in very newly launched products.
We want Greyline to be a company people want to work for, as we believe creating a culture of professional growth and brand pride will drive the success of our products. This simple perspective has informed our hiring and training plans, and we are thankful to have extremely low staff turnover in an industry constantly facing this struggle. Hiring was certainly a challenge for us due to COVID-19, but we brought on and trained more than 20 new employees. In 2021, we plan to hire another 25 employees across the globe, and we are exploring office spaces for our larger staff in our ever-expanding list of cities.
Culturally, we will continue to challenge our perspectives, conduct training and encourage learning. We remain committed to our principles of creating a diverse, inclusive and socially responsible company. Greyline is a woman-owned business, and my partners Talia Brandt, Kathy Malone and Jennifer Dickinson are incredible advisors both to our clients and to our management team. As we continue to grow into a larger global business, we hope to be a role model for financial services firms by putting our people and community first.
Even those inclined toward introversion are feeling the wear from 2020. In the next few quarters, we will trade our Uber Eats gift cards for in-person lunches and dinners. We will attend and sponsor those conferences that in 2019 seemed so repetitive. We are all eager to meet our new team members and catch-up with those we haven’t seen in too long. In early 2020, we were planning our first Greyline Annual Summit, so we are excited to start planning this firm and client event for Q1 2022!
In recent months, the regulatory technology and consulting space saw further consolidation and increased investment from private capital. With each transaction, we find the resulting consolidation or platform has a slightly different view of not only the services to offer, but how to deliver them to clients. In time, there will be less diversity in what platforms and GRC providers offer. We are one of the last independents in the space, which allows us to be nimble and refine the offering that has made us a leader in the industry.
In this inaugural edition of Greyline Quarterly, we are focusing on recent regulatory updates, the SEC’s lists of priorities and other important cases. With a return to normalcy in our sights, we’re beginning to see signs of increased activity by financial regulators across the world, and we will provide coverage and analysis of these events as they unfold.
We are excited by the challenges of running Greyline, and we look forward to the opportunity to guide you, our clients and peers, through this evolving and active regulatory landscape.
Matt Okolita
Managing Partner, Greyline
The SEC’s 2021 Exam Priorities: A Roadmap for Compliance
On March 9, 2021, the Securities and Exchange Commission’s (“SEC”) Division of Examinations (“EXAMS”) issued its priorities for the coming year. Many of these priorities interact with recent announcements or evolving areas such as (1) ESG and climate change, (2) fintech and digital assets and (3) June 2020’s Risk Alert regarding the London Inter-Bank Offered Rate (“LIBOR”) transition. Taken together, these releases illustrate the need for firms to take a holistic review of their compliance programs in 2021.
Information Security and Operational Resiliency
2020 spotlighted challenges associated with our rapid embrace of new technologies, communication systems, and the constant increase, diversification and sophistication of threats to our businesses.
Firms should also assume that their employees will continue to work remotely on some basis for two reasons: (1) They expect it as a standard benefit or perk (which it is in other industries), and (2) the pandemic and natural disasters we saw in 2020 were neither unprecedented in our history nor are they gone for good. Firms must have plans in place to allow their businesses to continue running securely in these drastic scenarios.
Earlier this year, the SEC issued its observations from the last wave of cybersecurity exams. Going forward, the SEC is concerned about endpoint security, data loss, remote access, use of third-party communication systems and managing vendors. Firms should expect EXAMS teams to thoroughly assess information security procedures surrounding:
- Client/investor accounts, including:
- Systems to detect and prevent intrusions
- Verifying their identities to prevent unauthorized access (e.g., unexpected changes in wire instructions or password reset requests)
- Malicious attacks, such as phishing and account intrusions
- Incident response, specifically highlighting ransomware
- Operational risks associated with a dispersed workforce, particularly working from home
- Service providers and vendors in general, plus:
- Online and mobile applications, especially those that access client/investor accounts
- Electronically stored books and records, particularly personally identifiable information on third-party cloud services
In 2020, examiners nimbly responded to the pandemic with requests for business continuity, disaster recovery and solvency information in exams that were currently underway. Unsurprisingly, these are priority areas for 2021. The SEC took a similar approach in the wake of Hurricane Sandy. This time, the agency is looking at these incidents through the lens of climate change. In other words, the SEC, like all of us, fully expects these disasters to recur and possibly intensify.
EXAMS teams are prioritizing systemically important firms. However, even small firms should consider how they will respond as these events recur.
Going forward, the SEC is concerned about endpoint security, data loss, remote access, use of third-party communication systems and managing vendors.
Fintech
As in years past, the SEC is focused on firms that provide investment advice through technology platforms. Many retail investors, particularly younger generations, have fully embraced this new way to invest. Protecting retail investors is at the core of the SEC’s mission and a perennial exam priority. EXAMS teams will assess policies and procedures for:
- Operating consistently with their representations to customers
- Handling customers’ orders in accordance with instructions
- Making trade recommendations in mobile applications
Protecting retail investors is at the core of the SEC’s mission and a perennial exam priority.
Ultimately, just like with traditional forms of investment advisory services, the key question is how firms supervise these functions, test for compliance and maintain their books and records.
The SEC observed that technology can create efficiencies for compliance staff, reduce manual processes and expand the ability to review trading. On other hand, there is heightened risk if technology is misused or improperly configured. Though not mentioned (or even hinted at) in the release, firms should also consider risks associated with how their customers invest and trade, as illustrated in the GameStop frenzy.
Digital Assets
Although digital assets are gaining acceptance in the industry, they are an emerging area from a regulatory perspective. Examiners will expect firms to consider whether these investments are in the best interests of their clients, and to have compliance programs that effectively address risks in these operational areas:
- Portfolio management and trading processes
- Safeguarding client assets
- Pricing and valuation
Although digital assets are gaining acceptance in the industry, they are an emerging area from a regulatory perspective.
The challenge for these firms is how to supervise, test and keep records in a way that meets examiners’ expectations. Firms should be prepared to educate examiners on their particular business to set the context for these questions. Using a “day one” presentation is especially helpful here.
The release also highlighted outside business activities. This is an essential component of a firm’s code of ethics and should specifically address relevant areas such as data mining and prohibiting use of the firm’s resources to conduct those activities. Though not mentioned, personal trading policies should also scope in digital asset trading by employees.
Anti-Money Laundering (“AML”)
Broker-dealers and registered investment companies (“RICs”) are subject to stringent anti-money laundering regulations. For broker-dealers, FINRA’s requirements also apply and AML is specifically highlighted in its 2021 Report. AML programs must be tailored to a firm’s location, size, products and services offered, and the method of offering those products and services. Policies and procedures must also be reasonably designed to identify and verify the identities of customers/investors, perform due diligence, monitor for suspicious activities and comply with Suspicious Activity Reporting (“SAR”) requirements. SARs help regulators detect and combat a variety of nefarious activities, such as terrorist financing, public corruption and market manipulation. EXAMS teams will review all aspects of firms’ AML programs, and firms should expect additional scrutiny of:
- Customer identification protocols, including looking through entities to check underlying beneficial owners
- Sufficiency of diligence procedures
- Meeting SAR obligations
- Conducting “robust and timely independent tests”
Broker-dealers should also revisit the SEC’s recent Risk Alert, which describes in depth various compliance issues with SARs.
AML programs must be tailored to a firm’s location, size, products and services offered, and the method of offering those products and services.
AML programs are also priority areas for other financial regulators, chiefly FinCen. Firms that are also registered with the CFTC and members of the NFA must ensure that their AML programs meet the totality of their obligations. Firms should understand that AML is not conducted in a vacuum but intersects with other priorities such as cybersecurity. In 2020, FinCen and OFAC released alerts concerning proceeds from ransomware being used to launder money or finance terrorism.
Although investment advisers are not required to have AML programs, it is a longstanding best practice. We encourage advisers to similarly assess their risks and keep their programs up to date. For example, many advisers utilize OFAC search tools to conduct their AML searches, which may be reasonable and sufficient for their particular client/investor base. However, as their client/investor base evolves or if they are also subject to more stringent rules in other jurisdictions (such as the Cayman Islands), advisers should consider more robust controls.
LIBOR
EXAMS teams will expect firms to have evaluated their exposure to LIBOR and preparedness for transitioning to an alternative reference rate. Firms should consider impacts to their own financial matters (e.g., their strength, solvency and ability to conduct business in addition to impacts on client portfolios and strategies).
At a high level, this process should include:
- Thorough risk assessment
- Documenting findings
- Tailoring preparations accordingly
Registered Investment Advisers and Investment Companies
As always, examinations will cover compliance program architecture and effectiveness, in particular, policies regarding:
- Fees and expenses
- Valuations
- Investment allocations and portfolio management
- Best execution
- Custody
- Business continuity plans
Examiners will also consider whether advisers have sufficient resources to fulfill their core compliance obligations.
The SEC continues to prioritize:
- Advisers that have not been examined in several years, to assess whether they have kept their programs up to date with regulatory expectations and business changes (including substantial growth)
- Advisers that have never been examined
- New registrants
- Dual-registrants or affiliations with broker-dealers, particularly on risks and conflicts of interest around:
- Compensation arrangements
- Employees’ outside business activities
- Best execution
- Prohibited transactions
The SEC is addressing ESG investing in a number of ways, including a new task force, and in examinations. Given the strength of this trend, EXAMS teams will focus on:
- Publicly offered products including open-ended funds and ETFs
- Offerings to accredited investors, such as qualified opportunity funds
- Disclosure issues:
- Consistency between stated strategies and processes/practices
- Combing marketing materials for false and misleading statements
- Proxy voting policies and alignment between votes and strategy
Practically speaking, advisers should consider how they make and document investment decisions to prove alignment with stated strategies. Firms that use benchmarking data should periodically assess the value/usefulness of that data (especially given that the cost is usually passed through to clients/fund investors). When marketing performance against those benchmarks, advisers should ensure that the benchmark in question is closely relevant to their strategy and that disclosures are adequate.
Additional considerations for registered funds include:
- Liquidity risk management programs (“LRMP”): Due to their highly customized and variable nature, the SEC will assess whether LRMPs are reasonably designed to manage the particular fund’s risk
- Money market funds’ compliance with stress-testing requirements, website disclosures and board oversight
Additional considerations for private funds include:
- Preferential treatment of investors with respect to liquidity terms
- Interaction between valuations and fee calculations
- Conflicted transactions (cross trades, principal investments, distressed sales)
- Adviser-led fund restructurings including stapled secondaries
- Funds with a higher concentration of structured products, such as CLOs and MBS and associated risks
- Strategies that have been impacted by recent economic conditions (citing real estate funds, among others)
Broker-Dealers and Municipal Advisers
For broker-dealers, this includes traditional priority areas of Regulation Best Interest, sales practices and products aimed at retail investors. Broker-dealer examinations will also focus on the safety of customer cash and securities, and specifically, compliance with the Customer Protection and Net Capital Rules.
EXAMS teams are also concerned about best execution and the impacts of:
- Changing commission and other cost structures, particularly in the zero-commission environment
- Compliance with the recently amended order routing disclosure rules
- Continuing the SEC’s payment for order flow initiative (also a best execution concern)
- Market maker compliance with Regulation SHO including rules on aggregation units and locate requirements
- Consistency between alternative trading systems’ operations with their Form ATS-N disclosures
Regarding municipal advisors, the SEC highlighted the effects of COVID-19 on municipal issuers’ finances. Examiners will evaluate whether/how these advisors adjusted their practices in response to the pandemic. Other focus areas will include:
- Disclosing and managing conflicts and documenting the scope of client engagements
- Satisfying registration, professional qualification, education and supervision requirements
- Whether advisors have relied on relief from Form MA annual update requirements or the temporary order permitting certain activities relating to direct placements of municipal securities
Greyline is watching these priorities unfold and will provide additional guidance as it becomes available. We encourage all firms to review their compliance programs in light of these priorities and reach out to us as they consider enhancements.
Table of Contents
Q1 2021 Regulatory Updates
Table of Contents
Q1 2021 Regulatory Updates
Greyline Employee Spotlight: Jennifer Dickinson
Greyline Employee Spotlight: Jennifer DickinsonJennifer Dickinson is a Partner at Greyline. She has worked for Greyline since 2016, and she’s based out of our Chicago office.
Q. What is your favorite thing about working for Greyline?
A. Our collaborative team and we all like each other!
Q. What made you decide to work in the compliance field?
A. I am a born compliance person! Compliance is a creative process to me because you have to constantly adapt, use all your resources and make something functional and cohesive.
Q. What gets you out of bed in the morning?
A. My clients and the prospect of a great cup of coffee. I am a coffee snob.
Q. What’s your favorite movie and why?
A. At Eternity’s Gate. It is a bio of Van Gogh, who is my favorite artist. It is incredibly sad, but so beautifully and sensitively filmed. I saw it at the Siskel Theatre here in Chicago, and I ugly cried for 15 minutes after. Willem Dafoe was made for that role.
Q. What are your hobbies outside of work?
A. Knitting, art and cooking.
Announcements
In the News: Greyline Partner & Head of Strategic Growth Sean Wilke was recently featured in Business Insider’s 29 bankers, advisors, and lawyers to know if you’re thinking about starting your own hedge fund.
Listen Up: The first episode of Greyline’s new podcast will be available at the end of May. Follow us on LinkedIn for more details.
A Worthwhile Read: Greyline Partner Talia Brandt is one of the female founders featured in the Founded By Women book. Check out the book at https://www.foundedbywomen.org.
Regulatory Updates
Investment Adviser and Broker-Dealer Compliance
Deutsche Bank Agrees to Pay $120M+ in FCPA Violations Settlement
On Jan. 8, the SEC announced that Deutsche Bank AG had agreed to pay more than $120 million to settle SEC and criminal charges related to violations of the Foreign Corrupt Practices Act.
The SEC alleges that Deutsche Bank engaged foreign officials, their relatives and their associates as third-party intermediaries, business development consultants and finders to obtain and retain global business. The SEC states that Deutsche Bank ultimately paid roughly $7 million in bribe payments, or payments for unknown, undocumented or unauthorized services, as a result of the institution’s lack of sufficient internal accounting controls.
Deutsche Bank agreed to a cease-and-desist order and said it would pay $35 million in disgorgement, with prejudgment interest of $8 million. The bank also paid a $79 million criminal penalty to resolve criminal charges.
SEC Charges Investment Adviser With Providing Incomplete Information to Clients
On Jan. 29, the SEC announced that Daniel Investment Associates, LLC, a registered investment adviser, and its principal, Gregory Daniel Van Wyk, agreed to settle charges of misleading client trustees who were evaluating investments managed by Daniel Investment Associates.
The SEC’s order states that in meetings during early 2018, client trustees sought Van Wyk’s advice in deciding whether to redeem $1.25 million in promissory notes in lease financing company Essex Capital Corporation. Van Wyk, who had several clients invested in Essex, knew that the company had cash flow difficulties and other serious financial problems. However, he did not disclose this information to the trustees; instead, he recommended that the trustees remain invested in the notes, which they did. The trustees eventually learned about Essex’s problems after the SEC filed a June 2018 complaint charging Essex and its founder with defrauding noteholder investors.
Daniel Investments Associates and Van Wyk were found to have violated Section 206(2) of the Investment Advisers Act of 1940. Daniel Investment Associates and Van Wyk did not admit or deny the SEC’s findings, but did agree to a cease-and-desist order, to be censured, to engage an independent compliance consultant and to provide notice of the SEC’s order to clients. Also, Daniel Investment Associates must pay disgorgement and prejudgment interest, and Van Wyk must pay a $75,000 civil penalty.
SEC Charges Investment Adviser in NCAA Athlete Scheme
On Feb. 8, the SEC settled charges against Rosedale Asset Management, LLC f/k/a Princeton Advisory Wealth Management, LLC (“PWM”).
Between February 2016 and September 2017, PWM allegedly participated in a widespread bribery scheme that misled several prospective clients who were past, present and prospective NCAA Division I college athletes.
PWMmade at least 20 payments totaling more than $96,000 to individuals and entities to influence amateur athletes to retain PWM as an investment adviser after they turned professional, or introduce Sood to others who would influence those athletes. As a result, at least five former NCAA (and now professional) basketball players signed advisory agreements with PWM.
These referral payments were not disclosed to prospective clients before they signed the advisory agreements.
PWM, which is charged with violating multiple sections of the Advisers Act, agreed to a cease-and-desist order, as well as to pay a civil penalty.
SEC Settles Charges Against Registered Investment Adviser/Broker-Dealer
On Feb. 12, the SEC settled charges against Winslow, Evans & Crocker, Inc. (“Winslow”), a dually registered investment adviser and broker-dealer, for overcharging clients and failure to disclose conflicts of interest.
The SEC states that between January 2014 and October 2020, Winslow invested clients in mutual fund share classes with higher fees than available lower-cost share classes. In addition to its advisory fees from clients, Winslow received two types fees from its clearing broker as a result of advisory clients’ investments in these higher fee share classes. The lower fee share classes were not eligible for such payments, or otherwise); and fees received from its clearing broker as a result of sweeping its advisory clients’ cash into certain money market mutual funds (“money market funds”)did not result in the payment of fees to Winslow.
During this time, Winslow also failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and rules thereunder in connection with its mutual fund share class and cash sweep selection practices.
The SEC censured Winslow and ordered it to cease and desistband pay disgorgement, prejudgment interest and a civil penalty totaling $1,851,787.08.
SEC Obtains Final Judgment Against Investment Adviser Charged With Failing to Disclose Conflicts
On Feb. 25, the U.S. District Court for the District of Massachusetts entered a final consent judgment against Bolton Securities Corporation, d/b/a Bolton Global Asset Management (“Bolton Securities”), in connection with the failure to disclose material conflicts of interest related to mutual fund 12b-1 fees and principal trading compensation generated from client investments.
Bolton Securities received 12b-1 fees associated with mutual fund share classes held by Bolton clients, including when less expensive share classes of the same funds fees were available. The 12b-1 fees were paid to a broker-dealer affiliated with Bolton Securities, which in turn paid some of those fees to Bolton Securities’ investment adviser representatives.
The SEC also alleges that Bolton Securities used its affiliated broker-dealer’s principal trading account to engage in self-dealing transactions with its advisory clients, and did so without the required disclosure to and written consent of clients.
Bolton Securities did not admit or deny the allegations, but it did consent to the entry of the final judgment. The firm was ordered to pay disgorgement and prejudgment interest of $224,994 and a civil penalty of $225,000.
SEC Announces Enforcement Task Force Focused on Climate and ESG Issues
On March 4, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement. Kelly L. Gibson, Acting Deputy Director of Enforcement, will lead the task force and oversee a Division-wide effort, utilizing 22 members from across the SEC’s headquarters, regional offices and enforcement specialized units.
The Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct. The task force also will coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.
The initial focus will be identifying material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. It also will look at disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.
The task force also will evaluate and pursue tips, referrals and whistleblower complaints on ESG-related issues, which can be submitted here.
Risk Alert: Compliance Issues Related to Suspicious Activity Monitoring and Reporting at Broker-Dealers
On March 29, the SEC’s EXAMS released a risk report sharing its observations from examinations of broker-dealers regarding their compliance with anti-money laundering (“AML”) requirements.
Among the observations:
- Broker-dealers did not establish reasonably designed policies and procedures and internal controls necessary to adequately identify and report suspicious activity as required under the Bank Secrecy Act.
- Weak policies, procedures and internal controls, or the failure to implement existing policies and procedures, ultimately resulted in firms not conducting or documenting adequate due diligence in response to known indicators of suspicious activity, especially with respect to activity in easy-to-manipulate low-priced securities.
- In some cases, broker-dealers did not include details known to the firm of individual customer trades or issuers that were suspicious or, in other cases, did not make use of specific structured data fields on the SAR. As a result, these firms filed hundreds of SARs containing the same generic boilerplate language, which obscured the true nature of the suspicious activity and the securities involved. This rendered the SAR less valuable to law enforcement and regulators trying to understand the activity and its criminal or regulatory implications.
SEC Charges Investment Adviser for Disclosure, Supervisory and Compliance Failures
On Jan. 14, the SEC settled charges against a formerly SEC-registered investment adviser and its sole principal for failing to make certain disclosures, which allowed an individual not formally associated with the adviser to advise its clients.
The SEC’s order states that in 2015, Advanced Practice Advisors, LLC (“APA”) and its sole principal, Paul C. Spitzer, would not associate with an individual who was being investigated by FINRA, but allowed the individual’s son – who had no real experience nor any clients of his own – to join APA as an investment adviser representative.
The representative, who was supervised by Spitzer, allowed his father to advise APA clients even though he was not formally associated with the adviser. Further, the order finds that APA and Spitzer knew or should have known that the representative’s father was advising APA clients and failed to supervise the investment adviser representative. APA also failed to implement certain compliance policies and procedures.
APA and Spitzer did not admit or deny the findings, but consented to the entry of an order finding that they violated multiple sections of the Investment Advisers Act of 1940. Spitzer was ordered to cease and desist, and pay a $20,000 civil penalty.
Securities Fraud
SEC Charges Father and Son Investment Advisers With Fraud
On Jan. 19, the SEC charged Michael Sztrom, his son David Sztrom, and their company Sztrom Wealth Management, Inc., (“SWM”) with defrauding advisory clients.
The SEC states that between November 2015 and March 2018, the Sztroms provided investment advice to clients through SWM. However, they created the false impression that Michael Sztrom was associated with Advanced Practice Advisors, LLC (“APA”), a previously registered investment adviser. David, without any disclosure to clients, also allegedly allowed Michael to use APA’s clearing broker for client transactions, and Michael impersonated David on telephone calls with the clearing broker on at least 38 separate occasions, leading the clearing broker to terminate its agreement with APA.
Michael Sztrom, David Sztrom and SWM were charged with violating several provisions of the Investment Advisers Act of 1940. The SEC seeks permanent injunctions and civil money penalties against all defendants.
SEC Obtains Final Judgment Against Investment Adviser Who Misappropriated $5M From Clients
On Jan. 5, the U.S. District Court for the Southern District of New York entered a final consent judgment on Dec. 30 against an investment adviser previously charged with misappropriating client funds.
The SEC’s original complaint, filed in February 2017, states that Barry F. Connell misappropriated more than $5 million from clients while he was employed at a major financial institution. The SEC claims Connell performed the fraud by moving funds between client accounts and issuing falsified third-party wire transfer forms and checks.
Those funds allegedly were used to cover personal expenses and fund a “lavish lifestyle.”
Connell was found liable for $5,148,651 in disgorgement, which was satisfied when he paid restitution as part of a parallel criminal action brought against him by the district court. In addition, Connell is permanently barred from association with brokers, dealers, investment advisers and a number of other financial entities, as well as from participating in penny stock offerings.
SEC Settles Securities Fraud Charges Against Utah Company, Principals and Recidivists
On Jan. 8, the SEC settled charges against a Utah-based corporation, its principals and two securities fraud recidivists related to a pair of inter-related frauds that caused roughly $11 million in investor losses.
The SEC states that Thomas J. Robbins and Daniel J. Merriman, who met while serving time for separate securities fraud convictions, created a high-yield trading program and began soliciting investor funds in 2016. They did so via several misrepresentations, including that the Church of Jesus Christ of Latter-day Saints was a client, that they consistently generated high returns for other clients, and that investors could expect 20% in monthly profits. The alleges that trading program generated more than $10 million in losses.
In 2017, Robbins, Merriman, Clark J. Madsen and Mark W. Wiseman created a new scheme to fraudulently sell millions of shares in ConTXT, Inc., which Madsen founded, through unregistered transactions. Robbins and Merriman’s involvement in ConTXT was concealed, and a Private Placement Memorandum (“PPM”) provided to investors contained false and misleading information. The complaint states that all four men lied about the use of investor funds, misrepresented ConTXT’s financial condition and misappropriated investor funds, and sold at least $942,800 of ConTXT stock in unregistered transactions.
All four men, as well as ConTXT, were ordered to pay disgorgement plus prejudgment interest. All but Robbins faced civil penalties. Robbins and Merriman also agreed to a conduct-based injunction, and are barred from associating with brokers, dealers, investment advisers and a number of other financial entities, and also from participating in any penny stock offering.
SEC Obtains Final Judgment Against Kerry L. Hoffman for Fraud
On Jan. 8, the U.S. District Court for the Northern District of Illinois entered a final judgment against Kerry L. Hoffman on SEC charges of fraudulently selling securities to investment advisory clients and of acting as an unregistered broker.
The SEC, in a complaint filed in July 2019, states that Hoffman and another person raised more than $3.3 million by selling securities in GT Media, Inc. to 46 investors without disclosing certain financial conflicts of interest. The conflicts include the fact that Hoffman received compensation from GT Media, and had made short-term loans to GT Media repaid using investor funds.
Hoffman was ordered to pay $60,000 in disgorgement, $10,788 in prejudgment interest and a $93,000 civil penalty. On Jan. 11, the SEC barred Hoffman from association with any broker, dealer, investment adviser and a number of other financial entities, as well as from participating in any penny stock offering.
SEC Obtains Emergency Court Order to Halt Alleged Ongoing Fraud
On Jan. 11, the SEC obtained an emergency court order to freeze the assets of a California-based company and its founder to stop was an alleged ongoing investment fraud.
The SEC’s states that Justin Robert King and his company, Elevate Investments LLC, raised $7.4 million from investors since at least June 2019. The money was raised by offering interests in the Elevate Investment Fund, which does not exist. Further, while Elevate’s website claims that King’s trading resulted in a 61% return for client accounts between June 2019 through June 2020, he actually accumulated losses of $3.8 million during that period. While the website boasted a track record of client profits, King had consistently generated losses.
The complaint also alleges that King transferred $400,000 from clients’ brokerage accounts to his wife’s bank account between September 2020 and Dec. 1, 2020.
On Dec. 28, the district court granted the SEC’s request for a temporary restraining order against King and Elevate. That order froze the assets of King, Elevate and Shannon King, Justin King’s wife.
Real Estate Fund Manager Charged With Misappropriating $7M+ From Retail Investors
On Jan. 12, the SEC charged fund manager Eric C. Malley and his company, MG Capital Management L.P., with defrauding retail investors out of more than $7 million through two real estate funds managed by MG Capital.
The SEC states that starting in 2014, Malley and MG Capital raised $58 million worth of investments in MG Capital Management Residential Funds III and IV on the basis of false performance claims. Specifically, Malley and MG Capital falsely claimed they had managed two successful real estate funds with a combined $1.18 billion in value; in reality, those two funds never existed. They also claimed investors’ capital was “100 percent protected from loss” and secured by a $250 million balance sheet that did not exist.
Finally, the complaint states that more than $7 million in investor assets were misappropriated. The two funds suffered huge losses that ultimately forced them into wind down, but Malley and MG Capital allegedly used falsified financial reports to conceal those losses.
The SEC charged Malley and MG Capital with violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Malley also was charged with aiding and abetting the violations of MG Capital and violating the control person provision of Section 20(a) of the Exchange Act.
The SEC seeks injunctive relief, civil penalties and disgorgement of ill-gotten gains plus prejudgment interest.
SEC Wins Bench Trial Against Advisory Firm, Co-Owners, for Cherry-Picking Scheme
On Jan. 15, the U.S. District Court for the Western District of Louisiana entered final judgment in favor of the SEC against investment advisory firm World Tree Financial, LLC (“World Tree”), as well as its co-owners, Wesley Kyle Perkins and Priscilla Perkins.
World Tree and its co-owners were charged in 2018 with perpetrating a fraudulent cherry-picking scheme between July 2012-July 2015. They were also charged with misrepresentations to investors regarding the firm’s trading policies.
The court found that Wesley Perkins intentionally allocated profitable trades to favored accounts, including his own, while allocating unprofitable trades to two accounts with substantial assets controlled by one client. The court also found that Wesley and Priscilla Perkins, as well as World Tree, falsely represented to its clients that they were not trading in the same securities as World Tree’s clients, and that the scheme violated the firm’s stated trading policies.
Wesley Perkins and World Tree were found liable on all counts, involving violations of provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. Wesley Perkins and World Tree were ordered to pay civil penalties of $160,00 and $300,000, respectively, and to disgorge $347,947 plus prejudgment interest jointly and severally, and enjoined them from future violations of the charged provisions.
Priscilla Perkins was found to have violated the anti-fraud provisions of Section 17(a)(2) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. She was ordered to pay civil penalties of $80,000.
SEC Charges Investment Adviser, Others With Defrauding 17,000+ Retail Investors
On Feb. 4, the SEC charged three individuals and their affiliated entities with running a Ponzi-like scheme that raised more than $1.7 billion.
David Gentile, owner and CEO of GPB Capital, and Jeffry Schneider, owner of GPB Capital’s placement agent Ascendant Capital, told investors that an 8% annualized distribution payment was paid with money generated by GPB Capital portfolio companies. However, GPB Capital allegedly used investor money to pay portions of those distributions. GPB Capital and Gentile, with assistance from Jeffrey Lash, a former managing partner at GPB Capital, manipulated financial statements of certain funds managed by GPB Capital to make it appear that the funds’ income was closer to generating enough income to cover the payments than it was.
The SEC’s complaint charges Gentile, Schneider, GPB Capital, Ascendant Alternative Strategies with violating antifraud provisions of the Securities Act of 1933 and Securities Exchange Act of 1934; Lash with aiding and abetting certain of those violations; GPB Capital and Gentile with violating the antifraud provisions of the Investment Advisers Act of 1940; and GPB Capital with violating the registration and whistleblower provisions of the Exchange Act and the Advisers Act’s custody and compliance rules.
The SEC seeks disgorgement of ill-gotten gains, as well as prejudgment interest and penalties.
SEC Charges Three Individuals in Connection With Fraudulent Investment Adviser
On Feb. 5, the SEC charged Stephen Scott Moleski (a/k/a Steve Scott) and David Michael with fraud in connection with an investment adviser and private fund enterprise they operated. It also charged the pair, as well as their agent, Erik Christian Jones, with engaging in unregistered offerings of securities and acting as unregistered brokers.
In 2018 and 2019, the trio solicited investors to buy securities offered by a pair of unaffiliated companies. Roughly 30% of the funds collected were paid, directly or indirectly, to the defendants as commissions, yet none were registered as broker-dealers or affiliated with registered broker-dealers at the time.
The SEC also alleges that Moleski and Michael acted as investment advisers in connection with three private investment funds that they and their agents offered and sold to investors starting in 2019. Investors were misled into believing that the money they entrusted with the pair would be invested in one or more securities, but little of the money was actually invested. Instead, it was used to pay personal and business expenses, including the commissions.
Moleski and Michael were charged with violating various provisions of the Securities Act of 1933, Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. Jones was charged with violating provisions of the Securities Act and Securities Exchange Act.
The SEC seeks injunctions, disgorgement plus prejudgment interest and civil penalties.
SEC Charges Former Investment Adviser With Fraud
On Feb. 9, the SEC charged former Minneapolis-area investment adviser Isaiah L. Goodman for allegedly defrauding at least 20 advisory clients out of $2.25 million.
The SEC states that between at least September 2018 to November 2020, Goodman, who did business through Becoming Financial Advisory Services, LLC, falsely represented to clients that he would invest their money in securities such as mutual funds and stocks for their retirement and investment accounts. Instead, Goodman allegedly used their money for personal and business expenses that included car payments, building expenses and vacations.
Goodman also allegedly made Ponzi-like payments to certain clients, and provided clients with fake account statements and computer screenshots misrepresenting how their funds were being invested.
Goodman was charged with violating provisions of the Securities Act of 1933, Securities Exchange Act of 1934 and Investment Advisers Act of 1940. The SEC seeks injunctive relief, disgorgement with pre-judgment interest and civil penalties.
SEC Obtains Final Judgment Against Connecticut Investment Adviser Who Misappropriated Client Funds
On Feb. 22, the SEC entered a final judgment against former Connecticut investment adviser James T. Booth.
The SEC alleges that Booth bilked $4 million in assets from more than three dozen retail investors, including senior citizens saving for retirement, via a Ponzi scheme. Booth was permanently enjoined from future violations of provisions of the Securities Act of 1933, Securities Exchange Act of 1934 and Investment Advisers Act of 1940.
In a parallel action by the U.S. Attorney’s Office for the Southern District of New York, Booth pleaded guilty to one count of securities fraud. On Nov. 18, 2020, he was sentenced to 42 months in prison followed by three years of supervised probation, and was ordered to pay $4,969,689 in forfeiture.
SEC Charges Unregistered Investment Adviser With Defrauding Investors for 10 Years
On March 9, the SEC charged South Carolina-based George Heckler with operating a decade-long fraud through two private hedge funds formed to conceal massive losses incurred by Conestoga Holdings LP (“Conestoga”), a fund controlled by Heckler.
The SEC states that Heckler, after forming hedge funds Cassatt Short Term Trading Fund LP (“Cassatt”) and CV Special Opportunity Fund LP (“CV”) transferred Conestoga’s poorly performing assets to those funds, then misrepresented the funds’ objectives and performance to investors in those two funds. Between 2009 and 2019, Heckler allegedly told investors that their funds were being used to engage in very short-term equity trading and that their investments were consistently generating positive returns.
In reality, a substantial amount of investors’ funds were not invested. Heckler raised at least $90 million in new investor capital through Cassatt, CV and three other entities he controlled; allegedly, more than $32 million was used to pay prior investors and more than $1 million for Heckler’s personal use.
The SEC’s complaint charges Heckler with violations of the antifraud provisions of the federal securities laws. Heckler has agreed to settle the SEC’s charges by consenting to a judgment that permanently enjoins him from future violations of the charged provisions and bars him from the securities industry. Disgorgement and penalties will be resolved at a future date.
SEC Charges Texas Investment Adviser, Two Executives, in Connection With $17M Fraud
On March 11, the SEC charged Texas-based investment adviser APEG Energy, GP (“APEG”) and its owners, Patrick E. Duke and Paul W. Haarman, with fraudulently raising more than $17 million for an oil-and-gas investment fund they managed. The SEC also charged Duke and Haarman with misappropriating more than $2.6 million.
The SEC states that between December 2015 and October 2016, Duke and Haarman engaged in a fraudulent scheme involving the sale of limited partnership interests in the fund, including numerous false and misleading statements about the fund’s risks, and their expertise in the oil and gas industry.
Duke and Haarman allegedly told investors that their compensation was limited to a 2% management fee; however they improperly took nearly $2.7 million in additional “acquisition fees” not disclosed to investors.
Duke, Haarman and APEG Energy GP are charged with violating provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties against each defendant.
SEC Obtains Emergency Freeze Against California Trader Charged With Posting False Stock Tweets
On March 17, the SEC announced fraud charges, an asset freeze and other emergency relief against a California-based trader who used social media to spread false information about a defunct company while also secretly profiting by selling his own holdings in that company’s stock.
The SEC states that on Dec. 9, 2020, Andrew L. Fassari began accumulating more than 41 million shares in Arcis Resources Corporation (“ARCS”). Shortly thereafter, he allegedly used the Twitter handle @OCMillionaire to tweet false statements about ARCS to his thousands of followers, including claiming that ARCS was reviving its operations and being backed by “huge” investors. In that time, he allegedly made 120 tweets referencing “$ARCS,” dozens of which were false and misleading.
Further, between Dec. 10 and 16, 2020, Fassari allegedly sold all his shares in ARCS, capitalizing on a 4,000%-plus jump in ARCS shares to lock in a profit of more than $929,000.
Fassari is charged with violating provisions of the federal securities laws, the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC is seeking a permanent injunction, disgorgement, prejudgment interest and a civil penalty from Fassari.
SEC Charges Investment Adviser With Defrauding Advisory Clients
On March 30, the SEC announced charges against Douglas E. Elstunfor repeatedly defrauding and breaching his fiduciary duty to advisory clients through his formerly registered investment adviser, Crossroads Financial Management, Inc. (“CFM”).
From 2015 through 2018, Elstun fraudulently overcharged advisory clients via undisclosed fees, as well as by applying advisory fees to non-advisory assets, according to the SEC’s complaint.
The SEC also alleges that Elstun misled advisory clients about his trading in high-risk, daily leveraged and/or inverse exchange-traded funds (“ETFs”) by failing to disclose the substantial risks of the products, and by inaccurately representing the products as “insurance” or “hedges” for their portfolios. Those investments were unsuitable and risky, and inconsistent with Elstun’s clients’ investment objectives and risk tolerances. Ultimately, Elstun’s clients lost millions because of his trading.
Elstun was charged with violations of several provisions of the Advisers Act. The SEC seeks permanent injunctions, disgorgement with prejudgment interest and civil penalties.
Insider Trading
SEC Obtains Final Judgment Against Former Portfolio Manager for Insider Trading
On Feb. 2, the U.S. District Court for the Southern District of New York entered final judgment against Mathew Martoma, a former portfolio manager at CR Intrinsic Investors, LLC, a former hedge fund advisory firm and affiliate of S.A.C. Capital Advisors, L.P.
The SEC filed its initial complaint in November 2012, charging Martoma with insider trading. A doctor involved in clinical trials for a drug being jointly developed by two pharmaceutical companies allegedly provided confidential trial information to Martoma. Martoma then caused trades in the securities of both pharmaceutical firms to be made in several hedge fund portfolios ahead of a negative trial announcement, resulting in $275 million in profits and avoided losses across funds advised by CR Intrinsic and S.A.C. Capital.
In 2013, the court established a fund to compensate the fraud victims. The fund comprised more than $601 million in disgorgement, prejudgment interest and civil penalties; more than $531 million was distributed to more than 4,800 harmed investors.
In 2014, Martoma was convicted of insider trading. He was sentenced to nine years in prison and ordered to forfeit more than $9 million. He has now consented to the entry of a final judgment enjoining him from future violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.
SEC Charges Fraudster With Selling “Insider Tips” on the Dark Web
On March 18, the SEC charged California-based James Roland Jones with perpetrating a fraudulent scheme to sell what he called “insider tips” on the dark web, which allows users to access the internet anonymously and is frequently used for illegal activity.
The SEC states that in late 2016 and 2017, Jones searched the dark web for material, nonpublic information (“MNPI”) to use for his own securities trading. Jones allegedly lied about possessing MNPI to gain access to a website claiming to be an insider trading forum.
The complaint alleges that Jones subsequently developed a scheme to sell purported insider tips to others on the dark web, and that in spring 2017, he offered and sold “insider tips” on one of the dark web marketplaces to several users paying in bitcoin.
Jones is charged with violating the antifraud provisions of the federal securities laws. Jones agreed to a settlement that permanently enjoins him from further violating these provisions. Disgorgement and civil penalties will be determined at a later date.
This is the SEC’s first enforcement action involving alleged securities violations on the dark web.
Digital Assets
SEC Charges Cryptocurrency Issuer With Making False and Misleading Statements
On Jan. 15, the SEC settled charges against financial technology Wireline, Inc., for making materially false and misleading statements in connection with an unregistered offer and sale of digital asset securities.
The SEC’s order states that, starting in 2017, Wireline raised more than $16 million in investor funds to develop a “marketplace” for the development and sale of microservices. Wireline also told investors that it was going to create a digital token that would be used by software developers and end users in the proposed marketplace.
However, wireline distributed marketing materials that materially misrepresented the platform’s functionality and the timing of the token distribution. Wireline also offered and sold digital assets through simple agreements for future tokens (“SAFTs”), but the offering was not registered pursuant to federal securities laws, nor did it qualify for an exemption, and tokens were not distributed pursuant to the SAFTs.
Wireline was found to have violated antifraud and registration provisions of the Securities Act of 1933. The firm was ordered to cease and desist, pay a $650,000 penalty to be distributed to investors, and perform several other undertakings, including informing investors that tokens will not be distributed pursuant to their SAFTs.
SEC Charges Three in Digital Asset Frauds
On Feb. 1, the SEC charged three individuals with defrauding hundreds of retail investors out of more than $11 million through a pair of fraudulent and unregistered digital asset securities offerings.
The SEC’s complaint alleges that between December 2017 and May 2018, Kristijan Krstic, founder of Start Options and Bitcoiin2Gen, and John DeMarr, the primary U.S.-based promoter for these companies, fraudulently induced investors into buying digital asset securities. During this time period, the pair touted Start Options’ purported digital asset mining and trading platform, falsely claiming that Start Options was “the largest Bitcoin exchange in euro volume and liquidity” and “consistently rated the best and most secure Bitcoin exchange by independent news media.”
Starting in January 2018, Krstic and DeMarr promoted Bitcoiin2Gen’s unregistered initial coin offering (“ICO”) of digital asset securities known as B2G tokens. Another individual, Robin Enos, worked with DeMarr to draft fraudulent promotional materials that Enos knew would be disseminated to the investing public. “Bitcoiin2Gen was a sham,” the order states , and Krstic and DeMarr allegedly misappropriated millions of dollars of investor funds for their own benefit.
The SEC is seeking injunctive relief, disgorgement plus interest, penalties, and an officer-and-director bar against Krstic and DeMarr.
SEC Charges Digital Asset Trading Platform, CEO With Registration Violations
On Feb. 17, the SEC announced charges against Coinseed, which purported to offer a mobile investment app enabling users to invest in digital assets, and its CEO, Delgerdalai Davaasambuu, in connection with Coinseed’s offer and sale of digital asset securities.
Between at least December 2017 and May 2018, Coinseed and Davaasambuu raised at least $141,410 by selling digital asset securities called “CSD tokens” to hundreds of investors. Coinseed and Davaasambuu allegedly did not file a registration statement for the offering, which also failed to satisfy any exemption from registration.
Coinseed and Davaasambuu were charged with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. The SEC is seeking permanent injunctive relief, disgorgement plus prejudgment interest and civil penalties.
Risk Alert: The Division of Examinations’ Continued Focus on Digital Asset Securities
On Feb. 26, the SEC released a Risk Alert related to investment advisers managing digital asset securities, as well as other digital assets and derivative products, for clients either directly or indirectly through pooled vehicles. The SEC’s EXAMS will focus on the following compliance areas, among others:
- Investment Advisers:
- Portfolio management, such as classification of digital assets managed on behalf of clients, due diligence on digital assets, and management of risks and complexities associated with “Forked” and “Airdropped” digital assets.
- Whether advisers are making and keeping accurate books and records, including recording trading activity in accordance with requirements where applicable.
- Compliance with the custody rule.
- Disclosures to investors regarding the unique risks associated with digital assets.
- Broker-Dealers:
- Safekeeping of funds and operations.
- Compliance with registration requirements.
- Anti-Money Laundering programs’ ability to consistently address or implement routine searches, or when they have implemented routine searches, whether those searches check against the Specially Designated Nationals list maintained by the U.S. Department of the Treasury’s Office of Foreign Assets Control.
SEC Halts Alleged Ongoing Fraud Involving Digital Asset Trading Fund
On March 11, the SEC filed an emergency action and obtained a temporary restraining order and asset freeze against Idaho-based Shawn C. Cutting. The SEC alleges that Cutting raised at least $6.9 million from more than 450 investors between October 2017 through at least May 2020. Cutting told investors that he would pool their money into a fund that invested in various digital assets. Instead, he used at least hundreds of thousands of dollars of the funds raised on personal expenses including cars, home improvements and his daughter’s wedding.
Allegedly, Cutting emailed investors fictitious updates that described the purported trading and investment returns, and that he prolonged the fraud by making at least $760,000 in Ponzi-like payments to investors. Lastly, Cutting falsely represented to investors that he had worked as a financial adviser and that he held securities licenses.
The SEC charges Cutting of violations of several provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC seeks emergency relief, a permanent injunction, disgorgement of allegedly ill-gotten gains with prejudgment interest and a civil penalty.
SEC Charges New Hampshire Issuer of Digital Asset Securities With Registration Violations
On March 29, the SEC charged blockchain company LBRY with conducting an unregistered offering of digital asset securities.
The SEC states that from at least July 2016 through February 2021, LBRY sold digital asset securities called “LBRY Credits” to numerous investors, and received more than $11 million in U.S. dollars, Bitcoin and services from purchasers. However, LBRY did not file a registration statement for the offering, and the offering failed to satisfy any exemption from registration.
LBRY is charged with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. The SEC seeks permanent injunctive relief, disgorgement plus prejudgment interest, and civil penalties.
