An Optimistic Outlook
Happy summer from the Greyline team! As we approach peak vacation season, we hope that each and every one of you is taking ample time away from work to reverse the work-from-home fatigue many have experienced during the past 15 months.
As an organization, we are cautiously optimistic that we will see a return to normalcy in the coming months. In fact, we are planning to open several new offices across the country in early September. We are eager not only to see familiar faces again, but also to finally meet all the new team members who have joined us in the past year and a half.
As far as regulatory updates go, we continue to see one of the most active examination environments in recent memory, both in terms of occurrence and scope. Overall, the primary areas of focus tend to track closely with the SEC’s 2021 exam priorities – operational resiliency (i.e., business continuity), fintech and digital assets, investment and expense allocation, custody, side letters and investor preferences, valuation, GP-led restructurings, conflicts of interest, and adequacy of disclosure.
While many of these have been standard issue for years, environmental, social and governance (“ESG”) related inquiries have also become far more common. With the proliferation of strategies centralized around ESG and socially responsible investing (“SRI”), the SEC has expressed skepticism that advisers are truly living up to their claims. To date, most SEC queries have been largely exploratory, which indicates that the Commission is attempting to educate itself on what the industry is doing. But it would not be surprising to see a fraud-based enforcement action in the near future rooted in ESG/SRI misrepresentations.
In terms of industry updates, we have seen a steady stream of new launches across strategies and asset classes. Hedge fund inflows are the highest in years, allocators continue to pour capital into the private markets, and registered funds continue to evolve and innovate. We have also seen an uptick in new “alternative alternatives,” including crypto and digital asset funds, robo-advisors and fintech-based investing platforms, as well as co-investment syndicates, real estate and other more traditional investing forums. Despite some market turbulence as of late, this is a great sign for the investment management community, although much is yet to be seen as it relates to potential tax and regulatory changes under the Biden administration.
Sean Wilke
Partner and Head of Strategic Growth, Greyline
The Rise in ESG Investing
From a compliance standpoint, it seems that every day brings a new risk alert, guidance, presentation, news article, or Securities and Exchange Commission (“SEC”) staff opinion regarding the ever-increasing interest in investing based on environmental, social, and corporate governance (“ESG”) factors. Firms considering ESG factors in their investment decisions might be compelled to do so for a number reasons, whether it’s because their investors have sustainability interests, or to keep up with the trend toward ESG in some world’s largest banks. Some ESG touchpoints from the previous quarter are outlined below.
House Passes ESG Disclosure Act
The United States has generally been slower than other areas of the world, such as the European Union, to address climate change and other ESG concerns. Similarly, the SEC had been stalling on ESG initiatives for years. Since President Joe Biden began his administration, however, the SEC has turned to the ESG agenda, notably by forming its Climate and ESG Task Force in the Division of Enforcement in Q1 2021.
Likewise on Capitol Hill, on June 16, 2021, the U.S. House of Representatives passed the ESG Disclosure Simplification Act as part of the larger Corporate Governance Improvement and Investor Protection Act. The ESG legislation was introduced by Rep. Juan Vargas, D-Calif. This law would require the SEC to create standardized ESG metrics and mandate ESG disclosures to publicly traded companies.
While the bill’s fate in the U.S. Senate is unclear, those advocating for ESG concerns consider this step a victory. The SEC currently does not require firms (public or private) to adopt or implement ESG programs, and this marks the first time the House passed sweeping legislation on ESG issues. According to House Financial Services Chairwoman Maxine Waters, D-Calif., the bill “will create clear, consistent disclosure standards for issuers and finally provide investors and our markets with the information they need to make the best investment decisions possible and to hold the companies they’re invested in accountable.”
In short, the law would require publicly traded companies to disclose ESG metrics and their view on the link between ESG considerations and performance; allow the SEC to consider independent and standardized disclosure requirements; and require public companies to disclose industry-tailored climate information, reporting on political activities, details on executive pay and details on hiring activity. Final reporting requirements will likely be on a quarterly and/or annual basis.
Division of Examinations Risk Alert
The SEC Division of Examinations (“the Division”) issued a risk alert in April 2021 regarding ESG investing, and how the increased interest in ESG investing has led to certain issues. There is currently no SEC requirement for firms to implement ESG programs, and thus no standardized program to follow. ESG definitions and criteria are inconsistent amongst firms, which has led to deficient programs. The following are highlighted as SEC examination focus areas in the risk alert: (i) portfolio management, (ii) performance advertising and marketing, and (iii) compliance programs.
Below are the highlighted deficiencies:
- Portfolio management practices were inconsistent with disclosures about ESG procedures;
- Controls were inadequate to maintain, monitor and update clients’ ESG-related investing guidelines, mandates and restrictions;
- Proxy voting may have been inconsistent with advisers’ stated approaches;
- Unsubstantiated or other potentially misleading claims regarding
ESG approaches; - Inadequate controls to ensure that ESG-related disclosures and marketing are consistent with the firm’s practices;
- Compliance programs did not adequately address relevant ESG
issues; and - Compliance programs were less effective when compliance personnel had limited knowledge of relevant ESG-investment analyses or oversight over ESG-related disclosures and marketing decisions.
The SEC noted the below areas that did work:
- Disclosures that were clear, precise and tailored to firms’ specific approaches to ESG investing, and which aligned with the firms’ actual practices;
- Policies and procedures that addressed ESG investing and covered key aspects of the firms’ relevant practices; and
- Compliance personnel that are knowledgeable about the firms’ specific ESG-related practices.
It is important to consider implementing and effectively monitoring an ESG program if the firm is marketing itself as an ESG-focused firm.
Sustainable Finance Disclosure Regulation
The European Union (“EU”) has generally gone further than the United States in ESG regulations with the enactment of the Sustainable Finance Disclosure Regulation (“SFDR”). The SFDR imposes mandatory ESG disclosure obligations for asset managers or other financial market participants. There are two tiers of obligations: one with basic website disclosure obligations (Level 1) and the other with more detailed disclosure obligations (Level 2). Level 1 requirements apply from March 10, 2021, forward, while Level 2 requirements will apply from July 1, 2022, forward.
At Level 1, which applies to all asset managers, the SFDR requires managers to disclose on their websites statements summarizing their ESG-related decisions. If ESG factors are not considered in investment decisions, then a statement must be disclosed as to why the manager does not do this, or whether it intends to in the future.
If the asset manager is at Level 2, meaning it has a specific fund or strategy that the firm intentionally markets as ESG-compliant, then a second set of disclosures is needed. Some items that must be included in the disclosure include:
- A description of any ESG impacts or ESG factors taken into considerations when making investment decisions, based on 14 key indicators (nine relating to environment, five covering social factors);
- A summary of the ESG disclosures and the relevant reference period;
- A description of policies to identify and prioritize ESG factors, the date of their approval and description of the methodologies to select the indicators, and description of the data sources used;
- Information on engagement policies and policies relating to reducing adverse ESG impacts; and
- References to international standards, including a description of adherence to responsible business conduct codes, internationally recognized standards for due diligence and reporting, and where relevant, the degree of alignment with the objectives of the Paris Agreement.
(The complete regulation and a template are here.)
Level 2 asset managers are required to include additional disclosures, but these are not yet final.
Other Resources
SEC staff have recently given speeches on ESG investing, providing asset managers with some insight into how they plan to confront ESG trends. Some important resources include:
- Climate, ESG, and the Board of Directors: “You Cannot Direct the Wind, But You Can Adjust Your Sails”
- Can the SEC Make ESG Rules that are Sustainable?
The SEC’s webpage dedicated to Climate and ESG Risks and Opportunities can also be found here. This page houses the SEC’s request for comments on climate disclosure and other ESG initiatives.
Table of Contents
Q1 2021 Regulatory Updates
Greyline Employee Spotlight: Annie Kong
Greyline Employee Spotlight: Annie KongAnnie Kong is a Senior Vice President and Head of the Venture Capital at Greyline, and she was the first employee hired back in 2016. She’s based out of our San Francisco office.
Q. What do you like most about working for Greyline?
A. The amazing clients we work with who are making an impact on our world daily.
Q. Why did you decide to work in the compliance field?
A. It is a natural fit to my personality. I love learning, and the wealth of knowledge I get every day from my colleagues and clients is priceless.
Q. What is your superpower and why?
A. I believe I can read people fairly well because I often think two steps ahead and it plays out just as I imagined it.
Q. What are your hobbies outside of work?
A. Baking! I am currently obsessed with making Basque cheesecakes and flower cupcakes.
Q. Where do you land on the pineapple-on-pizza debate?
A. I love a savory fruit dish, so pineapple definitely belongs!
Announcements
In the News: Greyline has been shortlisted for two 2021 HFM US Services Awards in the Best Advisory Firm – Regulation and Compliance and Best Technology Firm – Newcomer categories.
Listen Up: The first episode of Greyline’s new podcast will be available later this month. For more details, follow us on LinkedIn.
Regulatory Updates
SECURITIES FRAUD
Indianapolis-Area Resident Charged Fraudulent Offering
On April 1, the SEC announced partially settled charges against an Indiana resident it said raised more than $11 million via fraudulent and unregistered securities offerings.
Between August 2016 and May 2019, George S. Blankenbaker – along with his companies, StarGrower Commercial Bridge Loan Fund 1 LLC, StarGrower Asset Management LLC, and Blankenbaker Investments Fund 17 LLC – fraudulently raised millions of dollars from 109 investors, many of whom were elderly. Specifically, Blankenbaker and his companies falsely told investors that their funds would be used to make short-term loans to food exporters in Asia, and that their investments were secured by shipping containers holding the food products.
However, at least $8.1 million of that money was misused. The SEC alleges that at least $1.7 million was misappropriated for Blankenbaker’s own benefit, at least $4 million was directed into hemp companies, and nearly $1 million in new investor funds went to Ponzi-style payments to earlier investors.
Blankenbaker consented to the entry of a judgment permanently enjoining him from violating the charged provisions. He is barred from being an officer and/or director, and must pay disgorgement, prejudgment interest and a civil penalty, with the amounts to be determined later. Blankenbaker’s companies have also consented to the entry of a judgment imposing a permanent injunction, and they will have to pay nearly $5.2 million in disgorgement and prejudgment interest.
Also on April 1, the U.S. Attorney’s Office for the Southern District of Indiana filed criminal charges against Blankenbaker in a parallel action.
Atlanta Resident Charged With Offering Fraud, Misappropriating Funds
On April 1, the SEC charged an Atlanta resident with defrauding and misappropriating more than $1.6 million in investor funds in connection with a variety of business and real estate ventures.
The SEC states that Richard J. Randolph III, raised funds from at least 14 investors through fraudulent promotion of several projects. They allege he used false financial statements based on fictitious assets, and made false claims about impending projects. The SEC states that many of these projects never existed; Randolph greatly exaggerated the value of those that did.
The SEC also alleges that Randolph misappropriated “a substantial amount” of investor proceeds, including making more than $400,000 in unauthorized cash withdrawals, using tens of thousands of dollars for personal expenses, and using investments in one business to fund other ventures that the investors had no interest in.
Randolph has agreed to settle the SEC’s charges by being permanently enjoined from violating the charged provisions, barred from acting as an officer or director of a public issuer, and participating in the issuance, purchase, offer or sale of any security. He also will pay disgorgement, prejudgment interest and civil penalties of an amount to be determined.
Also on April 1, the U.S. Attorney’s Office for the Northern District of Georgia filed criminal charges against Randolph in a parallel action.
SEC Obtains Final Judgment Against Lawyer Who Assisted Fraud
On April 5, the U.S. District Court for the Eastern District of New York entered a final consent judgment against Evan Greebel. Greebel was the former lawyer to publicly traded pharmaceutical firm Retrophin, which was founded by Martin Shkreli.
The SEC states that between September 2013 and March 2014, Shkreli, then the CEO, fraudulently induced Retrophin to issue stock and make cash payments to certain disgruntled investors in hedge funds Shkreli owned. The SEC alleges that Shkreli had investors enter into agreements with Retrophin that misleadingly stated the payments were for consulting services, but instead the payments went toward the release of potential claims against Shkreli.
The SEC adds that Greebel, who was Retrophin’s outside counsel and served as corporate secretary at the time, aided and abetted this misconduct by drafting sham consulting agreements, and failing to disclose the true purpose of the agreements to Retrophin’s Board of Directors.
Greebel was also convicted in a related criminal case, where he consented to the entry of a final judgment enjoining him from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and barring him from serving as an officer or director of a public company.
Note: In 2020, Retrophin changed its corporate name to Travere Therapeutics, which remains publicly traded on the Nasdaq under the ticker TVTX.
Actor Charged With Operating $690 Million Ponzi Scheme
On April 6, the SEC announced an asset freeze and other emergency relief against Los Angeles-based actor Zachary Horwitz and his company, 1inMM Capital, LLC. The SEC alleges that Horwitz and 1inMM raised more than $690 million in a Ponzi scheme involving the purported purchase of film rights to sell them to Netflix and HBO.
The SEC alleges that Horwitz falsely claimed to have a successful track record of selling movie rights to Netflix and HBO, even though neither Norwitz nor 1inMM had ever sold movie rights to (nor ever done any business with) either company. Horwitz allegedly showed investors fabricated agreements and emails regarding these purported deals, and promised 35%-plus returns to investors. However, the SEC states that Horwitz paid returns on old investments with funds from new investments, and misappropriated investor funds on personal expenditures such as a multimillion-dollar home, trips to Las Vegas and the hiring of a celebrity interior designer.
The SEC is seeking a permanent injunction, disgorgement, prejudgment interest and civil penalties against Horwitz and 1inMM, with an amount to be determined at a later date.
SEC Charges IIG Co-Founder With Fraud
On April 15, the SEC announced partially settled charges against Martin Branch – co-founder of International Investment Group (IIG), a formerly registered investment adviser – in connection with a fraudulent scheme to overvalue assets held in one of IIG’s hedge funds.
The SEC alleges that from October 2013 to at least July 2018, Silver, also the chief operating officer of IIG, defrauded investment advisory clients by grossly overvaluing assets in IIG’s flagship hedge fund. That resulted in the payment of inflated fees to IIG, some of which were paid to Silver. Additionally, the SEC claims that Silver falsely reported to investors that certain fake and overvalued loan assets that IIG sold between funds it advised were legitimate, fairly valued assets.
Silver cooperated with the SEC and consented to a permanent injunction from violations of the charged provisions, and he will pay monetary relief in an amount to be determined later.
IIG, as well as other individuals, were previously charged for their roles in the fraud.
Binary Options Trading Platform, Two Top Executives Charged With Fraud
On April 16, the SEC charged Israel-based Spot Tech House Ltd., formerly known as Spot Option Ltd., as well as two former top executives, with deceiving
U.S. investors out of more than $100 million through the fraudulent and unregistered online sales of binary options.
The SEC states that Spot Option – under the control of founder and former CEO Malhaz Pinhas Patarkazishvili (aka Pini Peter) and former president Ran Amiran – developed “nearly all” of the products and service necessary to offer and sell binary options through the internet, including their own proprietary trading platform. They licensed these products and services to “white label partners,” who directly marketed the binary options.
According to the complaint, Spot Option told white label partners to aggressively market the options as highly profitable investments, but investors were not told that these partners were counter-parties on all investor trades, so they profited when investors lost money. To make the scheme profitable, Spot Option allegedly instructed partners to permit investors to withdraw only a portion of the money they had deposited, devised a manipulative payout structure for binary options trades, and designed its platform to increase the profitability that investors’ trades would expire worthless.
The SEC states that U.S. and foreign investors lost a “substantial” portion of the money they deposited because of these deceptive business practices, while the defendants made millions of dollars through the scheme.
The SEC’s complaint seeks disgorgement of ill-gotten gains, prejudgment interest, financial penalties and permanent injunctions against all three defendants.
Final Judgment Entered Against Investment Adviser Who Defrauded Retired Couple
On April 19, the U.S. District Court for the District of Connecticut entered a judgment against unregistered investment adviser Hai Khoa Dang for defrauding a retired couple who had been his advisory clients for 20 years.
The SEC states that Dang gained complete control over the couple’s brokerage accounts and misled them about his risky trading strategies. While he made the couple believe that he would invest most of their investment portfolio conservatively with a minimum of $250,000 in cash, Dang instead engaged in risky, unauthorized options trading, causing the couple’s accounts’ value to drop from more than $2.2 million in February 2018 to roughly $27,000 in November 2019.
Dang allegedly also hid the fact that he had depleted virtually all of their retirement savings in that time.
Dang has been enjoined from violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and ordered to pay a $2.2 million civil penalty, as well as $7,249 in disgorgement and prejudgment interest.
SEC Obtains Judgment Against Jewelry Wholesaler for Fraudulent Securities Offering
On April 20, the U.S. District Court for the Eastern District of New York entered a consent judgment against Gregory Altieri for defrauding current and retired police officers and firefighters, among others, via a Ponzi-like scheme, and for misappropriating investor funds.
The SEC says that, Altieri raised more than $69 million from at least 80 investors by falsely claiming that their investments would be used to acquire jewelry. He allegedly guaranteed quick returns of at least 30% and as much as 100% on their investments. Instead, Altieri used most of the funds to perpetuate and conceal his fraudulent scheme, using funds from new investors to pay earlier investors their anticipated returns.
The SEC also alleges that Altieri misappropriated at least $3.8 million in investor funds.
Altieri was permanently enjoined from violating 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. He also was ordered to pay disgorgement, prejudgment interest and a civil penalty in an amount to be determined.
SEC Charges Fund Manager, Former Race Car Team Owner With Multimillion-Dollar Fraud
On April 23, the SEC charged Andrew T. Franzone, former owner of a race car team, and investment adviser FF Fund Management, LLC (“FFM”) with fraudulently raising and misappropriating millions of dollars from the sale of limited partnership interests in a private fund, FF Fund I, LP.
The SEC alleges that Franzone, sole owner and principal of FFM, defrauded approximately 90 investors of more than $38 million by misrepresenting the fund’s strategy and investments, failing to eliminate or disclose conflicts of interest, misappropriating fund assets, and falsely stating that the fund would be audited annually. In particular, Franzone represented to potential and existing investors that the fund would hold a highly liquid portfolio primarily focused on options and preferred stock trading when in fact he invested some of the fund’s assets in highly illiquid private companies and real estate ventures.
However, Franzone instead diverted the remaining fund assets to an entity he owned for the purchase of a garage to store his personal race car collection, among other uses. Franzone’s management of the fund was subject to numerous conflicts he did not eliminate or disclose, including allegedly taking personal loans from the founders of at least two companies in which the fund invested. The SEC adds that Franzone pledged assets to secure other loans for his own personal benefit, and misappropriated fund assets. Lastly, the SEC alleges that Franzone and FFM removed a critical investor safeguard by not having the fund audited on an annual basis.
The SEC seeks disgorgement of ill-gotten gains, civil penalties and permanent and conduct-based injunctive relief.
Previously Barred Broker Charged With Defrauding Investors in Pre-IPO Investment Scheme
On April 27, the SEC charged previously barred securities broker Peter R. Quartararo with fraudulently raising funds from investors, purportedly to buy shares in prominent private companies prior to their initial public offerings (IPOs).
The SEC states that Quartararo began soliciting investors to invest in “unicorn” companies through him. Those companies included Peloton Interactive, Inc. (PTON) and Airbnb, Inc. (ABNB), both of which were expected to increase in value when those companies went public.
Quartararo raised $436,000 from four investors to purchase purported pre-IPO shares, but the SEC states that Quartararo never bought or held any pre-IPO shares in those companies. Instead, the funds were used on payments for his own Maserati, as well as for the benefit of four relief defendants – his business associate, Paul Casella, a convicted felon and former broker who also was barred by FINRA; Casella’s company, Private Equity Solutions, Inc.; Quartararo’s father, Leonard Quartararo; and Quartararo’s girlfriend, Lisa Eckert.
The SEC seeks disgorgement of ill-gotten gains with prejudgment interest from Quartararo and the four relief defendants, as well as an injunction and civil penalty against Quartararo.
Fraudster Gets More Than 13 Years in Prison in Parallel Criminal Case
On May 13, DaRayl D. Davis, whom the SEC charged with raising millions of dollars from investors by selling fictitious financial products, was sentenced to 160 months in prison and ordered to pay restitution of more than $7.1 million.
The SEC’s complaint alleges that Davis hosted seminars and used his religious affiliation to gain investors’ trust. It adds that he fabricated documents and made false statements to support the sale of fictitious financial products. The SEC claims that Davis did not invest raised funds as represented, but instead used them to pay for his lavish lifestyle, repay prior investors and continue his fraudulent scheme.
The SEC’s litigation against Davis and relief defendant Affluent Advisory Group, LLC is ongoing.
Texas Investment Adviser, Three Individuals Charged With Defrauding Advisory Clients, Retail Investors
On May 13, the SEC charged investment adviser Knight Nguyen Investments and three individuals with scheming to invest funds from advisory clients and retail investors in at least five fraudulent securities offerings.
According to the SEC, Knight Nguyen majority owner Chris Lopez and representative Forrest Jones said the firm was an established investment adviser with expertise in low-risk alternative investments, but in reality, Lopez had no experience as a securities professional before forming Knight Nguyen, and the firm had little or no experience with alternative investments.
The SEC adds that Lopez and Jones largely targeted older and unsophisticated investors seeking to preserve or grow their retirement savings, telling them Knight Nguyen only invested in “proven” companies meeting the firm’s stated investment criteria. However, investor funds were only placed in high-risk securities issued by companies that did not meet Knight Nguyen’s investment criteria, and in fact were owned or controlled by Lopez and/or his brother, Jayson Lopez.
According to the complaint, Knight Nguyen, Chris Lopez, and Jones raised approximately $3.7 million from at least 70 advisory clients and retail investors between March 2016 and September 2018. Jayson Lopez is alleged to have aided and abetted by misusing investor funds and helping fabricate false financial statements and other documents.
Partnership, Four Individuals Charged in Connection With Fraudulent Investment Offering
On May 20, the SEC charged LFS Funding Limited Partnership and four individuals with engaging in fraud in connection with an unregistered offering of the partnership’s securities.
The SEC states that Stephen Michael Thompson, Steven Robert Comisar, Dale Jay Engelhardt and Ross Gregory Erskine raised more than $618,000 from investors through an offering of limited partnership securities interests in LFS Funding.
Thompson, who has a history of securities law violations, allegedly possessed undisclosed de facto control over LFS Funding, but other people were named as nominal general partners in an effort to conceal Thompson’s involvement. Thompson also recruited and engaged Comisar, Englehardt, and Erskine as salespersons to solicit investors on LFS’s behalf, even though none of them were registered as a broker or a dealer.
Additionally, the offering documents states that investments would be used to fund two medical clinics, but were materially misleading because they failed to disclose that funds would be used to pay more than $170,000 in total commissions to unregistered salespersons, or that Thompson was engaged in a skimming scheme. LFS Funding also included materially misleading statements in its Forms D filed with the SEC about control of the partnership, as well as compensation paid to salespersons.
LFS Funding Limited Partnership and Thompson have agreed to settle the SEC’s charges by consenting to the entry of judgments that permanently enjoin them from violating charged provisions. The judgment against Thompson also permanently enjoins him from soliciting any purchase or sale of any security; participating in the issuance, purchase, or sale of any security; or acting as an officer or director; and imposes a civil penalty. The SEC seeks permanent injunctions, disgorgement plus prejudgment interest, and civil penalties against Comisar, Englehardt and Erskine, as well as disgorgement and prejudgment interest.
SEC Obtains Final Judgment Against Broker Charged With Defrauding Customers
On May 21, the U.S. District Court for the Southern District of New York, entered a final consent judgment against a New York-based broker previously charged by the SEC with defrauding retail customers.
In September 2018, the SEC charged Emil Botvinnik, a former registered representative associated with broker-dealer Windsor Street Capital, L.P. with defrauding five retail customers by recommending frequent, short-term trades that were almost guaranteed to lose money but generated large commissions for Botvinnik.
The SEC’s complaint states that Botvinnki’s customers, as well as New York resident Jovannie Aquino, lost roughly $3.6 million as a result of the trades, yet the brokers pocketed approximately $4.6 million in commissions.
Botvinnik did not admit nor deny the allegations of the SEC’s complaint, but consented to the entry of a final judgment enjoining him from violating several provisions, as well as ordering him to pay a $160,000 civil penalty, disgorgement of $1,140,996.48, and $208,155.86 in prejudgment interest. The SEC may propose a plan to distribute any funds collected from Botvinnik to harmed investors.
Botvinnik also agreed to the entry of an SEC order barring him from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent or nationally recognized statistical rating organization.
Real Estate Investment Entity, Principals Charged With Securities Fraud and Registration Violations
On May 24, the SEC charged Randy R. King, Matthew B. King and Andrea S. Trout, as well as three entities they operated – The Legacy Group, Inc.; Colorado Ventures I, LLC; and Radiant Holdings, LLC – with fraudulently offering and selling about $29 million in unregistered securities to more than 200 investors.
The SEC states that the defendants raised money to fund residential and small-scale commercial real estate projects. The trio allegedly defrauded investors by using money meant for specific projects on other projects instead or by diverting money to themselves. The SEC also claims they materially misstated the risks of certain investments – including by misrepresenting how much was already invested in the project.
The defendants did not admit nor deny the allegations, but consented to judgments enjoining them from violating the charged provisions of the securities laws, and imposing conduct-based injunctions. Also, Randy King was ordered to pay $174,318 in disgorgement, $6,056 in prejudgment interest and a civil penalty of $195,000. Matthew King was ordered to pay disgorgement of $89,438, an additional $9,097 in prejudgment interest and a civil penalty of $150,000. Trout was ordered to pay $23,509 in disgorgement, $1,637 in prejudgment interest and a civil penalty of $125,000. Legacy was ordered to pay $416,859 in disgorgement and $85,867 in prejudgment interest.
Final Judgment Entered Against Defendant in Microcap Fraud Scheme
On May 26, the U.S. District Court for the District of Massachusetts entered a final judgment against defendant Michael Luckhoo-Bouch in a previously filed action against 11 defendants alleging a fraudulent scheme that generated more than $25 million from illegal sales of multiple microcap companies’ stock.
According to the SEC, Nelson Gomes, working with Luckhoo-Bouch and others, ran a fraudulent business through which corporate control persons could conceal their identities while illegally dumping their company’s stock into the market for purchase by unsuspecting investors. The complaint alleges that these illegal stock sales were often boosted by promotional campaigns that sometimes included false and misleading information meant to capitalize on the COVID-19 pandemic. For instance, one false claim was that one promoted company could produce medical-quality facemasks when it could not.
The SEC also states that Luckhoo-Bouch facilitated the illegal sales by serving as the nominal director of a company, which allowed corporate control persons to conceal their identities, and also by making misrepresentations.
Luckhoo-Bouch did not admit nor deny the allegations in the SEC’s complaint, but consented to the entry of a final judgment enjoining him from violating several provisions. He also was ordered to pay a $20,000 civil penalty and barred from penny stocks for five years.
Massachusetts Investment Adviser Charged With Defrauding Clients
On June 1, the SEC charged Massachusetts-based investment adviser James K. Couture with defrauding his advisory clients, including misappropriating roughly $2.9 million in client funds.
The SEC alleges that Couture fraudulently prompted advisory clients to sell portions of their holdings to fund large money transfers to an entity that, unbeknownst to clients, Couture owned and controlled. In each instance, Couture obtained client authorization by falsely stating that the proceeds would be reinvested for that client’s financial benefit, but the SEC claims that Couture’s actual purpose was to divert the sale for his own benefit.
The complaint states that Couture used fabricated account statements to lull clients into believing their sale proceeds were reinvested, and when a client requested a withdrawal, he used other advisory clients’ assets to honor the withdrawal. This misappropriation was hidden via a “web of third-party accounts.”.
The SEC seeks a permanent injunction from future violations of the securities laws, disgorgement, prejudgment interest and a civil monetary penalty.
Estate of Deceased Real Estate Company Founder Charged With Misappropriating More Than $10 Million From Investors
On June 2, the SEC charged the Estate of Kenneth J. Casey with defrauding investors via a Ponzi-like real estate scheme.
The SEC states that Casey raised hundreds of millions of dollars by falsely telling investors in real estate companies Professional Financial Investors, Inc. (PFI, Professional Investors Security Fund, Inc.) and related entities that their money would be used primarily to invest in multi-unit residential and commercial real estate to be managed by PFI. However, Casey allegedly knew that a significant portion of investor funds was being used to pay existing investors in a Ponzi-like fashion, and the SEC states Casey directed PFI employees to falsify financial statements provided to investors, misrepresenting that their investments were safe and profitable.
The complaint also states that Casey personally misappropriated more than $10 million of investor money, including paying his federal and state taxes, and funding a large renovation at one of his personal residences.
Partial Judgment Entered Against Connecticut Investment Adviser Charged With Stealing Client Funds
On June 3, the U.S. District Court for the District of Connecticut entered a partial judgment against Matthew O. Clason in a previously filed SEC case charging Clason, a Connecticut-based investment adviser, with stealing more than $300,000 from an advisory client.
The SEC alleges that Clason stole hundreds of thousands of dollars from a retired 73-year-old advisory client. Clason did this by liquidating securities in the client’s accounts, transferring the proceeds from the sales to a bank account held jointly with the client and to facilitate the payment of miscellaneous expenses, and withdrawing cash from the account on numerous occasions and at different bank locations.
The client did not know of nor approve the withdrawals, nor did he receive the cash Clason withdrew.
Clason consented to the partial judgment entered by the court, enjoining him from violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Any disgorgement or civil penalty in the SEC matter will be determined at a later date.
Portfolio Manager Charged With Using Forged Document to Offer Securities to Investor
On June 7, the SEC charged Secaucus, New Jersey-based Thomas Nicholas Salzano with using a sham loan document containing a forged signature in a fraudulent attempt to entice a $150,000 investment in a New Jersey real estate joint venture.
The SEC states that Salzano – an advisor and portfolio manager at National Realty Investment Advisors, LLC, a New Jersey-based private real estate management firm – sent the loan document to an investor to obtain an investment in a joint venture opportunity. Salzano allegedly provided the investor a term sheet for a loan that purportedly was being used to finance the project. However, the term sheet falsely stated that a third-party lender had committed to provide a $25 million loan for the project, and contained a forged signature of the lender’s chief executive officer.
The U.S. Attorney’s Office for the District of New Jersey also charged Salzano with wire fraud and identity theft related to the same facts.
The SEC seeks injunctive relief, civil penalties and an officer-and-director bar.
Fraudster Sentenced to More Than Five Years in Parallel Criminal Case
On June 9, Edward E. Matthes, who the SEC charged in January 2020 with defrauding mostly elderly retail brokerage customers and investment advisory clients, was sentenced to 63 months in prison and ordered to pay more than $2.36 million in restitution in a parallel criminal case.
The SEC states that Matthes convinced brokerage customers and advisory clients to invest in what he described as a safe investment that would yield a minimum of 4% annually. However, the purported investment did not exist. Instead, Matthes allegedly stole roughly $1.4 million for his personal use, as well as another $1 million by making unauthorized sales and withdrawals from his customers’ variable annuities.
Further, Matthes covered up his fraud by creating fake account statements and paying about $170,000 in Ponzi-like payments.
Matthes has been permanently enjoined from violating the charged provisions, and ordered to pay disgorgement, prejudgment interest and penalties in amounts that will be determined at a later date.
Dentist-Turned-Investment Adviser Charged for Three Separate Frauds
On June 11, the SEC charged Edgar M. Radjabli, a former practicing dentist from Boca Raton, Florida, as well as two entities he controlled, for engaging in three separate securities frauds of escalating size.
The SEC alleges that Radjabli and Apis Capital Management LLC, an unregistered investment adviser firm Radjabli owned and controlled, conducted a fraudulent offering of Apis Tokens – a digital asset representing tokenized interests in Apis Capital’s main investment fund. Radjabli and Apis Capital issued a press release in June 2018 falsely claiming that the Apis Token offering had raised $1.7 million; in reality, the offering raised no money.
The complaint also states that Radjabli and Apis Capital manipulated the securities market for publicly traded artificial intelligence company Veritone Inc. The SEC states that Radjabli and Apis Capital announced in December 2018 an unsolicited cash tender offer to buy Veritone for $200 million, even though they lacked the financing or any reasonable prospect of obtaining the financing to complete the deal. Nonetheless, Veritone’s stock price increased, and Radjabli allegedly generated $162,800 in illicit profits by trading Veritone securities on behalf of Apis and an affiliated fund.
As for the last alleged fraud, the SEC states that Radjabli raised nearly $20 million from more than 450 investors in an unregistered, fraudulent securities offering launched in August 2019 through My Loan Doctor LLC. Radjabli falsely represented that Loan Doctor would raise investor funds that would then be used to originate loans to healthcare professionals. These loans would be securitized and sold to large institutional investors. But the complaint states that Radjabli instead invested most of those investor funds in unsecured, uninsured loans to digital asset lending firms, and loaned almost $1.8 million of proceeds to Apis Capital.
The defendants agreed to settle the charges against them without admitting or denying the allegations in the complaint. If approved, the settlement would require Radjabli to pay $600,000 in monetary relief comprised of $162,800 in disgorgement, $17,870 in prejudgment interest and $419,330 in civil penalties. Radjabli, Apis Capital and Loan Doctor would also be permanently enjoined from violating the charged provisions of the federal securities laws, and face a conduct-based injunction. Lastly, Radjabli would be barred from the securities industry and face a penny stock bar as well.
SEC Charges Microcap Company, Consultant With Fraudulent Statements Concerning COVID-19 Products
On June 11, the SEC charged microcap company Wellness Matrix Group, Inc., as well as George Todt, who controlled much of the firm’s day-to-day activities, with making misrepresentations to investors regarding COVID-19 products that they marketed to consumers.
The SEC states that Wellness Matrix and Todt made materially false and misleading statements regarding COVID-19 at-home test kits and/or disinfectants. Specifically, the SEC claims that the products were marketed on Wellness Matrix-affiliated websites and on social media, even though it did not have the products to deliver to consumers. The complaint also alleges that Wellness Matrix and Todt represented that the at-home test kits were approved and registered for use by the U.S. Food and Drug Administration and the Environmental Protection Agency, but at the time the statements were made, neither were true.
The SEC seeks permanent injunctions and civil penalties against Wellness Matrix and Todt, as well as an officer-and-director bar, a penny stock bar and a conduct-based injunction against Todt.
Wellness Matrix securities were temporarily suspended by an SEC order issued on April 7, 2020.
Investment Advisers Charged With Cherry-Picking; SEC Obtains Asset Freeze
On June 17, the SEC announced it obtained an asset freeze and other emergency relief, and filed fraud charges, against Miami-based investment professional Ramiro Jose Sugranes, and investment firms UCB Financial Advisers Inc. and UCB Financial Services Limited, for engaging in an alleged “cherry-picking” scheme in which they channeled millions of dollars in trading profits to preferred accounts.
The SEC states that Sugranes, UCB Financial Advisers and UCB Financial Services engaged in a scheme to allocate losing trades to some clients, while diverting profitable trades to two accounts, which the SEC believes are held by Sugranes’ relatives. The scheme allegedly involved using one account to place trades without specifying intended recipients of the securities when they placed the trades.
Preferred clients received roughly $4.6 million from profitable trades, while other clients sustained more than $5 million in first-day losses.
The SEC seeks permanent injunctions, disgorgement, prejudgment interest and civil penalties. The complaint also names the preferred clients as relief defendants and seeks to recover their unlawful gains and prejudgment interest.
SEC Obtains Asset Freeze Against Offshore Fund, Operators
On June 21, the SEC announced an emergency action charging an offshore fund and two individuals with engaging a fraudulent scheme. The SEC also obtained an asset freeze to safeguard remaining investor funds.
The SEC states that Ofer Abarbanel and Victor Chilelli engaged in a scheme to defraud investors in the Income Collecting 1-3 Months T-Bills Mutual Fund, an offshore mutual fund they controlled.
The complaint states that Abarbanel told investors that the fund would invest primarily in U.S. Treasury securities and enter into certain types of reverse repurchase agreements in which U.S. Treasury securities would serve as collateral. Instead, the fund routed nearly all investor funds to shell companies under the defendants’ control. When investors sought to redeem $106 million in investments last month, the defendants allegedly refused and instead took steps to transfer funds to an account from which no redemptions could be drawn.
The SEC seeks permanent injunctions, disgorgement with prejudgment interest, civil penalties and permanent bars against participating in future securities offerings. Six companies that either acted as purported counterparties with the fund or received fund assets in furtherance of the scheme were named as relief defendants: Institutional Syndication LLC, North American Liquidity Resources LLC, Institutional Secured Credit LLC, Growth Income Holdings LLC, CLO Market Neutral LLC and Global EMEA Holdings LLC.
Private Fund Manager, Consumer Credit Company, Three Individuals Charged With Fraudulently Raising More Than $73 Million From Investors
On June 25, the SEC announced charges against investment manager Princeton Alternative Funding LLC (PAF); Microbilt Corporation, a consumer credit reporting company; Philip N. Burgess, Jr.; Microbilt CEO Walter Wojciechowski; and PAF CEO John Cook, Jr. for fraudulently raising more than $73 million from investors through multiple false and misleading statements.
The SEC states that the defendants solicited investors to buy interests in Princeton Alternative Income Fund, LP (PAIF) by misrepresenting and actively concealing the role of Burgess, a convicted felon, in PAF’s management; making materially false statements about PAF and Microbilt’s ability to monitor PAIF’s investments in real time; making materially false statements about how PAIF’s investments were selected; and making materially false and misleading statements about PAIF’s largest investor.
The SEC seeks permanent injunctions against all defendants; conduct-based injunctions against Burgess, Wojciechowski and Cook; and civil money penalties against Microbilt, Burgess, Wojciechowski and Cook.
Investment Adviser, COO Charged With Defrauding Clients
On June 28, the SEC filed charges against Illinois-based investment adviser Barrington Asset Management, Inc., as well as its co-owner and chief operating officer Gregory D. Paris, for perpetrating a multiyear cherry-picking scheme that defrauded Barrington’s clients.
The SEC states that Paris reaped more than $630,000 in ill-gotten gains from clients by cherry-picking trades. The complaint alleges that Paris traded securities in Barrington’s omnibus account but delayed allocating the securities to specific client accounts until he observed their performance over the course of the trading day. He then allocated profitable trades to his own account, but unprofitable trades to client accounts.
The SEC also claims Barrington and Paris misrepresented to clients that their trades would be allocated fairly, and that Barrington reviewed its employees’ personal trading.
The SEC seeks injunctive relief, disgorgement of ill-gotten gains with prejudgment interest and civil penalties.
Investment Adviser Charged With Fraudulent Offer and Sale of Unregistered Funds
On June 28, the SEC announced charges against John Robert Jones, Jr., in connection with the alleged fraudulent offer and sale of two private unregistered funds he founded and controlled.
The SEC states that Jones induced at least 24 investors to invest at least $5.1 million in two funds – PED Index Fund, L.P., and PED Index Fund A1, L.P. – by falsely promising growth and safety with limited risk.
Specifically, the complaint states that Jones told investors they could lose only 10% to 15% of their principal investment, that their principal was insured and that his investment strategy was created alongside a purported national finance organization. But in reality, investors’ downside exposure was not limited to 10% to 15%, their investments were not insured, and the national financial organization did not even exist. The SEC adds that investors lost approximately $2.6 million (or 57% on average), while Jones collected at least $86,823 via a 2% annual management fee.
The SEC is seeking an injunction, disgorgement of allegedly ill-gotten gains with interest and a civil penalty.
SEC Charges Self-Proclaimed Real Estate “Dealmaker” With Offering Frauds, Misappropriation of Investor Funds
On June 29, the SEC announced charges against Matthew J. Skinner and five entities he owns and controls for conducting for unregistered and fraudulent real estate investment offerings, which he used to raise more than $9 million from more than 100 investors.
The SEC claims that Skinner, who told investors he was a successful real estate investor and dealmaker, made multiple misrepresentations to investors and misappropriated millions of dollars of investor funds. Additionally, the SEC states that Skinner told investors their money would be used to finance specific real estate projects or investments, and at times projected or even guaranteed double-digit annual returns.
However, Skinner allegedly spent “substantial” amounts of investor funds on expenses such as European vacations and payments on a Maserati and an Aston Martin; operational and marketing expenses unrelated to the specific projects; and making Ponzi-like payments to other investors.
In addition to owing millions of dollars to his investors, the SEC states that Skinner falsely blamed COVID-19 for his failure to pay them, and falsely told investors their money was safe.
The SEC is seeking permanent injunctions, disgorgement, prejudgment interest and civil penalties. It also is seeking conduct-based injunctions against Skinner that permanently enjoin him or any entity under his control from raising money through unregistered offerings, as well as from obtaining or receiving money related to or derived from Longacre Estates LP or Bayside Equity LP – two of the entities he controls.
INSIDER TRADING
Final Judgment Entered in SEC Insider Trading Case
On April 20, the U.S. District Court for the District of Connecticut entered a final consent judgment against a cardiologist who was charged with insider trading on confidential developments he learned about through working on a clinical drug trial.
The SEC states that Dr. Edward J. Kosinski, of Weston, Connecticut, who served as principal investigator of a drug trial sponsored by Regado Biosciences, Inc., learned that patient enrollment was being suspended because patients had experienced severe allergic reactions. He sold all 40,000 shares of his Regado stock the following day; as a result, he avoided roughly $160,000 in losses when the news became public and the stock dropped. A month later, Kosinski learned that trial enrollment would be halted because of a patient death, and he used this information to make roughly $3,000 through options trades.
The judgment enjoins Kosinski 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. Kosinski was sentenced to six months in prison and ordered to pay a $500,000 fine in a parallel criminal action.
Couple Charged With Insider Trading on Confidential Clinical Trial Data
On June 7, the SEC charged a New York-based couple with insider trading in the stock of a pharmaceutical company where one of them worked as a clinical trial project manager.
The SEC states that Holly Hand oversaw a clinical drug trial for a company then known as Neuralstem Inc. Hand learned about negative efficacy results from the trial and tipped Chad Calice, who then sold all of his Neuralstem stock ahead of the public announcement. Calice also allegedly tipped off his uncle, who also sold his entire position that day.
The negative news was announced the next morning, triggering a roughly 50% drop in Neuralstem shares. Calice effectively avoided losses of $103,875 by selling early, while his uncle avoided losses of $14,434.
Calice and Hand neither admitted nor denied the complaint’s allegations, but they consented to the entry of a final judgment that enjoins them from violating the charged provisions and requires each to pay a civil penalty. Calice will pay a $222,184 penalty, while Hand will pay a $103,875 penalty.
The defendants agreed to pay more than $325,000 to settle the charges.
Six Charged in Silicon Valley Insider Trading Ring
On June 15, the SEC announced insider trading charges against a Silicon Valley trading ring whose members generated nearly $1.7 million in illegal profits and losses avoided by trading on confidential earnings information of two local technology companies.
The SEC states that Nathaniel Brown, who served as the revenue recognition manager for Infinera Corporation (INFN), repeatedly tipped Infinera’s unannounced quarterly earnings and financial performance to his best friend, Benjamin Wylam. The SEC adds that Wylam traded on the information and also tipped Naveen Sood, who owed Wylam a six-figure gambling debt. Sood traded on this information and also tipped his friends Marcus Bannon, Matthew Rauch and Naresh Ramaiya, each of whom also illegally traded on the information.
The SEC also claims that Bannon tipped Sood with material, nonpublic information concerning his employer, Fortinet Inc. (FTNT). Bannon allegedly tipped unexpectedly negative preliminary financial results to Sood, who used it to trade and allegedly tipped Wylam and Ramaiya, who also traded.
Bannon, Rauch and Ramaiya consented to the entry of final judgments without admitting or denying the allegations in the complaint. Bannon, Rauch and Ramaiya agreed to pay civil penalties of $281,497, $128,230 and $65,780, respectively. Sood also consented to the entry of a final judgment and agreed to pay a civil penalty of $178,320. Wylam has consented to a permanent injunction; civil penalties, if any, will be decided at a later date.
Final Judgment Entered Against Former Biopharmaceutical Executive for Insider Trading
On June 25, the U.S. District Court for the District of Massachusetts entered a final consent judgment against Songjiang “Sam” Wang, a former biopharmaceutical executive previously charged for engaging in insider trading.
The SEC states that Wang, the former Director of Statistical Programming at Merrimack Pharmaceuticals, tipped his close friend, Jason “Schultz” Chan, to trade Merrimack securities in advance of the company’s announcement of positive drug trial results. The SEC claims Chan later returned the favor, tipping Wang with nonpublic information about a successful drug trial conducted by Chan’s employer, Akebia Therapeutics.
Wang allegedly made about $108,000 trading Akebia securities based on Chan’s tips.
The final judgment permanently enjoined Wang from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and imposed a $50,000 civil penalty as well as a permanent officer-and-director bar.
In the SEC’s separate action against Chan, Chan was similarly enjoined from future violations of Section 10(b) and Rule 10b-5, required to disgorge $68,699 in profits and pay $13,738 in prejudgment interest, and barred from acting as an officer or director of a publicly traded company for five years.
Wang also faced insider trading charges by the U.S. Attorney’s Office for the District of Massachusetts; he was criminally convicted and sentenced to six months in prison.
SEC Charges Bay Area Finance Employee, Friend With Insider Trading
On June 30, the SEC announced settled insider trading charges against San Francisco Bay Area finance employee Mounir N. Gad and his friend, Nathan E. Guido.
The SEC’s complaint states that Gad worked for a Northern California bank that helped private equity firms to finance corporate acquisitions. The SEC alleges that on three occasions, Gad used an encrypted messaging platform and code words to tip Guido material, nonpublic information about upcoming acquisitions that Gad learned about in the course of his employment.
The SEC states that Guido then bought stock in target companies based on those tips, then sold that stock after the acquisitions were announced, resulting in illegal gains of $51,700 and $11,000 of which Guido shared with Gad.
Both consented to a cease-and-desist order. Gad agreed to pay a civil penalty of $51,700, while Guido agreed to pay a $40,700 civil penalty.
INVESTMENT ADVISER AND BROKER-DEALER COMPLIANCE
Final Judgment Entered Against Investment Adviser Who Misappropriated Client Fuºnds
On April 21, the SEC announced the entry of a final judgment against former investment adviser Lester Burroughs, who allegedly engaged in a scheme to sell fictitious financial products to retail investors and misappropriated proceeds to pay other advisory clients, as well as for his own use.
The SEC states that Burroughs misappropriated funds from one advisory client and made Ponzi-like payments to that client using assets misappropriated from other advisory clients. He allegedly told certain clients he would invest their monies in “Guaranteed Interest Contracts” (GIC) that would guarantee a return of 4% to 7% annually. Burroughs never invested those monies in GICs, and instead misappropriated the funds, and gave clients fake account statements to hide the theft.
The SEC seeks a permanent injunction from future violations of the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, disgorgement and prejudgment interest and a civil monetary penalty.
Burroughs also faces criminal charges from the U.S. Attorney’s Office for the District of Connecticut, announced in a parallel action.
SEC Charges Broker-Dealer for Failures Related to Filing Suspicious Activity Reports
On May 12, the SEC announced settled charges against registered broker-dealer GWFS Equities Inc. (“GWFS”), an affiliate of Great-West Life & Annuity Insurance Company, for violating federal securities laws governing the filing of Suspicious Activity Reports (SARs).
The SEC alleges that GWFS was aware that external bad actors had attempted to gain access, or actually gained access to individual plan participants’ retirement accounts.
Broker-dealers must file SARs for certain transactions suspected to involve fraudulent activity or a lack of an apparent business purpose. However, the order finds that GWFS failed to file approximately 130 SARs, including cases when it had detected external bad actors gaining, or attempting to gain, access to the accounts of participants in the retirement plans it serviced. While GWFS did file nearly 300 SARS, it did not include the “five essential elements” of information it knew and was required to report.
GWFS did not admit nor deny the SEC’s findings, and it agreed to a settlement that imposes a $1.5 million penalty, a censure and an order to cease and desist from future violations. The SEC’s order does note significant cooperation by GWFS with the SEC’s investigation, as well as subsequent remedial efforts.
Electronic Trading Platform Charged for Operating as an Unregistered Broker-Dealer
On June 29, the SEC announced that Neovest Inc. agreed to pay $2.75 million in penalties for its failure to register as a broker-dealer.
Neovest –a subsidiary of JPMorgan Chase & Co. – operates an order and execution management system (OEMS) that lets customers route orders for stocks and options to more than 360 customer-selected destination brokers for execution.
The SEC states that prior to its acquisition by JPMorgan Chase, Neovest performed this activity through its registered broker-dealer, Neovest Trading Inc. Although Neovest withdrew its broker-dealer registration after the acquisition, it continued to operate the OEMS as an unregistered broker-dealer. Its activities included participating in order-taking and order-routing processes, and soliciting customers and destination brokers through the firm’s website, as well as in person at industry conferences and trade shows.
Neovest’s customers were deprived of protections associated with registration, including SEC inspections and examinations, as well as the requirement to establish policies and procedures that safeguard customer information. During the period Neovest failed to register, it replicated a database containing customer authentication information to one of its most active customers, and did not exercise any supervision over the customer’s use of the database.
Neovest did not admit nor deny the SEC’s findings, but it consented to the order and agreed to the $2.75 million penalty, and to cease and desist from committing or causing any violations.
Digital Assets
SEC Charges 5 in Unregistered Digital Asset Offering
On May 28, the SEC filed an action against five individuals, alleging that they promoted a global unregistered digital asset securities offering that raised more than $2 billion from retail investors.
The SEC’s complaint states that BitConnect used a network of promoters – including U.S.-based Trevon Brown (aka Trevon James), Craig Grant, Ryan Maasen and Michael Noble (aka Michael Crypto) – to market and sell securities in its “lending program.”
The securities offering was not registered with the SEC, and that the promoters offered and sold the securities without being registered as broker-dealers with the SEC. Their promotions included “testimonial” style videos that were published on YouTube, sometimes multiple times a day. These promoters were paid commissions based on their success in soliciting investor funds.
The SEC seeks injunctive relief, disgorgement plus interest and civil penalties.
SEC Charges Additional Defendants in $30 Million ICO Fraud
On June 15, the SEC charged three additional individuals for their roles in a $30 million initial coin offering (“ICO”) fraud spearheaded by convicted criminal Boaz Manor and his associate, Edith Pardo.
The SEC states that defendants Ali Asif Hamid, Michael Gietz and Cristine Page played leadership roles in an ICO that purportedly would fund the development of technology meant to trade digital assets. They also allegedly knew that Manor was a convicted criminal at the center of a widely publicized Canadian hedge fund collapse, but nonetheless, actively hid Manor’s role as the head of the venture, in part by using his chosen alias of “Shaun MacDonald” in ICO-related communications.
The SEC also states that the trio created and distributed materially misleading marketing materials, referring to a purported “executive team” of individuals that actually had no authority over the business, while omitting any reference to either Manor or “MacDonald.”
The SEC seeks disgorgement of ill-gotten gains plus interest, penalties and injunctive relief. Page agreed to a settlement without admitting or denying the SEC’s allegations; the agreement includes permanent injunctions, disgorgement of the digital assets received in connection with her misconduct and a $192,768 civil penalty.
SEC Charges ICO Issuer, CEO With Fraud and Unregistered Securities Offering
On June 22, the SEC announced settled charges against Loci Inc. and its CEO John Wise for making materially false and misleading statements in connection with an unregistered offer and sale of digital asset securities.
Loci provided an intellectual property search service for inventors and other users through its software platform, called InnVenn. The SEC’s order finds that Loci and Wise offered and sold digital tokens called “LOCIcoin,” raising $7.6 million from investors in the process. Loci and Wise made numerous materially false statements to investors and potential investors while promoting the ICO, including false statements about the company’s revenues, number of employees and InnVenn’s user base.
Loci’s offering was not registered with the SEC and no exemption from registration applied. The SEC also found that Wise misused $38,163 in investor funds to pay his personal expenses.
Loci and Wise did not admit nor deny the SEC’s findings, but they agreed to a cease-and-desist order, to destroy their remaining tokens, to request the removal of the tokens from trading platforms, to publish the SEC’s order on Loci’s social media channels, and to refrain from participating in future digital asset securities offerings. Loci will pay a $7.6 million civil penalty, and Wise faces an officer-and-director bar.
FOREIGN CORRUPT PRACTICES ACT
Final Judgment Entered Against Former Executive of Financial Services Company
On June 23, the SEC obtained a final judgment against Asante Berko, a former executive of a foreign-based subsidiary of a U.S. bank holding company, for his role in orchestrating a bribery scheme to help a client win a government contract in the Republic of Ghana, violating the FCPA.
The SEC states that Berko arranged for his firm’s client, a Turkish energy company, to funnel at least $2.5 million to a Ghana-based intermediary to pay illicit bribes to Ghanaian government officials to gain their approval of an electrical power plant project.
The SEC also alleges that Berko helped the intermediary pay more than $200,000 in bribes to various other government officials, and that Berko personally paid more than $60,000 to members of the Ghanaian parliament and other government officials. On top of that, Berko allegedly also took deliberate measures to hide the bribery scheme, including misleading his employer’s compliance personnel about the true role and purpose of the intermediary company.
Berko consented to the entry of a final judgment that permanently enjoins him from violating the anti-bribery provision of the FCPA, Section 30A of Securities Exchange Act of 1934. He also must disgorge $275,000 in ill-gotten gains plus $54,163.92 in prejudgment interest.
SEC Charges Amec Foster Wheeler Limited in Connection With Brazilian Bribery Scheme
On June 25, the SEC announced charges against Amec Foster Wheeler Limited (“Foster Wheeler”) – a company that provided project, engineering and technical services to energy and industrial markets – for violations of the FCPA arising out of a bribery scheme in Brazil.
The SEC states that Foster Wheeler engaged in a scheme to obtain an oil-and-gas engineering-and-design contract from Brazilian state-owned oil company Petroleo Brasileiro S.A. (“Petrobras”), known as the UFN-IV project. Foster Wheeler Energy Limited (“FWEL”), Foster Wheeler’s U.K. subsidiary, made some $1.1 million in improper payments to Brazilian officials to win the contract and establish a business presence in the country. The bribes were paid through third-party agents, one of whom failed Foster Wheeler’s due diligence process yet was still allowed to continue working on the UFN-IV project on an unofficial basis.
Foster Wheeler consented to an SEC cease-and-desist order finding it violated anti-bribery, books and records, and internal accounting controls provisions of the FCPA, and agreed to pay $22.7 million in disgorgement and prejudgment interest. In total, it will pay more than $43 million across resolutions with the SEC, U.S. Department of Justice, Brazil Controladoria-General da União (CGU)/Advocacia-Geral da União (AGU), Ministério Publico Federal (MPF) and United Kingdom Serious Fraud Office (SFO).
