Last week the Commission filed four new enforcement actions. They were centered on Reg. BI, insider trading, a note scheme and an accounting fraud.
Be careful, be safe this week
SEC
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the Commission filed 1 new civil injunctive action and 3 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Best interest: In the Matter of Lion Street Financial, LLC, Adm. Proc. File No. 3-22323 (Nov. 15, 2024) is an action which names as Respondent the registered broker-dealer. The Order alleges that between the effective date of Regulation Best Interest on June 30, 2020 and April 2021, Respondent made recommendations that clients purchase corporate securities known as “L Bonds.” Those instruments are high risk securities which were only suitable for sophisticated investors who could afford to lose their entire investment. Despite the high risk of the investments, the firm recommended L Bonds to clients. The Order alleges violations of Rule 1l-1(a)(1). To resolve the proceedings Respondent consented to the entry of an order precluding future violations of the Rule and imposing a censure. In addition, Respondent will pay disgorgement of $14,899.55, prejudgment interest of $3,683.32 and a penalty of $135,000.
Note selling scheme: SEC v. Money Magnet Platinum Membership Initiation LLC, Civil Action No. 22-cv-7640 (S.D.N.Y. Nov. 7, 2024) is a previously filed action that was settled as to defendant Lakenya Hopkins. Last week a final judgment was entered as to Ms. Hopkins. The Commission’s complaint alleged that Ms. Hopkins and the firm violated Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. The alleged violations were based on the issuance of promissory notes that were issued and guaranteed investors extraordinary monthly returns for each investment. The complaint alleges there was no reasonable basis for the claims. The complaint also alleges that Defendant misappropriated a portion of the funds raised. In addition to imposing injunctions based on the Sections cited in the complaint, the final settlement executed by the court also mandates that Defendant Hopkins pay disgorgement of $262,280 plus interest of $20,056. Those obligations are satisfied by the payments made in the parallel criminal action. There, Defendant Hopkins was directed to pay restitution. Defendant was also ordered to serve a two-year prison sentence in a parallel action brought by the U.S. Attorney’s Office for the Southern District of New York. See Lit. Rel. No. 26169 (Nov. 7, 2024).
Insider trading: In the Matter of Umpathi Kakkera, Adm. Proc. File No. 3-22267 (Oct. 17, 2024) is a previously filed action. Respondent Umapathi Kakkera is employed as an information technology specialist at the New Jersey office of a Belgian manufacturer of chemicals. On November 4, 2021, Lumentum Holdings Inc. announced that it had agreed to acquire NeoPhotonics Corporation. Defendant Umapathic Kakkera traded in the shares of NeoPhotonics prior to that announcement. At the time of the trades, Defendant had inside information about the transaction. That information had been misappropriated by Amit Bhardwaj, the Chief Information Security Officer of Lumentum. Mr. Bhardwaj acquired the deal information through his work at Lumentum. During the weeks leading up to the Announcement, he tipped three friends. Those included Srinivasa Kakkera, Respondent’s brother. He tipped those individuals so they could trade in the securities prior to the deal announcement, according to the complaint. Based on the information furnished to him, Umapathi Kakkera purchased NeoPhotonics call option contracts. Following the deal announcement he had over $200,000 in profits from the trades. The Order alleges violations of Exchange Act Section 10(b) and Rule 10b-5. Respondent resolved the proceedings. The Commission deemed it appropriate to enter a cease-and-desist order based on the Section and Rule cited in the Order. In addition, Respondent was ordered to pay disgorgement of $206,077.62, prejudgment interest of $30,717.92 and a penalty of $206,077.62. Previously, the Commission settled insider trading charges against Srinivasa Kakkera and Abbas Saeedi. SEC v. Bhardwaj, Civil Action No. 1:22-cv—6277 (June 13, 2024).
Accounting fraud: In the Matter of Robert H. Turner, Adm. Proc. File No. 3-22238 (Oct. 11, 2024) is a proceeding centered on the CEO of Respondent of Pareteum Corporation, a telecommunications company. During the period from 2018 through mid-2019. During the firm materially overstated revenue by about $12 million for fiscal year 2018, or 60%, and about $30 million for the first two quarters of 2019, or 91%. The firm restated its quarterly financial results for the first half of 2019 on March 12, 2021. The incorrect revenue numbers were the result of improperly recognizing from recognizing revenue on non-binding purchase orders and prior to product shipments, contrary to GAAP. To resolve the matter Respondent Turner consented to the entry of a permanent injunction based on Securities Act Sections 17(a)(2) and (3) and Section 304 of SOX. In addition, Respondent agreed to pay a penalty of $75,000.
FinCEN
Alert: The regulator issued an alert on Fraud Schemes involving Deep Flake Media targeting financial institutions, Nov. 13, 2024 (here).
Australia
Initiative: The Australian Securities & Futures Commission announced new enforcement priorities with a focus cost of living priorities on November 14, 2024 (here).
