Last week the Commission filed three new cases. One centered on unprofessional conduct. A second involved false statements. The third centeredon misrepresentations.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 1 new civil injunctive action and 2 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Unprofessional conduct: In the Matter of Ellen McCarthy, Esq., Adm. Proc. File No. 3-21897 (March 21, 2024). Respondent McCarthy is an attorney admitted to practice in the state of New York in 1989. Her career centered on regulatory and compliance work. Early in her career she focused work for self-regulatory organizations. Later she served as a compliance professional in the private sector. Recently, she informed the staff that she is retired. This matter focuses on an order entered by the Commission in May 2018 directing that Manhattan Transfer Register Company comply with certain undertakings. It directed that the firm retain an independent consultant to prepare a report identifying deficiencies and weaknesses in its policies, procedures and supervisory controls. This included the implementation of those policies and procedures. Manhattan hired an independent consultant or IC who in turn retained Ms. McCarthy. IC and Ms. McCarthy submitted their independent consultant Report to the Commission on or about September 13, 2018. This completed their engagement. Under the terms of the engagement both IC and Ms. McCarthy were required to remain independent of Manhattan Transfer for two years following the completion of the Report. By late September 2018, however, Ms. McCarthy disregarded her obligation. Specifically, she continued to perform work for the company. Respondent did request that the Commission permit her to accept the engagement in August 2018, prior to commencing work. She did not wait for a response before commencing work, however. By September 21, 2018, the staff informed Ms. McCarthy that she had to honor her commitment to remain independent. Ms. McCarthy continued with her engagement. She did take steps to conceal her activities after the staff denied her request. The Division of Enforcement later opened an investigation into the matter. During her testimony Ms. McCarthy made false statements. The Order alleges violations of Rule 102(e)(1)(ii). The proceeding was resolved when the Commission accepted Ms. McCarthy’s settlement offer and entered an order denying her the privilege of appearing or practicing before the Commission.

Stock selling scheme: SEC v. Padilla, Civil Action No. 1:23-cv-11331 (D. Mass.) is a previously filed action which named as defendants Kevin Dills, two entities he owned, and Joseph Padilla. The Court entered a final judgment by consent against Mr. Dills on March 19, 2024. The final judgments precluding Mr. Dills from future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The judgment also includes a penny stock bar and orders Defendant to pay a penalty of $223,229. In addition, the Court entered final judgements by consent as to the two entity relief Defendants. Those entities were directed to pay disgorgement of $6,225,448 and prejudgment interest of $786,645 on a joint and several basis with Mr. Dills. The disgorgement can be offset by any amount paid to the U.S. Attorney’s Office in a plea agreement to resolve a related criminal case involving Mr. Dills. The case is based on a manipulative stock selling scheme executed by the two individual defendants. See Lit. Rel. No. 25952 (March 20, 2024).

False statements: SEC v. Findley, Civil Action No. 3:20-cv-0397 (D. Conn. ) is an action which named as defendants Halitron, Inc. and its CEO, Bernard Findley. The Court entered a final judgment against each Defendant on March 25, 2024. The judgments permanently enjoin Defendants from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendants were also ordered to pay, on a joint and several basis, disgorgement in the mount of $141,000, along with prejudgment interest of %50,024.16. Mr. Findley was, in addition, barred from serving as an officer or director and from participating in any penny stock offering. The judgement was entered following a jury verdict finding against each Defendant. The claims were based on issuing false press releases to push up the share price of Halitron’s stock. See Lit. Rel. No. 25951 (March 25, 2024).

Misrepresentations: In the Matter of Delphia (USA) Inc., Adm. Proc. File No. 3-21894 (March 14, 2024). Delphia is a registered investment adviser based in Toronto, Canada. The firm managed about $7 million for 29,000 individual retail account using robo-advisory services and about $180 million for five pooled investment vehicles. The advisory has now ceased its investment activities. In 2019, not long after registering with the Commission, the firm developed algorithms to manage retail client portfolios based on different investment objectives and risk profiles. Delphai intended to use artificial intelligence and machine learning to collect data from its clients as inputs into its algorithms. Over the last five years, however, the advisory did not collect the data. Nevertheless, the firm claimed in a press release that it was “the first investment adviser to convert personal data into a renewable source of investment capital . . . that will allow consumers to invest in the stock market using their personal data.” This happed, according to the advisory, because it used “machine learning to analyze the collective data shared by its members to make intelligent investment decisions.” By 2020 the firm expanded its claims, telling investors that it turns “your data into an unfair investment advantage.” The adviser supposedly did this by putting client data to work as inputs into its investing algorithms. The claims were false, a fact that emerged while the Division of Examinations was conducting an exam. While Delphia admitted its wrongful conduct and promised to stop, it did not. The claims about AI continued. The company also failed to create and implement the appropriate compliance programs. It did cooperate with the Commission. The Order alleged violations of Exchange Act Sections 206(2) and 206(4) and the related Rules. To resolve the matter, Delphia consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure. In addition, the firm agreed to pay a penalty of $225,000. See also In the Matter of Global Predictions, Inc., Adm. Proc. File No. 3-21895 (March 18, 2024).(Similar action; resolved with a cease-and-desist order based on same Sections and a penalty of $175,000).

FinCEN

Remarks: Agency Director Andrea Gackj participated in a fire side chat at the International Business Association’s annual anti-money laundering conference. Her comments focused on encouraging transparency in the financial system, according to the March 20, 2024 release (here).

Hong Kong

Consultation: The Securities and Futures Commission of Hong Kong and the Hong Kong Monetary Authority launched a consultation on enhancements to the over-the-counter derivatives reporting regime, March 22, 2024 (here).

Singapore

Remarks: Chia Der Jiun, managing director, Monetary Authority of Singapore, announced the launch of the Singapore Sustainable Finance Association (here).

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The Commission has long enforced its ethical rules as to the wide variety of professionals who appear and practice before it. While in years past the enforcement of those rules against professionals was controversial, today enforcing ethical rules as to the professionals that appear before the agency is an accepted part of its work. The most recent example of such an action is In the Matter of Ellen McCarthy, Esq., Adm. Proc. File No. 3-21897 (March 21, 2024).

Respondent McCarthy is an attorney admitted to practice in the state of New York in 1989. Her career centered on regulatory and compliance work. Early in her career she focused on regulatory and compliance work for self-regulatory organizations. Later she served as a compliance professional in the private sector. Recently she informed the staff that she is retired.

This matter focuses on an order entered by the Commission in May 2018 directing that Manhattan Transfer Register Company comply with certain undertakings. It directed that the firm retain an independent consultant to prepare a report identifying deficiencies and weaknesses in its policies, procedures and supervisory controls. This included the implementation of those policies and procedures. Manhattan hired an independent consultant or IC who in turn retained Ms. McCarthy.

IC and Ms. McCarthy submitted their independent consultant Report to the Commission on or about September 13, 2018. This completed their engagement. Under the terms of the engagement both IC and Ms. McCarthy were required to remain independent of Manhattan Transfer for two years following the completion of the Report.

By late September 2018, however, Ms. McCarthy disregarded her obligation. Specifically, she continued to perform work for the company. Respondent did request that the Commission permit her to accept the engagement in August 2018, prior to commencing work. She did not wait for a response before commencing work, however. By September 21, 2018, the staff informed Ms. McCarthy that she had to honor her commitment to remain independent. Ms. McCarthy continued with her engagement. She did take steps to conceal her activities after the staff denied her request.

The Division of Enforcement later opened an investigation into the matter. During her testimony Ms. McCarthy made false statements. The Order alleges violations of Rule 102(e)(1)(ii). The proceeding was resolved when the Commission accepted Ms. McCarthy’s settlement offer and entered an order denying her the privilege of appearing or practicing before the Commission.

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