by T. GormanPosted on Posted in SECActions

The Division of Examinations or EXAMS published a risk alert on April 17, 2024, regarding the amended Marketing Rule for investment advisers, Rule 206(4)-1. The Observations are divided into two sections. The first focuses on books, records and Form ADV. The second centers on the general prohibitions of the Rule. Throughout the Alert, the staff has included examples of each of the points presented which aid in clarifying the observation.

Book, Records and Form ADV

The staff observed situations in which the policies and procedures were not reasonably designed or implemented to address the amended Marketing Rule. For example, in certain instances the policies and procedures consisted only of general descriptions, did not address applicable marketing channels utilized by the adviser or were informal and not in writing.

In other instances, the policies and procedures were not complete or updated. In others, they had not been tailored to the adviser’s specific advertisement while in certain instances failed to address adequately the preservation and maintenance of the advertisement and the related documents. In some instances, the updated policies and procedures had not been implemented.

The staff also observed situations in which the policies and procedures had been updated but the related books and records had deficiencies. This occurred in situations where, for example, materials referenced had not been maintained such as questionnaires or copies of social media or the documents that supported performance claims.

In some instances, there were deficiencies on Form ADV where the adviser reported, for example, that their advertisements did not include third party ratings, performance results and hypothetical results when in fact they did.

General Prohibitions

Here the staff observed deficiencies such as including untrue statements of a material fact or unsubstantiated statements of a material fact in an advertisement. Similarly, the staff observed instances where the advertisement appeared to omit material facts necessary to make the statement not misleading or to avoid a misleading inference.

The staff also observed situations where a fair and balanced treatment of material risks or limitations about the potential benefits were not adequately set forth. For example, there were instances observed where performance information was highlighted without discussing the material risks and limitations. In some instances involving specific investment advise, the presentation did not appear fair and balanced. Similarly, in some instances there were performance results which were not fairly balanced or where the presentation was materially misleading.

In the end, while many advisers had implanted the amended Marketing Rule, the staff did observe points that should be addressed further and detailed above. Throughout the Alert, the staff has included examples of each of the points presented which aid in clarifying the observation.

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by T. GormanPosted on Posted in SECActions

Last week the Commission resolved two litigated actions. One involved the so-called “shadow” insider trading case in which a jury returned a verdict in favor of the agency in a case where Defendant did not trade in the securities involved in the tip, but those of a similar mid-sized firm. The second centered on accounting violations. After obtaining a favorable summary judgment ruling Defendant settled.

The Commission also filed one new civil injunctive action. It centered on an unregistered broker claim.

Finally, Cornerstone Research filed a new report. It analyzed trends in PCAOB enforcement cases which shows increasing numbers of enforcement actions are being filed by the Board.

Be careful, be safe this week.

SEC Enforcement – Litigated Actions

SEC v. Panuwat, Civil Action No. 4:21-cv-06322 (N.D. Cal. Verdict April 5, 2024). Defendant is Matthew Panuwat, formerly a business development executive at Medivation Inc. The firm is a mid-sized oncology-focused biopharmaceutical company. On August 18, 2016, Mr. Panuwat learned from the CEO of his employer that Large Parma firm would acquire the company that employed him. Shortly after learning about the planned takeover, Mr. Panuwat purchased short-term stock options in the shares of Incyte Corporation that were out-of-the-money. He did not purchase shares of Medivation, his employer and the subject of the take-over tip he had received. Incyte was, another a mid-sized oncology biopharmaceutical firm like his employer. Two days after the option purchase – August 22, 2016 – Medivation announced it would be acquired by Large Parma firm. The share price of Medivation’s stock increased 20% over the course of the day. The share price of Incyte, whose options Mr. Panuwat had purchased, increased about 8% in value. The options Mr. Panuwat had purchased increased by about 20% in value, giving him trading profits of $107,066.

On April 5, 2024, a jury returned a verdict in favor of the Commission, concluding that Mr. Panuwat was liable for violating Exchange Act Section 10(b) by engaging in what many have called “shadow insider trading”. Remedies will be determined at a later date by the Court. This appears to be the first case initiated by the Commission charging insider trading in which the securities traded were not those which were the subject of the tip.

Accounting violations: SEC v. Rosenberger, Civil Action No. 1:22-cv-4736 (S.D.N.Y.) is a previously filed action in which the Commission obtained a favorable ruling on summary judgment as to Defendant Joanna Lannni. Subsequently, Defendant consented to, and the Court entered, a final judgment permanently enjoining her. The judgement is based on Rule 13b2-1. The Defendant was also ordered to pay $20,000 in civil penalties. The final judgment was entered on April 8, 2024. The complaint alleged violations of Exchange Act Sections 13(a) and 13(b)(2)(A) and aiding and abetting. See, Lit. Rel. No. 25972 (April 9, 2024).

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 1 new civil injunctive action and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Offering fraud: SEC v. King, Civil Action No. 8:20-cv-02398 (C.D. Cal.) is a previously filed action which named as defendant Robert King, an unregistered investment adviser. In June 2019 Defendant raised about $7.4 million from investors for interests in Elevate Investment Fund. The fund did not exist. The fund previously settled with the Commission as did the relief defendant wife who agreed to repay moneys that were transferred to her. Mr. King, whose trading with the investor funds resulted in huge losses, agreed to settle the matter. He consented to the entry of a permanent injunction based on Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Section 206(4). See Lit. Rel. No. 25974 (April 11, 2024).

Offering fraud: SEC v. Horwitz, Civil Action No. 2:21-cv-02927 (C.D. Cal) is a previously filed action which named as defendant Zachary Horwitz. Defendant is alleged to have shown fabricated agreements to potential investors regarding agreements with Netflix and HBO for movie rights. Mr. Horwitz told investors they would receive returns of 35% annually. In fact, the contracts were fraudulent and there were no agreements with Netflix or HBO. The Court entered a final judgment against Defendant, enjoining him from future violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The judgment requires Defendant to pay $11,375,001.28 as disgorgement and prejudgment interest, deemed satisfied by the payment of restitution ordered in the parallel criminal case, U.S. v. Horwitz, No. 21-214 (C.D. Cal.). Defendant is also required in the criminal case to pay $230,361,884 to his victims. See Lit. Rel. No. 25973 (April 11, 2024).

Unregistered broker: SEC v. Borden, Civil Action No. 1:24-cv-02621 (E.D.N.Y. Filed April 8, 2024) is an action which named as defendant Canadian Attorney Mark Borden. Defendant is alleged to have taken control of large quantities of penny stocks, transferred their ownership to himself and then sold the shares to the public. Defendant failed, however, to register with the Commission as a broker. The complaint alleges that Mr. Borden and his clients knew that the transactions were improper. The complaint alleged violations of Exchange Act Section 15(a). Defendant resolved the matter, consenting to the entry of a permanent injunction based on the Section cited in the complaint and agreed to pay a penalty of $70,000, disgorgement of $231,369 and prejudgment interest of $33,907. See Lit. Rel. No. 25971 (April 9, 2024).

PCAOB

Cornerstone Research has published a report analyzing trends in enforcement actions filed by the PCAOB titled “Public Company Accounting Oversight Board Enforcement Activity, 2023 Year in Review” (here). Basic enforcement statistics begin with the number of actions. In 2023 the PCAOB filed a total of 46 cases. That number is composed of 37 auditing actions and 9 matters related to the Board’s oversight which includes matters such as registration and reporting. The total number of actions filed last year reflects an increase over each of the prior years, tracing back to 2018. For example, in 2023 a total of 46 actions were filed while in 2022 there were 42 and in 2021 there were 21 cases initiated. The average over the entire period for which Cornerstone published data was 27.

The auditing actions filed last year were almost evenly divided between U.S. and non-U.S. respondents. Specifically, in 2023 the Board filed 19 such actions against U.S. Respondents and 18 which named non-U.S. firms. In the prior year the split between U.S. and non-U.S. firms was again also almost evenly split but was reversed — 14 actions involved U.S. respondents while 15 did not. Interestingly, only 11% of the auditing actions referenced a restatement. Similarly, no auditing actions referred to a material weakness in internal controls. These figures are consistent with prior years. They contrast sharply with the findings in SEC enforcement actions. There the SEC reported the highest number of enforcement actions citing an announced restatement and/or material weakness in internal controls in FY 2022 and 2023 in recent years.

In 2023 the mix of Respondents in Board actions changed. Last year there were 19 actions filed against individuals and 34 involving firms. In contract, in 2022 there were 26 actions filed involving individuals and 17 involving firms. In 2023 the majority of auditing actions alleged violations of auditing standards. Most of the actions also included claims regarding ethics and independence standards and quality control standards or both. In addition, about 25% of the auditing actions filed in 2023 alleged violations of auditor independence, a contrast to the prior year where there were no such claims.

Finally, in 2023 the Board imposed monetary penalties against all respondents. In contrast, penalties were imposed on 95% of respondents in 2022.

Australia

Liquidator guidance: The Australian Securities and Futures Commission released a consultation paper on proposed updates to its regulatory guidance for external administrators, according to a release dated April 11, 2024 (here).

Singapore

Monetary policy: The Monetary Authority of Singapore issued a new monetary policy statement for April 2024 on April 12, 2024 (here).

 

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