by T. GormanPosted on Posted in SECActions

The Commission filed a series of new cases last week. The filings included an action based on cherry picking, one focused on international banking and bribery in violation of the FCPA, another centered on a manipulation scheme and a case based on Reg. BI. The agency also partially prevailed in a jury trial where the triers of fact essentially split their verdict, partially in favor of the regulator and partially against it.

Be careful, be safe this week

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the Commission filed 6 new civil injunctive action and 1 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

False Statement: SEC v. Walczak, Civil Action No. 20-civ-0076 (W.D. Wisc.) is a previously filed action which named as defendant Edward S. Walczak, a former mutual fund portfolio manager for Catalyst Hedged Futures Strategy Fund. On April 18, 2022, a jury found in favor of the Commission and against Mr. Walczak on certain charges. Specifically, the \jury found that Defendant violated Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(2) and (4) and Rule 206(4)-8. The jury found against the Commission on charges based on Securities Act Section 17(a) and Advisers Act Section 206(1). The court ordered Defendant to pay disgorgement of $7,765.105, prejudgment interest of $1,868,158.50 and a penalty of $1,600,000. The complaint alleged that Defendant told investors the Fund had safeguards to prevent losses of over 8% which was false. Indeed, between December 2016 and February 2017 the firm lost over $700 million or about 20% of its value when the market moved against its position. See Lit. Rel. No. 26179 (Nov. 22, 2024).

Cherry picking: SEC v. Burleson, Civil Action No. 3:24-cv-08246 (N.D. Cal. Filed Nov. 21, 2024). Defendant James Burleson is the founder of Burleson & Co., LLC, a Commission registered investment adviser from March 2006 through May 31, 2023. Mr. Burleson owned 97% of the Firm and served as its principal, managing partner and chief compliance officer. Mr. Burleson was an investment advisers as defined in Section 202(a)(1) of the Advisers Act. The firm had over 200 clients and at one time held over $450 million in regulatory assets under management. Each client had an account at Charles Schwab & Co., Inc. The firm also maintained a block trading account. Beginning in August 2020, and continuing for about two years, Defendant executed his cherry picking scheme. Defendant did this by trading risky options in the Firm’s block trading account. There he could execute trades for multiple clients and then allocate the transactions to different accounts after the close of trading. In allocating the trades Defendant put the profitable transactions into his account. He then disproportionately allocated the unprofitable transactions to the firm’s clients. As a result, Mr. Burleson had trading profits of over $1.8 million, a return rate of +26.5%. The client accounts had over $3.2 million in losses, a return rate of -5.1%. The probability that such returns would occur on their own is less than one in a million. Defendant also made materially false and misleading statements to his clients in the Firm’s Form ADV, Part 2A. There the Firm stated that it would allocate trades “in the most equitable manner possible.” The statement was false. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). See Lit. Rel. No. 26178 (Nov. 21, 2024).

Bribery: SEC v. Adani, Civil Action No. 1:24 Civ. 8080 (E.D.N.Y. Filed Nov. 20, 2024) is an action which names as defendants Gautam Adani and Sagar Adani. Gautam Adani is an Indian citizen who founded both Adani Group and Adani Green Energy Ltd. He also serves on the board of each firm and is part of the management committee. Defendant Sagar Adani, in addition, serves on the board and management committee of each firm and is the nephew of Defendant Gautan Andani. In September 2021 Defendants conducted an offering of $750 million of Adani Green bonds that included over $175 million in Notes to U.S. investors. Investors were told that no bribes were paid in connection with the offering. The representations were false. In fact, Defendants were personally involved in paying millions in bribes to secure business. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as multiple counts of aiding and abetting. This is one of two cases filed that centers on a bribery scheme. The second case, SEC v. Cyril Sebastien Dominique Cabanes, is set forth below.

Bribery/FCPA: SEC v. Cyril Sebastein Dominique Cabanes, Civil Action No. 24-cv-8081 (E.D.N.Y. Filed Nov. 20, 2024) is an action which names as defendant Cabanes, a citizen of France and resident of Singapore was a member of Azure’s Board of Directors, a U.S. issuer. He was also employed by Caisse de depot et placement du Quebec or CDPQ. Defendant was part of a group that crafted a scheme that traces to 2019 when Solar Energy Corporation of India, Ltd., an arm of the Indian national government, awarded Azure and Adani Green contracts for a solar energy project. In 2021 and 2023 Azure and Adani Green executives and agents paid or promised to pay about $250 million in bribes to Indian state officials to secure the contracts necessary to proceed with an energy project known as Manufacturing Linked Projects. Following a series of conversations and discussions the scheme was put in place. The complaint alleges violations of Exchange Act Section 30A. A parallel action was filed by the U.S. Attorney’s Office for the Eastern District of New York naming as defendants Gautam and Sagar Adani and Cabanes, among others connected to Adani Green and Azure Power. See Lit. Rel. No. 26177 (Nov. 21, 2024).

Fraudulent scheme: SEC v. Kushner, Civil Action No. 1:24-cv-08900 (S.D.N.Y. Filed Nov. 21, 2024) is a case which names as defendants David Kushner and La Mancha Funding Corp. Defendant Kushner is a Florida resident who is under indictment in New Jersey. The firm is controlled by him. Over a period of about 3 years, beginning in 2018, he caused a series of LLCs to be formed that were used in connection with a scheme he created. There he sold interest in the entities to investors who were told their funds would be used to make loans to various borrowers, including professional athletes and sports agents. Over $10 million was raised from investors who acquired “membership” interests in the entities. The representations made regarding the use of the funds were false. Portions of the investor funds were misappropriated. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) &(4). See Lit. Rel. No. 26176 (Nov. 21, 2024).

Manipulation: SEC v. Page, Civil Action No. 1:21-cv-05292 (E.D.N.Y.) is a previously filed action in which Defendants Timothy Page and his son, Trevor Page, crafted a scheme to profit from the manipulation of microcap entities. Specifically, they schemed with others to manipulate the shares of several entities in conjunction with boiler rooms. The Commission secured a judgment by default as to defendants Timothy Page, Wellesley Holdings Limited, Porrima Ltd and Emergent Investment Company. The judgement entered is based on Exchange Act Section 10(b) and Securities Act Sections 5 and 17(a). It also enjoins Timothy Page from participating in violations of Exchange Act Sections 9(a) and 13(d). He was ordered to pay disgorgement $983,819, prejudgment interest of $133,853 and a penalty of $1,928,907. Similar awards were made to the other Defendants named in the order. See Lit. Rel. No. 26174 (Nov. 20, 2024).

Conflicts: SEC v. Igwealor, Civil Action No. 2:24-cv-09941 (C.D. Cal. Filed Nov. 18, 2024).
Defendants in the action are: Frank Igwealor, an attorney, CPA, investment adviser and the controller of many of the entities involved here; Patience Ogbozor, wife of Frank Igwealor; Alpharidge Capital, LLC; American Community Capital, LP; Givemepower, Inc.; Kid Castle Educational Corp.; Los Angeles Community Capital; and Video River Networks, Inc. Beginning June 2021 Defendant Igwealor and his wife misappropriated over $2.2 million from Defendant Alpharidge, a subsidiary of GiveMePower, a publicly traded entit Mr. Igwealor and his wife controlled. The funds were used to purchase a residence for Defendant Igwealor and his wife. Under the terms of the mortgage put on the property, no payments were due before 2031.

Subsequently, Defendants Kid Castle and other controlled entities, entered into a transaction designed to conceal transactions involving the home. Specifically, the mortgage was not disclosed by Defendant GiveMePower in its annual report filed with the Commission. The purpose of the mortgage was to shroud the original misappropriation and conflicts and avoid repayment. Finally, over a period of months, beginning in July 2021, Defendant Igwealor sold millions of shares of three penny stocks he owned. The size of the transactions violated the limitations for such sales under the federal securities laws. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and each subsection of 17(a), and Exchange Act Sections 10(b), Rule 10b-5 and aiding and abetting violations of Sections 13(a) and 13(k). See Lit. Rel. No. 26171 (Nov. 19, 2024).

False statements: SEC v. Mitchell, Civil Action No. 1:24cv-08741 (S.D.N.Y. Filed Nov. 18. 2024) is an action which names as defendant, Ian Mitchell, a resident of Queens, New York. Over a period of months, beginning in July 2021, Defendant Mitchell made misrepresentations to two investors regarding his identity and plan which supposedly was to invest in pre-IPO shares. The investors gave Defendant about $325,000 to invest on their behalf. In fact, Defendant diverted the funds to his personal use. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the matter Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, he agreed to pay disgorgement of $325,000 and prejudgment interest of $53,072.65. Those amounts are deemed satisfied by payment of the forfeiture orders entered in the parallel criminal action filed by the U.S. Attorney’s Office for the Southern District of New York. There Defendant pleaded guilty to one count of wire fraud. He was sentenced to serve 44 months in prison followed by 3 years of supervised release and ordered to make $469,999 in restitution and $469,999 in forfeiture. See Lit. Rel. No. 26173 (Nov. 19, 2024).

Kickbacks: SEC v. Auerbach, Civil Action No. 1:19-cv-5631 (E.D.N.Y.) is a previously filed action in which the defendant consented to the entry of a settlement. The complaint was based on a kickback scheme in which Defendant Richard Brown, then a stockbroker, accepted cash bribes from the CEO of Nxt-ID, Inc. and another defendant to purchase over $750,000 of stock in that firm in customer accounts. To resolve the charges Defendant consented to the entry of a permanent injunction based on Exchange Act Section 10(b) and barring him from participating in any penny stock offering. He also agreed to pay disgorgement of $10,000. See Lit. Rel. No. 26170 (Nov. 18, 2024).

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.

Insider trading: SEC v. Thompson, Civil Action No. 3:24-cv-800 (E.D. Va. Filed Nov. 8, 2024) is an action which names as defendant Robert B. Thompson, an employee of the Federal Reserve Bank in various capacities from 2004 to May 2024 as a senior bank examiner. On two instances Defendant used inside information obtained from the Federal Reserve to trade. In October 2023 he saw a preview of financial data for a bank and used it when purchasing about $678,000 in stock of the bank from which he had obtained inside information. The trade was made just before an announcement about the bank. After the announcement Defendant had illicit trading profits of $79,364. Subsequently, he again traded based on material information regarding a possible lose from a financial institute to trade. In this instance Defendant traded in options the day prior to the announcement. He realized $505,527 in illicit profits. The complaint alleges violations of Exchange Act Section 10(b). On November 19, 2024, Defendant pleaded guilty in a parallel criminal action filed in the Eastern District of New York. Previously, he had consented in the Commission’s action to the entry of a permanent injunction based on Exchange Act Section 10b and agreed to pay disgorgement, prejudgment interest and a penalty in accord with a future order of the court. See Lit. Rel. No. 26172 (Nov. 19, 2024).

ESMA

Settlement pricing: The European Securities and Markets Authority or ESMA, announced in a release dated November 18, 2024, that it is proposing the markets move to T+1 by October 2027 (here).

Hong Kong

Meeting: Securities and Futures Commission Chairman Dr. Kelvin Wong and Chief Executive Officer Ms. Julia Leung held a high-level meeting with the Chairman of China Securities Regulatory Commission Mr. Wu Qing in Hong Kong on Tuesday Nov. 19, 2024. The officials assessed recent fruitful cooperation between the Mainland and Hong Kong. The regulators also agreed to further their relationship and cooperation (here).

Singapore

Release: The Monetary Authority of Singapore, will make changes to its contributions to the International Monetary Fund according to a release issued on November 2024. Those will be made in support of multilateral efforts to strengthen the IMF’s capacity to safeguard global economic and financial stability (here).

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by T. GormanPosted on Posted in SECActions

Cherry picking is a long time focus of the Commission. In some senses, this practice may the be ultimate conflict of interest. It is based on an investment adviser placing a series of trades over the course of the trading day, for example. After the close of the markets the adviser values the transactions for the day. Those which were profitable are put into the adviser’s account. The trades which were not profitable are disproportionately allocated to clients. While there are variations of the transaction pattern, in the end it is the adviser who wins by securing a profit from the transactions while the client is left with the loss. In many ways these cases are the ultimate breach of duty. The Commission’s latest case in this area is SEC v. Burleson, Civil Action No. 3:24-cv-08246 (N.D. Cal. Filed Nov. 21, 2024).

Defendant James Burleson is the founder of Burleson & Co., LLC, a Commission registered investment adviser from March 2006 through May 31, 2023. Mr. Burleson owned 97% of the Firm and served as its principal, managing partner and chief compliance officer. Mr. Burleson was an investment advisers as defined in Section 202(a)(1) of the Advisers Act. The firm had over 200 clients and at one time held over $450 million in regulatory assets under management. Each client had an account at Charles Schwab & Co., Inc. The firm also maintained a block trading account. In May 2023 the Firm sold its assets to another investment adviser.

Beginning in August 2020, and continuing for about two years, Defendant executed his scheme. He did this by trading risky options in the Firm’s block trading account. There he could execute trades for multiple clients and then allocate the transactions to different accounts after the close of trading. In allocating the trades Defendant put the profitable transactions into his account. He then disproportionately allocated the unprofitable transactions to the firm’s clients. As a result, Mr. Burleson had trading profits of over $1.8 million, a return rate of +26.5%. The client accounts had over $3.2 million in losses, a return rate of -5.1%. The probability that such returns would occur on their own is less than one in a million.

Defendant also made materially false and misleading statements to his clients in the Firm’s Form ADV, Part 2A. There the Firm stated that it would allocate trades “in the most equitable manner possible.” The statement was false. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Sections 206(1) and (2) of the Advisers Act. See Lit. Rel. No. 26178 (Nov. 21, 2024).

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