by T. GormanPosted on Posted in SECActions

Note: This post was prepared for publication on Monday, November 4, 2024; it covers matters from the prior week. Unfortunately its publication was delayed – our apologies.

Last week the Commission brought a series of actions against J.P. Morgan and/or its affiliates primarily based on prohibited transactions. The agency also filed actions based on insider trading, the advertising rule and an offering fraud.

Be careful, be safe this week

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 3 new civil injunctive actions and 7 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Advertising rule: In the Matter of Wahed Invest, LLC, Adm. Proc. File No. 3-22283 (Nov. 1, 2024) is a proceeding which names as respondent, a registered investment adviser based in New York City. Following the effective date of the modified marketing rule (Nov. 4, 2022) Respondent distributed advertisements on its public website that contained endorsements from several professional athletes. The required disclosures were not contained in the materials that had been back-tested. The firm also published several hypotheticals that did not adopt and implement the required policies and procedures mandated to ensure that the hypothetical performance was relevant to the likely financial situation and objectives of the intended audience. The Order alleges violations of Advisers Act Section 206(4) and Rule 206(4) -1. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section and Rule cited in the Order as well as a censure. The firm will also pay a penalty of $250,000.

Insider trading: SEC v. Sacanell, Civil Action No. 24-cv-5839 (E.D. Pa. Filed Oct. 31, 2024) is an action which names defendant Carlos Sacanell. The case centers on the acquisition of Oak Street Health, Inc. by CVS Health Corporation. Defendant Sacanell had a long-term relationship with a senior executive at Oak Street. That agent, according to the complaint, tipped Mr. Sacanell who then purchase shares and call options. Following the deal announcement Defendant Sacanell had profits of about $617,000. The complaint alleges violations of Exchange Act Section 10(b) and Rule 10b-5. The U.S. Attorney’s Office for the Eastern District of Pennsylvania filed a parallel criminal action. See Lit. Rel. No. 26168 (October 31, 2024).

Prohibited transactions: In the Matter of J.P. Morgan Investment Management, Inc., Adm. Proc. File No. 3-22282 (Oct. 31, 2024) is one of five proceedings resolved by the firm or its affiliates regarding their operations. In this matter the firm engaged in 65 prohibited principal trades with a combined notional value of about $8.2 billion. Those included about $22,000 in spreads. The transactions were conducted by directing an unaffiliated broker-dealer to buy commercial paper or similar short-term income securities from an affiliate. The adviser then purchased the paper on behalf of its clients. Fifteen of the trades involved paper that tied to registered investment companies advised by the firm despite the prohibitions of the Investment Company Act. Although the Commission had granted the firm an exemption for these transactions years ago, the restrictions on which it was based were ignored. This resulted in violations of the Investment Company Act for the 15 transactions. For the remaining 50 transactions the firm also failed to provide the required client disclosures, resulting in violations of Section 206(3). In addition, the firm failed to implement adequate policies and procedures. The firm did undertake cooperative efforts and remedial acts. To resolve the matter the firm consented to the entry of a cease-and-desist order based on Investment Company Act Section 17(a)(1) and Rule 38a-1 and Advisers Act Sections 206(3) and 206(4) and Rule 206(4)-7. A censure was ordered. In addition, the adviser agreed to pay a penalty of $1 million. The firm or its affiliates resolved four other proceedings: In the Matter of J.P. Morgan Securities LLC, Adm. Proc. File No. 322280 (Oct. 31, 2024)(misleading disclosures by the firm used with brokerage customers investing in its “conduit” products which pooled customer money and invested in private equity or hedge funds that customers might not be able to access directly; resolved with a c&d based on Advisers Act Sections 17(a)(2) & (3) and a censure along with the payment of a $10 million penalty); In the Matter of J.P. Morgan Investment Management Inc., Adm. Proc. File No. 3-22281 (Oct. 31, 2024)(the firm caused prohibited joint transactions involving certain funds that advantaged a Foreign Fund over Domestic Funds in March 2020 as a result of the delegation to three U.S. money market funds and the portfolio manager of an affiliated foreign money market fund; resolved with c&d based on Investment Company Act Section 17(d) and Rule 17d-1 and the payment of a $5 million penalty); In the Matter of J.P. Morgan Securities LLC, Adm. Proc. File No. 3-22278 (Oct. 31, 2024)(failure to provide the required disclosures since July 2017 of the financial incentive of itself and certain of its financial advisers to recommend the PM Program over advisory programs offered by JP Morgan Securities that used third-party manager; resolved with a c&d based on Advisers Act Sections 206(2) and (4) and a censure and the payment of a penalty of $45 million); In the Matter of J.P. Morgan Securities LLC, Adm. Proc. File No. 3-22279 (Oct. 31, 2024)(from June 30, 2020 to July 14, 2022 recommended certain mutual fund products to its retail brokerage customers when materially less expensive ETF products that offered the same investment portfolio to investors were also available on JP Morgan Securities’ platform for recommendation to the customers; resolved with a c&d and a censure based on violations of Exchange Act Rule 15l-1 but no penalty based on self-reporting).

Offering fraud: SEC v. Pannon Investment Advisors LLC, Civil Action No. 1:24-cv-24241 (S.D. Fla. Filed October 30, 2024) is an action which names as defendants the advisory and Dusan Varga. The firm has never been registered as an investment adviser. Defendant Varga operated Pannon and is the sole signatory on its bank account. Over a four-year period, beginning in May 2020, Defendants raised about $1.6 million from 20 investors through a series of unregistered and fraudulent offerings. To induce investors to purchase interests in the fund they were told that Hannon Fund traded covered stock options to generate high income while managing the downside risk. Investors were promised high income in the form of dividends of 3% or 4% per month. Investors were solicited through a variety of means. They were told that Mr. Vargas had a background as a registered representative of a broker dealer and that the investments were safe. The claims were false. The scheme unraveled toward the end of 2023 when Defendants stopped paying dividends. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2) and 206(4) and related rules. Defendants resolved the action, consenting to the entry of permanent injunctions based on each of the Sections and Rules cited in the complaint. In addition, the judgment imposed an officer/director bar against Mr. Vaga and requires the payment of disgorgement, prejudgment interest and penalties in amounts to be determined by the court at a later date. See Lit. Rel. No. 26167 (October 31, 2024).

Fraudulent accounting: SEC v. Dellomo, Civil Action No. 24-cv-127 (D.Conn. Filed Oct. 29, 2024) is an action which names as defendants: Donna Dellomo, a CPA who served as the CFO and director of finance for the firm; Yoon Um, a CPA who served as the firm’s controller; and The Lovesac Company, a publicly held retail furniture outlet. The case centers on the treatment afforded about $2.2 million in shipping expenses. In April, 2023, the company discovered that about $2.2 million in last mile shipping expenses were not properly recorded. Defendants Um and Dellomo then engaged in a scheme to conceal the expenses from investors and the Commission by improperly accounting for them. In part that was done by providing the outside auditor with a false representation letter regarding the sum. In addition, the company and Defendant Dellomo failed to implement proper controls. The complaint alleges violations of Securities Act Securities Act Sections 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13b-5. Defendant Lovesac resolved the charges, consenting to the entry of permanent injunctions based on Securities Act Section 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and the related Rules. See Lit. Rel. No. 26166 (October 29, 2024).

Conflicts: In the Matter of Hamlin Capital Advisors, LLC, Adm. Proc. File No. 3-22274 (October 24, 3034). Named as respondents in this action are the advisory, a registered investment adviser, and its affiliate, Michael Ferrell Braun. He holds a Series 50 qualification as a municipal advisor representative. Mr. Braun is also the Managing Director of Hamlin Advisors. The Commission’s Order centers on the failure of Respondents to fully disclosure conflicts in specific instances involving their business transactions. The transactions here focus on the period September 2017 to April 2022. The advisory and Mr. Braun provided advice to certain charter schools on the issuance of select municipal bond offerings. The offering involved over $500 million in aggregate principal. In each instance an affiliate of the adviser purchased all, or a substantial portion of, the offering. The affiliate was a registered investment adviser. In most instances, Affiliate also acted as compensated bondholder representative. The affiliate relationship created a conflict of interest that was not disclosed until after the transactions. In addition, only partial disclosure was made at that point. Specifically, disclosure was not made of the fact that Hamlin Advisors had a financial incentive that was opposed to that of the Charter School clients involved. Finally, the written supervisory procedures of the advisory were not reasonably designed to achieve compliance with the applicable provisions of the securities laws or the MSRB rules. The Order alleges violations of Exchange Act Section 15B(c)(1) and MSRB Rules G-17 and G-42(b) &(c). To resolve the matter, Respondents each consented to the entry of a cease-and-desist order based on the Sections and Rules cited in the Order. Each Respondent was censured. In addition, Hamlin Advisors will pay a penalty of $200,000. Mr. Braun agreed to pay a penalty of $75,000. A total of $85,000 will be transferred to the MSRB in accord with Exchange Act Section 15B(c)(9)(A). If the penalties are not paid timely interest will be added under 31 U.S.C. §3717.

ESMA

Report: The European Supervisory Authority published a report on October 30, 2024, on principal adverse impacts disclosures under the Sustainable Finance Disclosure Regulation. (here).

Hong Kong

Report: The Securities & Futures Commission of Hong Kong published a report on its meeting with senior executives of the Capital Market Authority and Saudi Tadawul Group on October 31, 2024.

Singapore

Release: On October 30, 2024, the Monetary Authority of Singapore published a report on the Establishment of Global Finance & Technology Network for Next Phase of FinTec Growth.

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by T. GormanPosted on Posted in SECActions

Halting insider trading has long been a priority for the Commission. While the offense is not mentioned in the fraud provisions of the Securities Act or the Exchange Act, it is based on a breach of duty and has long been viewed as the kind of malfeasance that is contrary to statutes that were enacted to bring a new ethics to the marketplace. In the Matter of Umpathi Kakkera, Adm. Proc. File No. 3-22267 (Oct. 17, 2024) is one of the cases brought by the Commission for insider trading.

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 inside information about the acquisition 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. Based on the information furnished to him, Umapathi Kakkera purchased NeoPhotonics call option contracts. Following the deal announcement he had over $200,0000 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).

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