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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by T. GormanPosted on Posted in SECActions

Conflicts of interests and sham transactions are a key consideration when dealing with issues involving the federal securities laws. Many of the cases initiated by the Commission center on conflicts such as those that can arise when a controlling shareholder borrows funds from a company. The Commission’s latest case involving these kind of transactions is 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 defendant 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. Indeed, 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 in 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).

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