Last week the Commission focused in part on actions involving the illegal sale and manipulation of crypto assets. They called the effort a “Crackdown on Manipulation of Crypto Assets Offered and Sold as Securities.”. A series of cases were filed as reported below.
Be careful, be safe this week
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 11 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Manipulation: SEC v. Tobin, Civil Action No. 1:18-cv-12415 (D. Mass.) is a previously filed action centered on the manipulation and illegal sale of shares of Environmental Packaging Technologies Holding, Inc. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Section 10(b). On October 18, 2024, judgements were entered against Defendants Quinn and Skrilff who were charged with violations of the antifraud provisions. In addition, Mr. Quinn was charged with violations of the registration provisions. Mr. Quinn consented to the entry of a final judgment based on the Sections charged and a penny stock bar. It also orders him to pay a penalty of $230,464. Mr. Skrilff consented to the entry of permanent injunctions based on the Sections charged. The order also includes a penny stock bar as well as an officer/director bar. In addition, he has agreed to pay disgorgement of $53,658.73, prejudgment interest of $11,641.93 and a penalty of $414,368. See Lit. Rel. No. 26163 (October 18, 2024).
Reg. BI: SEC v. Cabalar, Civil Action No. 1:24-cv-07274 (E.D.N.Y. Filed October 16, 2024) is an action which names as defendant Baris Cabalar, a registered representative at PHX Financial, Inc. The firm is a registered broker-dealer in New York City with branch offices in Fort Lauderdale, Florida. After the effective date of Reg BI – June 30, 2020 – Defendant continued to recommend to clients a short term investment strategy for select clients that benefitted him but created significant loses for select customers which totaled over $1 million. Mr. Cabalar did not conduct any due diligence prior to making his recommendations. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 15l-1 (Reg. BI). See Lit. Rel. No. 26161 (October 16, 2024).
Insider trading: SEC v. Groom, Civil Action No. 1:24-cv-12621 (D. Mass. Filed October 15, 2024) names as defendant Matthew Groom, self-employed as Managing Director of TechNet UC, a private information technology consulting company he co-founded. In January 2022, Mr. Groom contracted to work as an information consultant to Spero Therapeutics, Inc. His agreement had a confidentiality provision. On March 30, 2022, Mr. Groom’s contact at the TechNet informed him that the company had a contingency plan for a possible work force reduction. The same day Mr. Groom placed an order to sell his shares in the company. On May 3, 2022, the company announced that it had been informed by the FDA that the support for its drug application on Tebipenem was insufficient. The company immediately downsize its work force. The stock price fell 64%. The prior sale of his shares saved Defendant $12,936.86. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the action Mr. Groom consented to the entry of a permanent injunction based on the Sections cited. He also agreed to pay disgorgement, prejudgment interest and penalties of about $28,000. See Lit. Rel. No. 26159 (October 15, 2024).
Manipulation: SEC v. Destiny Robotics Corp., Civil Action No. 1:24-cv-23958 (S.D. Fla. Filed October 15, 2024) is an action which names as defendant the company and Megi Kavtaradze as Defendants. The company, formed in 2021, is based in Florida. Defendant Kavtaradze served as CEO and sole officer of Destiny. Over a two-year period, beginning in July 2021, Defendants raised about $141,000 from investors. Those investors were told the firm focused on AI and robotics and had created the world’s first humanoid robot that could form deep and meaningful relationships with humans. Defendants touted the features of the creation on its Wefunder crowdfunding webpage with endorsements from Investor A. In making those enforcements Defendants failed to disclose that Investor A is in fact the CEO of the company. By April 2023 the firm was out of cash. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3). Defendants resolved the matter, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, Mr. Kavtaradze will pay disgorgement of $12,990.63, prejudgment interest of $1,394.06 and a penalty of $50,000. See Lit. Rel. No. 26157 (October 15, 2024).
Misappropriation: SEC v. Arsenault, Civil Action No. 3:24-cv-01633 (D. Conn. Filed October 11, 2024) is an action which names as defendants: Jeffrey Arsenault, the owner and managing member of Old Greenwich Capital; Old Greenwich Capital Advisors, LLC, an investment adviser; and OGCP Management Co., LLC, an investment adviser. Following the fall of 2008 the investment fund managed by Defendant Jeffrey Arsenault had financial difficulties. In addition, Mr. Arsenaut’s partner left OGCP and took a significant portion of the assets under management. Subsequently, Mr. Arsenault and Old Greenwich misappropriated money from OGCP Fund. Mr. Arsenault also used the Fund to pay his family expenses going forward. To conceal these actions the books were falsified. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4). See Lit. Rel. No. 26160 (October 11, 2024).
Manipulation: SEC v. CLS Global FZC LLC, Civil Action No. 1:24-cv-12590 (D. Mass. Filed October 9, 2024), is an action which names as defendants the firm and Andrey Zhorzhes. The firm is a UAE entity based in Dubai. It claims to provide marketing, consulting and “market making” services. Mr. Zhorzhes claims to be the firm’s Middle East and North American Leader and Senior Business Development Manager. He resides in Dubai. Mr. Zhorzhes claims that the firm provides services called self-trading and wash trading. The purpose, according to Defendant Zhorzhes, is to get people interested in the market. In June 2024 Defendant Zhorzhes had discussions with NexFundAI which supposedly had a project team that wanted to hire CLS Global to generate artificial trading. Neither Defendant knew that NexFundAI had been developed by the FBI. In mid-August an agreement was entered into for trading. During the period, CLS Global’s manipulative trades represented 98% of the NexFundAI’s total trading volume. This trading caused harm to the markets and investors. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Sections 9(a)(2) and 10(b). See Lit. Rel. No. 26154 (October 15, 2024).
,Crypto manipulation: SEC v. Armand, Civil Action No. 1:24-cv-12586 (D. Mass. Filed October 9, 2024) is an action in which the Commission announced that it charged the defendants as part of a “Crackdown on Manipulation of Crypto Assets Offered and Sold as Securities.” Named as defendants: Russell Armand, CEO of Saitama LLC; Maxwell Hermandez, Chief Tech Officer of Saitama; Manpreet Singh Kohli, Chief Financial Officer of Saitama; and Nam Tran, Chief Business Officer of Saitama. Initially Saitama was a Massachusetts entity; later it was dissolved and recreated in Dubai. Beginning in June 2021, Defendants Hernandez, Kohli and Tran created a scheme to distribute Saitama Inu – a dog-themed crypto asset that claimed it would create wealth through passive income. Initially, each Defendant, except Mr. Hernandez, distributed the SaitaRealty. Later each Defendant offered and sold SaitaRealty as a security. Each of the Defendants also worked on creating a market for the assets and engaged in manipulative trading which was promoted through a variety of social media sites. The promotions were based in part on misstatements of fact. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 9(a)(2) and 10(b). Defendants Armand and Hernandez consented to the entry of bifurcated settlements, consenting to the entry of injunctions and orders baring them from serving as officers or directors. The court will consider monetary relief at a later date. See Lit. Rel. No. 26155 (Oct. 15, 2024).
Insider trading. SEC v. Xie, Civil Action No. 2:24-cv-09801 (D. N.J. Filed October 15, 2024).
Defendant Ruimin Xie is a resident of New Jersey. During the period of this case he was the Director of Analytical Development at BELLUS Health.On. On April 18, 2024, a takeover deal was announced involving his employer: GKS plc would acquire Canadian-based BELLUS. Earlier in the month Defendant had been tasked with conducting due diligence for the deal. After finishing his assignment, Defendant did something he had never done – Mr. Xie purchased shares of BELLUS Health. He continued to purchase shares until April 17, 2024. By that time he had acquired over 7,000 shares, although his last order was not filled. The deal was announced the next day. Following the deal announcement, Defendant sold all of his shares. He had profits of over $59,000. The complaint alleges violations of Exchange Act Section 10(b) and Rule 10b-5. To resolve the matter Defendant consented to the entry of a permanent injunction based on the Section and Rule cited in the complaint. In addition, he agreed to pay disgorgement of $59,408.42, prejudgment interest of $6,800.89 and a penalty equal to the amount of his trading profits. In addition, he is be barred from serving as an officer or director of a firm for five years. See Lit. Rel. No. 26162 (October 17, 2024).
Crypto manipulation: SEC v. Vy Pham, Civil Action No. 1:24-cv-12588 (D. Mass. Filed Oct. 9, 2024). Defendant Vy Pham is a citizen of Vietnam who resides in Los Angeles. She holds herself out as the leader of a project related to Robo Inn and as the CEO of Robo Global Investment PTE, Ltd. In the spring of 2021 Defendant Pham participated in the launch of Saitama Inu, a crypto asset offered and sold as a security. Those involved with the promotion of the asset claimed it would create wealth through passive income. They also claimed that it would promote financial literacy and global financial well-being. Ms. Pham and the others promoting the crypto asset then engaged in a series of actions designed to increase the price and trading volume. Shortly thereafter Defendant Pham had a falling out with the leadership team. Members of that team were also named in a Commission enforcement action, SEC v. Russell Armand, et. al (D. Mass 2024). Later in 2021 Ms. Pham launched another crypto asset – the Robo Inu Finance token. It was inspired by a NASA plan to launch Robo dogs to Mars. There was no real market for the asset. Defendant hired Gotbit Consulting LLC to provide market making services. They did. A process was used to create the illusion of public interest in Robo Inu. Trading in the assets was designed to attack public interest in the assets. It did. There was wash trading to induce public interest. Those efforts began in February 2022 and continued through June of 2023. Social media and other, similar avenues, were used to promote the assets. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Section Sections 9(a)(2), 10(b) and Rules 10b-5(a) and (c). See Lit. Rel. No. 26153 (Oct. 15, 2024).
Additional crypto manipulation cases: SEC v. Gotbit Consulting LLC, Civil Action No. 1:24-cv-12589 (D. Mass. Filed October 9, 2024)(Amanipulation case in which Defendant Gotbit provided on demand market manipulation of crypto assets; the firm is operated by Fedor Kedrov, according to the complaint; one of the clients was Vy Pham, involved in another action here; the complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act and Exchange Act Section 9(a)(2) and 10(b); see also Lit. Rel. No. 26156 )(Oct. 15, 2024). Another action in this series is: SEC v. ZM Quant Investment Ltd., Civil Action No. 1:24- cv –12587 (D. Mass. Filed October 9, 2024)(market manipulation case against ZM Quant Investment Ltd., a so-called crypto market maker, and its employees, Baijun Ou and Ruiqi Lau; the action involves the manipulation of Saitama Inu, SaitaRealty and NexFundsAI, all crypto assets. As a result of the manipulative trading SaitaRealty had a price increase of 412,000,000,000%. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). See Lit. Rel. No. 26158 (October 15, 2024).
FinCEN
Regulation: The Financial Crimes Enforcement Network announced that it is renewing its real estate geographic targeting orders in a release issued on October 16, 2024 (here).
Australia
Regulations: The Australian Securities and Futures Commission announced changes to the OTC derivative transaction reporting requirements. The new requirements are in effect as of October 21, 2024 (here).
ESMA
Article: The European Securities and Markets Authority published highlights from the 2024 Joint Consumer Protection Day in Budapest in an article dated October 17, 2024 (here).
