SEC Enforcement’s Third Quarter: More Cases, Broader Reach (Part I)

Directional note: This is the first of two articles analyzing the actions initiated in the third quarter of 2020 by SEC Enforcement. The second articles will be published on Friday.

The Commission frequently increases the rate at enforcement actions are filed in advance of the September 30^th fiscal year end. That fiscal year end is followed by Congressional budget hearings where statistics are at least one measure of performance. Filing over 120 enforcement actions during as the Government fiscal year end approached far eclipsed the number of cases brought in each of the earlier quarters, clearly suggesting a push to increase the number of filings.

The push and number of cases may, however, also reflect a possible shift in the enforcement program focus. During the third quarter for the first time in years more administrative proceedings were filed than federal court cases. In addition, a review of the cases suggests that the focus was broader with, for example, more financial fraud actions and cases involving market professionals being filed. These points will have to be carefully assessed by compliance professionals to ensure a proper focus.

Statistics

The following table depicts the leading categories of cases as a percentage of the total actions filed during the period.

Grouping the actions are grouped by defendant/respondent provides a different assessment as shown below.

Select cases

Examples of the cases are set forth below, grouped by category.

Offering fraud

SEC v. Karlsson, Civil Action No. 20-civ-04615 (E.D.N.Y. Filed Sept. 29, 2020) names as defendants Roger Nils-Jonas Karlsson who describes himself as a System Analysis Manager. Over a period of about seven years, beginning in late 2012, Defendants marketed an investment called a Pre Funned Reversed Pension Plan that claimed to be the first such instrument. The instrument was supposedly developed by world class economists and had “huge” payouts tied to the value of gold. At least 2,200 investors acquired interests in Eastern Metals. The initial payment was $99. In the last 18 months about $3.5 million in digital assets were transferred to Defendants. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24932 (Sept. 30, 2020)

SEC v. Rogas, Civil Action No. 20 cv 7628 (S.D.N.Y. Filed Sept. 17, 2020) is an action which names the founder of NS8 FP, LLC as a defendant. NS8 is a privately held high tech company founded by Adam Roges. In 2019, and again in 2020, Mr. Roges defraud investors purchasing shares of the firm. The scheme was implemented by altering the firm’s bank records to show millions of dollars in revenue. Those records were then furnished to the company which used them to prepare financial statements for the offerings. Mr. Rogas took steps to conceal his fraudulent acts but was persistent. In 2019 he continued the fraud after being questioned by a representative for an investor. He also continued to furnish false information to the company after being contacted by the staff. About $123 million was raised in the two offerings. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24905 (Sept. 18, 2020).

SEC v. Coggins, Civil Action No. 70-cv-23444 (S.D. Fla. Unsealed August 26, 2020) is an action which names as defendants David C. Coggins and Coral Gables Asset Management LLC, an investment adviser he controlled. Beginning in 2015 Defendants solicited investors using a series of lies about the nature of the investments, how the money would be invested and the performance of the funds. While about $1.85 million was raised, a substantial portion of the investor money was misappropriated. The portion that was invested performed poorly. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10)(b), and Advisers Act Sections 201(1), 206(2) and 206(4). The case is pending. See Lit. Rel. No. 24877 (August 26, 2020).

Disclosure

In the Matter of Fiat Chrysler Automobiles N.V., Adm. Proc. File No. 3-20092 (Sept. 28, 2020) is a proceeding naming the auto manufacturer as a respondent. In early 2016, following the action brought against a German auto firm for circumventing environmental limitations on emissions with a “defeat mechanism,” the firm disclosed the results of an internal inquiry focused on the same issue. While the disclosures stated the findings of the inquiry that no defeat mechanism was used, it failed to state that the investigation was limited and that the EPA and California Air Resources Board engineers had raised concerns about certain of its engines. The Order alleges violations of Exchange Act Section 13(a). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited. The firm will also pay a penalty of $9.5 million. A fair fund will be created.

Internal controls

In the Matter of Kroll Bond Rating Agency, LLC, Adm. Proc. File No. 3-20096 (Sept. 29, 2020) names the rating agency as a respondent. The firm’s internal controls relating to its rating of conduit/fusion commercial mortgage backed securities had deficiencies. Those issues resulted in material weaknesses in its internal control structure. The firm established procedures to determine credit ratings for the instruments which permitted the use of professional judgment to make adjustment. Unfortunately, the system failed to include any analytical method for determining the applicability of, the magnitude of, or recording the rational for the adjustments. The firm failed to detect or prevent the omissions. The Kroll’s written procedures from 2012 to 2017 also permitted the adjustments made to be done on a portfolio basis rather than by property. The Order alleges violations of Exchange Act Section 15E(e)(3)(A). To resolve the proceedings the firm consented to the entry of a cease and desist order based on the section cited and a censure. The firm will also pay a penalty of $1,250,000 which will be transferred to the U.S. Treasury. See also In the Matter of Kroll Bond Rating Agency, LLC, Adm. Proc. File No. 3-20097 (Sept. 29, 2020)(base on a failure to establish and maintain policies and procedures re if CLO combination notes will default; resolved with a cease and desist order based on Rule 17g-8(b)(1) of Exchange Act, a censure, a series of undertakings, payment of $160,000 in disgorgement, $4,836.33 in prejudgment interest and a penalty of $600,000). A fair fund was created.

Manipulation

In the Matter of J.P. Morgan Securities LLC, Adm. Proc. File No. 3-20094 (Sept. 29, 2020). The Order alleges that over series of months from April 2015 to January 2016 certain traders at the firm engaged in manipulative trading in the secondary market of U.S. Treasury cash securities. On one side of a trade orders would be entered that were bona fide. On the other trades were placed that were not bonified but were designed to either raise or depress the price. The non-bonified trades were generally cancelled. The Order alleges violations of Securities Act Section 17(a)(3). To resolve the proceedings the firm acknowledged that its conduct violated the federal securities laws, consented to the entry of a cease and desist order based on the section cited in the order and to a censure. The firm will pay a civil penalty of $25 million and disgorgement of $10 million. The penalty and disgorgement will be satisfied by amounts paid in the parallel DOJ and CFTC actions.

Insider trading

SEC v. Sheinfeld, Civil Action No. 20-civ-01692 (M.D. Pa. Filed Sept. 17, 2020) is an action which names as a defendant Steven J. Sheinfeld, a 20 year employee of Rite Aid Corp. who implements their code of ethics. The case centers around a planned merger of Rite Aid and Walgreens Boots Alliance, Inc. which was scheduled to close on January 17, 2017. Prior to that date Defendamt learned while working on a special project at work that the deal would likely not close on time. In fact, the deal did not close and the stock dropped about 13%. Just prior to the announcement that it would not close Defendant sold all of his shares, avoiding a loss of about $140,000. He also sold firm shares held in the accounts of relatives, avowing over $15,000 in losses. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24903 (Sept. 17, 2020).

SEC v. Kelly, Civil Action No. 1:20-cv-04449 (E.D.N.Y. Filed Sept. 23, 2020) is an action which names as a defendant Edward T. Kelly, the retired controller of Aceto Corporation. After Mr. Kelly retired the firm had financial difficulties. In March 2018 Mr. Kelly was brought in to aid the firm. After determining that the company had financial issues, he sold all of his firm shares and exercised his stock options and sold those shares. By trading while in possession of inside information, and after the facts were disclosed, he avoided losses of over $85,000. The complaint alleges violations of Exchange Act Section 10(b). To resolve the action Mr. Kelly consented to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to the entry of an order that bars him from serving as an officer or director of a public company and to pay a penalty of $170,228. See Lit. Rel. No. 24912 (Sept. 23, 2020).

SEC v. Yang, Civil Action No. 1:29-cv-04427 (E.D.N.Y. Filed Sept. 21, 2020). Yinghang “James” Yang and Yuanbiao Chen, respectively, the Senior Index Manager of Company and his friend, a manager at a sushi restaurant, are defendants in the action. Mr. Yang has held his position since September 2018. In that position he helped manage the firm’s Indexes. He also served on the Index Committee during which there were discussions regarding the components of the various indexes. The firm had confidentiality procedures in place to protect their information as Mr. Yang knew. Prior to the commencement of the scheme, Mr. Chen opened a Brokerage Account at Broker. Mr. Chen informed the brokerage that he had five years of experience in trading options. He executed an agreement that would permit trading options through the new account. Over a period of just over four months, beginning on June 24, 2019, Defendants purchased options in the shares of fourteen stocks shortly prior to the time the Company made additions or deletions from those Indexes. Following the announcement by Company of either the addition or deletion of stocks from an Index, Defendants closed the transactions. The trades were placed while in possession of material, non-public information about the actions to be taken for various securities with regard to being added or deleted from the Indexes of Company. Defendants placed the trades in Brokerage Account with computers using IP addresses at three locations. One was Mr. Yang’s home. A second was the Company. A third was at Mr. Chen’s place of employment. The transactions netted illegal trading profits of $912,082. The profits were divided by the two men. The complaint alleges violation of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24909 (Sept. 22, 2020). [1]

False statements

In the Matter of Alan J. Kau, Adm. Proc. File No. 3-20052 (Sept. 23, 2020) is an action centered on the bankruptcy of the firm for which Mr. Kau once served as President, Worthington Energy, Inc. In 2018 Mr. Lau signed off on a fraudulent Disclosure Statement Describing Debtor’s Joint Plan of Reorganization and Debtor’s Joint Plan of Reorganization as a Chapter 11 prepackaged plan. The materials were filed with the U.S. Bankruptcy Court for the Southern District of California. The materials were included in the plan of reorganization. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. He also agreed to the entry of an officer-director bar and a penny stock bar with a right to apply for reentry after two years. In addition, he will pay a penalty of $15,000 that will be forwarded to the U.S. Treasury. See also In the Matter of Daniel C. Masters, Adm. Proc. File No. 3-20051 (Sept. 23, 2020)(action based on the same facts against the attorney involved; resolved with a cease and desist order based on the same sections and an officer and director bar, a penny stock bar and the revocation of his right to appear and practice before the Commission as an attorney; he will also pay a penalty of $50,000 that will be transferred to the U.S. Treasury).

Part II will be published tomorrow