This Week In Securities Litigation (Week ending November 6, 2015)
Conflicts and investment fund fraud cases were the focus this week. The SEC brought two actions in each category. In addition, a settled insider trading action was filed.
SEC
Remarks: Andrew Cheresney, Director, Division of Enforcement addressed the 2015 National Society of Compliance Professional National Conference (Nov. 4, 2015). His remarks discussed the Division’s prospective on compliance officers, select related cases and Rule 206(4)-7 (here).
CFTC
Remarks: Chairman Timothy Massad addressed the Futures Industry Association Futures and Options Expo (Nov. 4, 2015). His remarks addressed margin for uncleared swaps, automated trading, swaps trading cybersecurity, data reporting and refining swap identifiers (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 2 civil injunctive cases and 3 administrative actions, excluding 12j and tag-along proceedings.
Conflicts: In the Matter of Cherokee Investment Partners, LLC, Adm. File No. 3-16945 (November 5, 2015) is a proceeding which names as Respondents the registered investment adviser (since March 2012) and Cherokee Advisers, LLC, an adviser that relies on CIP’s registration. CIP advises Funds II and III while CA advises Fund IV. Beginning in mid-2011, and continuing through March 2015, the CIP and CA incurred consulting and legal and compliance-related expenses in the course of either preparing to register under the Advisers Act, preparing a registration statement or responding to requests for an Enforcement investigation. Those costs were allocated to the funds despite the fact that the partnership agreements stated that operating but not legal and consulting expenses would be so allocated. The Order alleges violations of Advisers Act Section 206(2) and 206(4). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, they will jointly and severally pay a penalty of $100,000.
Investment fund fraud: In the Matter of Scott A. Doak, Adm. Proc. File No. 3-1694 (Nov. 4, 2015). Respondent Scott Doak was an emergency medicine physician when he first met Mr. Apostelos in 2005 (see case below). He became a client in 2007, investing in Midwest Green LLC. Subsequently, he resigned from his position and formed OVO Wealth Management, LLC with Mr. Apostelos and others. The firm began operations in 2013. OVO held client funds in custodial accounts through a registered broker-dealer. The funds were to be invested in publicly traded investments through model portfolios. Clients were charged an asset management fee based on AUM. In 2014 Mr. Doak began seeking new employment as a physician. In May of that year he decided to wind down OVO and started advising clients to close their account. He advised clients to transfer their accounts to Midwest Green and other vehicles controlled by Mr. Apostelos. Seventeen OVO clients made the transfers from self-directed IRAs. Clients were told the investments were safe but Mr. Doak had no basis for that representation. Mr. Doak did not tell clients that he and other investors were trying unsuccessfully to withdraw their funds form Midwest Green and other investments controlled by Mr. Apostelos and that some were threatening to sue. During the period Mr. Doak was paid $86,833.34 from a non-OVO account controlled by Mr. Apostelos. The Order alleges violations of Securities Act Sections 5(a), 5(c), and 17(a)(1) and (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the proceedings Mr. Doak 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 order barring him from the securities business. Mr. Doak will pay disgorgement of $86,833.34, prejudgment interest and a penalty of $160,000.
Conflicts: In the Matter of Fenway Partners, LLC, Adm. Proc. File No. 3-16938 (November 3, 2015). Fenway Partners, a Commission registered investment adviser, serves as the adviser to three private equity funds, including Fenway Partners Capital Fund III, L.P. Respondents Peter Lamm and William Smart served as Managing Directors and had an ownership interest in the adviser. Respondent Timothy Mayhew was also a Managing Director until his resignation in May 2012 when he joined Fenway Consulting Partners, LLC, an affiliate largely owned by Messrs. Lamm, Smart and Mayhew. Respondent Walter Wiacek served as Vice President, CFO and COO of Fenway Partners. The action centers on failing to disclose conflicts. First, Fenway Partners had entered into agreements with Portfolio Companies under which monitoring fees were paid. Those monitoring fees were 80% offset against the advisory fee paid by Fund III. In December 2011 Respondents caused four Fund III Portfolio Companies to terminate the agreements under which monitoring fees were paid. Those agreements were replaced with Consulting Agreements with Fenway Consulting, an affiliate of Fenway Partners, for essentially the same services without the offset and without disclosing the conflict to the Advisory Board. Second, in January 2012 Fenway Partners sent a capital call notice to the Limited Partners regarding Portfolio Company A. The notice requested $4 million to invest in the firm’s securities for capital improvements. Fund III only used $3 million for the securities while $1 million went to pay Fenway Consulting under a consulting agreement executed at the same time as the capital call. The $1 million payment was not disclosed to the Limited Partners in the capital call notice. Finally, Respondents failed to disclose the conflict in a June 2012 transaction in which Fund III sold its equity interest in a second Portfolio Company, Company B. Mr. Mayhew and two former Fenway Partners were included in the Company B cash incentive plan. As part of the sales transaction the men were paid $15 million under the cash incentive plan from the sale proceeds, reducing the amount received by Fund III for services largely performed while the men were employees of Fenway Partners. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure, except Mr. Wiack who was not censured. In addition, each of the Respondents, except Mr. Wiack, will, on a joint and several basis, pay disgorgement in the amount of $7,892,000 and prejudgment interest. Each Respondent will pay a civil penalty of: $1 million by the adviser; $150,000 each by Messrs. Lamm, Smart and Mayhew; and $75,000 by Mr. Wiacek.
Insider trading: SEC v. Spivak, Case No. 1:15-cv-13704 (D. Mass. Filed November 2, 2015). Defendant Shirmila Doddi was employed as a financial analyst in the commercial banking group of Wells Fargo Bank, N.A. Defendant Vlad Spivak is unemployed but day trades. This action centers on the acquisition of American Dental Partners, Inc. by JLL Partners, Inc., announced on November 7, 2011. The transaction began in March 2011 when representatives of Wells Fargo Securities met with American Dental regarding the possibility of a merger and acquisition. As it moved forward Ms. Doddi learned about it first in August and later when it was confirmed in September 2011. While she had repeatedly resisted requests for inside information from Mr. Spivak, with whom she developed a romantic relationship beginning in early 2011, after the deal was confirmed she texted him and he traded. Mr. Spivak sold his shares after the deal announcement at a profit of $222,357. The complaint alleges violations of Exchange Act Section 10(b). Ms. Doddi settled, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). Determinations regarding the appropriate amount of disgorgement, prejudgment interest and penalties will be resolved in further proceedings. Mr. Spivak did not settle. See Lit. Rel. No. 23398 (November 2, 2015).
Investment fund fraud: SEC v. Apostelos, Civil Action No. 1:15-cv-00699 (S.D. Ohio Filed October 29, 2015). Named as defendants are: William Apostelos and his companies, WMA Enterprises, LLC, Midwest Green Resources, LLC and OVO Wealth Management, LLC. Midwest Green claims to be in the business of investment and real estate management. OVO is a state registered investment adviser. The complaint alleges that since at least 2010 Mr. Apostelos, WMA, Midwest Green and OVO have raised over $66 million from about 350 investors. Mr. Apostelos is alleged to have made a variety of misrepresentations to induce the investors to part with their funds. In reality virtually all of the funds obtained from investors were funneled to WMA’s bank accounts. The funds were then used to make Ponzi-like payments to earlier investors and finance other ventures of Mr. Apostelos and his wife. Portions of the funds were used for the couple’s personal expenses. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(1) and 17(a)(3), Exchange Act Sections 10(b) and 15(a) and Advisers Act Sections 206(1), 206(2) an 206(4). The case is pending. See Lit. Rel. No. 23397 (October 30, 2015).
Hong Kong
Due diligence/suitability: The Securities and Futures Commission reprimanded and fined Okasan International Limited $4 million for failures in connection with selling unlisted investment products. Specifically, the firm did not conduct adequate due diligence, failed to ensure that its recommendations to clients were suitable, did not maintain adequate records and failed to adequately disclose its trading profits.
UK
Investment fraud: Defendants Richard Clay and Kathryn Clark, who was authorized under the Financial Services Act, raised £47.5 million marketing investment financial products through their control of Arck LLP. Mr. Clay and Ms. Clay each pleaded guilty to three counts of fraud and, in addition, Ms. Clay pleaded guilty to three counts of forgery. Mr. Clay was sentenced to 10 years and 10 months in prison. Ms. Clay was sentenced to serve two years in prison, suspended for two years, with 3000 hours unpaid work. Mr. Clay was also given a serious crime prevention order to last for five years. Both defendants were disqualified from serving as a director of a company for 15 years as to Mr. Clay and 14 years as to Ms. Clark.