This Week In Securities Litigation (Week of May 8, 2023)
Last week the Commission announced its largest whistleblower award in the history of the program. More rules were also announced, this time regarding Form PF and the repurchase of shares. The agency also filed a series of enforcement actions. The cases focused on the liquidity requirements of the Investment Company Act, market manipulation and offering frauds.
Be careful; be safe this week.
SEC
Whistleblower: The Commission announced its largest single whistleblower award of nearly $279 million on May 5, 2023.
Rules: The agency adopted amendments to Form PF, the confidential reporting form for certain registered investment advisers to private funds, on April 3, 2023. The amendments will in part enhance reporting by large funds to facilitate the work of the Financial Stability Oversight Counsel or FSOC. They will also require certain additional disclosures regarding select events (here).
Rules: The Commission announced rule amendments that would enhance the information disclosed regarding share repurchases by issuers, according to a release of April 2, 2023 (here). Specifically, the disclosures would include: an obligation to reveal the daily repurchase activity quarterly or semiannually; indicate within four business days if certain directors or officers traded; provide a narrative describing the program; and provide quarterly disclosure in periodic reports.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 5 civil injunctive actions and 2 administrative proceeding, excluding 12j and tag-along proceedings as well as those presenting conflicts for the author (which are counted in the totals).
Liquidity rule violations: SEC v. Pinnacle Advisors, LLC, Civil Action No. 5:23-cv-00547 N.D.N.Y. Filed May 5, 2023) is an action which names as defendant: Pinnacle, a registered investment adviser; Robert F. Cuculich, president of Pinnacle and 30% owner; Benjamin Quilty, CCO of the firm and a 10% owner; and Mark Wadach, an independent trustee of the NYSA Liquidating Fund, an open ended investment company; and Lawton Williamson, also an independent trustee of the NYSA Liquidating Fund. Beginning in June 2019, and continuing for about a year, over 15% of its net assets were invested in the restricted shares of a medical device company. During the period the firm failed to comply with the applicable reporting and filing requirements or to bring its position in the restricted shares under 15%. Pinnacle, the Fund’s adviser, and Defendant Cudulidh and Quity, who were primary responsible for compliance in this obligation, failed to require that the proper steps be taken. They also disregarded the advice of Fund counsel, who resigned over the issue, and its auditors. In addition, false statements were made to the Division the staff of the Division of Investment Management about the position. The proper disclosure forms were also not filed. By September 9, 2020 NYSA Fund had deregistered with the Commission — the shares still had not been sold. The complaint alleges violations of ICA Rules 22e-4(b)(1) and 30v-1-10. See also In the Matter of Pinnacle Investments, LLC, Adm. Proc. File No. 3-21405 (May 5, 2023)(alleges false statements re Forms ADV Part 2A, failure to disclose conflicts and not properly implementing compliance; alleges violations of Advisers Act Sections 204(a), 206(2) and 206(4); firm took remedial acts, agreed to implement certain undertakings which include the retention of a consultant; consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure; agreed to pay disgorgement of $83,462, prejudgment interest of $11,874 and a penalty of $393,381); In the Matter of Joseph Masella, Adm. Proc. File No. 3-21406 May 5, 2023)(based on civil injunctive action detailed above; resolved with consent to entry of cease-and-desist order based on IC Rule 22e(4); suspension from advisory and brokerage businesses for six month; and payment of $20,000 penalty).
Offering fraud: SEC v. Griffin, Civil Action No, 3-cv-00539 (M.D. Fla. Filed May 4, 2023) is an action which names as defendant Cedrick D. Griffin. Over a period of about one year, beginning in early 2020, Defendant and an entity he formed, raised over $5.8 million from 103 investors through the sale of G8 promissory notes. Defendant claimed that the investor funds would be used to invest in and rehab real estate. In fact, the offering was a Ponzi scheme. The complaint alleges violations of Exchange Act Section10(b) and Securities Act Sections 17(a)(1) & (3). The case is pending. See Lit. Rel. No. 25707 (May 4, 2023).
Microcap fraud: SEC v. GPL Ventures LLC, Civil Action No. 1:21-cv-06814 (S.D.N.Y.) is a previously filed action which named as defendants: GPL Ventures, GPL Management LLC, Alexander Dillon, and Cosmin Panait. The underlying complaint alleges that Defendants acted as unregistered dealers and engaged in a penny stock fraud scheme over a four-year period beginning in 2017. Defendants acted as unregistered dealers by acquiring shares of microcap stocks at a discount and them marketing and selling them to the public. As part of the scheme Defendants arranged to have the shares marketed to the pubic who purchased them as Defendants sold their shares into the market. Defendants resolved the action, consenting to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). Defendants were also ordered to pay disgorgement of $29,681,569 and prejudgment interest of $2,489,799. In addition, Defendant Dillon and Panait were ordered to pay penalties of $3.5 million each and surrender all remaining shares. A five-year penny stock bar was also imposed on Defendants. See Lit. Rel. No. 25706 (May 3, 2023).
Offering fraud: SEC v. Bartlett, Civil Action No. 8:23-cv-00765 (C.D. Ca. Filed May 2, 2023). Named as defendants in the complaint are: Brett Bartlett, the founder of the entities named as defendants; Scott Miller, the brother-in-law of Mr. Bartlett; Dynasty Toys, Inc.; The 7M Egroup Corp.; Concept Management Company LLC; and Dynasty Inc. The two individual Defendants were at one time members of the board of directors of each entity Defendant but resigned prior to the filing of this action. This case centers on a two-year period, beginning in June 2018, during which investors were solicited. Messrs. Miller and Bartlett claim to share their Christian faith. They told potential investors that they were affiliated with a large church in Illinois and that their business model was based on family values. Investors were assured that their funds would be used in one of three ways. One was for the purchase of toy inventory for resale. A second was to develop a pre-production gold mine. The third focused on acquiring and shipping face masks to government agencies and other organizations during the COVID pandemic. Based on these claims at least $20.5 million was raised from over 1,000 investors. Contrary to Defendants’ representations about the use of the cash raised, approximately $1.1 million of the investor funds was misappropriated. Over $11 million of the investor funds was used to make Ponzi like payments. And about $21 million was supposedly used to back checks signed by Mr. Bartlett and sent to investors. The checks all bounced. In fact, the “rags-to-riches” story which was the underlying theme Defendants used wea false as was each of the three proposals. The interests purchased in the entities by the investors were not registered. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Manipulation: SEC v. Cohen, Civil Action No. 1:23-cv-03309 (E.D.N.Y. Filed May 2 2023) is an action which names as defendant Lee Cohen, a U.K. citizen who previously pleaded guilty to stock manipulation charges after being arrested in Saipan. U.S v. Cohen, No. 1:22-cr-00209 (E.D. N.Y. May 4, 2022). In 2017 he joined a Matched Trading Scheme operated by William Hirschy and Dennis Mancino, each of whom has been charged by the Commission and criminal authorities. While participating in that scheme he also operated a call room from the Philippines to sell shares of HD View stock to senior citizens. Mr. Cohen made misrepresentations to induce investors to purchase the stock. The HD View failed in 2017. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(1) & (2) as well as 10(b) and 15(a). The case is pending. See Lit. Rel. No. 25704 (May 3, 2023).
Manipulation: SEC v. Reyes, Civil Action No. 1:23-cv-03429 (S.D.N.Y.) is a previously filed action which named as defendant Carlos Eduardo Reyes Alvarez. The Court entered a final judgment by consent against Defendant prohibiting violations of Securities Act Securities Act Section 17(a) and Exchange Act Sections 9(a)(1) & (2) and 10(b). The final judgment also requires the payment of disgorgement in the amount of $368,045, prejudgment interest of $76,843 and a penalty of $160,000. The judgment imposes and officer/director bar and prohibits participation in any penny stock offering. In addition, the judgement precluded Defendant from participating in certain activities tied to an offering. The underlying complaint alleges that Mr. Reyes engaged in market manipulation involving several microcap stocks and targeted several others from which he profited. See Lit. Rel. 25703 (May 1, 2023).
Offering fraud: SEC v. Andrews, Civil Action No., 01:23-01063 (D. Colo. Filed April 27, 20230 is an action which names as defendant Tyler Andrews. The complaint claims that over a period of several months, beginning in May 2019, Defendant defrauded investors out of over $1 million through the offer and sale of promissory notes in a claimed luxury Travel Business operated by a convicted felon. Defendant Andrews set up the scheme in which the criminal background of the person making the solicitations was concealed. Misstatements were made to induce investors to purchase the notes which included claims that included statements claiming that an attorney had conducted due diligence on the investments and that he had invested. Ponzi type payments were also made. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25702 (April 28, 2023).
FinCEN
Testimony: Acting Director Himanuali testified before the House Committee on Financial Services on April 28, 2023. After reviewing the basic mission of the organization, the Acting Director review key areas of focus for the agency. Those include data protection, creating an effective risk-based AML/CFT framework and effective enforcement (here).
Hong Kong
Release: The People’s Bank of China, Securities & Futures Commission of Hong Kong, and the Monetary Authority of Singapore commenced mutual access between the mainland and Hong Kong interest rate swap markets on May 5, 2023 (here).
Singapore
Statement: The Monetary Authority of Singapore released a paper regarding its monetary policy in April 2023 (here).