This Week In Securities Litigation (Week of October 2, 2023)
The Government fiscal year concluded on Saturday. A Government shutdown was avoid. At the same time the drive to file new cases at the Commission ended. In the last week of the fiscal year the Commission filed 53. Those cases were based on a variety of violations ranging from offering fraud and insider trading to the FCPA as detailed below. .
Have a great and safe week.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 28 civil injunctive actions and 25 administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Offering fraud: SEC v. Third Friday Management, LLC, Civil Action No. 9:23-cv-81332 (S.D. Fla. Filed September 29, 2023) is an action which names as defendants the firm, a former registered investment adviser, and Michael Lewitt, the majority owner. The Third Friday Total Return Fund, LP was managed by Defendant Third Friday Management. Since at least 2012 investors were told that the Fund only invested in S&P 500 index options. In January 2018 the Fund began investing in other interests, however. For example, contrary to its disclosed guidance, it made 45 separate loan advances for about $19 million to a distressed company. There was no disclosure to investors. The Fund also failed to disclose that it was making bridge loans to what the complaint calls a Bankrupt Entity. In addition, Defendant Lewitt misappropriated about $4.7 million in assets and paid his personal taxes of about $900,000 from the Fund. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), and 206(4). The case is in litigation. See Lit. Rel. No. 25869 (September 29, 2023).
Audit failure: SEC v. Speight, Civil Action No. 1:23-cv-04384 (N.D. Ga. Filed September 27, 2023) is an action against the audit firm, Speight & Company, and its owner, Luther Speight. The firm was retained to audit a State of Louisiana based school board for fiscal 2019. The school conducted a $120 million municipal bond offering. While the audit firm failed to conduct an audit in accord with the appropriate standards, it issued an opinion to the contrary – the opinion stated that the audit had been conducted in accord with GAAS when it had not. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3). To resolve the matter Defendants each consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, the firm paid a penalty in the amount of $20,000 while Mr. Speight agreed to pay a penalty of $10,000. See Lit. Rel. No. 25870 (September 29, 2023).
Offering fraud: SEC v. Feloni, Civil Action No. 1:23-cv-12233 (D. Mass. Filed September 29, 2023) is an action which names as defendant John Feloni and Stock Squirrel, Inc. Beginning in 2019, and continuing for the next four years, Defendants solicited investors, assuring them that their money would be used to develop a smartphone application. Contrary to that representation, about $1.6 million of the $2.5 million raised was used to pay personal expenses. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The action is in litigation. See Lit. Rel. No. 25871 (September 29, 2023).
Unregistered dealer: SEC v. Long, Civil Action No. 1:23-cv-14260 (N.D. Ill. Filed September 29, 2023). Beginning in 2018 Defendants Adam Long, L2 Capital, LLC and Oasis Capital, LLC operated as unregistered dealers. While acting in that capacity Defendants engaged in the business of purchasing convertible promissory notes from small business entities that needed cash and issued penny stocks. Defendants engaged in at east 20 convertible note transactions and sold over 5.8 billion shares of stock into the public markets. None of the shares were registered. The complaint alleges violations of Exchange Act Section 15(a)(1). The case is in litigation. See Lit. Rel. No. 25872 (September 29, 2023).
False statements: SEC v, Patton, Civil Action No. 8:23-cv-02212 (M.D. Fla. Filed September 29, 2023) is an action which names as defendants: Stephone Patton, a convicted felon; and her firm Star Oil and Gas Company. The complaint alleges that Defendants made false statements in at least 30 Reg D filings for multiple companies from 2020 to 2023. The forms filed claimed that the firms involved had $16 billion in revenue and 3,000 employees. The claims were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25873 (September 29 2023).
Cherry picking scheme: SEC v. Jacobson, Civil Action No. 2:23-cv-05650 (E.D. La. September 29, 2023) is an action which names as defendants: Steven Jacobson and Advisor Resources. Council II (ARC). Beginning on July 31, 2020, and continuing until October 1, 2020, Defendant Jacobson disproportionally allocated option trades with positive returns to his personal account, one in the name of his mother and three favored client accounts. His account and that of his mother had gains from this process of about $20,902 in excess of first day returns. The scheme was uncovered when a custodian for the accounts suspected that a cherry picking scheme might be in progress. Defendant’s firm also failed to implement the proper policies and procedures to prevent such actions. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a) along with Advisers Act Sections 206(1), 206(4) and 204(a). See Lit. Rel. No. 25874 (September 29, 2023).
Offering fraud: SEC v. Utah Regional Investment Fund, LLC, Civil Action No. 1:23-cv-00106 (D. Utah September 29, 2023) is an action which names as defendants the Fund and Christofer Scott Shurian. Beginning in October 2014, and continuing for the next six years, Defendants raised $18 million by selling limited partnership interests to 36 investors. The offering was conducted through the Utah Regional Investment Fund, authorized by USICS to serve as a regional center for an EB-5 program. The materials represented that the investment funds would be dedicated to a specific project. In fact, only a portion of the funds went to the project. That project was not completed in 2017 as represented. In fact only a portion of the project was completed. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25875 (September 29, 2023).
Misrepresentation: SEC v. Nano-X Imaging Ltd., Civil Action No. 1:23-cv-8611 (S.D.N.Y. Filed September 29, 2023) is an action which names as defendants the firm, a medical imaging company, and Ran Poliakine, the founder and CEO of the company. Over a period of less than one-year Defendants negligently made a series of false and misleading statements to investors about the estimated cost to manufacturer at least 15,000 units of its flagship product – a device that was supposed to make diagnostic imaging substantially more affordable. In the prospectus Defendants stated the cost would be $8,000 to $12,000. This estimate continued to be used after the firm’s IPO. Several firm executives expressed doubts about the estimates. The complaint alleges violations of Securities Act Section 17(a)(2) and Exchange Act Section 13(a). Defendants resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, the firm will pay a penalty of $650,000 while Mr. Poliakine will pay $150,000. See Lit. Rel. No. 25876 (September 29, 2023).
Auditor independence: SEC v. Prager Metis CPA’s, Civil Action No. 1:23-cv-23723 (S.D. Fla. Filed September 29, 2023) names as defendants the firm and Prager Metis CPAs LLP. The complaint alleges that over a period of three years, beginning in 2017, Defendants failed to comply with the auditor independence rules for 62 audits, 11 examinations and 144 reviews. The complaint alleges violations of Regulation S-X, Rule 2-02(b), Exchange Act Sections 13(a) and 15(d), Advisory Act Section 206(4) and Exchange Act Rule 17(a)-5(i). The case is in litigation.
Whistleblower provisions: In the Matter of D.E. Shaw & Co. L.P., Adm. Proc. File No. 3-21775 (September 29, 2023) names the registered investment adviser as a respondent. The firm had an employment agreement that required employees to maintain the confidentiality of information since 2011. Agreements used when the employee departed contained similar restrictions. In 2017 the firm circulated a communication stating that nothing in its employment contracts or release prohibited employees from communicating directly with, or providing information to, regulators. However, the employment agreement was not amended until April 2019. The Release was not updated until July 2023. The complaint alleges violations of Exchange Act Rule 21F-17(a). To resolve the matter the firm undertook remedial actions and consented to the entry of a cease-and desist order based on the Rule and to a censure. The firm also agreed to pay a civil penalty of $10 million.
Record keeping: In the Mater of Interactive Brokers Corp., Adm. Proc. File No. 3-21779 (September 29, 2023) names as respondents the firm and Interactive Brokers LLC. This is one of 10 actions against broker-dealers (here) for not maintaining the appropriate records. The violations center on the use of devices such as WhatsApp and GroupMe which permit personal messaging or texts without maintain the required records These practices, which are widespread, constitute violations of Exchange Act Section 17(a) and Rule 17a-4. To resolve the matter the firm agreed to retain an independent consultant and will take remedial acts. Each consented to the entry of a cease-and-desist order based on the Section and Rule cited. The firm will also pay a penalty of $35 million.
Policies and procedures: In the Matter of DBRS, Inc., Adm. Proc. File No. 321772 (September 29, 2023) is a proceeding which names the credit rating agency as a respondent. Over a three year period, beginning in July 2019, the firm failed to maintain an effective internal control structure governing implementation of and adherence to its published procedures and methodologies. The Order alleges violations of Exchange Act Section 15E(c)(3)(A) and Rule 17g-7(a)(1)(ii)(B). To resolve the matter Respondent consented to the entry of a cease-and-desist order and a censure.. In addition, the firm will pay a penalty of $2 million. See also In the Matter of Kroll Bond Rating Agency, Adm. Proc. File No. 3-21776 (September 29, 2023)(similar); Cf. In the Matter of DBRS, Inc., Adm. Proc. File No. 3-21773 (September 29, 2023)(similar but based on a lack of internal controls; resolved with a consent to the entry of a cease-and-desist order based on Exchange Act Section 17(a) and Rule 17g-2(b)(7), a censure and the payment of a $6 million fine).
Revenue: In the Matter of Newell Brands Inc., Adm. Proc. File No. 3-21766 (September 29, 2023) is a proceeding which names as respondents the firm and Michael B. Polk, the firm’s CEO. The Order alleges that the firm’s financial statements were misleading because of the adoption of two non-GAAP measures, one called “core sales growth” and the second “core sales.” According to the firm these two measures allow investors to understand sales on a consistent basis by removing from its net sales measure the effects of acquisitions, divestures, and foreign currency fluctuations. Yet for Q3 2016 and Q2 2017 the firm announced sales growth rates that were misleading. This was because the firm did not disclose that its publicly disclosed a core sales growth rate as a result of actions Newell took that were unrelated to its actual sales trends. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and related rules. To resolve the matter Respondents each consented to the entry of cease-and-desist order. Mr. Polk will also pay a penalty of $110,000.
FCPA: In the Matter of Albemarle Corporation, Adm. Proc. File No. 3-21763 (September 29, 2023) names as respondent the specialty chemical company. From 2009 through 2017 the firm paid bribes to obtain sales to public sector oil refineries in Vietnam, India and Indonesia and to private -sector oil refineries in India. The firm also failed to implement sufficient internal account controls designed to reasonably prevent such actions. As a result, the firm obtained an improper benefit of about $81.86 million from sales to state-owned customers. The Order alleges violations of Exchange Act Section 30A, 13(b)(2)(A) and 13(b)(2)(B). The firm consented to the entry of a cease-and-desist order based on the Sections cited in the Order. It also agreed to pay disgorgement of $81,856,863 and prejudgment interest of $21,761,447.
Corrupt payments: Excelon Corporation, Adm. Proc. File No. 3-21761 (September 28, 2023) is a proceeding which names as respondents Exelon and its subsidiary Commonwealth Edison Company. ComEd engaged in a years long scheme to corruptly influence and reward Michael Madigan, then speaker of the Illinois House of Representatives, for his assistance with respect to certain legislation the might impact the power company. The scheme began in 2011 and continued through 2019. It involved arranging for various associates of Mr. Madigan to obtain jobs at certain firms. The Order alleges violation of Exchange Act Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B). Each Respondent resolved the proceedings by consenting to the entry of a cease-and-desist order based on the Sections cited in the Order. Exelon will also pay a penalty of $46,200,000.
FCPA: In the Matter of ClearChannel Outdoor Holdings, Inc., Adm. Proc. File No. 3-21755 (September 28, 2023) is a proceeding which names as respondent ClearChannel. Over a period of five years, beginning in 2012, Respondent bribed Chinese government officials to obtain concession contracts required to sell advertising services to public and private sector clients for display in various areas. To implement the program, the company used sham intermediaries and false invoices. In addition, from 2012 through 2019 the firm failed to have sufficient internal accounting controls. Respondent obtained about $16.4 million in benefits from the improper payments which were also not properly recorded. ClearChannel cooperated with the investigation and took remedial steps. The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding, ClearChannel consented to the entry of a cease-and-desist order based on the Sections cited in the Order. Respondent will also pay disgorgement in the amount of $16,355,567, prejudgment interest of $3,760,920 and a penalty of $6 million.
Misappropriation: SEC v. Filoramo, Civil Action No. 0:23-cv-61858 (S.D. Fla. Filed September 28, 2023) is an action which names as defendant Ronald Filoramo, a registered representative and investment adviser with a dual registered firm. Beginning in February 2017 and continuing for the next four years, Defendant misappropriated about $761,000 from two long standing brokerage customers. To implement the scheme Defendant instructed the customers to send their funds to a client that was purportedly liquidating his bond positions. Fake documents represented that the bonds were purchased. Ultimately the funds were transferred to another bank account. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To partially resolve the matter, Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. Monetary penalties will be considered in the future. See Lit. Rel. No. 25864 (September 28, 2023).
Offering fraud: SEC v. Hao, Civil Action No. 1:23-cv-23704 (S.D.Fla. Filed September 28, 2028) is an action which names as defendants Bin Hao and Qidian LLC. Over a four-year period, beginning in January 2017, Defendants sold promissory notes and membership interests in various special purpose vehicles to investors. Those investors were told the notes paid returns of 8 to 25%. In January 2019 the entry making the payments was bankrupt and all payments ceased. Nevertheless, Defendants continued to solicit more investors without disclosing the bankruptcy. About $103 million was raised from 67 investors. Defendants used more than $2.3 million of to make Ponzi-like fashion. Defendant Hao misappropriated at least $793,267 to pay his personal expenses. The scheme collapsed with the filing of a Chapter 11 proceeding. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25867 (September 28, 2023).
Custody: In the Matter of FSC Securities Corporation, Adm. Proc. File No. 3-21757 (September 28, 2023) is one of 4 proceedings filed against investment advisers based on the custody rule. The other proceedings are listed here. FSC, a registered investment adviser failed to obtain verification by an independent public accountant of client funds and securities which it had custodied. FSC used a form agreement for certain aspects of the relationships among FSC, its clients and a particular clearing agent. The agreement included a margin account arrangement that required the Clearing Agent to accept without inquiry instructions by FSC for those clients. As a result, FSC had custody of the assets. The Order alleges violations of Advisers Act Section 206(4). To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Section cited in the order. The firm was also censured and directed to pay a penalty of $100,000.
Excessive trading: SEC v. Blumer, Civil Action No. 23-cv-7250 (E.D.N.Y. September 28, 2023) is an action which names as defendants: Michael Blumer; John Kuprianchik; David Page; Steven Thompson; and Joseph Todaro. Defendants are registered representatives at Salomon Whitney LLC, a registered broker-dealer. Over a four-year period, beginning in August 2018, Defendants recommended and executed a short-term trading strategy for certain accounts. Over 2,000 trades were placed in the impacted accounts. As a result, a profit would have been almost impossible. In fact, the accounts suffered losses exceeding $1 million. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3). The case is in litigation. See Lit. Rel. No. 25863 (September 28, 2023).
Issuer reporting obligations: In the Matter of AfgEagle Aereial System Inc. Adm. Proc. File No, 3-21737 (September 27, 2023) is one of eleven actions brought against issuers and their employees based on Exchange Act Sections 13(a) and 16(a) and the related rules which ensure appropriate disclosure by issuers. These provisions are bolstered by Item 405 of Regulation S-K which requires an issuer to disclose any late filing or known failure by an insider to file a report required by Section 16(a) Respondent, and the others named in similar actions listed here failed to comply with their obligations. Here the action was resolved by consenting to the entry of a cease-and-desist order based on Exchange Act Sections 13(a) and 16(a). The firm in this proceeding will pay a penalty of $190,000.
Offering fraud: SEC v. Tralka, Civil Action No. 5:23-cv-04958 (N.D. Ca. Filed September 27, 2023) is an action which names as defendants: Charles Tralka, a director and manager of Secured Real Estate Income Fund I’s (Income Fund) and its managing member SREIF; Thomas Braegelmann, a director and managing member of Secured Real Estate Income Strategies, LLC (Income Strategies); Mathew Sullivan, a director and manager of SREIF II; Jordan Goodman, a director and manager of SREIF; Robert Barr; and Good Steward Capital Management. The case centers on an offering fraud perpetrated by the individuals and entities behind Income Fund and Income Strategies. Over a 5 year period, Income Fund and Income Strategies raised over $7.3 million from 147 investors using a series of false promises. The offering documents and marketing materials mislead investors in several ways. For example, the Funds’ offering documents and materials promised reliable monthly payments of 8% while touting the extensive experience of those involved. The representations were false. 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 in litigation. Defendant Goodman resolved the matter, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 5 and from participation of the sale of any security except for his own account. He was also ordered to monetary penalties based on future determinations by the court. See Lit. Rel. No. 25856 (September 27, 2027).
Concealed promotions: SEC v. Levin, Civil Action No. 2:23-cv-08081 (C.D. Cal. Filed September 27, 2023) is an action which names as defendant Adam Levin, the founder and chief of executive of Hightimes Holding Corporation. Beginning in April 2020, and continuing for the next year, Defendant, on behalf of his firm, entered into a sham agreement with a Canadian entity to pay shares of stock and a percentage of investor funds raised in exchange for promotional articles authored by William Mikula. The articles touted Hightimes’ securities offering under Regulation A. Mr. Levin also violated the registration provisions and provided investors with a false price for the shares they purchased. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). See also SEC v. Bentley, Civil Action 2:23-cv-02119 (C.D. Cal. Filed September 27, 2023)(similar action against Sheldon Bentley). See Lit. Rel. No. 25857 (September 27 2023).
Insider trading: SEC v. Prete, Civil Action No. 32-cv-02452 (D. N.J.) is a previously filed insider trading case that named as Defendant Robert Prete, an accounting consultant to HighCape who learned the firm was planning a merger. Subsequently, he purchased shares and sold them just after the deal announcement for an almost 100% profit of $60,170. He settled, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). The judgment also bars him from acting as an officer or director. Monetary remedies will be determined at a later date. See Lit. Release No. 25859 (September 27, 2023).
Financial fraud: SEC v. O’Donnell, Civil Action No. 1:23-cv-8543 (S.D.N.Y. Filed September 28, 2023) is an action which names as defendants Edward O’Donnell and Victor Bozzo. Defendants are executives at Pareteum Corporation, a now defunct telecommunications and cloud software company. Beginning in 2018, and continuing for about 1 year, the firm overstated its revenue by $12 million for fiscal 2018 and by $27 million for the first and second quarters of 2019. The misstatements resulted from improper accounting practices implemented by Defendant. Steps were taken to conceal the practices but ultimately they were uncovered and a restatement was done. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). Recovery under SOX Section 304 is also being sought. Charges were also brought against the former company controller, Stanley Stefansky which were settled with the entry of a cease-and-desist order based on the same Sections cited here. Monetary relief will be determined at a later date. The U.S. Attorneys Office for the Southern District of New York announced parallel criminal charges against Defendants Bozzo and O’Donnell. See Lit. Rel. No. 25860 (September 28, 2023).
Offering fraud: SEC v. Mehrian, Civil Action No. 2:23-cv-08009 (C.D. Cal. Filed September 27, 2023) is an action which names a defendants: Pedram Abraham Mehrian; Strategic Legacy Investment Group, Inc.; and Slig High Interest Liquid Savings Company. Over a four-year period, beginning in January 2018, Defendant Mehrian and his firms, Defendants SLIG and SLIG High Interest raised over $17.5 million from over 150 investors who were assured that the notes they purchased were safe and collateralized by SLIG’s portfolio of assets. The statements were false. In fact, about $4.2 million of the investor money was used to make Ponzi like payments. The complaint alleges violation 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. 25858 (September 27, 2023).
Disclosure: In the Matter of Assetmark, Inc., Adm. Proc. File No. 3-21724 (September 26, 2923). Over a five-year period, beginning in September 2016 the registered adviser failed to provide full and fair disclosure of conflicts that arose from its cash sweep program. That program swept clients’ uninvested cash into interest-earning bank accounts. One option clients could chose was to have the funds swept into an account with AssetMark Trust Company or ATC which was affiliated with the adviser. In that program, which was FDIC insured, customer cash was held in interest bearing accounts. The adviser earned a fee and the assets held. It failed to disclosure to clients that the firm was involved with ATC in setting the fees however. The firm also received custodial support payments from certain third party custodians on the Platform again without making disclosure that the contracted amounts for service were paid directly to the adviser while the funds were held in no-transaction fee mutual funds when in fact there were other options where the adviser would not have been paid a fee. The firm undertook remedial actions and agreed to implement certain undertakings. To resolve the matter the firm consented to the entry of a cease-and-desist order based on the Section and Rule cited. The Order alleges violations of Advisers Act Section 206(2) and 206(4) and Rule 206(4)-7. Respondent consented to the entry of a cease-and-desist order based on the Sections and Rule cited. The firm also agreed to pay disgorgement in the amount of $6,779,138.34, prejudgment interest in the amount of $2,047,571.23 in the amount of $18,326,709.57 and a penalty of $9,500,00. A Fair Fund was created.
False statement: SEC v. Hyzon Motors, Inc., Civil Action No. 23-6553 (W.D. N.Y. Filed September 26, 2023) is an action which names as defendants: the firm, an assembler of hydrogen fuel cell electric vehicles or FCEVs; Craig Knight, an Austrian citizen who is CEO of the firm; and Max Holthausen, a resident of the Netherlands and the founder of a firm that is in a joint venture with Hyzon. The action centers on the time period January through July 2021. During that period, and in advance of two key-capital-raising events, the firm exaggerated the status of its business dealings with potential customers, suppliers and others. The false statements contributed to creating the incorrect impression that significant sales transactions were imminent. In another false statement the firm claimed it had delivered its first FCEV that was a milk truck. In addition, in documents filed with the Commission from November 2021 through March 2022 the firm reported sales through its European and Chinese subsidiaries of vehicles it did not have or own. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), Section 13(b)(5) and 14(a) and Rule 13a-15(a). Defendants resolved the matter with each consenting to the entry of a permanent injunction based on the Sections and Rule cited. The company also agreed to pay a penalty of $25 million while Messrs. Knight and Holthausen will pay, respectively, $100,000 and $200,000. Messrs. Kight and Holthausen also agreed to the entry of five year officer/director bars. Those two Defendants will also reimburse the firm in the amount, respectively, of $252,000 and $122, 500.
Misrepresentations: SEC v. Intrusion Inc., Civil Action No. 4:23-cv-00859 (E.D. Tx. Filed September 26, 2023) is an action against the firm which focuses on cybersecurity. Beginning in May 2020 the firm, largely through its CEO, issued repeated false statements regarding its new product, Intrusion Shield. The misstatements focused on the background of the CEO and his expertise. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a). See Lit. Rel. No. 25854 (September 26, 2023).
Manipulation: SEC v. Verges, Civil Action No,. 3:23-cv-02146 (N.D.Tx. Filed September 26, 2023) is an action which names as defendants: Philip Verges who maintained control over the five stocks involved; James D. Tilton, Jr. who has a judgment against him from a Commission front running case; Robert F. Malin, a New York attorney; Linda Malin, sister of Robert; and Bule Citi, LLC, controlled by the Malin defendants. Over a five-year period, beginning in 2017, Defendants, lead by Mr. Verges, prepared and implemented pump and dump schemes involving five companies. The schemes generated over $112 million. Those schemes were generally implemented by obtaining control of each entity, involving the other defendants, and then pushing up the price while the person controlling the company remained concealed. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Sections 10(b) and 20(a). The case is in litigation. See Lit. Rel. No. 25853 (September 26, 2023).
Assets under management: SEC v. Vista Financial Advisors LLC, Civil Action No. 1:23-cv-08432 (S.D.N.Y. Filed September 25, 2023) is an action which names as defendants the firm, a registered investment adviser, and its CEO and CCO, Ruben Cedrick Williams. Since April 2022 the firm has claimed to have $10 billion in assets under management in their filings. Defendants, however, have ignored repeated requests by the Commission to verify the statements. Indeed, in a recent filing the firm claimed those assets have increased. The complaint alleges violations of Advisers Act Section 207 and 203A . The case is in litigation.
Cherry picking: SEC v. MacWright, Civil Action No. 23-cv-20609 (D. N.J. Filed September 25, 2023) is an action which names as defendants Highlander Capital Management LLC, a registered investment adviser, and Douglas Macwright, an adviser representative. Since 2015 Defendants have engaged in a cherry picking scheme. Under the scheme profitable trades were awarded to Mr. Macwright and his family. Over the period, Defendants have benefited by over $1 million. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Section 206(1), 206(2) and 206(4). Defendants settled, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, Defendant Macwright will pay disgorgement in the amount of $1118, 718 and prejudgment interest of $253,903. See Lit. Rel. No. 25849 (September 25, 2023).
Offering fraud: SEC v. The Diamond Desk Corporation, Civil Action No. 0:23-cv-61837 (S.D. Fla. Filed September 25, 2023) names as defendant the company and its owner Adam Love. Over a period of about one year, beginning in February 2018, Defendants raised about $2.2 million from investors who were told they were acquiring an interest in “natural fancy color diamonds” with the hope of a profit. Investors were offered different programs that would receive returns of 6% to 27% over a period of 3 to 12 months. In fact, the sales pitch was a lie. Significant portions of the investor money was misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a). The case is in litigation. See Lir. Rel. No. 25852 (September 26, 2023).
Offering fraud: SEC v. Bailey, Civil Action No. 3:23-cv-2123 (N.D. Tx. Filed September 25, 2023) is an action which names as defendants Stephen Bailey and his two firms, Sapphire Exploration LLC and Harris Exploration, Inc. Beginning in late 2017 and continuing through May 2023, Defendant Bailey and his two firms raised about $7.8 million from 51 individuals. Investors purchased limited-partnership interests, promissory notes, and working interests in oil-and-gas wells. While investors were assured their money was safe Defendant Bailey misappropriated nearly $4.1 of the investor capital for personal expenses. An additional $900,000 was used for unauthorized purchases and $670,0000. The complaint alleges violations of Exchange Act Section 10(b) and Securities Action, Section 17(a), The case is in litigation. See Lit. Rel. No. 25851 (September 25, 2023).
ESG – policies and procedures: In the Matter of DSW Investment Management Americas, Inc., Adm. Proc. File No. 3-21709 (September 25, 2023) is a proceeding which names the registered investment adviser as Respondent. The Order claims that the firm made material misstatements regarding it incorporation of ESG factors into its business. The company cited the factors on its website and in public statements, claiming that ESG was at the center of the firm’s business. In fact, the implementation of the standards was inconsistent. Indeed, the advisory failed to properly implement the standards. The firm did undertake remedial efforts and cooperated with the Commission’s investigation. The Order alleges violations of Advisers Act Sections 206(2) and (4) and the related rues. To resolve the proceedings the firm consented to the entry of a cease-and-desist order based on the cited provisions and a censure. It also agreed to pay a penalty of $19 million.
Policies and procedures: In the Matter of GTT Communications, Inc., Adm. Proc. File No. 3-21708 (September 25, 2023) is a proceeding which names the Virginia based telecommunications firm as a Respondent. The firm grew rapidly in 2017 and 2018 but could not maintain the appropriate systems for certain matters. Specifically, its Client Management data base and third party billing systems, reflected persistent and growing discrepancy between actual invoiced received between the two business segments. While the company was aware of the issues it had no real way to compare data between the two segments which resulted in false statement in 2019 and 2020 in its financial records. The firm cooperated with the investigation and undertook remedial actions. The Order alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and the related rules. The firm consented to the entry of a cease-and-desist order based on the Sections and Rules cited. Respondent acknowledged that no penalty was imposed based on cooperation.
Offering fraud: SEC v. Motil, Civil Action No. 23-cv-1853 (N.D. Ohio. Filed September 25, 2023). Named as defendants are Mathew Motil and three of his entities — North Shore Equity Sales, LLC, The Marie Paul Company and North Shore Equity Management, LLC. Defendant Matthew Motil is a principal of NS Sales and NS Management. He is also an Ohio-licensed engineer and claimed to be a real estate expert. In addition, he supposedly holds MBA, Ph.D and JD degrees. Defendant Motile is alleged to have created a lucrative real estate investment scheme. He solicited investors by promising them short-term, low-risk and high-return promissory notes collateralized by residential real estate located throughout Ohio. A good example of how the plan worked involved the issuance of at least 20 investor promissory notes to cover over $1.3 million of investor capital. The notes were collateralized by a home acquired by Defendant Motil or one of his entities. The home had a value of $130,000. Ultimately Defendant Motile used investor funds to make over $3.7 million in Ponzi payments, spend over $1.6 million on personal expenses and divert millions of dollars in other investor funds to selected projects and his wife. Over a period of about 4 years, beginning in October 2017, Defendant Motile used a number of his controlled entities, such as North Shore Equity Management, to raise over $11 million from 60 investors across the U.S. The scheme then collapsed. In March 2022 Mr. Motile filed for bankruptcy, listing the investors as creditors. 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.
Unregistered advisory: SEC v. Concord Management LLC, Civil Action No. 23-cv-8253 (S.D.N.Y. Filed September 19, 2023). Despite the dictates of the Advisers Act, Defendants Concord Management LLC and Michael Martin have operated an advisory that has had billions of dollars under management for years. Defendant Concord Management is based in Tarrytown New York. Mr. Martin was born in Russia and emigrated to the United States in 1988. He now resides in New York state and is a U.S. citizen and founded Concord in 1988. The firm has only one client, UBO. A, a Russian individual that is the ultimate beneficial owner (UBO) of all the assets under management by Concord. Mr. Martin has operated an advisory for the benefit of his one client since 1999. The advisory, which has a complex structure, provides supervisory and management services so that the client’s assets are continuously invested in a diverse portfolio of US private fund investments. Over time the size of the investments has increased. By 2012, for example, Respondents employed about a dozen investment professionals. As of January 2022, Concord managed a private fund portfolio with an estimated value of $7.2 billion.
From 2012 through 2022 Respondents received about $85 million in total compensation from its client. The client ownership of the private fund investments through an interrelated group of entities. Concord, however, is one business. In March 2022 the client was designated as a sanctioned individual by the U.K. and the EU. The assets were frozen. Since the freeze Respondents have not actively engaged in investment activity. Nevertheless, many of the underlying remain active. The Order alleges violations of Advisers Act Section 209(d). The case is in litigation.
ESMA
Statement: The European Securities and Markets Authority announced ESMA Work Program 2024: Focus on Digital Change and the Green Transition (here)
Hong Kong
Report: The Securities and Futures Commission of Hong Kong published its Annual Report 2022-2023 (here).
Remarks: Christopher Wilson, Executive Director, Enforcement delivered remarks titled How to Protect the Company? on September 29, 2023 (here).
Singapore
Paper: The Monetary Authority of Singapore and McKinsey & Co. published a working paper on Accelerating the Early Retirement of Coal-Fired Power Plants through Carbon Credits, September 28, 2023 (here). Rule 13a-15(a
This Week In Securities Litigation (Week of October 2, 2023)
The Government fiscal year concluded on Saturday. A Government shutdown was avoid. At the same time the drive to file new cases at the Commission ended. In the last week of the fiscal year the Commission filed 53. Those cases were based on a variety of violations ranging from offering fraud and insider trading to the FCPA as detailed below. .
Have a great and safe week.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 28 civil injunctive actions and 25 administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Offering fraud: SEC v. Third Friday Management, LLC, Civil Action No. 9:23-cv-81332 (S.D. Fla. Filed September 29, 2023) is an action which names as defendants the firm, a former registered investment adviser, and Michael Lewitt, the majority owner. The Third Friday Total Return Fund, LP was managed by Defendant Third Friday Management. Since at least 2012 investors were told that the Fund only invested in S&P 500 index options. In January 2018 the Fund began investing in other interests, however. For example, contrary to its disclosed guidance, it made 45 separate loan advances for about $19 million to a distressed company. There was no disclosure to investors. The Fund also failed to disclose that it was making bridge loans to what the complaint calls a Bankrupt Entity. In addition, Defendant Lewitt misappropriated about $4.7 million in assets and paid his personal taxes of about $900,000 from the Fund. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), and 206(4). The case is in litigation. See Lit. Rel. No. 25869 (September 29, 2023).
Audit failure: SEC v. Speight, Civil Action No. 1:23-cv-04384 (N.D. Ga. Filed September 27, 2023) is an action against the audit firm, Speight & Company, and its owner, Luther Speight. The firm was retained to audit a State of Louisiana based school board for fiscal 2019. The school conducted a $120 million municipal bond offering. While the audit firm failed to conduct an audit in accord with the appropriate standards, it issued an opinion to the contrary – the opinion stated that the audit had been conducted in accord with GAAS when it had not. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3). To resolve the matter Defendants each consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, the firm paid a penalty in the amount of $20,000 while Mr. Speight agreed to pay a penalty of $10,000. See Lit. Rel. No. 25870 (September 29, 2023).
Offering fraud: SEC v. Feloni, Civil Action No. 1:23-cv-12233 (D. Mass. Filed September 29, 2023) is an action which names as defendant John Feloni and Stock Squirrel, Inc. Beginning in 2019, and continuing for the next four years, Defendants solicited investors, assuring them that their money would be used to develop a smartphone application. Contrary to that representation, about $1.6 million of the $2.5 million raised was used to pay personal expenses. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The action is in litigation. See Lit. Rel. No. 25871 (September 29, 2023).
Unregistered dealer: SEC v. Long, Civil Action No. 1:23-cv-14260 (N.D. Ill. Filed September 29, 2023). Beginning in 2018 Defendants Adam Long, L2 Capital, LLC and Oasis Capital, LLC operated as unregistered dealers. While acting in that capacity Defendants engaged in the business of purchasing convertible promissory notes from small business entities that needed cash and issued penny stocks. Defendants engaged in at east 20 convertible note transactions and sold over 5.8 billion shares of stock into the public markets. None of the shares were registered. The complaint alleges violations of Exchange Act Section 15(a)(1). The case is in litigation. See Lit. Rel. No. 25872 (September 29, 2023).
False statements: SEC v, Patton, Civil Action No. 8:23-cv-02212 (M.D. Fla. Filed September 29, 2023) is an action which names as defendants: Stephone Patton, a convicted felon; and her firm Star Oil and Gas Company. The complaint alleges that Defendants made false statements in at least 30 Reg D filings for multiple companies from 2020 to 2023. The forms filed claimed that the firms involved had $16 billion in revenue and 3,000 employees. The claims were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25873 (September 29 2023).
Cherry picking scheme: SEC v. Jacobson, Civil Action No. 2:23-cv-05650 (E.D. La. September 29, 2023) is an action which names as defendants: Steven Jacobson and Advisor Resources. Council II (ARC). Beginning on July 31, 2020, and continuing until October 1, 2020, Defendant Jacobson disproportionally allocated option trades with positive returns to his personal account, one in the name of his mother and three favored client accounts. His account and that of his mother had gains from this process of about $20,902 in excess of first day returns. The scheme was uncovered when a custodian for the accounts suspected that a cherry picking scheme might be in progress. Defendant’s firm also failed to implement the proper policies and procedures to prevent such actions. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a) along with Advisers Act Sections 206(1), 206(4) and 204(a). See Lit. Rel. No. 25874 (September 29, 2023).
Offering fraud: SEC v. Utah Regional Investment Fund, LLC, Civil Action No. 1:23-cv-00106 (D. Utah September 29, 2023) is an action which names as defendants the Fund and Christofer Scott Shurian. Beginning in October 2014, and continuing for the next six years, Defendants raised $18 million by selling limited partnership interests to 36 investors. The offering was conducted through the Utah Regional Investment Fund, authorized by USICS to serve as a regional center for an EB-5 program. The materials represented that the investment funds would be dedicated to a specific project. In fact, only a portion of the funds went to the project. That project was not completed in 2017 as represented. In fact only a portion of the project was completed. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25875 (September 29, 2023).
Misrepresentation: SEC v. Nano-X Imaging Ltd., Civil Action No. 1:23-cv-8611 (S.D.N.Y. Filed September 29, 2023) is an action which names as defendants the firm, a medical imaging company, and Ran Poliakine, the founder and CEO of the company. Over a period of less than one-year Defendants negligently made a series of false and misleading statements to investors about the estimated cost to manufacturer at least 15,000 units of its flagship product – a device that was supposed to make diagnostic imaging substantially more affordable. In the prospectus Defendants stated the cost would be $8,000 to $12,000. This estimate continued to be used after the firm’s IPO. Several firm executives expressed doubts about the estimates. The complaint alleges violations of Securities Act Section 17(a)(2) and Exchange Act Section 13(a). Defendants resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, the firm will pay a penalty of $650,000 while Mr. Poliakine will pay $150,000. See Lit. Rel. No. 25876 (September 29, 2023).
Auditor independence: SEC v. Prager Metis CPA’s, Civil Action No. 1:23-cv-23723 (S.D. Fla. Filed September 29, 2023) names as defendants the firm and Prager Metis CPAs LLP. The complaint alleges that over a period of three years, beginning in 2017, Defendants failed to comply with the auditor independence rules for 62 audits, 11 examinations and 144 reviews. The complaint alleges violations of Regulation S-X, Rule 2-02(b), Exchange Act Sections 13(a) and 15(d), Advisory Act Section 206(4) and Exchange Act Rule 17(a)-5(i). The case is in litigation.
Whistleblower provisions: In the Matter of D.E. Shaw & Co. L.P., Adm. Proc. File No. 3-21775 (September 29, 2023) names the registered investment adviser as a respondent. The firm had an employment agreement that required employees to maintain the confidentiality of information since 2011. Agreements used when the employee departed contained similar restrictions. In 2017 the firm circulated a communication stating that nothing in its employment contracts or release prohibited employees from communicating directly with, or providing information to, regulators. However, the employment agreement was not amended until April 2019. The Release was not updated until July 2023. The complaint alleges violations of Exchange Act Rule 21F-17(a). To resolve the matter the firm undertook remedial actions and consented to the entry of a cease-and desist order based on the Rule and to a censure. The firm also agreed to pay a civil penalty of $10 million.
Record keeping: In the Mater of Interactive Brokers Corp., Adm. Proc. File No. 3-21779 (September 29, 2023) names as respondents the firm and Interactive Brokers LLC. This is one of 10 actions against broker-dealers (here) for not maintaining the appropriate records. The violations center on the use of devices such as WhatsApp and GroupMe which permit personal messaging or texts without maintain the required records These practices, which are widespread, constitute violations of Exchange Act Section 17(a) and Rule 17a-4. To resolve the matter the firm agreed to retain an independent consultant and will take remedial acts. Each consented to the entry of a cease-and-desist order based on the Section and Rule cited. The firm will also pay a penalty of $35 million.
Policies and procedures: In the Matter of DBRS, Inc., Adm. Proc. File No. 321772 (September 29, 2023) is a proceeding which names the credit rating agency as a respondent. Over a three year period, beginning in July 2019, the firm failed to maintain an effective internal control structure governing implementation of and adherence to its published procedures and methodologies. The Order alleges violations of Exchange Act Section 15E(c)(3)(A) and Rule 17g-7(a)(1)(ii)(B). To resolve the matter Respondent consented to the entry of a cease-and-desist order and a censure.. In addition, the firm will pay a penalty of $2 million. See also In the Matter of Kroll Bond Rating Agency, Adm. Proc. File No. 3-21776 (September 29, 2023)(similar); Cf. In the Matter of DBRS, Inc., Adm. Proc. File No. 3-21773 (September 29, 2023)(similar but based on a lack of internal controls; resolved with a consent to the entry of a cease-and-desist order based on Exchange Act Section 17(a) and Rule 17g-2(b)(7), a censure and the payment of a $6 million fine).
Revenue: In the Matter of Newell Brands Inc., Adm. Proc. File No. 3-21766 (September 29, 2023) is a proceeding which names as respondents the firm and Michael B. Polk, the firm’s CEO. The Order alleges that the firm’s financial statements were misleading because of the adoption of two non-GAAP measures, one called “core sales growth” and the second “core sales.” According to the firm these two measures allow investors to understand sales on a consistent basis by removing from its net sales measure the effects of acquisitions, divestures, and foreign currency fluctuations. Yet for Q3 2016 and Q2 2017 the firm announced sales growth rates that were misleading. This was because the firm did not disclose that its publicly disclosed a core sales growth rate as a result of actions Newell took that were unrelated to its actual sales trends. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and related rules. To resolve the matter Respondents each consented to the entry of cease-and-desist order. Mr. Polk will also pay a penalty of $110,000.
FCPA: In the Matter of Albemarle Corporation, Adm. Proc. File No. 3-21763 (September 29, 2023) names as respondent the specialty chemical company. From 2009 through 2017 the firm paid bribes to obtain sales to public sector oil refineries in Vietnam, India and Indonesia and to private -sector oil refineries in India. The firm also failed to implement sufficient internal account controls designed to reasonably prevent such actions. As a result, the firm obtained an improper benefit of about $81.86 million from sales to state-owned customers. The Order alleges violations of Exchange Act Section 30A, 13(b)(2)(A) and 13(b)(2)(B). The firm consented to the entry of a cease-and-desist order based on the Sections cited in the Order. It also agreed to pay disgorgement of $81,856,863 and prejudgment interest of $21,761,447.
Corrupt payments: Excelon Corporation, Adm. Proc. File No. 3-21761 (September 28, 2023) is a proceeding which names as respondents Exelon and its subsidiary Commonwealth Edison Company. ComEd engaged in a years long scheme to corruptly influence and reward Michael Madigan, then speaker of the Illinois House of Representatives, for his assistance with respect to certain legislation the might impact the power company. The scheme began in 2011 and continued through 2019. It involved arranging for various associates of Mr. Madigan to obtain jobs at certain firms. The Order alleges violation of Exchange Act Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B). Each Respondent resolved the proceedings by consenting to the entry of a cease-and-desist order based on the Sections cited in the Order. Exelon will also pay a penalty of $46,200,000.
FCPA: In the Matter of ClearChannel Outdoor Holdings, Inc., Adm. Proc. File No. 3-21755 (September 28, 2023) is a proceeding which names as respondent ClearChannel. Over a period of five years, beginning in 2012, Respondent bribed Chinese government officials to obtain concession contracts required to sell advertising services to public and private sector clients for display in various areas. To implement the program, the company used sham intermediaries and false invoices. In addition, from 2012 through 2019 the firm failed to have sufficient internal accounting controls. Respondent obtained about $16.4 million in benefits from the improper payments which were also not properly recorded. ClearChannel cooperated with the investigation and took remedial steps. The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding, ClearChannel consented to the entry of a cease-and-desist order based on the Sections cited in the Order. Respondent will also pay disgorgement in the amount of $16,355,567, prejudgment interest of $3,760,920 and a penalty of $6 million.
Misappropriation: SEC v. Filoramo, Civil Action No. 0:23-cv-61858 (S.D. Fla. Filed September 28, 2023) is an action which names as defendant Ronald Filoramo, a registered representative and investment adviser with a dual registered firm. Beginning in February 2017 and continuing for the next four years, Defendant misappropriated about $761,000 from two long standing brokerage customers. To implement the scheme Defendant instructed the customers to send their funds to a client that was purportedly liquidating his bond positions. Fake documents represented that the bonds were purchased. Ultimately the funds were transferred to another bank account. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To partially resolve the matter, Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. Monetary penalties will be considered in the future. See Lit. Rel. No. 25864 (September 28, 2023).
Offering fraud: SEC v. Hao, Civil Action No. 1:23-cv-23704 (S.D.Fla. Filed September 28, 2028) is an action which names as defendants Bin Hao and Qidian LLC. Over a four-year period, beginning in January 2017, Defendants sold promissory notes and membership interests in various special purpose vehicles to investors. Those investors were told the notes paid returns of 8 to 25%. In January 2019 the entry making the payments was bankrupt and all payments ceased. Nevertheless, Defendants continued to solicit more investors without disclosing the bankruptcy. About $103 million was raised from 67 investors. Defendants used more than $2.3 million of to make Ponzi-like fashion. Defendant Hao misappropriated at least $793,267 to pay his personal expenses. The scheme collapsed with the filing of a Chapter 11 proceeding. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25867 (September 28, 2023).
Custody: In the Matter of FSC Securities Corporation, Adm. Proc. File No. 3-21757 (September 28, 2023) is one of 4 proceedings filed against investment advisers based on the custody rule. The other proceedings are listed here. FSC, a registered investment adviser failed to obtain verification by an independent public accountant of client funds and securities which it had custodied. FSC used a form agreement for certain aspects of the relationships among FSC, its clients and a particular clearing agent. The agreement included a margin account arrangement that required the Clearing Agent to accept without inquiry instructions by FSC for those clients. As a result, FSC had custody of the assets. The Order alleges violations of Advisers Act Section 206(4). To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Section cited in the order. The firm was also censured and directed to pay a penalty of $100,000.
Excessive trading: SEC v. Blumer, Civil Action No. 23-cv-7250 (E.D.N.Y. September 28, 2023) is an action which names as defendants: Michael Blumer; John Kuprianchik; David Page; Steven Thompson; and Joseph Todaro. Defendants are registered representatives at Salomon Whitney LLC, a registered broker-dealer. Over a four-year period, beginning in August 2018, Defendants recommended and executed a short-term trading strategy for certain accounts. Over 2,000 trades were placed in the impacted accounts. As a result, a profit would have been almost impossible. In fact, the accounts suffered losses exceeding $1 million. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3). The case is in litigation. See Lit. Rel. No. 25863 (September 28, 2023).
Issuer reporting obligations: In the Matter of AfgEagle Aereial System Inc. Adm. Proc. File No, 3-21737 (September 27, 2023) is one of eleven actions brought against issuers and their employees based on Exchange Act Sections 13(a) and 16(a) and the related rules which ensure appropriate disclosure by issuers. These provisions are bolstered by Item 405 of Regulation S-K which requires an issuer to disclose any late filing or known failure by an insider to file a report required by Section 16(a) Respondent, and the others named in similar actions listed here failed to comply with their obligations. Here the action was resolved by consenting to the entry of a cease-and-desist order based on Exchange Act Sections 13(a) and 16(a). The firm in this proceeding will pay a penalty of $190,000.
Offering fraud: SEC v. Tralka, Civil Action No. 5:23-cv-04958 (N.D. Ca. Filed September 27, 2023) is an action which names as defendants: Charles Tralka, a director and manager of Secured Real Estate Income Fund I’s (Income Fund) and its managing member SREIF; Thomas Braegelmann, a director and managing member of Secured Real Estate Income Strategies, LLC (Income Strategies); Mathew Sullivan, a director and manager of SREIF II; Jordan Goodman, a director and manager of SREIF; Robert Barr; and Good Steward Capital Management. The case centers on an offering fraud perpetrated by the individuals and entities behind Income Fund and Income Strategies. Over a 5 year period, Income Fund and Income Strategies raised over $7.3 million from 147 investors using a series of false promises. The offering documents and marketing materials mislead investors in several ways. For example, the Funds’ offering documents and materials promised reliable monthly payments of 8% while touting the extensive experience of those involved. The representations were false. 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 in litigation. Defendant Goodman resolved the matter, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 5 and from participation of the sale of any security except for his own account. He was also ordered to monetary penalties based on future determinations by the court. See Lit. Rel. No. 25856 (September 27, 2027).
Concealed promotions: SEC v. Levin, Civil Action No. 2:23-cv-08081 (C.D. Cal. Filed September 27, 2023) is an action which names as defendant Adam Levin, the founder and chief of executive of Hightimes Holding Corporation. Beginning in April 2020, and continuing for the next year, Defendant, on behalf of his firm, entered into a sham agreement with a Canadian entity to pay shares of stock and a percentage of investor funds raised in exchange for promotional articles authored by William Mikula. The articles touted Hightimes’ securities offering under Regulation A. Mr. Levin also violated the registration provisions and provided investors with a false price for the shares they purchased. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). See also SEC v. Bentley, Civil Action 2:23-cv-02119 (C.D. Cal. Filed September 27, 2023)(similar action against Sheldon Bentley). See Lit. Rel. No. 25857 (September 27 2023).
Insider trading: SEC v. Prete, Civil Action No. 32-cv-02452 (D. N.J.) is a previously filed insider trading case that named as Defendant Robert Prete, an accounting consultant to HighCape who learned the firm was planning a merger. Subsequently, he purchased shares and sold them just after the deal announcement for an almost 100% profit of $60,170. He settled, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). The judgment also bars him from acting as an officer or director. Monetary remedies will be determined at a later date. See Lit. Release No. 25859 (September 27, 2023).
Financial fraud: SEC v. O’Donnell, Civil Action No. 1:23-cv-8543 (S.D.N.Y. Filed September 28, 2023) is an action which names as defendants Edward O’Donnell and Victor Bozzo. Defendants are executives at Pareteum Corporation, a now defunct telecommunications and cloud software company. Beginning in 2018, and continuing for about 1 year, the firm overstated its revenue by $12 million for fiscal 2018 and by $27 million for the first and second quarters of 2019. The misstatements resulted from improper accounting practices implemented by Defendant. Steps were taken to conceal the practices but ultimately they were uncovered and a restatement was done. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). Recovery under SOX Section 304 is also being sought. Charges were also brought against the former company controller, Stanley Stefansky which were settled with the entry of a cease-and-desist order based on the same Sections cited here. Monetary relief will be determined at a later date. The U.S. Attorneys Office for the Southern District of New York announced parallel criminal charges against Defendants Bozzo and O’Donnell. See Lit. Rel. No. 25860 (September 28, 2023).
Offering fraud: SEC v. Mehrian, Civil Action No. 2:23-cv-08009 (C.D. Cal. Filed September 27, 2023) is an action which names a defendants: Pedram Abraham Mehrian; Strategic Legacy Investment Group, Inc.; and Slig High Interest Liquid Savings Company. Over a four-year period, beginning in January 2018, Defendant Mehrian and his firms, Defendants SLIG and SLIG High Interest raised over $17.5 million from over 150 investors who were assured that the notes they purchased were safe and collateralized by SLIG’s portfolio of assets. The statements were false. In fact, about $4.2 million of the investor money was used to make Ponzi like payments. The complaint alleges violation 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. 25858 (September 27, 2023).
Disclosure: In the Matter of Assetmark, Inc., Adm. Proc. File No. 3-21724 (September 26, 2923). Over a five-year period, beginning in September 2016 the registered adviser failed to provide full and fair disclosure of conflicts that arose from its cash sweep program. That program swept clients’ uninvested cash into interest-earning bank accounts. One option clients could chose was to have the funds swept into an account with AssetMark Trust Company or ATC which was affiliated with the adviser. In that program, which was FDIC insured, customer cash was held in interest bearing accounts. The adviser earned a fee and the assets held. It failed to disclosure to clients that the firm was involved with ATC in setting the fees however. The firm also received custodial support payments from certain third party custodians on the Platform again without making disclosure that the contracted amounts for service were paid directly to the adviser while the funds were held in no-transaction fee mutual funds when in fact there were other options where the adviser would not have been paid a fee. The firm undertook remedial actions and agreed to implement certain undertakings. To resolve the matter the firm consented to the entry of a cease-and-desist order based on the Section and Rule cited. The Order alleges violations of Advisers Act Section 206(2) and 206(4) and Rule 206(4)-7. Respondent consented to the entry of a cease-and-desist order based on the Sections and Rule cited. The firm also agreed to pay disgorgement in the amount of $6,779,138.34, prejudgment interest in the amount of $2,047,571.23 in the amount of $18,326,709.57 and a penalty of $9,500,00. A Fair Fund was created.
False statement: SEC v. Hyzon Motors, Inc., Civil Action No. 23-6553 (W.D. N.Y. Filed September 26, 2023) is an action which names as defendants: the firm, an assembler of hydrogen fuel cell electric vehicles or FCEVs; Craig Knight, an Austrian citizen who is CEO of the firm; and Max Holthausen, a resident of the Netherlands and the founder of a firm that is in a joint venture with Hyzon. The action centers on the time period January through July 2021. During that period, and in advance of two key-capital-raising events, the firm exaggerated the status of its business dealings with potential customers, suppliers and others. The false statements contributed to creating the incorrect impression that significant sales transactions were imminent. In another false statement the firm claimed it had delivered its first FCEV that was a milk truck. In addition, in documents filed with the Commission from November 2021 through March 2022 the firm reported sales through its European and Chinese subsidiaries of vehicles it did not have or own. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), Section 13(b)(5) and 14(a) and Rule 13a-15(a). Defendants resolved the matter with each consenting to the entry of a permanent injunction based on the Sections and Rule cited. The company also agreed to pay a penalty of $25 million while Messrs. Knight and Holthausen will pay, respectively, $100,000 and $200,000. Messrs. Kight and Holthausen also agreed to the entry of five year officer/director bars. Those two Defendants will also reimburse the firm in the amount, respectively, of $252,000 and $122, 500.
Misrepresentations: SEC v. Intrusion Inc., Civil Action No. 4:23-cv-00859 (E.D. Tx. Filed September 26, 2023) is an action against the firm which focuses on cybersecurity. Beginning in May 2020 the firm, largely through its CEO, issued repeated false statements regarding its new product, Intrusion Shield. The misstatements focused on the background of the CEO and his expertise. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a). See Lit. Rel. No. 25854 (September 26, 2023).
Manipulation: SEC v. Verges, Civil Action No,. 3:23-cv-02146 (N.D.Tx. Filed September 26, 2023) is an action which names as defendants: Philip Verges who maintained control over the five stocks involved; James D. Tilton, Jr. who has a judgment against him from a Commission front running case; Robert F. Malin, a New York attorney; Linda Malin, sister of Robert; and Bule Citi, LLC, controlled by the Malin defendants. Over a five-year period, beginning in 2017, Defendants, lead by Mr. Verges, prepared and implemented pump and dump schemes involving five companies. The schemes generated over $112 million. Those schemes were generally implemented by obtaining control of each entity, involving the other defendants, and then pushing up the price while the person controlling the company remained concealed. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Sections 10(b) and 20(a). The case is in litigation. See Lit. Rel. No. 25853 (September 26, 2023).
Assets under management: SEC v. Vista Financial Advisors LLC, Civil Action No. 1:23-cv-08432 (S.D.N.Y. Filed September 25, 2023) is an action which names as defendants the firm, a registered investment adviser, and its CEO and CCO, Ruben Cedrick Williams. Since April 2022 the firm has claimed to have $10 billion in assets under management in their filings. Defendants, however, have ignored repeated requests by the Commission to verify the statements. Indeed, in a recent filing the firm claimed those assets have increased. The complaint alleges violations of Advisers Act Section 207 and 203A . The case is in litigation.
Cherry picking: SEC v. MacWright, Civil Action No. 23-cv-20609 (D. N.J. Filed September 25, 2023) is an action which names as defendants Highlander Capital Management LLC, a registered investment adviser, and Douglas Macwright, an adviser representative. Since 2015 Defendants have engaged in a cherry picking scheme. Under the scheme profitable trades were awarded to Mr. Macwright and his family. Over the period, Defendants have benefited by over $1 million. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Section 206(1), 206(2) and 206(4). Defendants settled, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, Defendant Macwright will pay disgorgement in the amount of $1118, 718 and prejudgment interest of $253,903. See Lit. Rel. No. 25849 (September 25, 2023).
Offering fraud: SEC v. The Diamond Desk Corporation, Civil Action No. 0:23-cv-61837 (S.D. Fla. Filed September 25, 2023) names as defendant the company and its owner Adam Love. Over a period of about one year, beginning in February 2018, Defendants raised about $2.2 million from investors who were told they were acquiring an interest in “natural fancy color diamonds” with the hope of a profit. Investors were offered different programs that would receive returns of 6% to 27% over a period of 3 to 12 months. In fact, the sales pitch was a lie. Significant portions of the investor money was misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a). The case is in litigation. See Lir. Rel. No. 25852 (September 26, 2023).
Offering fraud: SEC v. Bailey, Civil Action No. 3:23-cv-2123 (N.D. Tx. Filed September 25, 2023) is an action which names as defendants Stephen Bailey and his two firms, Sapphire Exploration LLC and Harris Exploration, Inc. Beginning in late 2017 and continuing through May 2023, Defendant Bailey and his two firms raised about $7.8 million from 51 individuals. Investors purchased limited-partnership interests, promissory notes, and working interests in oil-and-gas wells. While investors were assured their money was safe Defendant Bailey misappropriated nearly $4.1 of the investor capital for personal expenses. An additional $900,000 was used for unauthorized purchases and $670,0000. The complaint alleges violations of Exchange Act Section 10(b) and Securities Action, Section 17(a), The case is in litigation. See Lit. Rel. No. 25851 (September 25, 2023).
ESG – policies and procedures: In the Matter of DSW Investment Management Americas, Inc., Adm. Proc. File No. 3-21709 (September 25, 2023) is a proceeding which names the registered investment adviser as Respondent. The Order claims that the firm made material misstatements regarding it incorporation of ESG factors into its business. The company cited the factors on its website and in public statements, claiming that ESG was at the center of the firm’s business. In fact, the implementation of the standards was inconsistent. Indeed, the advisory failed to properly implement the standards. The firm did undertake remedial efforts and cooperated with the Commission’s investigation. The Order alleges violations of Advisers Act Sections 206(2) and (4) and the related rues. To resolve the proceedings the firm consented to the entry of a cease-and-desist order based on the cited provisions and a censure. It also agreed to pay a penalty of $19 million.
Policies and procedures: In the Matter of GTT Communications, Inc., Adm. Proc. File No. 3-21708 (September 25, 2023) is a proceeding which names the Virginia based telecommunications firm as a Respondent. The firm grew rapidly in 2017 and 2018 but could not maintain the appropriate systems for certain matters. Specifically, its Client Management data base and third party billing systems, reflected persistent and growing discrepancy between actual invoiced received between the two business segments. While the company was aware of the issues it had no real way to compare data between the two segments which resulted in false statement in 2019 and 2020 in its financial records. The firm cooperated with the investigation and undertook remedial actions. The Order alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and the related rules. The firm consented to the entry of a cease-and-desist order based on the Sections and Rules cited. Respondent acknowledged that no penalty was imposed based on cooperation.
Offering fraud: SEC v. Motil, Civil Action No. 23-cv-1853 (N.D. Ohio. Filed September 25, 2023). Named as defendants are Mathew Motil and three of his entities — North Shore Equity Sales, LLC, The Marie Paul Company and North Shore Equity Management, LLC. Defendant Matthew Motil is a principal of NS Sales and NS Management. He is also an Ohio-licensed engineer and claimed to be a real estate expert. In addition, he supposedly holds MBA, Ph.D and JD degrees. Defendant Motile is alleged to have created a lucrative real estate investment scheme. He solicited investors by promising them short-term, low-risk and high-return promissory notes collateralized by residential real estate located throughout Ohio. A good example of how the plan worked involved the issuance of at least 20 investor promissory notes to cover over $1.3 million of investor capital. The notes were collateralized by a home acquired by Defendant Motil or one of his entities. The home had a value of $130,000. Ultimately Defendant Motile used investor funds to make over $3.7 million in Ponzi payments, spend over $1.6 million on personal expenses and divert millions of dollars in other investor funds to selected projects and his wife. Over a period of about 4 years, beginning in October 2017, Defendant Motile used a number of his controlled entities, such as North Shore Equity Management, to raise over $11 million from 60 investors across the U.S. The scheme then collapsed. In March 2022 Mr. Motile filed for bankruptcy, listing the investors as creditors. 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.
Unregistered advisory: SEC v. Concord Management LLC, Civil Action No. 23-cv-8253 (S.D.N.Y. Filed September 19, 2023). Despite the dictates of the Advisers Act, Defendants Concord Management LLC and Michael Martin have operated an advisory that has had billions of dollars under management for years. Defendant Concord Management is based in Tarrytown New York. Mr. Martin was born in Russia and emigrated to the United States in 1988. He now resides in New York state and is a U.S. citizen and founded Concord in 1988. The firm has only one client, UBO. A, a Russian individual that is the ultimate beneficial owner (UBO) of all the assets under management by Concord. Mr. Martin has operated an advisory for the benefit of his one client since 1999. The advisory, which has a complex structure, provides supervisory and management services so that the client’s assets are continuously invested in a diverse portfolio of US private fund investments. Over time the size of the investments has increased. By 2012, for example, Respondents employed about a dozen investment professionals. As of January 2022, Concord managed a private fund portfolio with an estimated value of $7.2 billion.
From 2012 through 2022 Respondents received about $85 million in total compensation from its client. The client ownership of the private fund investments through an interrelated group of entities. Concord, however, is one business. In March 2022 the client was designated as a sanctioned individual by the U.K. and the EU. The assets were frozen. Since the freeze Respondents have not actively engaged in investment activity. Nevertheless, many of the underlying remain active. The Order alleges violations of Advisers Act Section 209(d). The case is in litigation.
ESMA
Statement: The European Securities and Markets Authority announced ESMA Work Program 2024: Focus on Digital Change and the Green Transition (here)
Hong Kong
Report: The Securities and Futures Commission of Hong Kong published its Annual Report 2022-2023 (here).
Remarks: Christopher Wilson, Executive Director, Enforcement delivered remarks titled How to Protect the Company? on September 29, 2023 (here).
Singapore
Paper: The Monetary Authority of Singapore and McKinsey & Co. published a working paper on Accelerating the Early Retirement of Coal-Fired Power Plants through Carbon Credits, September 28, 2023 (here). Rule 13a-15(a