This Week In Securities Litigation (Week of October 5, 2020)(Part II)
The article published each Monday typically reviews the actions filed the prior week. This week the article was divided into two parts in view of the number of cases filed by the Commission as the fiscal year closed on Wednesday. The first half of the article was published yesterday (here). The second part is set forth below.
SEC Enforcement – Filed and Settled Actions (continued from Monday)
Internal controls: In the Matter of Kroll Bond Rating Agency, LLC, Adm. Proc. File No. 3-20096 (Sept. 29, 2020) names the rating agency as a respondent. The firm’s internal controls relating to its rating of conduit/fusion commercial mortgage backed securities had deficiencies. Those issues resulted in material weaknesses in its internal control structure. The firm established procedures to determine credit ratings for the instruments which permitted the use of professional judgment to make adjustment. Unfortunately, the system failed to include any analytical method for determining the applicability of, the magnitude of, or recording the rational for the adjustments. The firm failed to detect or prevent the omissions. The Kroll’s written procedures from 2012 to 2017 also permitted the adjustments made to be done on a portfolio basis rather than by property. The Order alleges violations of Exchange Act Section 15E(e)(3)(A). To resolve the proceedings the firm consented to the entry of a cease and desist order based on the section cited and a censure. The firm will also pay a penalty of $1,250,000 which will be transferred to the U.S. Treasury. See also In the Matter of Kroll Bond Rating Agency, LLC, Adm. Proc. File No. 3-20097 (Sept. 29, 2020)(base on a failure to establish and maintain policies and procedures re if CLO combination notes will default; resolved with a cease and desist order based on Rule 17g-8(b)(1) of Exchange Act, a censure, a series of undertakings, payment of $160,000 in disgorgement, $4,836.33 in prejudgment interest and a penalty of $600,000}. A fair fund was created.
Offering fraud: SEC v. Stebbins, Civil Action No. 2:13-cv-00755 (D. Az.) is a previously filed action which named as defendants Jeffrey Stebbins and Corbin Jones. In a complaint filed in April 2013 the Commission alleged that Defendants had defrauded investors out of about $1.8 million on a tankless water heater scheme. In the parallel criminal case, the Arizona State Attorney General brought criminal charges based on essentially the same conduct. In 2019 Defendants pleaded guilty to three felony counts of selling unregistered securities. Mr. Stebbins was sentenced to 60 days in prison plus eight years of probation; Mr. Jones was sentenced to four years of probation. The Defendants were ordered to pay, on a joint and several basis, $1,771,995. In the Commission’s action, each Defendant consented to the entry of financial judgments based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(d), 15(a) and 16(a). Each Defendant also consented to the entry of a penny stock bar. The judgments also direct the payment, on a joint and several basis, of disgorgement in the amount of $1,692,323 and prejudgment interest of $334,567 to the extent there are funds remaining from the criminal action. Mr. Stebbins was also barred from the securities business in a separate administrative proceeding. See Lit. Rel. No. 24927 (Sept. 29, 2020).
Unregistered securities/broker: SEC v Baqierozo, Civil Action No. 9:20-cv-8163 (S.D. Fla. Filed Sept. 29, 2020) is an action which names as defendants Christian Baquerizo and Kevin Cardenas, each of whom worked for NIT Enterprises Inc. as an unregistered broker. The firm has been the subject of a prior Commission enforcement action. Defendants defrauded retail investors from 2015 through 2019. During the period the firm raised at least $4.9 million from about 100 investors. Investors were told their funds would be used for research and development. They were not told that 30% to 50% of their investment would be used to pay commissions. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See also SEC v. Newman, Civil Action No. 0:20-cv-61976 (S.D. Fla. Filed Sept. 29, 2020)(names as defendant Mason Newman who engaged in same conduct as above; complaint is based on same alleged violations).
Manipulation: In the Matter of J.P. Morgan Securities LLC, Adm. Proc. File No. 3-20094 (Sept. 29, 2020). The Order alleges that over series of months from April 2015 to January 2016 certain traders at the firm engaged in manipulative trading in the secondary market of U.S. Treasury cash securities. On one side of a trade orders would be entered that were bona fide. On the other trades were placed that were not bonified but were designed to either raise or depress the price. The non-bonified trades were generally cancelled. The Order alleges violations of Securities Act Section 17(a)(3). To resolve the proceedings the firm acknowledged that its conduct violated the federal securities laws, consented to the entry of a cease and desist order based on the section cited in the order and to a censure. The firm will pay a civil penalty of $25 million and disgorgement of $10 million. The penalty and disgorgement will be satisfied by amounts paid in the parallel DOJ and CFTC actions.
False statements: SEC v. Ledbetter, Civil Action No. 20-civ-61972 (S.D. Fla. Filed Sept. 29, 2020) is an action which names as a defendant attorney Andrew D. Ledbetter. The charges are based on the action brought against 1 Global Capital, LLC and its former CEO and CFO. That action alleged a $322 million fraud on over 3,600 investors. Attorney Ledbetter is alleged to have told investors that the offering did not involve securities and that it did not violate the securities laws. He helped raise about $2.9 million for the fraud. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. The U.S. Attorney’s Office for the Southern District of Florida filed parallel criminal charges. See Lit. Rel. No. 24926 (Sept. 29, 2020).
Offering fraud: SEC v. Karlsson, Civil Action No. 1:20 -cv- 04615 (E.D.N.Y. Filed Sept. 29, 2020) is an action which names as a defendant Roger Nils-Jonas Karlsson, a Sweden borne resident of Thailand who claimed to be a “System Analysis Manager.” ( Lars Georgsson is listed in the case caption but is not a named defendant). Over a six-year period, beginning in late 2012, Defendant orchestrated a fraudulent scheme in which he sold a “pre Funded Reverse Pension Plan” that was supposedly the product of award winning economists and other professionals. The payout was to be based on the value of gold and offered investors a huge windfall for an initial investment of $99. The claims were false. Yet 2,200 investors from 49 states, the District of Columbia, Puerto Rico and 45 counties put up money. In the last two years of the scheme, for example, more than $3.5 million in investor funds were put in. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending.
Disclosure: In the Matter of Fiat Chrysler Automobiles N.V., Adm. Proc. File No. 3-20092 (Sept. 28, 2020) is a proceeding naming the auto manufacturer as a respondent. In early 2016, following the action brought against a German auto firm for circumventing environmental limitations on emissions with a “defeat mechanism,” the firm disclosed the results of an internal inquiry focused on the same issue. While the disclosures stated the findings of the inquiry that no defeat mechanism was used, it failed to state that the investigation was limited and that the EPA and California Air Resources Board engineers had raised concerns about certain of its engines. The Order alleges violations of Exchange Act Section 13(a). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited. The firm will also pay a penalty of $9.5 million. A fair fund will be created.
Offering fraud: In the Matter of Scott Eugene Bachman, Adm. Proc. File No. 3-20089 (Sept. 28, 2020) is a proceeding which names as a respondent Mr. Bachman, a principal of Crudefunders, LLC, a website that collected information about potential investors and sold securities. From August 2017 to later that year Mr. Bachman had Crudefunders’ Director of Client Relations distribute promotional materials to potential investors regarding the Oddfellows Project which was associated with interests in an oil well that sought funds to drill. Along with that information was an invitation to purchase membership units through phone calls and the mails. Crudefunderes received transaction-based compensation. The securities were not registered nor were the sellers registered as brokers or dealer. The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a)(1). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. He also agreed to pay a penalty of $8,824. A fair fund will be created. See also In the Matter of David Taylor, Adm. Proc. File No. 3-20088 (Sept. 28, 2020)(Respondent is one of the owners of Crudefunders; facts are similar to above but adds charges based on Securities Act Sections 17(a)(2) and (3); resolved with a cease and desist order based on sections cited in the Order and entry of a bar from the securities business and a penny stock bar; payment of disgorgement of $60,000, prejudgment interest of $14,111.06 that is waived except for $15,000 based on financial condition); In the Matter of Raymond Allan Fine, Adm. Proc. File No. 3-20087 (Sept. 28, 2020)(Respondent is a principal of Crudefunders; essentially the same conduct and violations alleged in Taylor; resolved with entry of a cease and desist order based on sections cited and entry of order directing payment of disgorgement in the amount of $110,000 and prejudgment interest of $17,263.05, all of which is waived except $21,000 based on financial condition; a bar order as to penny stocks and the securities business was also entered).
Cherry picking: SEC v. Lambert, Civil Action No. 4:20-cv-03116 (D. Neb. Filed Sept. 28, 2020) is an action which names as a defendant Corbin Lambert, an Investment Adviser Representative at an Advisory. Over a two year period, beginning in early 2017, Defendant placed block trades for the clients, held them in an omnibus account until later and then allocated the profitable trades to his account and the others to clients who were assured that a fair method was used to make the allocations. Charles Schwab & Co., Inc. detected what was going on and confronted Defendant. The broker terminated the Advisory as a client. The advisory then terminated Defendant. The complaint alleges violations of Securities Act Sections 17(a)(1) & (2), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The case is pending. See Lit. Rel. No. 24925 (Sept. 29, 2020).
Insider trading: SEC v. Bohra, Civil Action No. 2:20-cv-01434 (W.D. WA. Filed Sept. 28, 2020) is an action which names as defendants Laksha Bohra, Viky Bohra and Gotham Bohra, respectively an employee in the tax department of a large internet firm, the husband of Ms. Bohra, and her father in law. Over a two-year period, beginning in January 2016, Ms. Bohra repeatedly tipped the other defendants who traded in 11 separate brokerage accounts at least in part on inside information she provided. The complaint alleges violations of Exchange Act Section 10(b). Each of the Defendants consented to the entry of a final judgment imposing a permanent injunction based on the section cited. In addition, the order directs the payment of total disgorgement in the amount of $1,428,049, prejudgment interest of $118,406 and total penalties of $1,106,399. A parallel criminal action was filed by the U.S. Attorney’s Office for the Western District of Washington. See Lit. Rel. No. 24923 (Sept. 28, 2020).
Financial fraud: In the Matter of Interface, Inc., Adm. Proc. File 3-20085 (Sept. 28, 2020) is a proceeding which names as respondents the firm, a global manufacturer of modular carpet, Gregory J. Bauer, CPA and Patrick C. Lynch, CPA, respectively, the firm, its v.p. and controller and its CFO. Beginning in the second quarter of 2015, and continuing through the second quarter of the next year, the firm and its executives made manual adjustments to the firm records to adjust EPS to meet expectations. The entries were material. They did not comport with GAAP. The company cooperated with the investigation and undertook remedial actions. The Order alleges violations of Securities Act Sections 17(a)(1) and (2) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and the related rules. Each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. Messrs. Bauer and Lynch were each denied the privilege of appearing and practicing before the Commission as accounts with the right to re-apply after, respectively, three years and one year. In addition, the firm will pay a penalty of $5 million, Mr. Bauer $45,000 and Mr. Lynch $70,000. The funds will be transferred to the U.S. Treasury. The action is part of Enforcement’s EPS initiative. See also In the Matter of Fulton Financial Corporation, Adm. Proc. File No. 3-20084 (Sept. 28, 2020)(similar action that also involved internal controls; alleged violations of the same Exchange Act Sections; firm undertook remedial actions; resolved with cease and desist order based on the Exchange Act Sections and the payment of a penalty of $1.5 million that was paid to the Treasury).
Offering fraud/misappropriation: SEC v. Bean, Civil Action No. 19 cv 6458 (N.D. Ill.) is a previously filed action which named as a defendant Marcus Bean. Mr. Bean solicited investors and obtained funds in connection with the advisory. Investors were promised the funds would be used to conduct an IPO. The money was misappropriated. Defendant resolved the matter, consenting to the entry of a permanent injunction enjoining Mr. Bean from violating Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The Court ordered Defendant to pay disgorgement and prejudgment interest of $219,921 and a penalty of $207,000. See Lit. Rel. No. 24921 (Sept. 28, 2020).
Insider trading: SEC v Hill, Civil Action No. 3:20-civ-00536 (W.D.N.C. Filed Sept. 25, 2020) is an action which names as a defendant Eric Hill. He obtained inside information about the pending deal in which Piedmont Natural Gas Company, Inc. would merge with Duke Energy from a friend and former colleague. Within one hour he purchased call options. Subsequently, he purchase additional options and stock. After the deal was announced on October 26, 2015 Defendant liquidated his position. The complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney for the Western District of North Carolina filed parallel criminal charges. See Lit. Rel. No. 24919 (Sept. 25, 2020).
Conflicts: In the Matter of Hancock Whitney Investment Services, Inc., Adm. Proc. File No. 3-20074 (Sept. 25, 2020) is a proceeding which names as a respondent the registered investment adviser. This action centers on the failure of the adviser to properly inform its clients about the conflict that arise from the payment of certain fees on some shares acquired, held or sold for clients. First, over a three-year period the firm failed to advise its clients when buying, recommending a hold or selling fund shares that paid 12b-1 fees. Second, the same conflict arose with respect to certain money fund interests. Neither conflict was properly disclosed. The firm agreed to implement certain undertakings and took a series of remedial actions. The Order alleges violations of Advisers Act Section 206(2) and 206(4). Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. Respondent will also pay disgorgement, prejudgment interest and a civil penalty totaling $2,337,792.08 as follows: disgorgement of $1,651,686.59, prejudgment interest of $286,105.79 and a penalty of $400,000. A fair fund is created.
False statements: SEC v. Mueller, Civil Action No. 1:20-cv-00984 (D. N.M. Filed Sept. 25, 2020) is an action against Frank Mueller, the former CFO of Santa Fe Gold Corp. Previously the agency brought an action against the former CEO of the company, Thomas H. Laws, for misappropriating $1 million of investor funds. Mr. Mueller identified a series of red flags suggesting the theft. Rather than expose it he signed the firm’s annual report and the corresponding management representation letter for the outside auditor, both of which were false – they represented that $500,000 had been escrowed towards the purchase of a mine. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Sections 10(b), 13(a), 13(b)(2) and 13(b)(5). To resolve the matter Defendant consented to the entry of a permanent injunction based on the sections cited in the complaint and agreed to pay a penalty of $50,000. See Lit. Rel. No. 24917 (Sept. 25, 2020).
False statements: SEC v. Schena, Civil Action No. 5:20-cv-06717 (N.D.CA. Filed Sept. 25, 2020) is an action which names Mark Schena, the former president of Arrayt Corporation, as a defendant. The complaint alleges that over a period of about two years, beginning in October 2018, the firm made a series of false statements regarding its delinquent financial reports and the development of a COVID-19 test. The complaint alleges violations of Exchange Act Section 10(b). Trading in Arrayt’s stock was suspended. The case is pending.
False filings: SEC v. Lidner Capital Advisors, Inc., Civil Action No. 1:20-cv-03970 (N.D. Ga. Filed Sept. 25, 2020) is an action which names as defendants the registered investment adviser and its founder Robert J. Lindner. In 2018 and 2019 the firm made false filings with the Commission that were distributed to its investors. Those false statements related to the financial condition of the firm. In 2018 OCIE conducted an exam and wrote up the deficiencies which focused on its financial condition. Those included a loan on the books from Mr. Lindner that actually came from clients and a statement in Form ADV that the firm did not have any financial condition that was reasonably likely to impair its contractual obligations. Although the firm promised to remedy the matters identified by OCIE it did not. The Order alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207. The action is pending. See Lit. Rel. No. 24922 (Sept. 28, 2020).
FinCEN
Ransomware: Treasury issued, on October 1, 2020, an advisory regarding ransomware to increase awareness and thwart attacks (here).