Trends in SEC Enforcement: 2Q22 Statistics and Beyond, Part III

This is the third part of a four-part series analyzing trends in Commission enforcement actions filed during the second quarter of 2022. Part I, was published on Wednesday, August 24, 2022 (here) found that 101 enforcement were filed during the quarter concentrated in five key areas: Offering fraud, transfer agents, manipulation and insider trading. Part II, published on Friday, August 26, 2022 (here) provided examples of the cases in the five areas of concentration. (here).

This third segment of the series features examples of significant cases filed during the period that are not included in one of the five groups discussed in Part II. The final part of the series, Part IV, will be published on Thursday, September 1, 2022. It is the conclusion to the series.

Other Significant Cases

The Commission filed a series of actions centered on a wide variety of fact patterns and legal theories during the quarter. Those range from a sham tender offer and crypto assets to the first action based on Reg BI. The cases are listed below in the order in which the Commission filed them.

Sham tender offer: SEC v. Ten Cate, Civil Action No. 22-cv-2787 (S.D.N.Y. Filed April 5, 2022) is an action which names as defendant, Melville Peter Ten Cate, a U.S. citizen residing in Europe who serves as the Chief Technology Officer of Xcalibur Aerospace, Ltd. The firm is a U.K entity that purports to be engaged in the aerospace industry. Defendant and Xcalibur made offers to acquire Textron, Inc. a NYSE listed firm engaged in the aircraft, defense and industrial business. On November 9, 2021, Defendant placed an advertisement in the New York Times announcing Xcalibur’s offer for the common shares of Textron at $60.50 per share or a 56% premium to market would expire shortly. The advertisement followed earlier correspondence about the proposal. The transaction would have required about $11 billion to complete. Later Defendant forwarded what were claimed to be financial statements for Xcalibur. About one year later Defendant again contacted Textron, forwarding what purported to be financial information regarding Xcalibur and again suggesting a purchase of all Textron shares. The proposal was a sham — neither Defendant Ten Cate nor Xcalibur had the funds to complete the transaction. Nevertheless, Textron shares increased in price by about 15%. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is pending.

Microcap manipulation: SEC v. Shaw, Civil Action No. 22CV3012 (S.D.N.Y. Filed April 14, 2022) is an action which names as defendants: Dean Shah, a U.K. citizen residing in Spain; Henry Clarke, also a U.K. citizen who resides in Spain; Julius Csurgo, a Canadian and Hungarian citizen residing in Canada; and Antevorta Capital Partners, Ltd., a firm incorporated in Canada and the British Virgin Islands that claims to be in the finance and consulting business. This case is one of three related international microcap market manipulations. Over a five-year period, beginning in 2013, Defendants engaged in classic microcap manipulations involving at least two firms. In each instances control of the firm was secretly acquired, shares were distributed without registration and then dumped on the market. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The case is pending. See also SEC v. Calabrigo, Civil Action No. 1:22-cv-03096 (S.D.N.Y. Filed April 14, 2022)(named as defendants are Domenic Calabrigo, Curtis Lehner, Hasan Sario, and Courtney Vasser; over a two year period, beginning in 2016, Defendants essentially engaged in the same conduct alleged above involving different issuers; the complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Section 9(a)(2) and 10(b)); SEC v. Bauer, Civil Action No. 1:22-cv-31089 (S.D.N.Y. Filed April 14, 2022) (named as defendants: Ronald Bauer; Craig Auringer; Alon Friedlander; Massimiliano Pozzoni; Daniel Ferris; Petar Mihaylov; David Sidoo; and Adam Kambeitz ; over a 14 year period beginning in 2006, Defendants engaged in microcap fraud manipulations similar to those in the other two cases, yielding $145 million in illicit profits; the complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Section 10(b); the case is pending).

False statements: SEC v. Vale S.A., Civil Action No. 1:22-cv-02405 (E.D.N.Y. Filed April 28, 2020) is an action which names a defendant the Brazilian stock corporation whose ADRs and notes are registered for trading with the Commission. The firm is one of the world’s largest iron ore producers. This action centers on the deception of the firm with regard to dams it built to hold the waste water from mining operations. In January 2019 the Brumadinho damn of Defendant collapsed. Nearly 12 million cubic tons of mining waste or tailings was released ultimately burying 150 people alive and killing 270. It was one of the worst mining disasters in history. Prior to the collapse, Vale deliberately manipulated multiple dam safety audits. The firm obtained numerous false stability declarations and regularly misled local governments and others about the integrity of the dam. Experts who examined the question in the wake of the collapse attributed it to “liquefaction, a condition that occurs when saturated waste deposits spontaneously lose strength which undermines stability.” This occurred here from consistent high-water levels and poor drainage. The firm was aware of the risks from the collapse of another dam in 2015. Indeed, since at least 2003 the company had been aware of the very fragile condition of the dam. Despite the risks, Vale continued its pattern of manipulation and deception regarding the mining reports and its ESG disclosures in the filings with the Commission, The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a). The case is pending.

Crypto: SEC v. Chiang, Civil Action No. 22-cv-0600 (S.D. Cal. Filed April 28, 2022) is an action which names as defendants Steven Chjaing, Cyrus Kong, Eric Tippetts, James Hardy and Maurice Chelliah. The complaint claims Defendants raised over $10 million through two fraudulent, unregistered digital asset securities offerings. The first took place beginning in December 2017 when the NASGO platform was launched which claimed to have a blockchain based on which clients could use digital securities known as NSG tokens. The solicitations were made with false statements about the tokens including their projected value. When interest in those tokens waned, a second offering was launched to market the platform. This involved SNP tokens. The tokens were marketed through direct contacts, multi-level marketing strategies and videos posed on social media. Defendants misappropriated about $4 million of the investor coins and certain crypto assets. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Defendants Tippets, Hardy and Chiang settled. Messrs, Tipppetts and Chelliah consented to bifurcated settlements under which they will each be enjoined from violating the provisions of the federal securities laws cited in this action. Mr. Tippetts also agreed to the entry of an injunction prohibiting participating in any offering of securities including digital assets except for his personal account. Mr. Cheiliah agreed to pay a penalty of $75,000. The Court will determine the amounts of disgorgement and prejudgment interest to be ordered as to Messrs. Tippetts and Cheiliah and the amount of penalty as to Mr. Tipets n the future. See Lit. Rel. No. 25377 (April 28, 2022).

Crypto: SEC v. Block Bits Capital, LLC, Civil Action No. 3:22-cv-2563 (N.D. Cal. Filed April 27, 2022) is an action which names as defendants: Block Bits Capital, LLC, a firm formed in 2017 and owned by Defendants Dillman and Mata, each of whom have 50% of the shares; Block Bits Capital GP I, LLC, also formed in 2017 is jointly owned by Messrs. Dillman and Matta; and Japheth Dillman, a co-founder and co-owner and Managing Member of Block Bits Capital and Block Bits GP. Mr. Meta is the co-founder, co-owner and Managing Member of Block Bits Capital and Block Bits GP and is a defendant in the action cited below. Defendants participated in an offering fraud primarily created by Mr. Dillman. In the scheme about $960,000 was raised from 22 investor between July and December 2017. The offering materials claimed that a proprietary trading bot had been developed that would trade hundreds of digital assets from different platforms based on certain parameters to maximize returns for the Block Bits Fund 1 LP in which the investors had shares. In fact, there was no trading bot. All trading was conducted by Mr. Mata through a digital asset trading platform. Mr. Dillman also told investors that about 40% of the Fund’s assets were in “cold storage” – that is, off-line. Portions of the investor funds were also put into a related firm’s initial ICO offering that is the subject of another Commission enforcement action. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10b and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending except as to Defendant Mata who settled, consenting to the entry of permanent injunctions and a conduct based injunction. He will also pay disgorgement in the amount of $75,000 plus prejudgment interest of $11,624. The amount of any penalty was reserved for future consideration. In addition, he agreed to the entry of an administrative order barring him from the securities business. See SEC v. Mata, Civil Action No. 3:22-cv-2565 (N.D. Cal. Filed April 27, 2022). See also Lit. Rel. No. 25376 (April 28, 2022).

Deceptive trading: SEC v. Stone, Civil Action No. 1:22-cv-03553 (S.D.N.Y. Filed May 3, 2022) names as defendants two friends, David Stone and John Robson. The two men are alleged to has engaged in deceptive trading based on obtaining advanced copies of stock recommendations made by The Motley Fool, LLC. Specifically, since November 2020 Mr. Stone have used deceptive means to obtain unauthorized, pre-release access to stock picks by two Motley Fool services. After obtaining the information the two men immediately placed stock trades based on the information. Once Motley Fool made its picks available to clients the stock prices increased. Defendants then sold their shares. Overall, they have made about $12 million dollars. The complaint alleges violations of Exchange Act Sections 10(b), 20(e) and 20(b). The case is pending. See Lit. Rel. No. 25381 (May 4, 2022).

Complex products: SEC v. Tournant, Civil Action No. 1:22-cv-04016 (S.D.N.Y. Filed May 17, 2022) names as defendants three Alliance senior portfolio managers who used AGI US’s Structured Alpha funds to defraud many of the largest pension funds through the use of a complex investment scheme. Named as defendants are: Gregoire P. Tournant, Chief Investment Officer of the U.S Structured Products Group for AGI US and lead portfolio manager for the Structured Alpha funds; Trevor L. Taylor, Managing Director at AGI US and Co-lead Portfolio Manager of the Structured Alpha funds; and Stephen G. Bond-Nelson, Managing Director at AGI US and Portfolio Manager for the Structured Alpha funds. At the center of the cases is Allianz Global Investors U.S. LLC and Structured Alpha funds. The former is a registered investment adviser. The latter is a group of 17 pooled investment vehicles. Structured Alpha offered investors a complex options trading strategy designed to generate profits by using a portfolio of debt or equity securities as collateral to purchase and sell options. Investors could get exposure to a variety of debt or equity securities tied to the options trading strategy which was designed to add profits with hedges to protect against loss. Over a period of about four years, beginning in early 2016, AGI US and Defendants marketed Structured Alpha funds to 114 institutional investors. About $11 billion was raised. Over time Defendants sought to and did manipulate key financial metrics and reports in an effort to conceal the scope of the financial risk and eventually the actual risk. Ultimately, the fund collapsed, causing millions in losses. 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).

Related proceedings and resolutions:

In the Matter of Global Investors U.S. LLC, Adm. Proc. File No. 3-20855 (May 17, 2022)(Proceeding against the fund based on above; resolved with a cease-and-desist order based on Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4) and a censure; the firm will pay disgorgement of $315.2 million plus prejudgment interest of $34 million, deemed satisfied by the forfeiture and restitution order entered in the parallel criminal case; in addition a penalty of $675 million was imposed which will be paid by putting $131 million into a fair fund; see also U.S v. Allianz Global Investors U.S. LLC (S.D.N.Y.) in which the firm pleaded guilty); In the Matter of Stephen G. Bond-Nelson, Adm. Proc. File No. 3-20854 (March 17, 2022) (based on guilty plea in parallel criminal case; Respondent is barred from the securities business and participating in any penny stock offering); In the Matter of Trevor Taylor, Adm. Proc. File No. 3-20853 (May 17, 2022)(same as immediately above).

Mini bond fraud: SEC v. Breland, Civil Action No. 3:22-cv-01470 (D.La. Filed June 2, 2022) is an action which named as defendant Vern Breland, former Mayor of the Town of Sterlington, Louisiana. The action centers largely around an April 26, 2017, offering and sale by the Town of $4 million of water and sewer utility bonds and the sale on September 28, 2018, of $1.8 million of “refunding bond” water and sewer utility revenue bonds. Essentially, the offerings replaced then existing bonds. The offerings were approved by the state bond commission. In fact, the offerings were based on false financial projections as Defendant Breland knew. Defendant Breland also deceived the state bond commission. In addition, he did not disclose that over $3 million of the proceeds from the earlier offerings had been misused. The complaint alleges violations of each subsection of Securities Act Sections 17(a) and Exchange Act Section 10(b). The case is pending. See also SEC v. Fletcher, Civil Action No. 3:22-cv-01467 (D.La. Filed June 2, 2022 (Acton against Aaron Fletcher and Twin Spires Financial LLC, the municipal advisory firm and its owner on the offerings, alleging violations of the same statutes as above; settled with entry of cease-and-desist orders based on Securities Act Section 17(a) and Exchange Act Section 10(b) and agreement to pay disgorgement, prejudgment interest and penalties in amounts to be determined later); In the Matter of Town of Sterlington Louisiana, Adm. Proc. File No. 3-20873 (June 2, 2022)(action against the town alleging same facts; resolved based on remedial acts of town plus its consent to the entry of a cease-and-desist order based on Securities Act Section 17(a) and Exchange Act Section 10(b)).

Reg. BI:: SEC v. Western International Securities, Inc., Civil Action No. 22:22-cv-04119 (C.D. Ca. Filed June 15, 2022) is an action which names as defendants: the firm, a registered broker dealer and Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham and Tomas Swan. Each individual defendant is a registered representative working at the firm which is a registered investment adviser and broker-dealer. Over a period of less than one year, beginning in July 2020, Defendants sold $13.3 million in L Bonds to retail investors. The bonds are a complex product that pays a significant rate of interest. In making those sales Defendants violated the care obligation of Regulation BI. The investors who purchased the bonds were not sophisticated and lacked an understanding of them. Nevertheless, the bonds were sold to those investors in violation of Reg. BI and its duty of care. The firm also had inadequate compliance procedures on the point. The complaint alleges violations of Reg. BI and Exchange Act Sections 20(a). The complaint is pending. This is the first case brought under Reg. BI.

Conflicts: In the Matter of Charles Schwab & Co. Inc., Adm. Proc. File No. 3-20897 (June 13, 2020). Respondents in the proceeding include the dual registered investment adviser and broker-dealer; Charles Schwab Investment Advisory, Inc, a registered advisory which is a subsidiary of Schwab Holdings, Inc., a subsidiary of The Charles Schwab Corporation; and Schwab Wealth Investment Advisory, Inc, an investment adviser formed for the firm’s Schwab Intelligent Portfolios or SIP product – a robo advisor. Over a three-year period, beginning in early 2015, certain adviser subsidiaries of The Charles Schwab corporation made false and misleading statements regarding its SIP product. The robo advisers were based on model portfolios that held between 6% and 29.4% of client assets in each case. The amount was preset so the affiliated bank would make at least a minimum amount of revenue from the spread on the cash by loaning the money. Investors were not charged a fee for the SIP service. The firm did not disclose the fact that under certain market conditions other assets such as equities outperform cash. Respondents were also alleged to have made false statements in their Form ADV filings regarding the conflict of interest in setting the cash allocations at levels that would generate a certain amount of revenue. For example, firm clients were told that the allocations were created through a “disciplined portfolio construction methodology.” In fact, they were set for business reasons. The difficulty was compounded by the fact that the firm launched an advertising campaign informing investors that the SIP program permitted them to keep more of their money than other advisers who charged a fee. Respondent cooperated with the Commission’s investigation. The firm also agreed to implement certain undertakings which included the retention of an independent consultant. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure. The firm will pay disgorgement of $45,907,541 and prejudgment interest of $5,629,320. The firm will pay a penalty of $135 million. A Fair Fund will be created.

Conflicts: In the Matter of Egan-Jones Ratings Company, Adm. Proc. File No,. 3-20902 (June 21, 2022). Named as Respondents are Egan-Jones Ratings and Sean Egan. The firm is a well-known ratings agency. It registered with the Commission and became an NRSRO for financial institutions, insurance companies, corporate issuers, government and municipal securities and those of foreign governments. Sean Egan, the founder and CEO of the privately held company, is also a Respondent. In 2013 Egan-Jones was found to have violated Exchange Act Sections 15E(a)(1) and related provisions by making a material misstatement in its form NRSRO and causing violations of Sections 15E and 17(a). The action was resolved with the entry of a cease-and-desist order as to Egan-Jones and the revocation of its registration regarding ratings for asset-backed securities and government securities with a right to apply for reentry after eighteen months. A cease-and-desist order based on Rule 17g-5 was also entered as to Mr. Egan. The action here centered on alleged violations of Rule 17g-5(c)(8)(i) regarding the issuance of a rating when there is a conflict of interest and Rule 17(g)-5(c)(1) which is concerned with maintaining a rating for a client that is responsible for 10% or more of the firm’s revenue under certain circumstances. First, Egan-Jones issued a rating in 2019 at a time when Respondent Egan had participated in determining the credit rating for the client. The firm founder engaged in sales and marketing activities with respect to the client. This breached the divide between sales and marketing and the issuance of a rating mandated by the Dodd-Frank Act. Second, Egan-Jones violated the 10% rule. Specifically, in 2017 the firm solicited business from a client that it was aware might contribute over 10% of its revenue for the year. This is contrary to Rule 17g-5(c)(1) of the Exchange Act. While $538,000 was recorded in the year-end financial statements in a footnote and labeled as “excess revenue refundable” – the exact amount by which the 10% level was exceeded — the loss contingency was not accrued in accord with GAAP. There was thus no reason for not tabulating the sum for purposes of the 10% rule. Respondent firm also failed to establish, maintain and enforce policies and procedures reasonably designed to manage conflicts of interest as required by Rule 15E(h)(1). The firm agreed to implement certain undertakings, including conducting a training program regarding the matters at issue here, and retaining an Independent Consultant in connection with resolving the matter. The firm will also develop and implement policies and procedures prohibiting Mr. Egan from participating in the development or approval of any ratings. The Order alleges violations of Sections 15E(h)(1) and 15E(f)(2) and Rules 17g-(5)(c)(8)(i), 17(g)(5(c)(8)(ii) and 17(g)-5(c)(1). In resolving this action, the firm consented to the entry of a cease-and-desist order based on each of the three Rules cited above and to a censure. It will also pay disgorgement of $129,000 along with prejudgment interest of $17,592. In addition, the firm will pay a penalty of $1.7 million. Respondent Egan also consented to the entry of a cease-and-desist order based on Rules 17g-(5)(c)(8)(i) and 17(g)(5(c)(8)(ii). He will pay a penalty of $300,000.

Next: Part IV, Conclusion will be published on Thursday, September 1, 2022