Trends in SEC Enforcement: 2Q23 – Part III
This is the third installment of this series. The first focused on statistics for the second quarter of 2023, noting that 46 enforcement actions were filed by the SEC. The second part of the series provided examples of the cases in four largest categories of actions filed during the period – offering frauds, insider trading, manipulation and financial fraud.
This segment centers on cases of note brought during the period which were not discussed in the earlier segments. These cases are presented in order in which they were published by the agency during the second quarter of 2023.
Cases of Note
SARs: In the Matter of Cambria Capital, LLC, Civil Action No. 3-21319 (March 2, 2023) is a proceeding which names the dual registered broker-dealer/investment advisor as a Respondent. The firm specialized in assisting clients liquidating holdings in microcap securities. Over a period of two years, beginning in March 2017, the firm repeatedly failed to file SARs when faced with red flags. Those included suspicious activities such as the liquidation of large amounts of microcap stock followed by the immediate transfer out of the funds. The Order alleges violations of Exchange Act Section 17(a) and Rule 17a-8. Respondent resolved the charges, consenting to the entry of a cease-and-desist order bae on the provisions cited in the Order and a censure. The firm also agreed to pay a civil penalty of $100,000
Undisclosed perks: In the Matter of The Greenbrier Companies, Inc., Adm. Proc. File No. 3-21318 (March 2, 2023) names the firm, an international supplier of equipment and services to global freight transportation markets, as a respondent. The Order alleges that former CEO William A. Furman, and other executives, failed to disclose certain information regarding related personal transactions as required. Specifically, in proxy statements from 2017 to 2022 Greenbrier failed to disclose about $320,000 in perquisites to Mr. Furman and others for travel related expenses. Those filings also failed to disclose that the former CEO received about $1.6 million of the $3 million total Greenbrier paid for the charter of his private aircraft. The internal accounting controls also failed to require the recording in the books and records of certain travel-related personal security expenses as perquisites. The firm took remedial steps considered by the Commission regarding the controls over recording expenses in resolving this matter. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(a)(1)(A), 13(a)(2)(B) and 14(a). Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, Greenbrier will pay a penalty of $1 million. See also In the Matter of William A. Furman, Adm. Proc. File No. 3021317 (March 2, 2023)(action against former CEO; resolved with the entry of a cease-and-desist order based on same Sections as above and payment of a penalty in the amount of $100,000).
Beneficial ownership: In the Matter of Ralph Bartel, Adm. Proc. File No. 3-21337 (March 9, 2023) is a proceeding which names Mr. Bartel, a German citizen resident in Switzerland as Respondent. Mr. Bartel first had a disclosure obligation with respect to the shares of NASDAQ listed Wilhelmina International Inc. securities he controlled in mid-December 2015 when his holdings exceeded 5%. About one year later a Schedule 13G was filed about one year later but it only for those shares in his name. He also failed to comply with his Section 16(a) obligations beginning in mid-May 2017 when his holdings in the company exceeded 10%. Again, accurate disclosures were not made. The Order alleges violations of Exchange Act Sections 13(d)(1), 13(g)(1), and 16(a). To resolve the matter, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, he will pay a penalty of $100,000.
Cybersecurity: SEC v. Blackbaud, Inc., Adm. Proc. File No. 3-21339 (March 9, 2023) is a proceeding which names as respondent the firm, a provider of donor relationship software to non-profit organizations. In May 2020, the firm discovered it had been the victim of a cyber attack. At first the firm believe that the attack resulted in the unauthorized access and exfiltration of over a million files related to 13,000 persons, about one quarter of its customers. By mid-July 2020 the company announced the incident on its website and notified impacted customers. The disclosed information stated that the attack did not result in the access of donor information and social security numbers. Within days the company learned this information was incorrect. Nevertheless, the company filed a Form 10-K in early August which failed to disclose the correct facts about the impact of the attack. Rather the filing only provided general information about it. In early September the company finally disclose the actual scope of the attack. Blackbaud also failed to maintain disclosure controls and procedures as defined in Exchange Act Rule 13a-15(c). The Order alleges violations of Securities Act Section 17(a)(2) & (3) and Exchange Act Section 13(a) along with the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections and Rules cited in the Order. In addition, the agreed to pay a penalty of $3 million.
Continuous disclosure re muni-offerings: In the Matter of Keybank Capital Markets Inc., Adm. Proc. File No. 3-21336 (March 7, 2023). Over a four year period, beginning in September 2017, Respondent failed to comply with its obligations under Rule 15c2-12 which generally provides for what the industry calls continuous disclosure. Under the rule an underwriter of muni securities such as Respondent is obligated for offerings over $100,000 that involve sales to 35 persons or more to make continuous disclosures with certain exceptions keyed to the knowledge and experience of the purchaser. Here Respondent did not comply with its obligations and did not determine that the exception applied. Indeed, Respondent did not have policies and procedures in place requiring the determination be made. Accordingly, the Order alleges violations of Exchange Act Rule 15c2-12 and MSRB Rule G-27. The Commission considered the remedial efforts of Respondent. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on Exchange Act Section 15B(c)(1), Rule 15c2-12 and MSRB Rule G-27. Respondent also agreed to pay disgorgement of $263,607.66, prejudgment interest of $33,528.55 and a penalty of $100,000. A portion of the penalty will be transferred to the MSRB.
Manipulation – crypto: SEC v. Sun, Civil Action No. 1:23-cv-02433 (S.D.N.Y. Filed March 22,2023) is an action which names as defendants Justin Sun, a Chinese national who is an entrepreneur acting through the entity Defendants, Tron Foundation Ltd., a Singapore entity that conducted the offerings of TRX and BTT assets involved here; BitTorrent Foundation Ltd., also a Singapore entity; Rainberry, Inc., a California entity; Austin Mahone, a singer; and Deandre Cortez Way, also a singer. Beginning in August 2017, and continuing, Defendant Sun, working through the entity Defendants, engaged in the offer and sale of crypto assets TRX and BTT while creating an active market for the assets. The crypto assets were sold under a claim that they were exempt from registration; they were not. Mr. Sun also engaged in wash trading the assets, again using the entity Defendants. The transactions were touted by the two singer Defendants. Mr. Sun falsely claimed the fees paid the two singers to tout the crypto assets were disclosed; they were not. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Sections 9(a)(1) &(2) and 10(b). The case is pending. See Lit. Rel. No. 25676 (March 24, 2023); See also. In the Matter of Lindsay Dee Lohan, Adm. Proc. File No. 3-21349 (March 22, 2023)(one of a series of actions against celebrities based on Securities Act Section 17(b); resolved with the entry into a cooperation agreement, a cease-and-desist order based on the Section and the payment of disgorgement in the amount of $10,000, prejudgment interest of $670 and a penalty of $30,000). Similar actions were filed against Michele Anne Mason; Miles Parks McCollum; Jake Joseph Paul; Shaffer Chimere Smith; and Allaune Danala Badara Akon Thiam. See Lit. Rel. No. 25676 (March 24, 2023).
Unregistered broker/exchange: SEC v. Beaxy Digital, Ltd., Civil Action No. 23-cv-1962 (N. D. Ill. Filed March 29, 2023) is an action which names as defendants: Beaxy, an off-shore entity; Artak Hamazaspyan, the founder and president of Beaxy Digital; Windy Inc., which maintained the Beaxy Platform; Nicholas Murphy, co-owner and co-president of Windy; Radolph Bay Abbott, co-owner and co-president of Windy; Braverok Investments, LLC, a firm that provide market making services for crypto securities; Windy Financial LLC; Future Financial LLC, a firm that also provided market making services for crypto securities: and Brian Peterson. Beginning in May 2018, and continuing for the next year, Beaxy Digital and its founder, Defendant Hamazaspyan, conducted an unregistered private sale of crypto asset security called BXUY, raising over $8 million. In October 2019 Defendants Murphy and Abbot – each a high-level Beaxy Digital official – discovered that Defendant Hamazaspyan had misappropriated investor assets. They arranged for his separation from the firm and took control. Defendants Murphy and Abbott continued the operations. Windy still did not register as a national securities exchange. Windy also did not register as a broker or clearing agency. In addition, beginning in 2019, Windy Financial worked with Braverock Investments, Beaxy Digital and Future Financial (collectively the “Braverock Defendants”) to provide market making services to Windy and Dragonchain, Inc., the issuer of DRGN, a crypto asset offered for sale as a security. Defendant Peterson owned the Braverock Defendants. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 5, 10(b), 15(a) and 17(A) & (b). The case is pending.
Suitability: SEC v. Sapere Wealth Management, Civil Action No. 3:23-cv-00172 (W.D.N.C. Filed March 22, 2023) is an action which names as defendants the investment adviser and its principal, Scott Trease. It centers on recommendations of unsuitable investments in 2018 and 2019. In May 2019, for example, Defendants recommended that three investment advisory clients put $7.3 million into two risky alternative investment deals. Defendants incorrectly believed the transactions were collateralized by gold. The investments came from a person Defendant Trease befriended at Bible Study. Subsequently, similar opportunities were presented. In one recommended by Defendants a client lost $2.3 million. In another the client put $5 million at risk. Ultimately the investor was able to recover the funds. The recommendations where were made without a reasonable understanding of the investments and despite red flags suggesting the investment may not be suitable. The complaint alleges violations of Advisers Act Section 206(2). To resolve the matter Defendants consented to the entry of a permanent injunction based on the Section cited in the complaint, to a five year injunction requiring the retention of a due-diligence consultant and to the payment of a $100,000 civil penalty along with an order to circulate the complaint in this case to their clients See Lit. Rel. No. 25681 (March 30, 2023).
Unregistered crypto platform: SEC v. Bittrex, Inc., Civil Action No. 2:23-cv-00580 (W. D. Was. Filed April 17, 2023) is an action which names as defendants: Bittrex, a firm founded in 2014 in Seattle, Washington that has served as a crypto trading platform but is winding down as of April 2023; Bittrex Global GMBH, a Liechtenstein firm that launched a crypto asset trading platform that supposedly prohibits U.S. customers; and William Shihara, resident of Richmond Washington who has been a member of the board of directors of Bittrex. Since 2014 Defendant Bittrex has acted as a crypto asset platform. In that role the firm buys, sells and trades crypto assets for U.S. and other customers. The firm has thus acted as a broker and an exchange, charging customers for its services despite the fact that it has never registered with the Commission in any capacity. During its tenure the firm has urged issuers of crypto assets to “scrub” their language to avoid scrutiny by the Commission. The complaint alleges violations of Exchange Act Sections 5, 15(a) and 17A(b). The case is in litigation. See Lit. Rel. No. 25694 (April 17, 2023).
False statements: SEC v. Javice, Civil Action No. 1:23-cv-02795 (S.D.N.Y. Filed April 4, 2023) is an action which names a defendant Charles Javice, the founder, CEO and a stockholder of TAPD, Inc., a for profit firm known as “Frank.” During the summer of 2021 Frank negotiated a deal in which Major Financial Institution would acquire the firm. Key to the deal supposedly was the 4.25 million Frank student customers looking to finance their educations. Major Financial Institution wanted the customer identifying data for the students to market student loans. In fact, Frank only had information on about 300,000 students. Knowing that Major Financial Institution was interested in the student data, throughout the negotiations Frank made misrepresentations about its data and even created false documents. Following the closing of the deal Major Financial Institution conducted an internal investigation which concluded that the data did not exist. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Prohibited transactions: In the Matter of Chatham Asset Management, LLC, Adm. Proc. File No. 3-21355 (April 3, 2023) is a proceeding which names as respondents the registered investment adviser and its founder, Anthony Melchiorre. A number of the fund clients held high yield debt securities issued by American Media Inc., a subsidiary of AMI Parent Holdings, LLC. Over a two-year period, beginning in 2017, the managed funds engaged in transactions involving the same AMI Bonds in which one fund sold AMI bonds and a different fund would purchase AMI bonds. These “rebalancing” trades were undertaken to address portfolio constraints such as industry or issuer fund constraint limits, to meet investor redemptions and to allocate capital inflows and outflows. Over time the transactions had the impact of moving the price up. Many of the transactions involved open-ended mutual funds regulated as registered investment companies. For those funds the rebalancing transactions were prohibited affiliate transactions that violated the Investment Company Act. In resolving the matter Respondents agreed to assist the Commission staff in administrating a distribution plan. To resolve the proceedings each Respondent consented to the entry of a cease-and-desist order prohibiting future violations of Advisers Act Section 206(2) and Investment Company Act Section 17(a). Mr. Melchiorre is also prohibited from serving as an employee, officer, director or member of an advisory board, investment advisor or principal underwriter of an investment company or an affiliate. Respondents will pay, jointly and severally, disgorgement of $11 million and prejudgment interest of $3,375,072. Mr. Chatham will pay a civil penalty of $4.4 million. A Fair Fund was created.
Liquidity rule violations: SEC v. Pinnacle Advisors, LLC, Civil Action No. 5:23-cv-00547 N.D.N.Y. Filed May 5, 2023) is an action which names as defendant: Pinnacle, a registered investment adviser; Robert F. Cuculich, president of Pinnacle and 30% owner; Benjamin Quilty, CCO of the firm and a 10% owner; and Mark Wadach, an independent trustee of the NYSA Liquidating Fund, an open ended investment company; and Lawton Williamson, also an independent trustee of the NYSA Liquidating Fund. Beginning in June 2019, and continuing for about a year, over 15% of its net assets were invested in the restricted shares of a medical device company. During the period the firm failed to comply with the applicable reporting and filing requirements or to bring its position in the restricted shares under 15%. Pinnacle, the Fund’s adviser, and Defendant Cudulidh and Quity, who were primary responsible for compliance in this obligation, failed to require that the proper steps be taken. They also disregarded the advice of Fund counsel, who resigned over the issue, and its auditors. In addition, false statements were made to the Division the staff of the Division of Investment Management about the position. The proper disclosure forms were also not filed. By September 9, 2020, NYSA Fund had deregistered with the Commission — the shares still had not been sold. The complaint alleges violations of ICA Rules 22e-4(b)(1) and 30v-1-10. See also In the Matter of Pinnacle Investments, LLC, Adm. Proc. File No. 3-21405 (May 5, 2023)(alleges false statements re Forms ADV Part 2A, failure to disclose conflicts and not properly implementing compliance; alleges violations of Advisers Act Sections 204(a), 206(2) and 206(4); firm took remedial acts, agreed to implement certain undertakings which include the retention of a consultant; consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure; agreed to pay disgorgement of $83,462, prejudgment interest of $11,874 and a penalty of $393,381); In the Matter of Joseph Masella, Adm. Proc. File No. 3-21406 May 5, 2023)(based on civil injunctive action detailed above; resolved with consent to entry of cease-and-desist order based on IC Rule 22e(4); suspension from advisory and brokerage businesses for six month; and payment of $20,000 penalty).
Regulation A: Regulation A created a limited exemption from the registration requirements of Section 5, Securities Act for those who comply with the dictates of the Regulation. Generally, it requires that certain information be furnished to investors for what are often limited offerings. A good example of how the Regulation works is In the Mater of Hemp Naturals, Inc., Adm. Proc. File No. 3-21430 (May 16, 2023). There the firm initially complied with the dictates of the regulation regarding a specific number of shares priced within a range. Ultimately, however, the issuer improperly changed the offering price and did not update its financial information as required. The firm’s offering of shares was thus found to be in violation of Section 5 of the Securities Act since the Regulation did not apply. The company resolved the case by consenting to the entry of a cease-and-desist order based on Section 5 and paying a penalty of $50,000. The Commission concluded that nine other issuers had run afoul of one or more of the requirements for utilizing the Regulation in a fashion similar to the Hemp Naturals proceeding. Yet each issuer sold its shares to investors. Each issuer thus violated Section 5 of the Securities Act. Those named in the proceedings, in addition to Hemp Naturals, are: CW Petroleum Corporation; DNA Brands Inc.; Graystone Company, Inc., Green Stream Holdings Inc.; LiveWire Ergogonenics, Inc; Principal Solar Inc.; SFL Maven Corporation; The Marquie Group Inc.; and Verde Be Holdings Inc. To resolve the charges each issuer consented to the entry of a cease-and-desist order based on Section 5. In addition, each issuer agreed to pay a penalty in an amount ranging from a high of $90,000 to a low of $5,000.
Insider trading-crypto: SEC v. Wahi, Civil Action No. 2:22-cv-01009 (W.D. Was.) is a previously filed action which named as defendants Ishan Wahi, a citizen of India employed as a Manager in Coinbase’s Asset and Investing Products group; Nikhil Wahi, a citizen of India and the brother of Defendant Ishan Wahi, who was employed as a senior manager at Salesforce; and Sameer Ramani, a U.S. citizen who is believed to be in India. Ishan Wahi invoked the 5th Amendment in testimony while Nikhil Wahi did not appear. Mr. Ramani is a close friend of Defendant Wahi. Beginning in June 2021, and continuing through April 2022, Defendant Ishan Washi repeatedly tipped his brother and Defendant Ramani to pending announcements that Coinbase, a large crypto platform, was about to announce on its blog or through Twitter, the listing of another crypto asset. The communication of that information violated the internal policies and procedures of Coinbase. The communications sparked repeated trading prior to the announcements. The suspicious trading of Nikhil and Ramani drew the attention of the Director of Security Operations at Coinbase who launched an investigation. On May 11, 2022, the Director scheduled an interview with Ishan who then sent a screen shot of it to Ishan using a phone with a foreign number. By trading in advance of Coinbase announcements while in possession of material non-public information about the pending announcements brother and Defendant Ramani amassed insider trading profits of over $1.1 million. The night before he was scheduled to testify Defendant Nikhil Wahi flew to India. The complaint alleges violations of Exchange Act Section 10(b). The two Wahi brothers settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Exchange Act Section 10(b). They also agreed to pay disgorgement and prejudgment interest which will be satisfied by the order in the parallel criminal case requiring the payment of forfeiture. In that action two brothers have been sentenced to prison. This is the Commission’s first insider trading case tied to crypto assets. See SEC Press Release, May 30, 2023.
Unregistered broker/exchange/cryoto: SEC v. Coinbase, Inc., Civil Action No. 23 Civ. 4738 (S.D.N.Y. Filed June 6, 2023) names as defendants Coinbase, Inc., the largest crypto asset trading platform in the U.S. and Coinbase Global, Inc., a holding company. Since at least 2019 Coinbase has acted as an unregistered broker, including soliciting potential investors, handling customer funds and assets and providing a marketplace. The firm also has wallets to facilitate the transactions and provides clearing services. All of these traditional security operations are collapsed into one firm. The firm has worked for years to facilitate crypto asset transactions. It is well aware of the test of a security developed in the Howey case and claims to adhere to its principles – it does not, according to the complaint. The firm also operates a Staking Program that allows investors to earn financial returns through its managerial efforts with respect to certain protocols. Under the program assets are transferred to and pooled by Coinbase and subsequently “staked” or committed by the firm in exchange for certain rewards. The firm has never registered with the Commission in any capacity. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 15(a) and 17A(b). The case is in litigation.
Unregistered exchange/crypto: SEC v. Binance Holdings Limited, Civil Action No. 1:23-cv-01599 (D.D.C. Filed June 5, 2023). Named as defendants are: Holdings, one of a number of entities using the well-known Binance name, a group that includes Binance.com and Binance.US Platform; BAM Trading Services Inc. and BAM Management US Holdings Inc., two entities recently created by Changpeng Zhao, generally called CZ, the control person of all entity Defendants. Collectively, the Binance named entities deliver a wide variety of well-known securities type services. Those include trading crypto assets like a stock exchange, buying and selling those assets like a broker-dealer and transferring those assets like a securities transfer agent. The difference between the Binance entities delivering those services to investors and those in the securities industry is regulation, oversight and information. Those in the securities industry are registered, regulated by the SEC and required to disclose material information about their services to investors. The Binance entities are not registered and not regulated. Those entities are not required to furnish investors information about their services. As the CCO of Binance stated: “we do not want [Binance].com to be regulated ever.” The case focuses 2018 and the aftermath of actions then initiated when Mr. Zhao and the Defendants took a series of steps to ensure that the vision of their CCO continued – no regulation. BAM Management and BAM Trading were created. The entities were designed to control the Binance.US Platform. These steps were followed by public representations that the Biance.com Platform did not provide services to U.S. persons. In fact, nothing changed according to the SEC’s complaint. Mr. Zhao continued to control everything just as he did prior the creation of the two new entities and U.S. investors were still served – only the talking points delivered to the public that U.S. investors now claimed those investors were not being served, a false statement. Behind the BAM façade Defendants transferred the millions of dollars of U.S. investor assets they held at will among the various entities. In some instances, the crypto assets and fiat assets held were commingled and diverted to an account held by a Zhao-controlled entity know as Merit Peak Limited. Later the assets were at times moved to a third party. While BAM Management and BAM Trading touted their surveillance and controls, in fact they seemed to be lacking. For example, there none stopping the “wash trading” and self-dealing on the Binance.US Platform that began in 2019 when Sigma Chain AG, another Zhao owned and controlled entity, engaged in wash trading that artificially inflated the trading volume of crypto assets securities on the Biance.US Platform. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and 17(a)(2) and (a)(3) and Exchange Act Sections 5. 15(a) and 17A(b). The case is in litigation.
Perks: In the Matter of Stanley Black & Decker, Inc., Adm. Proc. File No. 3-21497 (June 20, 2023) is a proceeding which names as respondent the provider of hand tools, power tools and other products and services. The Order alleges that over a three-year period, beginning in 2017 Respondent failed to disclose in its definitive proxy statements at least $1.3 million in perquisites and personal benefits paid to or on behalf of four of its named executive officers and directors. The Order alleges violations of Exchange Act Sections 13(a), 14(a) and the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. Respondent acknowledged that the Commission did not impose a penalty based on cooperation which included self-reporting, conducting an internal investigation and implementing remedial measures. See also In the Matter of Jeffery D. Ansell, Adm. Proc. File No. 3-21498 (June 20, 2023)(Respondent is EVP of the company and had a role in the failure to disclose perks; resolved with cease-and-desist order based on Exchange Act Sections 13(b)(2)(A) and 14(a) and the imposition of a penalty of $75,000).
Next: On December 12 the Final Segment to this series
Trends in SEC Enforcement: 2Q23 – Part III
This is the third installment of this series. The first focused on statistics for the second quarter of 2023, noting that 46 enforcement actions were filed by the SEC. The second part of the series provided examples of the cases in four largest categories of actions filed during the period – offering frauds, insider trading, manipulation and financial fraud.
This segment centers on cases of note brought during the period which were not discussed in the earlier segments. These cases are presented in order in which they were published by the agency during the second quarter of 2023.
Cases of Note
SARs: In the Matter of Cambria Capital, LLC, Civil Action No. 3-21319 (March 2, 2023) is a proceeding which names the dual registered broker-dealer/investment advisor as a Respondent. The firm specialized in assisting clients liquidating holdings in microcap securities. Over a period of two years, beginning in March 2017, the firm repeatedly failed to file SARs when faced with red flags. Those included suspicious activities such as the liquidation of large amounts of microcap stock followed by the immediate transfer out of the funds. The Order alleges violations of Exchange Act Section 17(a) and Rule 17a-8. Respondent resolved the charges, consenting to the entry of a cease-and-desist order bae on the provisions cited in the Order and a censure. The firm also agreed to pay a civil penalty of $100,000
Undisclosed perks: In the Matter of The Greenbrier Companies, Inc., Adm. Proc. File No. 3-21318 (March 2, 2023) names the firm, an international supplier of equipment and services to global freight transportation markets, as a respondent. The Order alleges that former CEO William A. Furman, and other executives, failed to disclose certain information regarding related personal transactions as required. Specifically, in proxy statements from 2017 to 2022 Greenbrier failed to disclose about $320,000 in perquisites to Mr. Furman and others for travel related expenses. Those filings also failed to disclose that the former CEO received about $1.6 million of the $3 million total Greenbrier paid for the charter of his private aircraft. The internal accounting controls also failed to require the recording in the books and records of certain travel-related personal security expenses as perquisites. The firm took remedial steps considered by the Commission regarding the controls over recording expenses in resolving this matter. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(a)(1)(A), 13(a)(2)(B) and 14(a). Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, Greenbrier will pay a penalty of $1 million. See also In the Matter of William A. Furman, Adm. Proc. File No. 3021317 (March 2, 2023)(action against former CEO; resolved with the entry of a cease-and-desist order based on same Sections as above and payment of a penalty in the amount of $100,000).
Beneficial ownership: In the Matter of Ralph Bartel, Adm. Proc. File No. 3-21337 (March 9, 2023) is a proceeding which names Mr. Bartel, a German citizen resident in Switzerland as Respondent. Mr. Bartel first had a disclosure obligation with respect to the shares of NASDAQ listed Wilhelmina International Inc. securities he controlled in mid-December 2015 when his holdings exceeded 5%. About one year later a Schedule 13G was filed about one year later but it only for those shares in his name. He also failed to comply with his Section 16(a) obligations beginning in mid-May 2017 when his holdings in the company exceeded 10%. Again, accurate disclosures were not made. The Order alleges violations of Exchange Act Sections 13(d)(1), 13(g)(1), and 16(a). To resolve the matter, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, he will pay a penalty of $100,000.
Cybersecurity: SEC v. Blackbaud, Inc., Adm. Proc. File No. 3-21339 (March 9, 2023) is a proceeding which names as respondent the firm, a provider of donor relationship software to non-profit organizations. In May 2020, the firm discovered it had been the victim of a cyber attack. At first the firm believe that the attack resulted in the unauthorized access and exfiltration of over a million files related to 13,000 persons, about one quarter of its customers. By mid-July 2020 the company announced the incident on its website and notified impacted customers. The disclosed information stated that the attack did not result in the access of donor information and social security numbers. Within days the company learned this information was incorrect. Nevertheless, the company filed a Form 10-K in early August which failed to disclose the correct facts about the impact of the attack. Rather the filing only provided general information about it. In early September the company finally disclose the actual scope of the attack. Blackbaud also failed to maintain disclosure controls and procedures as defined in Exchange Act Rule 13a-15(c). The Order alleges violations of Securities Act Section 17(a)(2) & (3) and Exchange Act Section 13(a) along with the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections and Rules cited in the Order. In addition, the agreed to pay a penalty of $3 million.
Continuous disclosure re muni-offerings: In the Matter of Keybank Capital Markets Inc., Adm. Proc. File No. 3-21336 (March 7, 2023). Over a four year period, beginning in September 2017, Respondent failed to comply with its obligations under Rule 15c2-12 which generally provides for what the industry calls continuous disclosure. Under the rule an underwriter of muni securities such as Respondent is obligated for offerings over $100,000 that involve sales to 35 persons or more to make continuous disclosures with certain exceptions keyed to the knowledge and experience of the purchaser. Here Respondent did not comply with its obligations and did not determine that the exception applied. Indeed, Respondent did not have policies and procedures in place requiring the determination be made. Accordingly, the Order alleges violations of Exchange Act Rule 15c2-12 and MSRB Rule G-27. The Commission considered the remedial efforts of Respondent. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on Exchange Act Section 15B(c)(1), Rule 15c2-12 and MSRB Rule G-27. Respondent also agreed to pay disgorgement of $263,607.66, prejudgment interest of $33,528.55 and a penalty of $100,000. A portion of the penalty will be transferred to the MSRB.
Manipulation – crypto: SEC v. Sun, Civil Action No. 1:23-cv-02433 (S.D.N.Y. Filed March 22,2023) is an action which names as defendants Justin Sun, a Chinese national who is an entrepreneur acting through the entity Defendants, Tron Foundation Ltd., a Singapore entity that conducted the offerings of TRX and BTT assets involved here; BitTorrent Foundation Ltd., also a Singapore entity; Rainberry, Inc., a California entity; Austin Mahone, a singer; and Deandre Cortez Way, also a singer. Beginning in August 2017, and continuing, Defendant Sun, working through the entity Defendants, engaged in the offer and sale of crypto assets TRX and BTT while creating an active market for the assets. The crypto assets were sold under a claim that they were exempt from registration; they were not. Mr. Sun also engaged in wash trading the assets, again using the entity Defendants. The transactions were touted by the two singer Defendants. Mr. Sun falsely claimed the fees paid the two singers to tout the crypto assets were disclosed; they were not. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Sections 9(a)(1) &(2) and 10(b). The case is pending. See Lit. Rel. No. 25676 (March 24, 2023); See also. In the Matter of Lindsay Dee Lohan, Adm. Proc. File No. 3-21349 (March 22, 2023)(one of a series of actions against celebrities based on Securities Act Section 17(b); resolved with the entry into a cooperation agreement, a cease-and-desist order based on the Section and the payment of disgorgement in the amount of $10,000, prejudgment interest of $670 and a penalty of $30,000). Similar actions were filed against Michele Anne Mason; Miles Parks McCollum; Jake Joseph Paul; Shaffer Chimere Smith; and Allaune Danala Badara Akon Thiam. See Lit. Rel. No. 25676 (March 24, 2023).
Unregistered broker/exchange: SEC v. Beaxy Digital, Ltd., Civil Action No. 23-cv-1962 (N. D. Ill. Filed March 29, 2023) is an action which names as defendants: Beaxy, an off-shore entity; Artak Hamazaspyan, the founder and president of Beaxy Digital; Windy Inc., which maintained the Beaxy Platform; Nicholas Murphy, co-owner and co-president of Windy; Radolph Bay Abbott, co-owner and co-president of Windy; Braverok Investments, LLC, a firm that provide market making services for crypto securities; Windy Financial LLC; Future Financial LLC, a firm that also provided market making services for crypto securities: and Brian Peterson. Beginning in May 2018, and continuing for the next year, Beaxy Digital and its founder, Defendant Hamazaspyan, conducted an unregistered private sale of crypto asset security called BXUY, raising over $8 million. In October 2019 Defendants Murphy and Abbot – each a high-level Beaxy Digital official – discovered that Defendant Hamazaspyan had misappropriated investor assets. They arranged for his separation from the firm and took control. Defendants Murphy and Abbott continued the operations. Windy still did not register as a national securities exchange. Windy also did not register as a broker or clearing agency. In addition, beginning in 2019, Windy Financial worked with Braverock Investments, Beaxy Digital and Future Financial (collectively the “Braverock Defendants”) to provide market making services to Windy and Dragonchain, Inc., the issuer of DRGN, a crypto asset offered for sale as a security. Defendant Peterson owned the Braverock Defendants. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 5, 10(b), 15(a) and 17(A) & (b). The case is pending.
Suitability: SEC v. Sapere Wealth Management, Civil Action No. 3:23-cv-00172 (W.D.N.C. Filed March 22, 2023) is an action which names as defendants the investment adviser and its principal, Scott Trease. It centers on recommendations of unsuitable investments in 2018 and 2019. In May 2019, for example, Defendants recommended that three investment advisory clients put $7.3 million into two risky alternative investment deals. Defendants incorrectly believed the transactions were collateralized by gold. The investments came from a person Defendant Trease befriended at Bible Study. Subsequently, similar opportunities were presented. In one recommended by Defendants a client lost $2.3 million. In another the client put $5 million at risk. Ultimately the investor was able to recover the funds. The recommendations where were made without a reasonable understanding of the investments and despite red flags suggesting the investment may not be suitable. The complaint alleges violations of Advisers Act Section 206(2). To resolve the matter Defendants consented to the entry of a permanent injunction based on the Section cited in the complaint, to a five year injunction requiring the retention of a due-diligence consultant and to the payment of a $100,000 civil penalty along with an order to circulate the complaint in this case to their clients See Lit. Rel. No. 25681 (March 30, 2023).
Unregistered crypto platform: SEC v. Bittrex, Inc., Civil Action No. 2:23-cv-00580 (W. D. Was. Filed April 17, 2023) is an action which names as defendants: Bittrex, a firm founded in 2014 in Seattle, Washington that has served as a crypto trading platform but is winding down as of April 2023; Bittrex Global GMBH, a Liechtenstein firm that launched a crypto asset trading platform that supposedly prohibits U.S. customers; and William Shihara, resident of Richmond Washington who has been a member of the board of directors of Bittrex. Since 2014 Defendant Bittrex has acted as a crypto asset platform. In that role the firm buys, sells and trades crypto assets for U.S. and other customers. The firm has thus acted as a broker and an exchange, charging customers for its services despite the fact that it has never registered with the Commission in any capacity. During its tenure the firm has urged issuers of crypto assets to “scrub” their language to avoid scrutiny by the Commission. The complaint alleges violations of Exchange Act Sections 5, 15(a) and 17A(b). The case is in litigation. See Lit. Rel. No. 25694 (April 17, 2023).
False statements: SEC v. Javice, Civil Action No. 1:23-cv-02795 (S.D.N.Y. Filed April 4, 2023) is an action which names a defendant Charles Javice, the founder, CEO and a stockholder of TAPD, Inc., a for profit firm known as “Frank.” During the summer of 2021 Frank negotiated a deal in which Major Financial Institution would acquire the firm. Key to the deal supposedly was the 4.25 million Frank student customers looking to finance their educations. Major Financial Institution wanted the customer identifying data for the students to market student loans. In fact, Frank only had information on about 300,000 students. Knowing that Major Financial Institution was interested in the student data, throughout the negotiations Frank made misrepresentations about its data and even created false documents. Following the closing of the deal Major Financial Institution conducted an internal investigation which concluded that the data did not exist. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Prohibited transactions: In the Matter of Chatham Asset Management, LLC, Adm. Proc. File No. 3-21355 (April 3, 2023) is a proceeding which names as respondents the registered investment adviser and its founder, Anthony Melchiorre. A number of the fund clients held high yield debt securities issued by American Media Inc., a subsidiary of AMI Parent Holdings, LLC. Over a two-year period, beginning in 2017, the managed funds engaged in transactions involving the same AMI Bonds in which one fund sold AMI bonds and a different fund would purchase AMI bonds. These “rebalancing” trades were undertaken to address portfolio constraints such as industry or issuer fund constraint limits, to meet investor redemptions and to allocate capital inflows and outflows. Over time the transactions had the impact of moving the price up. Many of the transactions involved open-ended mutual funds regulated as registered investment companies. For those funds the rebalancing transactions were prohibited affiliate transactions that violated the Investment Company Act. In resolving the matter Respondents agreed to assist the Commission staff in administrating a distribution plan. To resolve the proceedings each Respondent consented to the entry of a cease-and-desist order prohibiting future violations of Advisers Act Section 206(2) and Investment Company Act Section 17(a). Mr. Melchiorre is also prohibited from serving as an employee, officer, director or member of an advisory board, investment advisor or principal underwriter of an investment company or an affiliate. Respondents will pay, jointly and severally, disgorgement of $11 million and prejudgment interest of $3,375,072. Mr. Chatham will pay a civil penalty of $4.4 million. A Fair Fund was created.
Liquidity rule violations: SEC v. Pinnacle Advisors, LLC, Civil Action No. 5:23-cv-00547 N.D.N.Y. Filed May 5, 2023) is an action which names as defendant: Pinnacle, a registered investment adviser; Robert F. Cuculich, president of Pinnacle and 30% owner; Benjamin Quilty, CCO of the firm and a 10% owner; and Mark Wadach, an independent trustee of the NYSA Liquidating Fund, an open ended investment company; and Lawton Williamson, also an independent trustee of the NYSA Liquidating Fund. Beginning in June 2019, and continuing for about a year, over 15% of its net assets were invested in the restricted shares of a medical device company. During the period the firm failed to comply with the applicable reporting and filing requirements or to bring its position in the restricted shares under 15%. Pinnacle, the Fund’s adviser, and Defendant Cudulidh and Quity, who were primary responsible for compliance in this obligation, failed to require that the proper steps be taken. They also disregarded the advice of Fund counsel, who resigned over the issue, and its auditors. In addition, false statements were made to the Division the staff of the Division of Investment Management about the position. The proper disclosure forms were also not filed. By September 9, 2020, NYSA Fund had deregistered with the Commission — the shares still had not been sold. The complaint alleges violations of ICA Rules 22e-4(b)(1) and 30v-1-10. See also In the Matter of Pinnacle Investments, LLC, Adm. Proc. File No. 3-21405 (May 5, 2023)(alleges false statements re Forms ADV Part 2A, failure to disclose conflicts and not properly implementing compliance; alleges violations of Advisers Act Sections 204(a), 206(2) and 206(4); firm took remedial acts, agreed to implement certain undertakings which include the retention of a consultant; consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure; agreed to pay disgorgement of $83,462, prejudgment interest of $11,874 and a penalty of $393,381); In the Matter of Joseph Masella, Adm. Proc. File No. 3-21406 May 5, 2023)(based on civil injunctive action detailed above; resolved with consent to entry of cease-and-desist order based on IC Rule 22e(4); suspension from advisory and brokerage businesses for six month; and payment of $20,000 penalty).
Regulation A: Regulation A created a limited exemption from the registration requirements of Section 5, Securities Act for those who comply with the dictates of the Regulation. Generally, it requires that certain information be furnished to investors for what are often limited offerings. A good example of how the Regulation works is In the Mater of Hemp Naturals, Inc., Adm. Proc. File No. 3-21430 (May 16, 2023). There the firm initially complied with the dictates of the regulation regarding a specific number of shares priced within a range. Ultimately, however, the issuer improperly changed the offering price and did not update its financial information as required. The firm’s offering of shares was thus found to be in violation of Section 5 of the Securities Act since the Regulation did not apply. The company resolved the case by consenting to the entry of a cease-and-desist order based on Section 5 and paying a penalty of $50,000. The Commission concluded that nine other issuers had run afoul of one or more of the requirements for utilizing the Regulation in a fashion similar to the Hemp Naturals proceeding. Yet each issuer sold its shares to investors. Each issuer thus violated Section 5 of the Securities Act. Those named in the proceedings, in addition to Hemp Naturals, are: CW Petroleum Corporation; DNA Brands Inc.; Graystone Company, Inc., Green Stream Holdings Inc.; LiveWire Ergogonenics, Inc; Principal Solar Inc.; SFL Maven Corporation; The Marquie Group Inc.; and Verde Be Holdings Inc. To resolve the charges each issuer consented to the entry of a cease-and-desist order based on Section 5. In addition, each issuer agreed to pay a penalty in an amount ranging from a high of $90,000 to a low of $5,000.
Insider trading-crypto: SEC v. Wahi, Civil Action No. 2:22-cv-01009 (W.D. Was.) is a previously filed action which named as defendants Ishan Wahi, a citizen of India employed as a Manager in Coinbase’s Asset and Investing Products group; Nikhil Wahi, a citizen of India and the brother of Defendant Ishan Wahi, who was employed as a senior manager at Salesforce; and Sameer Ramani, a U.S. citizen who is believed to be in India. Ishan Wahi invoked the 5th Amendment in testimony while Nikhil Wahi did not appear. Mr. Ramani is a close friend of Defendant Wahi. Beginning in June 2021, and continuing through April 2022, Defendant Ishan Washi repeatedly tipped his brother and Defendant Ramani to pending announcements that Coinbase, a large crypto platform, was about to announce on its blog or through Twitter, the listing of another crypto asset. The communication of that information violated the internal policies and procedures of Coinbase. The communications sparked repeated trading prior to the announcements. The suspicious trading of Nikhil and Ramani drew the attention of the Director of Security Operations at Coinbase who launched an investigation. On May 11, 2022, the Director scheduled an interview with Ishan who then sent a screen shot of it to Ishan using a phone with a foreign number. By trading in advance of Coinbase announcements while in possession of material non-public information about the pending announcements brother and Defendant Ramani amassed insider trading profits of over $1.1 million. The night before he was scheduled to testify Defendant Nikhil Wahi flew to India. The complaint alleges violations of Exchange Act Section 10(b). The two Wahi brothers settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Exchange Act Section 10(b). They also agreed to pay disgorgement and prejudgment interest which will be satisfied by the order in the parallel criminal case requiring the payment of forfeiture. In that action two brothers have been sentenced to prison. This is the Commission’s first insider trading case tied to crypto assets. See SEC Press Release, May 30, 2023.
Unregistered broker/exchange/cryoto: SEC v. Coinbase, Inc., Civil Action No. 23 Civ. 4738 (S.D.N.Y. Filed June 6, 2023) names as defendants Coinbase, Inc., the largest crypto asset trading platform in the U.S. and Coinbase Global, Inc., a holding company. Since at least 2019 Coinbase has acted as an unregistered broker, including soliciting potential investors, handling customer funds and assets and providing a marketplace. The firm also has wallets to facilitate the transactions and provides clearing services. All of these traditional security operations are collapsed into one firm. The firm has worked for years to facilitate crypto asset transactions. It is well aware of the test of a security developed in the Howey case and claims to adhere to its principles – it does not, according to the complaint. The firm also operates a Staking Program that allows investors to earn financial returns through its managerial efforts with respect to certain protocols. Under the program assets are transferred to and pooled by Coinbase and subsequently “staked” or committed by the firm in exchange for certain rewards. The firm has never registered with the Commission in any capacity. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 15(a) and 17A(b). The case is in litigation.
Unregistered exchange/crypto: SEC v. Binance Holdings Limited, Civil Action No. 1:23-cv-01599 (D.D.C. Filed June 5, 2023). Named as defendants are: Holdings, one of a number of entities using the well-known Binance name, a group that includes Binance.com and Binance.US Platform; BAM Trading Services Inc. and BAM Management US Holdings Inc., two entities recently created by Changpeng Zhao, generally called CZ, the control person of all entity Defendants. Collectively, the Binance named entities deliver a wide variety of well-known securities type services. Those include trading crypto assets like a stock exchange, buying and selling those assets like a broker-dealer and transferring those assets like a securities transfer agent. The difference between the Binance entities delivering those services to investors and those in the securities industry is regulation, oversight and information. Those in the securities industry are registered, regulated by the SEC and required to disclose material information about their services to investors. The Binance entities are not registered and not regulated. Those entities are not required to furnish investors information about their services. As the CCO of Binance stated: “we do not want [Binance].com to be regulated ever.” The case focuses 2018 and the aftermath of actions then initiated when Mr. Zhao and the Defendants took a series of steps to ensure that the vision of their CCO continued – no regulation. BAM Management and BAM Trading were created. The entities were designed to control the Binance.US Platform. These steps were followed by public representations that the Biance.com Platform did not provide services to U.S. persons. In fact, nothing changed according to the SEC’s complaint. Mr. Zhao continued to control everything just as he did prior the creation of the two new entities and U.S. investors were still served – only the talking points delivered to the public that U.S. investors now claimed those investors were not being served, a false statement. Behind the BAM façade Defendants transferred the millions of dollars of U.S. investor assets they held at will among the various entities. In some instances, the crypto assets and fiat assets held were commingled and diverted to an account held by a Zhao-controlled entity know as Merit Peak Limited. Later the assets were at times moved to a third party. While BAM Management and BAM Trading touted their surveillance and controls, in fact they seemed to be lacking. For example, there none stopping the “wash trading” and self-dealing on the Binance.US Platform that began in 2019 when Sigma Chain AG, another Zhao owned and controlled entity, engaged in wash trading that artificially inflated the trading volume of crypto assets securities on the Biance.US Platform. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and 17(a)(2) and (a)(3) and Exchange Act Sections 5. 15(a) and 17A(b). The case is in litigation.
Perks: In the Matter of Stanley Black & Decker, Inc., Adm. Proc. File No. 3-21497 (June 20, 2023) is a proceeding which names as respondent the provider of hand tools, power tools and other products and services. The Order alleges that over a three-year period, beginning in 2017 Respondent failed to disclose in its definitive proxy statements at least $1.3 million in perquisites and personal benefits paid to or on behalf of four of its named executive officers and directors. The Order alleges violations of Exchange Act Sections 13(a), 14(a) and the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. Respondent acknowledged that the Commission did not impose a penalty based on cooperation which included self-reporting, conducting an internal investigation and implementing remedial measures. See also In the Matter of Jeffery D. Ansell, Adm. Proc. File No. 3-21498 (June 20, 2023)(Respondent is EVP of the company and had a role in the failure to disclose perks; resolved with cease-and-desist order based on Exchange Act Sections 13(b)(2)(A) and 14(a) and the imposition of a penalty of $75,000).
Next: On December 12 the Final Segment to this series