by T. GormanPosted on Posted in SECActions

Conflicts of interest are frequently at the center of claims involving market professionals. While market professionals such as investment advisers have fiduciary duties to their clients, conflicts can undermine those obligations. The same is true of brokers governed by Regulation BI, conflicts can undermine the best interest obligations of those professionals to their clients. Municipal advisers are no different. Conflicts can undermine their obligations to clients as illustrated by the Commission’s latest case in this area. There the Court granted summary judgement in favor of the agency based on undisclosed conflicts. SEC v. City of Rochester, New York, Civil Action No. 22-cv-6273 (W.D.N.Y. Ruling on April 15, 2024).

Named as defendants in the action are: The City of Rochester; Capital Markets Advisors, LLC; Richard Tortora, a principal of that firm; and Richard Granci, also a principal of Capital Markets.

The complaint claimed that there was a material conflict of interest arising from the compensation arrangements of the advisory firm which required disclosure. Specifically, a municipal adviser has a material conflict when its compensation is contingent on the size or closing of a client’s transaction. Under those circumstances the adviser must disclose its material arrangements prior to, or upon engaging into, municipal advisor activities.

Here the advisory firm, as well as Messrs. Tortora and Granci, made written representation to the clients stating that the advisory firm did not have any undisclosed material conflicts. The representations were false. In addition, the advisory firm did not establish written supervisory procedures requiring the disclosure of all material conflicts of interest. Indeed, even after the firm adopted such procedures it failed to implement them.

The Court granted summary judgment in favor of the Commission and against the three Defendants, concluding that there were repeated violations arising from the undisclosed conflicts: 1) When Defendants failed to disclose their conflicts in violation of Exchange Act Section 15B(c)(1) and MSRB Rule G-42; 2) By failing to deal fairly with their clients and in fact being dishonest and/or engaging in dishonest or unfair practices; 3) By violating MSRB Rule G-42 by engaging in dishonest and unfair practices and not providing full and fair disclosure of the conflicts to their clients in writing; 4) By violating MSRB Rule G-17 by failing to deal fairly with their clients and engaging in wrongful, deceptive conduct; 5) By violating MSRB Rule G-44 by failing to establish appropriate policies and procedures to prevent such conduct; and 6) by violating Exchange Act Section 15B(c)(1) through their conduct.

The Commission did not seek summary judgment on other claims involving the advisory, Mr. Ganci and the City of Rochester. Those claims remain pending. See Lit. Rel. No. 25981 (April 22, 2024).

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by T. GormanPosted on Posted in SECActions

Last week the Commission filed three new civil injunctive actions. One centered on an offering fraud, a second focused on fraudulent trading and a third alleged insider trading.

EXAMS published its initial observations regarding the implantation of the amended marketing rule for investment advisers last week.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 3 new civil injunctive action and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Offering fraud: SEC v. Feller, Civil Action No. 1:24-cv-0896 (S.D.N.Y. Filed April 17, 2024).

Named as defendants in this action were Paul Feller and Icaro Media Group, Inc. The firm is a private entity that began life as Sport 195, Inc. and later changed its name. Paul Feller is the Chairman and CEO of Icaro. Prior to his association with this venture he co-owned a firm called Americas of Cronus Equity, LLC. Over a four-year period, beginning in 2017, Mr. Feller solicited investments in Icaro. Over the period he raised in excess of $22 million from at least 38 investors. The sales pitch was straight forward. He told the would-be investors that the firm’s business partners – two multinational telecoms – and Inco were about to launch, or already had launched, digital platforms and mobile phone applications featuring sports content tailored to the regional interests of clients of the two international firms. While one of the firms did in fact launch trial projects with Icaro, each was terminated in 2016. Icaro never launched any product with the other firm. Its effort in that regard were not successful for a variety of reasons which included Icaro’s failure to obtain the appropriate licenses for the content. Nevertheless, Mr. Feller continued the sales pitch, sometimes with variations such as a claim that a high profile business executive was about to become part of the deal along with a well know sportswear company. The transactions never took place. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 25979 (April 17, 2024).

Fraudulent trading: SEC v. Stubes, Civil Action No. 25978 (S.D.N.Y.) is an action which named as defendant George Stubos, a Canadian citizen, and his wife as a relief defendant, Don-Ann Stubes. Mr. Stuffs raised over $2.3 million from trading in the stocks of several microcap stocks he controlled and manipulated without disclosing his relationship to the companies. Defendant misled investors and stock transfer agents regarding the registration of the shares traded – there was no registration. On April 15, 2024, the Court entered a final judgment against relief-defendant Don-Ann Stubes and her husband, on a joint and several basis, in the amount of $5,367,926 in disgorgement along with $806,108 in prejudgment interest. This concludes the litigation. See Lit. Rel. 25978 (April 15, 2024).

Fraudulent valuations: SEC v. Lindell, Civil Action No. 1:22-cv-09363 (S.D.N.Y,) is a previously filed action which names as defendant Scott Lindell, formerly a senior officer of Infinity Q Capital Management LLC. The complaint alleges that over a four-year period, beginning in 2017, Defendant Lindell, the founder of Infinity Q, mislead investors by claiming that the valuation service for the firm was independent when in fact it was not. To the contrary, the inputs to the value calculations were manipulated in violation of Securities Act Section 17(a), Exchange Act Rule 13b2-2 and Advisers Act Sections 204(a), 206(2), 206(4) and 207(7) and Rules 204-2(a) and 206(a0-7. Mr. Lendell consented to the entry of a final judgment based on the cited Sections and Rules. He also agreed to pay a penalty in the amount of $100,000 and was barred for two years from serving and a officer or director of a public company. See Lit. Rel. No. 25977 (April 15, 2024).

Insider trading: SEC v. Van de Grift, Civil Action No. 1:23-cv-01491 (S.D.N.Y. April 15, 2024) is an action which names as defendant Gil Friedman, a former consultant to private equity firm Francisco Partners Management L.P. Defendant Friedman was tipped by close friend Kevin A. Van de Grift, that Francisco Partners was about to acquire Verifone. Prior to the deal announcement on March 9, 2018, Mr. Van de Grift purchased 60,000 shares of Verifone stock. The shares were later sold at a profit of over $300,000. Mr. Friedman resolved the matter, consenting to the entry of a permanent injunction based on Exchange Act Section 10(b). He also agreed to be barred from serving as an officer or director for a period of five years and to pay a penalty of $298,000. See Lit. Rel. No. 25976 (April 15, 2024).

The Amended Marketing Rule — EXAMS’ Initial Observations

The Division of Examinations or EXAMS published a Risk Alert on April 17, 2024, regarding the amended Marketing Rule for investment advisers, Rule 206(4)-1. The Observations are divided into two sections. The first focuses on books, records and Form ADV. The second centers on the general prohibitions of the Rule.

Book, Records and Form ADV: The staff observed situations in which the policies and procedures were not reasonably designed or implemented to address the amended Marketing Rule. For example, in certain instances the policies and procedures consisted only of general descriptions, did not address applicable marketing channels utilized by the adviser or were informal and not in writing. In other instances, the policies and procedures were not complete or updated. In others, the provisions had not been tailored to the adviser’s specific advertisement or failed to address adequately the preservation and maintenance of the advertisement and the related documents. In some instances, the updated policies and procedures had not been implemented. The staff also observed situations in which the policies and procedures had been updated but the related books and records had deficiencies. This occurred in situations where, for example, materials referenced had not been maintained such as questionnaires or copies of social media or the documents that supported performance claims. In some instances, there were deficiencies on Form ADV where the adviser reported, for example, that their advertisements did not include third party ratings, performance results and hypothetical results when in fact they did.

General Prohibitions: Here the staff observed deficiencies such as including untrue statements of a material fact or unsubstantiated statements of a material fact in an advertisement. Similarly, the staff observed instances where the advertisement appeared to omit material facts necessary to make the statement not misleading or to avoid a misleading inference. The staff also observed situations where a fair and balanced treatment of material risks or limitations about the potential benefits were not adequately set forth. For example, there were instances observed where performance information was highlighted without discussing the material risks and limitations. In some instances involving specific investment advice, the presentation did not appear fair and balanced. In other instances there were performance results which were not fairly balanced or where the presentation was materially misleading.

Conclusion: In the end, while many advisers had implanted the amended Marketing Rule, the staff observed points that should be addressed further or were not covered. Throughout the Alert, the staff has included examples of each of the points presented which aid in clarifying the observation.

FinCEN

Analysis: The regulator issued a paper noting that for 2023 financial institutions reported $27 billion in financial exploitation suspicious activity regarding the elderly, accordingly to an April 18, 2024 report (here).

PCAOB

Report: The Board released its 2023 Annual Report on April 11, 2024. The Report summarizes the regulator’s operations and financial reports for 2023 (here).

Australia

Report: The Australian Securities and Futures Commission reported on April 18, 2024, that there has been an increase in the number of failing companies over the nine-month period, beginning August 1, 2023 (here).

Hong Kong

Climate: The Securities and Futures Commission of Hong Kong welcomed the Stock Exchange of Hong Kong’s conclusion on climate-related disclosure requirements for issuers, in a release dated April 19, 2024 (here).

 

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