by T. GormanPosted on Posted in SECActions

Offering frauds are one of the most, if not the most, prevalent types of frauds the Commission deals with. The patterns and variations of these schemes are probably endless. Typically, however, the schemer crafts a tale that promises the investor significant profits and returns from a venture that is about to be launched. In some instances, the returns may be quite large, but often they are just good enough to induce the would-be investor to put up his or her savings, but not so large that the would-be investor is scared off. The subject matter of these schemes ranges from simple investments like obtaining tickets to Broadway plays that are sold out to new ventures and AI that, to an extent, “wow” the about to become investor. Again, whatever it is, the pitch is crafted to be good enough to draw in the would-be investor but not so good it scares him or her off.

The person behind the Commission’s latest offering fraud case clearly found the balance. Over a four-year period Defendants raised in excess of $22 million by using a privately held company as the front. 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 giants.

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 efforts in that regard failed 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).

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by T. GormanPosted on Posted in SECActions

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. Throughout the Alert, the staff has included examples of each of the points presented which aid in clarifying the observation.

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, they had not been tailored to the adviser’s specific advertisement while in certain instances 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 advise, the presentation did not appear fair and balanced. Similarly, in some instances there were performance results which were not fairly balanced or where the presentation was materially misleading.

In the end, while many advisers had implanted the amended Marketing Rule, the staff did observe points that should be addressed further and detailed above. Throughout the Alert, the staff has included examples of each of the points presented which aid in clarifying the observation.

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