by T. GormanPosted on Posted in SECActions

Artificial intelligence is one of the hot topics of the day. Sometimes it seems that it is only the topic. No doubt that will continue, at least until another subject emerges to take its place. Now however, the Commission has become part of the trend – the agency filed an action against a company supposedly involved in artificial intelligence, Centricity, Inc. SEC v. Brackett, Civil Action No. 1:24-0cv002965 (S.D.N.Y. Filed April 19, 2024).

Defendant is Michael Brackett. He has an MBA degree and had managed a $650 million dairy portfolio prior to his association with Centricity. He was the CEO of Centricity until his resignation in June 2021 when he moved to Zurich, Switzerland. On August 15, 2023, Mr. Brackett was arrested during a trip to Maine and charged with one count of securities fraud, U.S. v. Brackett, 23-cr-392 (S.D.N.Y.).

Centricity was created by Mr. Brackett in 2019. The firm, with a principal place of business in New York City, was a start-up technology company. It claimed to use artificial intelligence to analyze hundreds of millions of internet searches daily to provide clients with information regarding consumer demand in specific geographic areas.

Start-ups like Centricity typically raise capital in what are called “rounds” or “series” of external funding. Investors provide funding to the company in exchange for equity at a specific valuation. The initial round is usually the “seed” round. When the firm is sufficiently mature it will generate revenue and grow through a Series A round of financing.

Here then CEO Brackett raised about $2.8 million for Centricity through two rounds. The rounds were initiated in 2019 and continued for about two years. Potential investors were told that the firm had contracts with several large national companies. These arrangement supposedly created substantial revenue for Centricity.

While Defendant Brackett did raise revenue for the firm, Centricity did not generate substantial revenue. In 2020 and 2021 for example, the firm had revenue of less than $60,000. The representations Defendant made to investors about the company were false. The representations he made to investors about his background were false. The representations made to investors about the company were false. The complaint alleges violations of Securities Act Section 17(a)and Exchange Act Section 10(b). The case is in litigation.

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).

Tagged with: , ,