In a week that ends with religious holidays, the Commission’s enforcement efforts focused on offering fraud cases and insider trading. One offering fraud action centered on a state registered investment adviser who solicited clients with tales about a MarketDNA trading program that offered significant returns. It was a fraud. A second offering fraud centered on what was essentially a boiler room operation used to market a Ponzi scheme.
Finally, the agency brought an insider trading action against a senior analysist. After learning through his employment position that the quarterly results would decline as would the guidance for the following quarter, the analyst sold his firm’s stock short, profiting from its economic distress.
SEC Enforcement – Filed and Settled Actions
The Commission filed 2 civil injunctive actions and 1 administrative proceedings this week, exclusive of 12j and tag-along actions.
Offering fraud: In the Matter of Matthew R. Rossi, Adm. Proc. File No. 3-19145 (April 17, 2019) names as Respondents are Mr. Rossi who holds a Series 65 license and his firm, SJL Capital, LLC, a state registered investment adviser that managed the MarketDNA Hedge Fund LP and several separately managed accounts or SMAs. Over a period of months, beginning in May 2016 Respondents defrauded several advisory clients and at least one who invested in the Fund. The Fund supposedly invested in a diversified portfolio of largely publicly traded equity securities. It also claimed to have a highly successful proprietary algorithm created by Mr. Rossi known as MarketDNA. The algorithm, developed over a period of years, could take advantage of certain market inefficiencies. The claims were false. Initial trading returns, employing a high-risk option strategy were, nevertheless, successful. During the initial month of trading profits were made. Those returns vanished during the following months in repeated losses, often concealed from view with false statements furnished to clients. By March 2017 the SMA clients had loses of over $1.7 million. They revoked the discretionary authority that permitted Respondents to trade. The Fund lost over $300,000. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. The firm was censured. Mr. Rossi is bared from the securities business. Issues regarding disgorgement, prejudgment interest and penalties will be considered at a hearing to be held in the future.
Insider trading: SEC v. Wilcox, Civil Action No. 2:19-cv-02437 (D. Ariz. Filed April 16 2019). Defendant Quentin Louis Wilcox began with Avnet, Inc., a distributor of electronic components, in January 2006 as a Senior Financial Analyst. He was schooled by the firm in its code of conduct which prohibited insider trading. In May 2015 Mr. Wilcox became the financial manager for budgeting and forecasting at the company. Through that position he had access to Avnet’s financial information which was available on the company SAP Business Explorer computer program. Beginning in March, and continuing through April, Mr. Wilcox received a number of emails in his capacity as the financial manager regarding the potential financial results for the third quarter of 2017 and the fourth quarter financial guidance — each would be down. On April 25, 2017, Mr. Wilcox sold short 2,530 shares of firm stock. The next day he placed an order to cover the short position at $35 per share. That same day he also purchased 100 May 19, 2017 put options in the stock. Defendant also placed a sell order for all of the options at a minimum of $5 per contract the same day. Avnet released its earnings announcement for the third quarter along with fourth quarter guidance on April 27, 2017. Both numbers were lower than expected. The share price declined 8% over the trading day. A few hours after the earnings announcement Mr. Wilcox canceled the “cover” order for the short sale he had previously placed but immediately entered a new cover order at $39 per share. The transaction resulted in a profit of $15,154.70. That same day Defendant’s option order was executed, netting him a total trading profit of $40,000. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). To resolve the proceedings Mr. Wilcox consented to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. In addition, he agreed to pay disgorgement of $55,154 plus prejudgment interest of $3,744 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 24453 (April 16, 2019).
Offering fraud: SEC v. Meli, Civil Action No. 17-cv-632 (S.D.N.Y.); SEC v. Carton, Civil Action No. 17-cv-6764 (S.D.N.Y.). The court in each of these previously filed cases entered final judgments against defendant Joseph Meli and his entities. Each was an offering fraud action centered on the purported resale of tickets to events such as Broadway shows. The U.S. Attorney’s Office for Manhattan filed a parallel criminal action. Mr. Meli pleaded guilty to securities fraud in that case and was sentenced to prison. In the SEC’s actions settlements were reached. Under the terms of the settlements final judgments were entered against Mr. Meli and his firms prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, Mr. Meli was directed to pay disgorgement and prejudgment interest of $58 million. His firms were ordered to pay disgorgement and prejudgment interest of over $728,000. The payments are deemed satisfied by the restitution order in the criminal case. See Lit. Rel. No. 24451 (April 12, 2019).
Offering fraud: SEC v. Acevedo, Civil Action No. 1:19-cv-21380 (S.D. Fla. Filed April 11, 2019). Ivan Acevedo and Dane Roseman, respectively the Director if Investments and an Investment Consultant until each resigned from Woodbridge Group of Companies, LLC d/b/a Woodbridge Wealth, are named as defendants in this action. Woodbridge, a collection of dozens of affiliated entities, was owned by President Robert H. Shapiro. The firm is in bankruptcy. Woodbridge initially sold structured settlement to investors who had an annuity from the lottery or a stream of payments from a personal injury settlement. As business waned the model was altered to selling notes in the Woodbridge related entities. Those firms supposedly made hard money loans to real estate investors with significant rates of return. The firm used this structure to tell investors that it could pay substantial monthly returns on the notes they purchased which would be collateralized by the real estate. The Woodbridge path to profits was supposedly based on a simple three step plan: 1) Investors lend money to Woodbridge for one year and receive 5% monthly interest payments; 2) Woodbridge Wealth funds the real estate property loan and receives payments from the owner; and 3) the property owner makes payments to Woodbridge and investors receive the first lien position as security. The path was a sham. In fact, the operation was a Ponzi scheme, using funds from one investor to pay another. Eventually the firm tumbled into bankruptcy. Nevertheless, Messrs. Acevedo and Roseman were paid, respectively, $742,000 and $2.4 million in transaction–based compensation. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a)(1). The case is pending.
Sales practices: The Australian Securities and Investment Commission resolved matters with Citigroup regarding the sale of complex products. Specifically, Citi considered its advisors to be giving general advice about the products. In fact, clients believed that they were receiving personal investment advice. To resolve the matter the firm agreed to refund over $3 million to clients and to notify clients holding the investments of the arrangement and permit them to terminate it.