March 29, 2018 was a significant day for the Commission. The agency obtained decisions in two different cases. In one, the Commission prevailed against two defendants in a bench trial held seven years ago arising from the market crisis. The Court, however, found against the Commission as to five other defendants. Two other defendants settled before trial while one passed away. SEC v. Betta, Civil Action No. 80803 (S.D. Fla. Verdict March 29, 2018). In the second the Commission prevailed on a summary judgment motion in an action centered on an investment adviser alleged to have defrauded his firm and clients. SEC v. Ahmed, Civil Action No. 3:15-cv-675 (D. Comm. Ruling March 29, 2018).
The complaint in Betta named ten registered representatives as defendants who were employed by California based Brookstreet Securities Corporation: William Betta, Travis Branch, Barry Kornfield, James Caprio, Clifford Popper, Troy Gagliardi, Alfred Rubin, Steven Shrago, Russell Katz and Shane McCann. From 2004 to 2007 the Defendants lured investors to purchase Collateralized Mortgage Obligations or CMOs with false claims that they were safe liquid investments suitable for retirees and that the investments would not be margined, according to the complaint. In fact, the CMOs were margined and very risky investments, suitable only for sophisticated investors. Overall, the Defendants attracted more than 750 customers with CMO investments of more than $175 million from which they earned about $18 million in commissions and salaries.
In early 2007, the CMO market began to fail resulting in significant loses for the investors. By June 2007 the margin calls snowballed to the point where Brookstreet failed to meet its net capital requirements and went out of business. Many of the investors lost their savings, homes and ability to retire or stay retired. Many of the investors owe Brookstreet’s clearing firm hundreds of thousands of dollars. The complaint alleged violations of securities Act Section 17(a) and Exchange Act section 10(b).
The Court entered findings of fact and conclusions of law on March 29, 2018. In those findings the Court ruled in favor of the Commission and against Defendants William Betta and Travis Branch. In its lengthy findings the Court found sufficient evidence that these two representatives “acted with scienter because they made highly unreasonable omissions or misrepresentations that involved an extreme departure from the standard of ordinary care, and mislead investors which was either known to Betta and Branch or was so obvious that Betta and Branch must have been aware of it.” This was true for Mr. Betta, for example, whose “main role was to ensure that brokers and their clients properly understood the CMO program . . .” A permanent injunction was entered against each Defendant based on the sections cited in the complaint. The Court declined to impose a penalty but may consider the issue in the future.
The Court ruled against the Commission and in favor of Defendants Rubin, Shrago, Kautz, McCann and Garliradi. Here the Court fund that the “Commission has offered insufficient evidence to demonstrate the level of culpability for scienter or severe recklessness as to these five Defendants . . . There is an abundance of evidence showing that it was not unreasonable for [these five] Defendants to rely upon the expertise of Brookstreet, which at the time was a large, national firm. Brookstreet had a centralized, fully staffed and active legal and compliance department. And particularly significant, the CMO Program Manager was an experienced and knowledgeable trader who had a successful track history . . . Defendants reasonably relied upon Brookstreet’s renowned “expert” CMO Portfolio Manager Popper, along with his ‘portfolio management team’ . . .” (emphasis original). Defendants Kornfeld and Caprio settled with the Commission earlier while Defendant Popper passed away prior to trial. See Lit. Rel. No. 24112 (April 13, 2018).
The SEC fared better in Amed. Defendant Iftikar Ahmed, an investment professional, was a partner at Oak Investment Partners, a multistage venture capital firm, according to the complaint. The firm advised several funds, each of which invested investor funds in various entities. Those investors range from individuals to institutions and pension funds.
As a general partner at Oak Investment Mr. Ahmed identified and recommended investment opportunities for the funds advised by the firm. His duties included specifically recommending the purchase of securities and advising on the price. He also managed investments he recommended.
Beginning in October 2013, and continuing through the end of 2014, according to the complaint, Mr. Ahmed recommended that Oak Investment make significant investments in three companies:
Chinese e-commerce firm: In August 2014 Mr. Ahmed recommended an investment in a Chinese e-commerce company whose shares were held by an offshore firm. Although he knew, according to the complaint, that the shares were being offered at $1.5 million, he recommended that the fund pay a price which was $2 million more – that is, $3.5 million. To support the recommendation Mr. Ahmed made false representations regarding the finances of the firm. The fund purchased the shares for $3.5 million. Mr. Ahmed arranged for the purchase price to be wired to Iftikar Ali Ahmed Sole Prop, a claimed business with a BVI bank account where the seller was supposed to be located. In fact the firm’s bank account listed the address of Mr. Ahmed’s Connecticut residence. Later the $2 million was transferred to a personal bank account in the name of Mr. Ahmed and his wife.
Asia based joint venture: A second recommendation was made at the end of 2014. In this instance Mr. Ahmed arranged for an Oak Investment fund to purchase the shares of an Asia-based joint venture from its two partners. Although the offering price was $2 million, the fund was told by Mr. Ahmed that it was $20 million. Again he made false representations regarding the finances of the joint venture to support his claim. Mr. Ahmed then made arrangements for the payment to be wired in two installments, one of $2 million and a second of $18 million. The latter was to go to the BVI based partner and transferred to the partnership. Again the funds were wired to Iftikar Ali Ahmed Sole Prop. The funds were never transferred to the partnership. Mr. Ahmed had purported deal documents e-mailed to an Oak Investment employee showing the deal closed.
E-commerce firm: In late 2013 Mr. Ahmed made the first of two recommendations regarding the purchase by an Oak Investment fund of shares in an e-commerce company. At the time of the recommendations a substantial portion of those shares were owned by I-Cubed, a firm initially owned by Mr. Ahmed and later his wife. Initially, Mr. Ahmed recommended a $25 million purchase. He did not disclose his interest in the firm. Later he advised the fund to purchase additional shares of the e-commerce company directly from I-Cube. Although his firm purchased those shares in late 2012 for $2 million he advised the fund to pay $7.5 million. His interest in I-Cube was not disclosed.
The Commission filed an amended complaint, detailing additional instances of transactions such as those detailed above. That complaint alleged violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2), 206(3) and 206(4).
The Court ruled in favor of the Commission and against the Defendant on each of the deals in the amended complaint. In reaching its conclusion the Court rejected Defendant’s contentions based on Morrison v. National Australia Bank Ltd. 130 S.Ct. 2869 (2010) that the transactions were off shore. The Court found that Defendant Ahmed violated each of the sections cited in the complaint. In reaching its conclusion the Court ruled rejected a motion by the Defendant. The question of remedies will be considered at a later date.