by T. GormanPosted on Posted in SECActions

Last week the Commission filed four new actions. One centered on a misappropriation claim involving an investment adviser, two were tied to false statements allegations while the fourth was a new case involved misstatements by an adviser. The agency also finalized and published new rules centered on SPACs, shell companies and projections. And, Cornerstone Research published a Report on crypto enforcement which found that the number actions filed in 2023 compared to the prior year by the agency increased by over 50%.

Be careful, be safe this week.

 SEC

Rules: On January 24, 2024, the Commission adopted final rules to enhance disclosures by SPACs, shell companies and regarding projections (here).

Cornerstone Research – Report on Crypto Enforcement

Report: Cornerstone Research published a Report on SEC Enforcement actions centered on crypto currency, dated January 24, 2024. The Report found that the Commission filed 26 civil injunction actions centered on the assets and 20 administrative proceedings – a total of 46 actions in 2023. Those numbers represent a 53% increase from 2022 (here).

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 2 new civil injunctive action and 2 new administrative proceedings excluding tag-along actions and those that present a conflict for the author.

Misappropriation: SEC v. Rodriguez, Civil Action No. 3:24-cv-27 (W.D. Tx. Filed January 24, 2024) is an action which names as defendant Jesus Rodriguez, a registered representative and investment adviser in El Paso, Texas. He was employed at a large duly registered institution. Beginning in 2014, and continuing through 2021, defendant misappropriated over $3.4 million from the accounts of at least 10 investors. In some instances, he initiated fraudulent disbursements from client accounts and then misappropriated the funds. In others, Defendant caused the account to incur debt which was authorized and then misappropriated client funds. And, in still other instances, Defendant sold securities from client accounts and then misappropriated the funds. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) & (2). Parallel criminal charges have been filed by the U.S. Attorney’s Office. See also Lit. Rel. No. 25932 (January 25, 2024).

False statement/disclosure: In the Matter of Northern Star Investment Corp.II, Adm. Proc. File No. 3-21838 (January 25, 2024) is a proceeding with names as Respondent an entity formed in 2020 which is a special purpose entity. It had no operations or business. In late January 2021 the firm completed an IPO of 40 million units priced at $10 each. In February 2021 the firm announced an agreement to merge with Apex Clearing Holdings, LLC. The Form S-1 filed for the deal denied that there had been substantive conversations involving the parities prior to the deal. In fact, the statement was not true. Conversations about a deal traced back months. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceedings Norther Star consented to the entry of a cease-and-desist or based on the Section cited in the Order. The firm also agreed to pay a penalty of $1.5 million. If, however, the company returns all the funds in its trust account to the investors by April 30, 2024 the Commission will not impose the penalty.

Misstatements: In the Matter of Aon Investments USA Inc., Adm. Proc. File No. 3-21837 (January 25. 2024) is a proceeding which names as respondent the registered investment adviser. The Pennsylvania Public School Employees’ Retirement System or PSERS has been a client since 2013. The adviser provided certain consulting services to its client. One of those involved calculating what was called the “risk share” under the Pennsylvania Pension Code. Under the Code there were certain “hurdles” which if not met required the payment of additional contributions. During the period here — nine years ended in June 2020 — the hurdle was a return rate of 6.36%. Beginning in June 2020 PSERS staff repeatedly raised questions about the rate. Some staff stated that there was a 37 basis point discrepancy. Aon staff failed to adequately investigate the claims. In January 2021 the errors were identified along with misstatements by Aon. The Order alleges violations of Advisers Act Section 206(2). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order and a censure. The firm also agreed to pay disgorgement of $495,029.50 prejudgment interest of $47,089.29 and a penalty of $1million. See also In the Matter of Claire P. Shaughnessy, Adm. Proc. File No. 3-21836 (January 25, 2024)(proceeding which named as respondent the partner and investment adviser representative associated with Aon from July 2012 through December 2022; proceeding based on facts and Soutlined above and Section 206(2) of Advisers Act; resolved with entry of cease-and-desist order based on Section cited along with the payment of a $30,000 penalty).

Unregistered crypto securities: SEC v. Crowd Machine, Inc., Civil Action No. 4:22-cv-0076 (N.D. Cal.) is a previously filed action which named as defendants Crowd Machine, Inc., Metavine Inc. and Craig Sproule, an Australian citizen who controls Metavine which is owns Crowd Machine. The complaint alleged that Defendants sold unregistered crypto asset securities referred to as “Crowd Machine Compute Tokens or CMCTs. Defendants are reputed to have made a series of misrepresentations when marketing the securities and raising $33 million from hundreds of investors. In essence, Defendants claimed that the money was be used to develop and market a new technology they called a global decentralized peer-to-peer network or crowd computer. When marketing this new technology Defendants also claimed a new community would be created. The claims were not true. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and Exchange Act Section 10(b). Defendants resolved the proceedings by consenting to the entry of permanent injunctions based on the Sections cited. Defendants were also enjoined from participating in future offerings and directed to dismantle the CMCT Tokens and the trading platform. The court ordered the payment of disgorgement in the amount of $19,676,401.27 along with prejudgment interest of $3,358,147.75. Each Defendant was, in addition, directed to pay a penalty of $600,000. See Lit. Rel. No. 25931 (January 23, 2024). See Lit. Rel. No. 25931 (January 23, 2024).

Violation of bar order: SEC v. Grenda Group. LLC, Civil Action No. 1:18 -cv-00954 (W.D.N.Y.) is a previously filed action which named as defendants Grenda Group, LLC and its owner, president and COO, Gregory Grenda. The complaint alleges that Defendants permitted Gregory Grenda’s father, Walter Granda, who had been barred in 2015 by the SEC from associating with an investment adviser, to act contrary to that Order which was also not disclosed. The Court granted partial summary judgement in favor of the Commission by concluding that Defendants Gregory Grenda and Grenda Group violated the prior bar order, an act which constituted violations of Advisors Act Sections 206(1) and 206(2). Final judgements were entered against Defendants. See Lit. Rel. No. 25929 (January 22, 2024).

False statements: SEC v. Barbera, Civil Action No. 1:20-cv-10353 (S.D.N.Y.) is an action which names as defendant Carl Smith. The complaint alleged that over a three-year period, beginning in 2015, Defendant sold shares of Nanobeak Biotech Inc., using a series of false statements. The complaint also claimed that former company CEO, Jeremy Barbera, solicited and sold shares of the company using false and misleading statements. Mr. Smith resolved the matter, consenting to the entry of permanent injunctions based on Exchange Act Section 10(b). The final judgment imposed a penalty of $100,0900 and ordered the payment of disgorgement in the amount of $173,875 plus prejudgment interest of $23,470.5. See Lit. Rel. No. 25927 (January 18, 2024).

 

ESMA

Initiative: ESMA (The European Securities and Markets Authority) launched a Common Supervisory Action with National Competent Authorities or NCAs. The objective is to assess the implementation of pre-trade controls by EU investment firms, according to the January 11, 2024, release (here).

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by T. GormanPosted on Posted in SECActions

  

Aryeh Goldstein thought he had found the holy grail. After forming Adar Bays, LLC in 2014 and later Adar Alef, LLC in 2018, business was lending money to penny stock companies. Those issuers were small with a stock price below $5 and often much less. Frequently, these firms needed cash.

Beginning in 2014 Mr. Goldstein loaned the small issuers money through Adar Bays and later Adar Alef. The loans were extended to the companies using convertible debt agreements. If the issuer could not keep up with the payments, the loan provisions stipulated that the lender – here Mr. Goldstein and one of his entities – could convert the notes into shares of the borrower. The prices were favorable – about 30% to 50% below market. The shares could then be sold into the market, realizing significant profits.

The process seemed to be good for the small issuers involved – loans could be had that helped fund operations. The loans seemed to be good for Mr. Goldstein and his firms – they made money on the loans if they were repaid. They made even more money if the issuer failed to make the payments – the loans were called and converted into shares of the borrower at heavily discounted prices. That translated into significant profits for Mr. Goldstein when the shares were sold.

The lending business was solely Mr. Goldstein’s operation. He created the business. He funded the lending business. But in selling the shares while he was acting for his own account he was doing exactly what securities dealers do. The Exchange Act requires that such dealers register with the Commission even if the business is all one person using only his or her cash to invest.

Absent registration Mr. Goldstein violated Exchange Act Section 15(a). Mr. Goldstein and his businesses were named as defendants in an SEC enforcement action. SEC v. Goldstein, Civil Action No. 1:24-cv-20261 (S.D.Fla. Filed January 23, 2024. The complaint named as defendants Mr. Goldstein and each of his entities.

The action was settled. Each Defendant consented to the entry of a permanent injunction that prohibits future violations of Exchange Act Section 15(a). In addition, the order requires the payment of disgorgement in the amount of $1,044,252 plus prejudgment interest of $100,748 and the payment of a penalty of $105,000. In addition, a 5 year penny stock bar was imposed. See, Lit. Rel. No. 25930 (January 23, 2024).

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