Trends in SEC Enforcement 3Q22 – Part III

This is the third segment of a four-part series on SEC enforcement trends during the third quarter of 2023. The first Part of the series focused on the number of cases filed by SEC enforcement during the quarter (here). It also identified the largest categories of cases brought during the period. The second part of the series provided examples of the cases included in the largest groups of cases filed during the third quarter of 2023 (here). This segment of the series identifies significant actions initiated during the quarter which were not covered by the areas of concentration identified in part one. Brief write ups of each of those cases is set forth below in the order in order in which they were filed during the quarter.

Other significant actions filed during 3Q23

Free riding: SEC v. Evans, Civil Action No. 7:23-cv-00446 (W.D. Va. Filed July 19, 2023) is an action which names as defendant Chad Evans. Over a period of months, beginning in July 2020, Defendant placed multiple trades through five brokerage houses in which he had opened a new account, and made bogus transfers of cash from accounts that had insufficient assets to pay for the transaction. To implement the free riding scheme, he made false deposits of over $280,000 and placed trades of nearly $1 million. The brokers involved had losses of about $11,768. Defendant Evans also suffered loses. The complaint alleges violations of Exchange Act Section 10(b). Defendant resolved the matter, consenting to the entry of a permanent injunction based on the Section cited in the complaint. The judgment will also preclude Defendant from opening any brokerage account without first providing the firm with a copy of the SEC’s complaint and final judgment in this case. Defendant will pay a penalty of $10,000. See Lit. Rel. No. 25782 (July 19, 2023).

Net capital violations: SEC v. Ustocktrade LLC, Civil action No. 1:23-cv-6756 (S.D.N.Y. Filed August 2, 2023) is an action which names as defendants the company and Anthony Weersinghe. The company makes markets for the securities industry. Mr. Weeresinghe is the founder and CEO of the company. Ustocktrade Securities, Inc. was a broker dealer until it withdrew in 2022. It operated an alternative trading system and markets for college students and others to engage in day trading in exchange traded securities. The traders purchased and sold securities among the firm clients. The broker had a set net capital of $250,000. The firm withdrew its registration in October 2022. Defendants were responsible for maintaining the net capital of the broker. Over a twelve-month period in 2021 the broker was underfunded 11 times and violated the net capital requirements. The complaint alleges aiding and abetting violations of Exchange Act Section 15(c) and the related rules. Defendants Weeresinghe and UstockTrade LLC resolved the charged. Each Defendant consented o the entry of a permanent injunction based on the Section cited in the complaint. The firm agreed to pay a penalty of $75,000 while Mr. Weeresingle will pay $10,000. See Lit. Rel. No. 25799 (August 2, 2023).

FCPA: In the Matter of Grupo Aval Acciones Y Valores S.A., Adm. Proc Fie No. 3-21559 (August 10, 2023) is a proceeding which names as respondents: the company, one of the largest commercial banking groups in Colombia; and Corporation Financiera Colombiana, S.A., Grupo’s merchant banking subsidiary. The proceeding arose from bribes paid in connection with the largest road construction project in the history of Columbia. The order alleges violations of Exchange Act Sections 30A, 13(b)(2)(a) and 13(b)(2)(b). To resolve the proceedings Financiera Colombiana consented to the entry of a cease-and-desist order based on each of the Sections cited in the Order. Grupo consented to the entry of a permanent injunction based on the books-and-records Sections cited in the Order. In addition, Grupo will pay disgorgement of $32,139.73 and prejudgment interest of $8,129,558. Financiera Colombiana also entered into a deferred prosecution agreement with the Department of Justice. U.S. v. Corporacion Financiera Colombiana S.A. (D. Md.).

Records: In the Matter of Wedbush Securities Inc., Adm. Proc. File No. 3-21550 (August 8, 2023). The Order begins with the basic record keeping requirements at issue, Exchange Act Section 17(a)(1) and Advisers Act Section 204. Under these Sections the Commission has issued rules requiring broker-dealers and investment advisers to make and keep records that are necessary for the protection of investors under the circumstances here. Rules adopted under Section 17(a)(1), for example, require broker-dealers to preserve certain key records. The Advisers Act has similar provisions and Rules. Wedbush maintained policies and procedures that were designed to ensure the retention of business-related records required to be maintained by the Commission’s rules. The system did not, however, require follow-up. It also did not cover personal devices which employees were permitted to use. The staff investigation uncovered what the Order calls “pervasive off-channel communications at all seniority levels” of the firm. To resolve the matter Wedbush is implanting certain remedial matters. Under the terms of the settlement the firm is required to retain a Compliance Consultant and implement other remedial steps as well as adopt the recommendations of the Compliance Consultant. The Order alleges violations of Exchange Act Section 17(a) and Advisers Act Section 204. Respondent admitted to the violations and consented to the entry of a cease-and-desist order based on Exchange Act Section 17(a) and Rule 17a-4 and Advisers Act Section 204 and Rule 204-2. The firm was also censured and will pay a penalty of $10 million. The ten other firms were charged for similar violations; each settled on terms similar to those illustrated above and are listed here.

Touting: SEC v. Sun, Civil Action No. 1:23-cv-02433 (S.D.N.Y.) is an action which named as defendants: Justin Sun, Tran Foundation Ltd., BitTorrent Foundation Ltd, Rainberry Inc., Austin Muhone and Deandre Cortez Way. The complaint alleged that defendants engaged in a touting scheme tied to crypto assets. Defendant Austin Mahone settled with the Commission, consenting to the entry of a permanent injunction based on Section 17(b) of the Securities Act. Mr. Mahone is also subject to a three year conduct based injunction precluding touting for pay. In addition, he will pay disgorgement of $7,507, prejudgment interest of $682 and a penalty of $37,535.

SPAC: SEC v. Ulrich Kranz, Civil Action No. 23-cv-06332 (C.D. Ca. Filed August 4, 3023). Named as defendants in the action are: Ulrich Kranz, a special advisor to the Executive Chairman of Canoo Inc. who resigned in April 2021 and Paul Balciunas, a v.p. and CFO of Canno until his resignation in March 2021. At the center of the case is Canoo Inc., a firm that designs and produced EVs whose share have been registered with the Commission under Exchange Act Section 12(b) and trades under the thicker GOEV. Over a period of several months, beginning August 2020, the financial projections Canoo furnished investors and others for 2021showed that the firm would have revenue of $120 million and $250 million for 2022. The revenue resulted from providing engineering services to other companies. At the time Defendants Kratz and Balcciunas had information showing significant projects on which the projections were based were not likely to develop. At the end of March 2021 Canoo, which had just raised substantial sums from the public, announced that it would “deemphasize the engineering services line and removed the revenue from its public filings. The next day the firm’s stock price dropped about 21%. Previously, Mr. Kranz had entered into an agreement with two Canoo investors. Under the terms of the agreement, he would receive up to $1 million in compensation for his work at Canoo. In October 2020 Mr. Kranz received over $900,000 from the two individuals. The sum was not disclosed as compensation as required. The complaint alleges violations of Securities Act Section 17(a)(3) and Exchange Act Sections 13(a) and 14(a). To resolve the action Mr. Kranz agreed to be enjoined from future violations of Securities Act Section 17(a)(3) and Exchange Act Section 14(a) and from aiding and abetting violations of Section 13(a). He also consented to the entry of a three-year officer/director bar and agreed to pay a penalty of $125,000. Mr. Balcciunas consented to the entry of a permanent injunction based on Exchange Act Section 14(a), to the entry of a two-year officer/director bar and agreed to pay disgorgement and prejudgment interest of $7,500 and a penalty of $50,000. Canoo agreed to pay a penalty of $1,500.

Auditing: In the Matter of Crowe U.K. LLP, Adm. Proc. File No. 3-21560 (August 14, 2023) is a proceeding which names as respondents: Crowe U.K., a PCAOB registered audit firm; Nigel D. Bostock, FCA, the engagement partner; and Matthew C. Stallabrass, FCA, the engagement quality review partner. The Order centers on the audit of Akazoo Limited’s financial statements for 2018 which focuses on its business combination with a special purpose acquisition vehicle or SPAC. The audit firm had audited the Akazoo’s financial statements since 2016. The audit report for 2018 was part of a “deSPAC” transaction. The financial statements reported that Old Akazoo had earned over $120 million in revenue and had over four million paying subscribers. In fact, revenue was negligible as was the number of subscribers. The company told the auditors that it had netted out the revenues and expenses from companies it called “aggregators.” The audit firm was furnished with fabricated papers in support of the story. While the audit firm should have crafted procedures to address the issues it faced, it did not. In addition, the controls were deficient. Accordingly, none of the red flags were addressed. The Order alleges violations of Rule 2-02(b)(1) of Regulation S-X as well as Exchange Act Sections 4C(a)(2), 13(a) and 14(a). The Respondents were ordered to cease-and-desist committing or causing violations of the Sections and Rules cited in the Order. The firm was also censured and directed to comply with certain undertakings. It will, in addition, pay disgorgement of $187,740 and prejudgment interest of $28,104 all of which is deemed paid by Crowe U.K.’s remittance of $11,500,000 to Akazoo’s defrauded investors pursuant to settlements approved in private litigation. The engagement and quality review partners are both denied the privilege of appearing or practicing before the Commission as an accountant. The engagement partner may apply for readmission after five years while the quality review partner can apply after two years. The firm will also pay a penalty of $750,000 to the U.S. Treasury.

FCPA: In the Matter of 3M Company, Adm. Proc. File No. 3-21581 (August 25, 2023) is an action which names as respondent the global manufacturer of products and services. Over a four-year period, beginning in 2014, the China subsidiary of the firm arranged for Chinese health care officials employed by its state-owned entity customers to attend overseas conferences, educational events and make health care facility visits under the guise of the marketing and outreach efforts of the subsidiary. Funds were transferred to a complicit China-based travel agency and were used to help pay for the Tourism Activities. The expenses were falsely recorded in the books and records of the subsidiary which were consolidated into those of the parent entity. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm also agreed to pay disgorgement of $3,538,897, prejudgment interest of $1,042,721 and a penalty of $2 million.

Form NT: In the Matter of Black Spade Acquisition Co., Adm. Proc. File No. 3-21572 (August 22, 2025) is one of five related cases centered on violations of Exchange Act Rule 12b-25. That rule requires an issuer of a security registered under Exchange Act Section 12 to timey file Form 12b-25 “Notification of Late Filing” or Form NT and to provide in reasonable detail an explanation for the late filing. Black Spade is a Cayman Island corporation based in Hong Kong which is a special purpose acquisition company. Here, in August 2022 the firm filed a Form 12b-25 without disclosing in sufficient detail the predicate for the request or that it anticipated significant changes in operating results for the second quarter of FY 2022. Shortly after filing Form 12b-25, the firm filed a Form 8-K making the disclosures. The firm was ordered to cease-and-desist from future violations of Exchange Act Section 13(a) and Rule 12b-25. It was ordered to pay a penalty of $35,000. Four other firms were charged with similar violations. Each case was resolved on similar terms (here).

Undisclosed use of IPO funds/RPT: SEC v. QI, Civil Action No. 1:23-cv-7924 (S.D.N.Y. Filed September 7, 2023) is an action which names as defendants Guosheng QI and Gridsum Holding Inc., the founder of the company and a cloud-based analytics firm, respectively. From the time of the firm’s IPO until 2016 surplus funds from the offering were held and then later distributed in related party transactions involving family members that were valued at about Total value was about $7.1 million. Yet over a three year period, beginning in 2016, the annual reports of the company reported that the funds had been used to pay officers, directors or their associates. In fact the complaint claims that those individuals only received about $3.8 million of the proceeds while about $2.5 million were transferred to Defendant Q’s wife. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Sections 10(b), 13(a) and certain related rules. The case is pending. See Lit. Rel. No. 25822 (September 7, 2023).

Application of GAAP: In the Matter of Flour Corporation, Adm. Proc. File No. 3-21610 (September 6, 2023) is a proceeding which names as respondent the world-wide provider of engineering and related services. Respondent engaged in two fixed-price projects using the percentage of completion accounting method. To periodically record a project Estimate at Completion, Flour required use of the Project Margin Analysis Report. It should have documented the project management’s most likely current estimate of the project revenue, cost and its Estimate of Completion. Personal were required to use this method and document the project quarterly. The firm, however, failed to maintain proper controls over the project. Although the accounting policy required that the project team determine the most likely EAC, it failed to maintain this control during the period. Accordingly, personnel failed to maintain the applicable controls and include all costs that were known or should have been known. As a result, improper revenue was included in the process. Ultimately the firm failed to maintain adequate control over either project. To resolve the matter the firm agreed to implement certain undertakings. The Order alleges violations of Exchange Act Section 13(a), 13(b)(2)(A), and 13(b)(2)(B). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm also agreed to pay a penalty of $14.5 million. See also In the Matter of Jon Eric Best, Adm. Proc. File No. 3-21612 (September 6, 2023)(CFO of the firm; settled based on a consent to a similar cease-and-desist order as above with the payment of a $15,000 penalty); In the Matter of James F. Brittain, Adm. Proc. File No. 3-21613 (September 6, 2023)(President; based on same facts as above; settled on same terms except with payment of a $25,000 penalty); In the Matter of Robin K. Chopra, CA, Adm. Proc. File No. 3-21614 (September 6, 2023)(V.P., controller and CAO; settled on same basis as above; payment of a $15.000 penalty); In the Matter of Bradley R. Scott, Adm. Proc. File No. 3-21615 (September 6, 2023)(controller and later CFO; settled on same terms as above except with payment of $25,000 penalty); and In the Matter of Kenny N. Smith, Adm. Proc. File No. 3-21616 (September 6, 2023)(senior v.p.; settled on similar terms to those above but with payment of $20,000).

Disclosure: In the Matter of Prime Group Holdings, LLC, Adm. Proc. File No. 3-21602 (September 5, 2023) is a proceeding which names as respondent the firm which is a property manager in self-storage real estate properties, including those owned by a controlled fund. The firm manages and oversees the operation of numerous self-storage real estate properties. Respondent retained employees and others to source real estate acquisition transactions. The fund’s offering materials included various memoranda and other materials but did not adequately disclose that certain brokerage fees would be paid to an affiliate or that those payments could create a conflict of interest. As a result, the firm violated Securities Act Section 17(a)(2). In resolving the matter Respondent took certain remedial steps considered by the Commission. To settle the proceedings Respondent consented to the entry of a cease-and-desist order based on the cited in the Order. The firm also agreed to pay disgorgement of $11,510,625 and prejudgment interest of $2,561,197.

Unregistered dealer: SEC v. Long, Civil Action No. 1:23-cv-14260 (N.D. Ill. Filed September 29, 2023). Beginning in 2018 Defendants Adam Long, L2 Capital, LLC and Oasis Capital, LLC operated as unregistered dealers. While acting in that capacity Defendants engaged in the business of purchasing convertible promissory notes from small business entities that needed cash and issued penny stocks. Defendants engaged in at east 20 convertible note transactions and sold over 5.8 billion shares of stock into the public markets. None of the shares were registered. The complaint alleges violations of Exchange Act Section 15(a)(1). The case is in litigation. See Lit. Rel. No. 25872 (September 29, 2023).

Whistleblower provisions: In the Matter of D.E. Shaw & Co. L.P., Adm. Proc. File No. 3-21775 (September 29, 2023) names the registered investment adviser as a respondent. The firm had an employment agreement that required employees to maintain the confidentiality of information since 2011. Agreements used when the employee departed contained similar restrictions. In 2017 the firm circulated a communication stating that nothing in its employment contracts or release prohibited employees from communicating directly with, or providing information to, regulators. However, the employment agreement was not amended until April 2019. The Release was not updated until July 2023. The complaint alleges violations of Exchange Act Rule 21F-17(a). To resolve the matter the firm undertook remedial actions and consented to the entry of a cease-and desist order based on the Rule and to a censure. The firm also agreed to pay a civil penalty of $10 million.

Record keeping: In the Mater of Interactive Brokers Corp., Adm. Proc. File No. 3-21779 (September 29, 2023) names as respondents the firm and Interactive Brokers LLC. This is one of 10 actions against broker-dealers for not maintaining the appropriate records. The violations center on the use of devices such as WhatsApp and GroupMe which permit personal messaging or texts without maintain the required records These practices, which are widespread, constitute violations of Exchange Act Section 17(a) and Rule 17a-4. To resolve the matter the firm agreed to retain an independent consultant and will take remedial acts. Each consented to the entry of a cease-and-desist order based on the Section and Rule cited. The firm will also pay a penalty of $35 million.

Revenue: In the Matter of Newell Brands Inc., Adm. Proc. File No. 3-21766 (September 29, 2023) is a proceeding which names as respondents the firm and Michael B. Polk, the firm’s CEO. The Order alleges that the firm’s financial statements were misleading because of the adoption of two non-GAAP measures, one called “core sales growth” and the second “core sales.” According to the firm these two measures allow investors to understand sales on a consistent basis by removing from its net sales measure the effects of acquisitions, divestures, and foreign currency fluctuations. Yet for Q3 2016 and Q2 2017 the firm announced sales growth rates that were misleading. This was because the firm did not disclose that its publicly disclosed a core sales growth rate as a result of actions Newell took that were unrelated to its actual sales trends. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and related rules. To resolve the matter Respondents each consented to the entry of cease-and-desist order. Mr. Polk will also pay a penalty of $110,000.

Corrupt payments: Excelon Corporation, Adm. Proc. File No. 3-21761 (September 28, 2023) is a proceeding which names as respondents Exelon and its subsidiary Commonwealth Edison Company. ConEd engaged in a years long scheme to corruptly influence and reward Michael Madigan, then speaker of the Illinois House of Representatives, for his assistance with respect to certain legislation the might impact the power company. The scheme began in 2011 and continued through 2019. It involved arranging for various associates of Mr. Madigan to obtain jobs at certain firms. The Order alleges violation of Exchange Act Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B). Each Respondent resolved the proceedings by consenting to the entry of a cease-and-desist order based on the Sections cited in the Order. Exelon will also pay a penalty of $46,200,000.

Custody: In the Matter of FSC Securities Corporation, Adm. Proc. File No. 3-21757 (September 28, 2023) is one of 4 proceedings filed against investment advisers based on the custody rule. The other proceedings are listed here. FSC, a registered investment adviser failed to obtain verification by an independent public accountant of client funds and securities which it had custodied. FSC used a form agreement for certain aspects of the relationships among FSC, its clients and a particular clearing agent. The agreement included a margin account arrangement that required the Clearing Agent to accept without inquiry instructions by FSC for those clients. As a result, FSC had custody of the assets. The Order alleges violations of Advisers Act Section 206(4). To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Section cited in the order. The firm was also censured and directed to pay a penalty of $100,000.

Issuer reporting obligations: In the Matter of AfgEagle Aereial System Inc. Adm. Proc. File No, 3-21737 (September 27, 2023) is one of eleven actions brought against issuers and their employees based on Exchange Act Sections 13(a) and 16(a) and the related rules which ensure appropriate disclosure by issuers. These provisions are bolstered by Item 405 of Regulation S-K which requires an issuer to disclose any late filing or known failure by an insider to file a report required by Section 16(a) Respondent, and the others named in similar actions listed here failed to comply with their obligations. Here the action was resolved by consenting to the entry of a cease-and-desist order based on Exchange Act Sections 13(a) and 16(a). The firm in this proceeding will pay a penalty of $190,000.

Concealed promotions: SEC v. Levin, Civil Action No. 2:23-cv-08081 (C.D. Cal. Filed September 27, 2023) is an action which names as defendant Adam Levin, the founder and chief of executive of Hightimes Holding Corporation. Beginning in April 2020, and continuing for the next year, Defendant, on behalf of his firm, entered into a sham agreement with a Canadian entity to pay shares of stock and a percentage of investor funds raised in exchange for promotional articles authored by William Mikula. The articles touted Hightimes’ securities offering under Regulation A. Mr. Levin also violated the registration provisions and provided investors with a false price for the shares they purchased. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). See also SEC v. Bentley, Civil Action 2:23-cv-02119 (C.D. Cal. Filed September 27, 2023)(similar action against Sheldon Bentley). See Lit. Rel. No. 25857 (September 27 2023).

ESG – policies and procedures: In the Matter of DSW Investment Management Americas, Inc., Adm. Proc. File No. 3-21709 (September 25, 2023) is a proceeding which names the registered investment adviser as Respondent. The Order claims that the firm made material misstatements regarding it incorporation of ESG factors into its business. The company cited the factors on its website and in public statements, claiming that ESG was at the center of the firm’s business. In fact, the implementation of the standards was inconsistent. Indeed, the advisory failed to properly implement the standards. The firm did undertake remedial efforts and cooperated with the Commission’s investigation. The Order alleges violations of Advisers Act Sections 206(2) and (4) and the related rues. To resolve the proceedings the firm consented to the entry of a cease-and-desist order based on the cited provisions and a censure. It also agreed to pay a penalty of $19 million.

Next: Part IV, Conclusion