The Commission, in conjunction with the Manhattan U.S. Attorney’s Office, filed an insider trading case against a sitting U.S. Congressman, his son and others. The case, based on a drug trial failure at a firm on whose board the Congressman sat, comes at a time when the Congressman is still under investigation regarding his board membership and promotion of the firm’s stock.
The Commission also brought two other insider trading cases along with one based on an incorrect earnings projection. Two additional cases involved offering frauds and two others centered the failure to disclose conflicts detrimental to clients by investment advisers.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 5 civil injunctive cases and 5 administrative proceedings, excluding 12j and tag-along proceedings.
Conflicts; In the Matter of Jinesh P. Brahmbhatt, Adm. Proc. File No. 3-18635 (August 9, 2018) is a proceeding which names as a Respondent the founder of Jade Private Wealth Management, LLC, a defunct investment adviser that provided concierge services to athletes. Both its founder and the firm suffered from a lack of finances. Success Trade Securities, Inc., and its founder, both of whom are the subject of another Commission action, befriended Respondent and over a period of about four years beginning in 2009 loaned him about $1.2 million. The money supported Jade and its founder. While the transactions were denominated as loans they were treated more like gifts between the two firm owners who were acquaintances. Employees of Jade began working at the broker dealer. When Success Trade had financial difficulties Jade recommended to its clients that they invest in the notes of the broker which had returns as high as 30%. Over a four year period clients were also encouraged to roll over about $20 million in notes of Success Trade. No disclosure was made of the relationship between the firms. The Order alleges violations of Advisers Act sections 206(1) and 206(2) based on a breach of fiduciary duty in failing to disclose the conflict. Respondent resolved the proceedings, consenting to the entry of a cease and desist order based on the sections cited in the Order and to a bar from the securities business and from participating in any penny stock offering. Respondent will also pay disgorgement of $1,258,691, prejudgment interest of $170,134 and a penalty of $150,000. See also In the Matter of Ramnik S. Aulakh, Adm. Proc. File No. 3-18634 (August 9, 2018)(Mr. Aulakh was the COO of Jade and aided and abetted the actions detailed in that proceeding; resolved with the entry of a cease and desist order on the same basis, a similar bar order and the imposition of a $50,000 penalty).
Soft dollars: In the Matter of Knowledge Leaders Capital, LLC, Adm. Proc. File No. 3-18633 (August 9, 2019) is a proceeding which names the registered investment adviser as a Respondent. The firm, with the approval of its internal committees, used about $1 million to purchase research from an affiliated firm. Specifically, the managing director of the firm and its CIO developed proprietary software that the firm used with regard to its management decisions. Over time the amount paid for the software increased. No disclosure was made of the conflict. When the CIO became the majority owner of the firm and its CEO he had it self-report. The firm cooperated with the staff in its investigation and took remedial steps including agreeing to implement a series of undertakings. The Order alleges violations of Advisers Act section 206(4) regarding failure to properly implement a compliance system. The firm consented to the entry of a cease and desist order based on the section cited in the Order. It also agreed to pay a penalty of $50,000.
Insider trading: SEC v. Collins, Civil Action No. 18-cv-7128 (S.D.N.Y. Filed August 8, 2018); U.S. v. Collins, No. 18 crim 567 (S.D.N.Y. August 8, 2018). Each action names as a defendant Christopher Collins, a Congressmen from New York, Cameron Collins, his son and Stephen Zarsky, the father of Cameron’s then girlfriend (now fiancée). The action centers on the announcement by Australian Pharmaceutical Company Innate Immunotherapeutics, Ltd. following the the close of trading on Monday, June 26, 2017 of negative drug trial results for the firm’s only pharmaceutical product. The share price plunged 90%. Congressman Collins has been a member of Innate’s Board of Directors for three years. He was one of the firm’s largest shareholders. By 2014 Innate began developing a drug known as MIS416 which was intended to treat multiple sclerosis. A clinical trial to test the efficacy of the drug began. On June 22, 2017 Innate’s CEO sent an email at 6:55 p.m. to the board of directors, including Christopher Collins, with the results. The trial had been a failure, according to the email: “Top-line 12 month data . . . show no clinically meaningful or statistically significant differences in [outcomes] between MIS416 and placebo.” The Congressman was attending a Congressional Picnic at the White House at the time he received it. His responding email stated that the results made no sense. The Congressman then began trying to call his son. Six missed calls were placed from 7:11 p.m. to 7:15 p.m. At 7:16 p.m. father and son spoke on the phone for over six minutes. Cameron learned what his father already knew – the drug trial failed. While the firm informed the directors it also decided not to announce the results of the drug trial until after the close of business on Monday, June 26, 2017. The next morning Cameron Collins began placing orders to sell his Innate shares. On Friday and Monday he continued to place orders, at times canceled them, and then placing additional orders. By the time of the company announcement on Monday he had sold almost 1.4 million, avoiding losses of about $570,000. Others told by Cameron Collins or Mr. Zarsky about the trial failure also sold shares. Those included his girlfriend, Mr. Zarsky, his wife and a friend of Cameron as well as Mr. Zarsky’s brother, his sister and a long standing friend. At times their trading represented the bulk of the trading volume in the market for the stock. All avoided substantial losses. Subsequently, Congressmen Collins, his son and Mr. Zarsky were interviewed by the FBI. The three men lied, according to the indictment. The indictment alleges five counts of securities fraud, two counts of conspiracy, one count of wire fraud and three counts of making false statements. The SEC’s complaint alleges violations of Exchange Act section 10(b) and Securities Act section 17(a)(1). The two cases are pending. Lauren Zarsky, Cameron’s girlfriend, and her mother Dorothy settled with the Commission, consenting to the entry of permanent injunctions based on the sections cited in the complaints. Lauren Zarsky agreed to pay disgorgement of $19,440, prejudgment interest of $839 and a penalty equal to the amount of the disgorgement. See SEC v. Lauren Zarsky, Civil Action No. 18-cv-7129 (S.D.N.Y. Filed August 8, 2018). Dorothy Zarsky agreed to pay disgorgement of $22,600, prejudgment interest of $975 and a penalty equal to the amount of the disgorgement. See SEC v. Dorothy Zarsky, Civil Action No. 18-cv-7130 (S.D.N.Y. filed August 8, 2018). Lauren Zarsky, a CPA, also agreed to be suspended from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after five years.
Fictitious trades/false books: SEC v. Palermo, Civil Action No. 18-cv-03747 N.D. Ga. Filed August 8, 2018) is an action which names as a defendant Salvadore Patermo, formerly a trader at J.P. Turner & Co. LLC which is now defunct. Mr. Palermo had purchased market-linked certificates of deposit in a quantity that exceeded the firm’s inventory limits. Rather than sell the instruments he placed a series of fictitious trades which made it appear that he had sold them. That resulted in the inventory records at the firm being inaccurate. The complaint alleges that he aided and abetted violations of Exchange Act section 17(a) by the firm. The case is pending. See Lit. Rel. No. 24229 (August 8, 2018).
Misleading projection: In the Matter of Ribbon Communications, Inc., Adm. Proc. File No. 83791 (August 7, 2018). Ribbon Communications, formed in October 2017, is a holding company for the combination of GENBRAND LLC and Sonus Networks, Inc. Sonus provides products and services for Cloud communications. Respondent Mark Greenquist was the CFO of Sonus. Respondent Michael Swade was the senior vice president of sales, Americas at Sonus. The Order centers on a revenue estimate for Q1 2015 made on January 8, 2015 and reiterated on February 18, 2015. On January 8, Sonus issued a press release quoting Mr. Greenquist as stating that he was “comfortable” with the consensus analyst revenue estimate for the first quarter of $74 million. The statement reaffirmed guidance given in December 2014. At the time the estimate was given, the CFO was aware of information which undermined the projection which included: The fact that revenue had been pulled forward in the last quarter of 2014, depleting the potential sales for the first quarter; and the fact that the back log of deals for Q1 2015 was low as were the sales. Despite being uncomfortable with the estimate Mr. Greenquist reiterated the Q1 2015 guidance of $74 million. Prior to the February 18th statement, which again reiterated the guidance, Sonus held its Global Sales Conference. During the Conference Mr. Swade directed the sale force to figure out how the gap between committed pipeline deals and those needed to make guidance would be closed. Internal e-mails confirm that the sales force was instructed to improperly reclassify enough deals for the first quarter to close the gap. Millions of dollars worth of deals were reclassified to support the projection. Ultimately most of the reclassified deals did not close in time to support the projection. On February 18, 2015 during the firm’s fourth quarter and full year 2014 financial results conference call Mr. Greenquist provided Sonus’ formal guidance for Q1 2015, reaffirming the $74 million projection. By March 24, 2015 the firm was forced to issue a press release correcting guidance in the wake of sale force updates to the revenue number. Guidance was revised down to a range of $47 to $50 million. The share price dropped over 33%. Ultimately the firm reported revenue of $50.1 million for the first quarter. The Order alleges violations of Securities Act section 17(a)(2) and Exchange Act section 13(a). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, Ribbon agreed to pay a penalty of $1.9 million while Mr. Greenquist will pay $30,000 and Mr. Swade $40,000.
Muni securities: SEC v. City of Victorville, Civil Action No. 13-cv-00776 (C.D. Cal.) is a previously filed action against the City of Victorville, California, its Airport Authority, and Janees Williams, a senior executive with the underwriting firm, among others. The action centered on a $13 million “tax increment” bond offering in which investors were not told that the that the tax revenue projections for repayment were overvalued by 36%. The court entered final judgments against the City and the Airport Authority based on Securities Act section 17(a)(2). The order as to the City also directs that it not issue any municipal securities until an independent consultant reviews their internal controls and practices and that person’s recommendations are implemented. The judgment as to Ms. Williams is based on Exchange Act section 10(b) and the fair-dealing in municipal securities provisions of Exchange Act section 15B(c)(1) and MSRB Rule G-17. The litigation continues as to the underwriting firm and another party. See Lit. Rel. No. 24227 (August 7, 2018).
Insider trading: In the Matter of Aaron R. Smith, Adm. Proc. File No. 3-18625 (August 7, 2018) is an action which centers on the acquisition of Valley Commerce Bancorp by CVB Financial Corporation, announced on September 22, 2016. Prior to that date Mr. Smith learned from his father, a director of Valley Commerce, about the deal. He misappropriated the information and traded, buying 6,000 shares of Valley Commerce stock. When the deal was announced the share price increased 37%. Mr. Smith had profits of about $41,000. The Order alleges violations of Exchange Act section 10(b). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order. In addition, he agreed to pay disgorgement of $40,578.28, prejudgment interest of $3,205.07 and a penalty equal to his trading profits.
Offering fraud: SEC v. Murakami, Civil Action No. 1:17-cv-10928 (D. Mass.) is a previously filed action against adviser Yasuna Murakami and his two funds, MC2 Capital Management, LLC and MC2 Canada Capital Management, LLC in which the Court entered a final judgment. The complaint alleged that Defendants misappropriated about $1.3 million in investor funds in violation of Securities Act section 17(a), Exchange Act section 10(b) and Advisers Act sections 206(1) and 206(2). In a parallel criminal action Mr. Murakami pleaded guilty to wire fraud and was sentenced to serve six years in prison and pay restitution. The final judgement in the Commission’s action directed that the Defendants pay over $7.9 million in disgorgement and prejudgment interest to be satisfied from the restitution order in the criminal action. In a separate proceeding the Commission permanently barred Mr. Murakami from the securities business. See Lit. Rel. No. 24226 (August 6, 2018).
Unregistered broker: In the Matter of Gregory G. Young, Adm. Proc. File No 3-18623 (August 6, 2018). In November 2016 the Commission filed an emergency action against Blackbird Capital Partners, LLC, a firm registered as a member with the National Futures Association. The action charged the firm and its principals with securities fraud. SEC v. Blackbird Capital Partners LLC, Civil Action No. 2:16-cv-0119 (D. Utah). Mr. Young, who is not registered with the Commission, sold the securities of Blackbird and was paid transaction based compensation. The Order alleges violations of Exchange Act section 15(a)(1). To resolve the proceedings Mr. Young consented to the entry of a cease and desist order based on the section cited in the Order. He also agreed to the entry of an order barring him from the securities business or from participating in any penny stock offering with the right to reapply after five years. He will pay a penalty of $5,000.
Offering fraud-EB-5: SEC v. Palm House Hotel, LLLP, Civil Action No. 24224 (S.D. Fla. Filed August 3, 2018). The Palmer House Hotel, LLLP, or PHH, is an entity controlled by Defendant Joseph Walsh. Defendant South Atlantic Regional Center, LLC, was a designated Regional Center by the United States Citizenship and Immigration Services or USCIS. It was managed by Defendant Walsh. Defendant Robert Matthews controlled the Palmer House Hotel (“Hotel”) and other entities. He was indicted on bank fraud and other charges in March 2018. Over a seven year period, beginning in November 2012, PHH raised almost $44 million from at least 88 foreign nationals through an EB-5 offering of PHH limited partnership interests. The offering materials, drafted by Mr. Walsh and his in-house counsel, purported to offer investors interests in a venture that would lend the investor funds to the Hotel as an EB-5 project. Rather than invest the funds raised from those seeking a path to citizenship in the Hotel to create jobs, large portions of the investor cash was misappropriated. For example, Mr. Walsh kept at least $8 million of the investor funds for his personal use. The complaint alleges violations of each subsection of Securities Act section 17(a) and Exchange Act section 10(b). The case is pending. See Lit. Rel. No. 24224 (August 3, 2018).
Insider trading; SEC v. Yan, Civil Action No. 17-cv-5257 (S.D.N.Y.) is a previously filed action which named as a defendant Fei Yan. Defendant traded on inside information in advance of two corporate acquisitions using information obtained from his wife, an associate at a law firm that worked on the deals. He attempted to conceal the activity by trading through the account of his mother who resides in China. The court entered a final judgment against him, based on consent. That judgment imposed an permanent injunction based on Exchange Act sections 10(b) and 14(e). It also ordered the payment of disgorgement of $119,429. The payment will be deemed satisfied by the forfeiture order in the parallel criminal action. In that case Mr. Yan pleaded guilty and is serving a 15 month sentence of imprisonment. See Lit. Rel. No 24225 (August 3, 2018).
Offering fraud: U.S. v. Muraca, No. 1:17-cr-00739 (S.D.N.Y.) is an action in which a jury found Patrick Muraca guilty of wire fraud and making a false statement to the FBI. Mr. Muraca is the former president of Nuclea Biotechnologies, Inc. He founded two new businesses. Over a period of about one year, beginning in 2016, he raised about $1 million from investors, claiming that the funds would be invested in the two new entities. In fact he misappropriated much of the investor money. During an interview with the FBI after being arrested he made false statements to the agent. The date for sentencing has not been set.
Mark-ups: U.S. v. Blumberg, No. 2:14-cr-00458 (D.N.J) is an action in which Anthony Blumberg, formerly the CEO of ConvergEx Global Markets Limited, pleaded guilty in a scheme to commit securities and wire fraud. Specifically, from 2007 to 2011 Mr. Blumberg, and others acting under his direction at the firm, defrauded clients by adding excessive mark-ups or mark-downs to their transactions. The traders concealed the scheme by furnishing the clients with false documents. The firm made about $43.8 million as a result of the fraud. The date for sentencing has not been set. Previously three other participants in the scheme pleaded guilty.
International network: The Australian Securities and Investment Commission entered into collaboration with 11 international financial regulators and their related organizations, consulting on the proposed creation of the Global Financial innovation Network. The group issued a joint paper noting its objectives. Those include acting as a network for regulators to collaborate and share experience in innovative technology, to provide a forum for joint policy work and discussions and to give firms an environment in which to try cross-border solutions.
Manipulation: The Market Trading Tribunal found that Samantha Keung Wai Fun, the former CEO of China AU Group Holdings Limited and her friend, Wu Hsiu Jung and a business partner, Chen Kuo Shen, engaged in misconduct when launching a share placement to raise about $135,500,000. Initially the firm only raised about $38,300,000. Subsequently it issued convertible bonds to raise up to $114,000,000 in additional funding. To ensure that the funding goal was met the promoters engaged in manipulative trading, creating a false impression of activity and interest in the market place, according to charges brought by the Securities and Futures Commission. The Market Trading Tribunal sustained the charges.