by T. GormanPosted on Posted in SECActions

There are times when everything in Washington seems to be in grid-lock. One party wants to advance this bill; the other party does not. Everyone meets to discuss and nothing happens except next item up on the agency and time to move on. Was it always like this or is it worse now? Unfortunately, nobody can agree on that either.

That kind of bickering can also trickle down to independent agencies such as the Commission. Those entities were structured to be independent of the political processes. The Commissioners are drawn from different parties to furnish a variety of views. The Chair is selected by the President. And the Senate has to confirm each Commissioner and the Chair.

The question, however, is if the SEC is becoming more politicized? More importantly, if it does become more politicized will the agency be able to faithfully carry out its investor protection obligations?

To date there is some evidence indicating splintering approaches at the agency. Earlier this year Commissioners seemed to have divergent views, for example, on the role of the agency regarding climate change and ESG. See, e.g., Acting Chair Allison Herren Lee, Statement on the Review of Climate-Related Disclosure (February 24, 2021)(here) and Commissioners Hester Peirce and Elad Roisman, Enhancing Focus on the SEC’s Enhanced Climate Change Efforts (March 4, 2021)(here).

Recently, the splintering approach seems to be continuing. Consider, for example, the recent remarks by Commissioners Hester Peirce and Elad Roisman, titled Moving Forward or Falling Back? Statement on Chair Gensler’s Regulatory Agenda (June 14, 2021)(here). There the two Commissioners cite the Unified Agenda of Regulatory and Deregulatory Action released last Friday as the predicate for their comment. The directive to the staff listed on the Agenda “to consider revisiting recent regulatory actions taken with respect to proxy voting advice businesses” was labeled the “opening salvo in an effort to reverse course on a series of recently completed rulemaking,” according to the Commissioners. This includes a series of rule makings ranging from the proxy rules to accredited investors to resource extraction payments.

Historically the Commission has “embraced a transparent, methodical and rigorous rulemaking process to ensure its rules reflect sound policy . . .” that permit registrants to operate in a consistent manner the two Commissioners noted. Yet the items cited have only been on the books for very brief time periods. The point, apparently, is that the Agenda items are really an effort to undo the work of the prior administration.

Perhaps. At the same time it seems clear that Chair Gensler, and those who want to revisit the recently issued rules, could say that the provisions cited were political. Thus they need to be reconsidered. Perhaps.

Regardless of which side is correct, the key point is that the agency is heading toward the kind of gridlock on Capitol Hill and Congress. If that is the case its independence is being compromised; the losers will be the registrants, markets and the public. Transparency and investor protection will be lost in a cloud of political posturing. In the end, the agency will not be able to fulfill its historic mission. Before that happens perhaps the Chair and the Commissions can take a step back and consider the mission of the agency and their responsibility to help implement it.

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by T. GormanPosted on Posted in SECActions

Climate change and ESG continue to be key topics of discussion for the Commission. Cracks in the insider trading regime of the agency, according to Chairman Gensler, is another topic for analysis and discussion. And, disgorgement in the wake of the Supreme Court’s ruling in Liu is also back on the front burner. The ruling in Liu on remand regarding how to apply the Court’s directive to the facts in that case — a failed EB-5 development — offers guidance on the question.

Be careful, be safe this week

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 3 civil injunctive actions and 1 administrative proceedings, exclusive of tag-along and other similar proceedings.

SEC v. Luca International Group, LLC, Civil Action No. 3:15-cv-03101 (N.D. Ca.) is a previously filed action than named eight individuals and the CEO of the firm as defendants in an affinity fraud that generated over $68 million in illegal sales in oil and gas ventures. Defendant Binqhang Yang, the CEO, consented to the entry of permanent injunctions based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2) from selling any securities she owns, soliciting others to purchase securities or acting as an officer or director. In addition, she will pay disgorgement of $206,602, prejudgment interest of $64,579 and a penalty of $425,749. See Lit. Rel. 25112 (June 10, 2021).

Misappropriation: SEC v. Clason, Civil Action No. 3:20-cv-01279 (D. Conn.) is a previously filed action which names as a defendant investment adviser Matthew O. Clason. The complaint alleged that Mr. Clason misappropriated hundreds of thousands of dollars from an advisory client. The action was partially resolved when Defendant consented to the entry of permanent injunctions prohibiting future violations of the antifraud provisions and Advisers Act Sections 206(1) and 206(2). The Court will consider monetary relieve in the future. In the parallel criminal action brought by the U.S. Attorney’s Office for the District of Connecticut, Mr. Clason pleaded guilty. He is scheduled for sentencing on August 5, 2021. See Lit. Rel. No. 2511 (June 9, 20212).

Offering fraud: SEC v. Property Income Investors LLC, Civil Action No. 0:21-cv-61176 S.D. Fla. Filed June 7, 2021) is an action which names as defendants: the firm, Equinox, a series of related entities; Larry Brodman, the founding member of Defendant Property Income Investors or PII and the CEO of the Property Entities; and Anthony Nicolosi, a sales agent for PII and the Property Entities. Over a four-year period, beginning in early 2016, Defendants raised over $9 million from 156 investors through a series of offerings. Investors were told the funds would be used to develop the properties and sell them. Instead, Mr. Brodman misappropriated much of the investor cash while other portions went to unregistered sales agents like Mr. Nicolosi. Portions of the funds — the claimrd profits — were distributed to other investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(1) and 17(a)(2) and Exchange Act Section 10(b). The Defendants consented to a bifurcated settlement. Each agreed to the entry of permanent injunctions based on the sections cited in the complaint. Monetary relief will be considered by the Court in the future. Mr. Brodman and his companies also consented to the appointment of a receiver. See Lit. Rel. No. 25109 (June 7, 2021).

Sham transaction: SEC v. Slazano, Civil Action No. 2:21-cv-12189 (S.D.N.Y. Filed June 7, 2021) is an action which names as a defendant Thomas Slazano, until recently an executive and portfolio manager at NRIA. Mr. Slazano previously settled similar charges with the FTC, agreeing to pay $50 million in restitution to defrauded customers, although his obligation to pay was suspended due to his inability to pay. In January 2019, according to the complaint, Defendant used a forged document in an effort to defraud an investor in National Realty Investment Advisory LLC or NRIA, a private real estate management firm. The forgery was discovered before the transaction was finalized. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3). The case is pending. Mr. Salzano was arrested on March 4, 2021 and charged with wire fraud and identity theft related to the same facts. The charges were brought by the U.S. Attorney’s Office for the District of New Jersey. The case is pending. See Lit. Rel. No. 25108 (June 7, 2021).

Insider trading: SEC v. Calice, Civil Action No. 1:21-cv-05009 (S.D.N.Y. Filed June 7, 2021). Defendants Chad Calice and Holly Hand live together in a house owned by the couple. Chad Calicde is a veterinarian and the principal and owner of Calice Veterinarian Services, Inc. Ms. Hand is a senior project manager for clinical trials at Palisade Bio, Inc. Palisade Bio focused on developing central nervous system therapies in view of its neutral stem cell technology. In May 2016 the firm began a double-blind Phase 2 clinical study to determine the efficacy of NSI-189, an antidepressant. The drug was one of two lead assets the company had under development. Industry standards call for the results of the study to be held in confidence, a policy consistent with the internal policies of Palisade Bio. On Thursday, July 20, 2017, the top line results of the study were forwarded to the Chief Science Officer of the firm and its outside biostatistician for validation. The company imposed a “quiet period,” prohibiting disclosure. The firm’s CEO and outside medical consultant were told the results later the same day. The results were negative – the data did not show that the drug was effective. On Tuesday, July 25, 2017, prior to the market open, Palisade Bio announced the results. The share price dropped about 50% from the price at the close the prior day – from $5.58 to $2.81. Ms. Hand had worked on the project and thus knew the results prior to the announcement. She frequently discussed work with her live-in partner. Before the firm announcement she told Dr. Calice the news – the drug was not effective. Ms. Hand knew that the Doctor held a block of Palisade Bio shares. The day before the firm announcement, Monday, July 24, 2017, Dr. Calice liquidated all of his Palisade Bio shares. He also tipped Relative A with whom he had a close relationship. Relative A sold all of his shares that day. Dr. Calice avoided losses of about $103,875. Relative A avoided losses of about $14,434. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Each defendant resolved the action. Each consented to the entry of a permanent injunction based on the Sections cited in the complaint. Neither defendant paid disgorgement. Each paid a penalty. Dr. Calice agreed to pay a penalty of $222,184, twice the loss he avoided along with the prejudgment interest. Ms. Hand agreed to pay a penalty of $103,875, the amount of the loss of Dr. Calice avoided.

Conflicts: In the Matter of Gurprit Chandhoke, Adm. Proc. File No. 3-20359 (June 4, 2021) is a proceeding which names as respondents Mr. Chandhoke and his registered advisory firm, VII Peaks Capital, LLC. The firm is an advisor to a BDC. Over a period of two years, beginning in 2015, Respondents engaged in conduct that conflicted with their obligations to the BDC. First the firm collected over $700,000 in due diligence fees for loans made by the BDC to portfolio companies. There was no disclosure that the fees would be retained. The board did not approve the fees. Second, Respondent Chandhoke entered into two transactions that benefited him personally and conflicted with the interests of the BDCs without approval from the board. Third, in 2018 VII Peaks failed to implement its valuation policies and procedures during certain quarters. This resulted in a failure to update the quarterly valuation of assets that later in the year the BDC wrote off as worthless. The Order alleges violations of Advisers Act Sections 206(2) and 206(4) and Investment Company Act Section 57(a) and Rule 17d-1. To resolve the matter Respondent VII Peaks consented to the entry of a cease-and-desist order based on the Advisers Act Sections cited in the Order and was censured. In addition, the firm will pay disgorgement of $722,500, prejudgment interest of $123,199 and a penalty of $185,000. Respondent Chandhoke agreed to implement an undertaking regarding his compliance with his obligations here and consented to the entry of a cease-and-desist order and from causing any violations of the Advisers Act Sections cited in the Order and the Investment Company Act Section and Rule cited in the Order. He was also suspended from the securities business for a period of one year and agreed to pay disgorgement, jointly and severally, with VII Peaks of $87,5000 and prejudgment interest of $16,857 along with a penalty of $90,000. See also In the Matter of Michelle E. MacDonald, Adm. Proc. File No. 3-20360 (June 4, 2021)(proceeding naming CFO of the BDC above and v.p. of compliance at VII Peaks; resolved with consent to cease-and-desist-order based on Advisers Act Section 206(2) and the payment of a penalty of $20,000).

Criminal cases

Offering fraud; U.S. v. Lawrence (S.D.N.Y. Sentencing June 9, 2021) is a case in which Marc Lawrence and David Wagner were charged operating a Ponzi scheme. Mr. Lawrence was the Chairman and CEO of an operation known as the Downing Entities, supposedly a series of investment vehicles. Defendant Lawrence assisted with the implementation and operation of the investment operations. Over a four year period, beginning in 2013, the two defendants solicited investors. Overall about $10 million was raised initially. In fact the operations were not for investment but were Ponzi schemes. Over time employees at the firm began to complain and file suit. By 2016 Defendants Wagner and Lawrence launched another scheme known as Clinifow Technologies, LLC. There false representations were made to induce investors to put in their money. The statements concerned the supposed reserves and portfolio companies as well as its exposure to litigation. About $1.5 million was raised and transferred to other Downing entities and used to pay for Mr. Wagner’s personal expenses. Mr. Lawrence was sentenced to serve 55 months in prison after pleading guilty to two counts of securities fraud and one count of wire fraud.

Manipulation: U.S. v. Mancino, No. 18-cr-296 (E.D.N.Y. June 7, 2021) is an action in which Defendant Dennis Mancino, the former CEO of HD View 360, a penny stock, previously pleaded guilty to one count of conspiracy to commit securities fraud. The firm purported to sell security surveillance systems. Beginning in July 2017, and continuing through February 2018, Defendant manipulated the share price of the stock. In connection with those efforts he paid kickbacks and bribes. He was sentenced to server 15 months in prison and ordered to pay restitution of over $1.2 million to over 1,200 HD View investors.

Hong Kong

Remarks: Ravi Menon, Managing Director of the Monetary Authority of Singapore, delivered the First Sustainability Report on June 9, 2021. The report highlighted efforts by other regulators and discussed the impact of climate change on the world financial system (here).

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