A look forward; a look back:
How long should the statute of limitations be for the SEC? Since the Supreme Court’s decision in Kokesh it has been five years. Draft legislation in Congress would extend that time limitation to as much as fifteen year.
Does the agency really need 15 years to bring a case? Many investigations already drag on for years. FCPA investigations, for example, continue for five, six, seven or more years. It is not untypical for the SEC staff to request and receive an extension of the time within which to file a case – few want to risk precipitating an enforcement action by refusing such a request. Once the action is filed, for those who chose to litigate, the case can drag on for more years. Viewed in this context is ten or fifteen years a meaningful limitation period? If the agency is not required to bring the case for up to fifteen years this might mean the action could go on for two or more decades.
This past week the SEC brought a series of cases focused on offering frauds, conflicts, and similar issues. In the days of focusing on the retail investors cases such as these have become the staples of the enforcement division.
Rules: The agency adopted a package of rules under Dodd-Frank regarding security based swap dealers (Sept. 19, 2019)(here).
Rules: The agency proposed rules designed to update the statistical disclosures of banks and savings and loan registrants (Sept. 19, 2019)(here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 8 civil injunctive action and 10 administrative proceedings last week, exclusive of 12j and tag-along actions.
Undisclosed conflicts: In the Matter of Sigma Planning Corp., Adm. Proc. File No. 3-19472 (Sept. 19, 2019) is an against the registered investment adviser. The Order alleges three undisclosed conflicts that disadvantaged firm clients while benefiting the advisor in three ways: 1) In the selection of mutual fund shares that paid fees to the advisory; 2) in an undisclosed arrangement with its related broker that paid fees to Respondent from certain client assets held at the brokerage; and 3) through an arrangement under which the adviser and the broker received certain fees from tiered sponsorship agreements without disclosure to the clients. The Order alleges violations of Advisers Act Sections 206(2) and 206(4) and Exchange Act Section 15(a). To resolve the proceedings, Respondent agreed to implement certain undertakings, consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. Respondent also agreed to pay disgorgement, prejudgment interest and a penalty totaling $2,546,718.
In the Matter of Montebello Unified School District, Adm. Proc. File No. 3-19469 (Sept. 19, 2019) is a proceeding which names as Respondents the School District and Anthony Martinez, the superintendent of Schools for the area. In a $100 million municipal bond offering, conducted December 2016, Respondent refused to disclose the fact that: 1) The independent audit firm raised concerns about allegations of fraud an internal controls regarding the District; 2) the District refused to authorize funds for the firm to conduct required audit procedures which precluded completion of the audit; and 3) the District decided to terminate the audit firm. Mr. Martinez signed certain related misleading documents. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the proceedings the District agreed to implement certain undertakings. The District also consented to the entry of a cease and desist order based on Exchange Act Section 10(b) while Mr. Martinez consented to the entry of a permanent injunction based on Securities Act Section 17(a)(3). He also agreed to pay a penalty of $10,000.
Financial fraud: Matter of Marvell Technology Group, Inc., Adm. Proc. File No. 3-19454 (Sept. 16, 2019). Marvell is a producer of semiconductor components used in items such as data storage/hard drives, mobile phones and network devices. Previously, Marvell settled an enforcement action with the Commission which alleged violations of the antifraud, internal control and books and records provisions based on the backdating of stock options. SEC v. Marvel Technology Group, Ltd., Civil Action No. CV-082367 (N.D. Cal Filed May 8, 2008). After missing guidance for a period, the company initiated a top down process which imposed sales quotas in 2016. When the pressure from this process did not produce the desired results, senior management implemented a top-down “pull-in” scheme with assistance from the firm’s Financial Planning and Analysis unit. Under the plan Marvell’s customers were incentivized to accept delivery of product at an earlier time than would have been required. The company offered customers rebates, discounts, free products and extended terms to participate in the scheme during the fourth quarter of fiscal 2015 and the first two quarters of the next fiscal year. This resulted in about $24 million in pull-ins for the last quarter of fiscal 2016. When the financial results were announced for the period the company had revenues of $85 million. It missed the low-end revenue guidance of $880 million but beat its EPS guidance by one penny. The misleading results were recorded in a Form 10-K filed with the Commission. The fraudulent scheme spawned similar results over the next two quarters. Ultimately the board of directors became aware of the program. An internal investigation was launched. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a). To resolve the proceedings the firm consented to the entry of a cease and desist order based on the sections cited in the Order. Merrill will also pay a penalty of $5.5 million.
Misrepresentations: SEC v. Simeo, Civil Action No. 1:19-cv-08621 (S.D.N.Y. Filed Sept. 17, 2019). Defendant Tom Simeo is the CEO, Treasurer, Director and Chairman of the Board of Viking Energy Group, Inc. whose shares are listed on the OTC Markets Group’s OTCQB. The firm is engaged in the acquisition, exploration, development and production of oil and natural gas properties. Mr. Simeo’s former wife introduced him to Guangfang “Cecile” Yang in Shanghai, China in 2013. He retained Ms. Yang as the CFO. In February 2013 Ms. Yang was announced as the CFO and a member of the board of directors of Viking in a Form 8-K filed with the Commission. Subsequent filings detailed her background. Over a two-year period, beginning in 2014, Ms. Yang was held out in a number of firm filings as its CFO. The CFO represented in SOX certifications filed during the period that she was in fact the CFO. Nevertheless, there is no evidence that she performed any work over the two-year period. Few company documents reference her. Those that do suggest she had no role at the company. No written communications with Ms. Yang were produced to the staff. Her electronic signature appears on each of the eight annual and quarterly reports that Viking filed over the period. In a Form 8-K, filed in July 2016, Viking stated that Ms. Yang had resigned. Prior to that date the firm raised about $2 million from investors in an offering. Throughout the offering Ms. Yang was represented to be the CFO of the company. The complaint alleges violations of Securities Act Section 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24599 (Sept. 17, 2019).
Conflicts: In the Matter of Tyler T. Tysdal, Adm. Proc. File No. 3-19463 (Sept. 17, 2019) is a proceeding which names as Respondents Mr. Tysdale, Grant Carter, Impact Opportunities Fund Management LLC, TitleCard Capital Group, LLC and TitleCard Capital Management, LLC. The action centers on the fraudulent conduct of Tysdale, entites he controlled that acted as investment advisors and Mr. Carter, the president of Cobalt Sports Capital LLC, a private firm formed by the two men. Over a two-year period, beginning in 2014, the two individual respondents raised about 25 million from debt investors in Cobalt for the claimed purpose of making loans to professional athletes, sports agencies and related entities. Ultimately the funds were diverted to other purposes – cash strapped funds managed by Mr. Tysdal. In addition, Mr. Tysdal and an adviser he controlled defrauded a fund by charging undisclosed monitoring fees. Finally, Mr. Tysdal arranged a transaction involving an adviser and another fund in which an interest was acquired in Cobalt without informing investors that the concentration limits for the fund had been breached. The Order alleges violations of Advisers Act Sections 206(1), 206(4) and Exchange Act Section 10(b) by the entity Respondents. The individual defendants are alleged to have violated Exchange Act Section 10(b) and Securities Act Section 17(a). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections that they were charged with violating. The entity Defendants were also censured. In addition, Mr. Tysdal is barred from the securities business with the right to re-apply after three years. He will pay disgorgement of $747,762 and prejudgment interest of $95,337 to a special master. Messrs. Tysdal and Carter will also pay civil penalties in the amount of $320,000 and $160,000 respectively. A fair fund was also created. See also In the Matter of Michael Dejager, Adm. Proc. File No. 3-19462 (Sept. 17, 2019)(proceeding against CFO and COO of valuation committee of TCCG referenced above; resolved with entry of a cease and desist order based on Advisers Act Section 206(40 and the payment of a penalty in the amount of $15,000).
Misleading opinion letters: SEC v. Atlas, Civil Action No. 19-civ-62303 (Sept. 17, 2019) is an action which names as a defendant Jan Atlas, counsel to I Global Capital LLC. Over a period of four years, beginning in February 2014, I Global Capital LLC raised over $322 million from more than 3,600 investors nationwide by selling fraudulent, unregistered securities. Attorney Atlas wrote two opinion letters that were false. The first opinion contained false facts and omitted others that were inconsistent. The opinions also falsely stated the offerings did not involve securities, assertions that are incorrect. The complaint alleges aiding and abetting violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24598 (Sept. 17, 2019).
Offering fraud: SEC v. Henderson, Civil Action No. 1L19-cv-06183 (N.D. Ill. Filed Sept. 16, 2019) is an action which names as defendants John Henderson and Global Resources Leadership LLC. Through a June 2017 e-mail Defendants solicited members of a Christian college and church to invest their funds. The funds were to be used to secure the purchase of crude oil. In making the solicitation Defendants misrepresented their contacts with foreign governments and certain Indian tribes. One investor put up $10,000. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24597 (Sept. 17, 2019).
Offering fraud: SEC v. Seinfeld, Civil Action No. 1:19-cv-910 (W.D. Tex. Filed Sept. 16, 2019) is an action which named as defendants Jay Seinfeld, Sara Postma, Traditions Capital Management LLC and Hospice Patient Aid Program Inc. Mr. Seinfeld holds a law degree. He is the CEO of Hospice Patient. Ms. Postma was employed by that firm. Over a two-year period, beginning in 2010, Defendants engaged in a scheme involving “death puts.” Specifically, they sold securities to terminally ill patients based on representations that when they died most of the value would go to aid those who were similarly situated. In fact, the claims were false. Most of the money went to Defendants. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendants settled with the Commission, consenting to the entry of permanent injunctions based on the sections cited in the complaint. In addition, Mr. Seinfeld agreed to the entry of a three-year officer-director bar and to pay disgorgement and prejudgment interest of $412,750 and a penalty of $256,287. Ms. Postma agreed to the entry of a two-year officer and director bar and to pay disgorgement and prejudgment interest of $93,750 and a penalty of $50,000. See Lit. Rel. No. 24596A (Sept. 17, 2019).
Prohibited transactions: In the Matter of Garrison Investment Group, LP, Adm. Proc. File No. 3-19452 (Sept. 13, 2019). Respondents Garrison Investment and Garrison Capital Advisers LLC are each registered investment advisers. The private fund clients of GIG invest in debt securities and loans of U.S. based firms. The investments are allocated among the funds based on their investment mandate. If the firm does not have the capital to fund the investment, third party co-investors are sought. Typically, the co-investors’ participate through two GIG affiliates. At one point those vehicles were owned by one of the private funds. Later an affiliated special purpose vehicle was used. On November 21, 2012 Respondents filed an application with the Commission requesting an order that would permit GIG’s Sole Client, a publicly-listed business development company, to participate in certain commercial loan transactions with the private funds and co-investor. While the application was pending, Sole Client participated in nine co-investment transactions. In each the borrowers paid an origination or closing fee that was distributed pro-rata among the lending entities based on the percentage each contributed to the commercial loan. The private funds and Sole Client each received their pro-rata share. The transactions were originated by GIG. By effecting transactions that involved the business development fund client and advisory affiliates as joint participants, Respondents engaged in prohibited transactions before the SEC issued its ruling on the letter request. Indeed, on December 11, 2014 Respondents submitted their final Application for an order to the Division of Investment Management. It stated in part that all “existing entities that currently intend to rely on the Order have been named in the applications.” Not included, however, were the co-investment vehicles. The application also did not state that GIG would receive upfront fee revenue from the transactions. On January 12, 2015 the Commission issued the Co-Investment Order that permitted the parties to participate in joint transactions. The transactions were limited to the terms of the orders. One condition limited the type of compensation that could be received. Here that limitation was disregarded. Later the CCO discovered the non-compliance and instituted remedial action. GIG also violated the custody rule because when it first registered with the Commission it failed to conduct a surprise exam. The Order alleges violations of Investment Company Act Sections 57(a) and 34(b) and Rule 17d-1 as well as Advisers Act Section 206(4) and Rule 206(4)-2. To resolve the proceedings Respondents consented to the entry of a cease and desist order based on the sections and rules cited in the Order and to a censure. In addition, Respondents will pay, on a joint and several basis, a penalty in the amount of $250,000.
Conflicts/overcharges: SEC v. McDermott, Civil Action No. 19-4828 (E.D. Pa. Filed Sept. 13, 2019) is an action which names as defendants Dan McDermott and McDermott Investment Advisors, LLC, respectively, the principal and owner of the firm, and the registered advisory. Beginning in March 2013, and continuing for over one year, Defendants invested client funds in a version of unit investment trusts that had significantly higher transactions costs than the same units which did not benefit the advisory, thereby breaching their fiduciary duty. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No 24595 (Sept. 13, 2019).
Offering fraud: SEC v. Northridge Holdings, Ltd., Civil Action No. 19-cv-5957 (N.D. Ill. Filed Sept. 5, 2019). The complaint names as defendants the firm, supposedly in the home renovation business, its owner, Glenn Mueller, and several related, controlled entities. Since 2014 defendants have sold about $41.6 million in unregistered securities to over 300 investors across the nation. Investors were told that the funds would be used to fix-and-flip properties and that the investments were safe and profitable. In fact, the claims were false. The firm was not profitable and portions of the funds raised were used to repay others. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b) and 20(a). The case is pending. See Lit. Rel. No. 24594 (Sept. 13, 2019).
Offering fraud: SEC v. Merrill, Civil Action No. 18-cv-2488 (D. Md.) is a previously filed action which named as defendants Kevin Merrill, Jay Ledford and Cameron Jezierski. The complaint alleged an offering fraud in which over a five-year period, beginning in 2013, about $345 million was raised from 230 investors using a series of false statements, sham entities and fraudulent documents. The complaint alleged violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the matter Defendants each consented to the entry of permanent injunctions based on the sections cited in the complaint. Monetary issues will be resolved by the Court at a later date. Previously, each Defendant pleaded guilty to criminal charges filed in a parallel criminal case by the U.S. Attorney’s Office for the District of Maryland. See Lit. Rel. No. 24593 (Sept. 13, 2019).
Offering fraud: SEC v. Mediatrix Capital, Inc., Civil Action No. 1:190 cv 002594 (D. Colo. Filed September 12, 2019) is an action which names as defendants the investment adviser, Blue Isle Markets, Inc., Blue Isle Markets Ltd., Michael Young, Michael Stewart and Bryant Sewell. Beginning three years ago the individual defendants, through Mediatrix Capital and the other entity defendants, raised about $125 million from the sale of unregistered securities to investors who were told their funds would be pooled and used in a highly successful algorithmic trading strategy. To induce investors to participate in the program the trading history of the program was falsified along with its results. In fact, portions of the investor funds were misappropriated while portions were lost through trading. Investors were furnished with falsified records. The complaint, initially filed under seal, alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending.
Offering fraud: SEC v. Bio Defense Corp., Civil Action No. 1:12-cv-1169 (D. Mass.) is an action against the firm and Michael Lu, Jonathan Morrone, Paul Jurberg and Brett Hamburger. The firm was supposedly in the business of building and selling machines that irradiate mail to kill biological agents. Defendants raised about $26 million by selling unregistered securities. The funds were supposed to be invested in the business. Investors were told that the officers were not being paid. In fact, the claim was not true. Investors were not told that Defendant Hamburger had previously been convicted of securities fraud. Each Defendant agreed to settle. The firm and Messrs. Lu, Morrone, Jurberg, Ortho and Hamburger consented to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). The individual defendants were also enjoined from future violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). In addition, the firm, and Messrs. Lu, Morrone, Jurberg, Orth and Hamburger, will pay disgorgement, prejudgment interest and civil penalties of $37,475,717, $1,399,156, $1,398,961, $1,458,734, and $954,407, respectively. The individual defendants are also enjoined from holding senior positions in a public company. The judgments as to the individuals were entered after the Court granted summary judgment in favor of the Commission. See Lit. Rel. No. 24592 (Sept. 13, 2019).
Remarks: Deputy Director Jamal El-Hindi delivered remarks at the 2019 Money Transmitter Regulators Association Conference (Sept. 11, 2019). His remarks focused on reform regarding the implementation of the Bank Secrecy Act, the importance of supervision for non-bank institutions, and having a strong culture (here).
Remarks: Thong Leng Yeng, Executive Director, Financial Center Development Department, Monetary Authority of Singapore, delivered remarks at the Euromoney Asia Private Banking Seminar and Debate (Sept. 20, 2019). Her remarks focused on the growth of the asset management business in Asia (here).