The Dodd-Frank provisions on securities-based swaps were added to the Securities Act to protect investors when investing in those instruments. The securities typically have to be registered with the Commission to ensure that persons who are not eligible participants in those markets are properly protected by receiving adequate information. At the same time, the Commission has a legitimate interest in investor education and programs which teach potential investors about investing. These two points present a question regarding when, if at all, an interest in an investment game must be registered with the Commission. Tradent Capital recently discovered the answer. In the Matter of Tradent Capital Markets Ltd, d/b/a Tradenet, Adm. Proc. File No. 90261 (October 23, 2020).

Respondent is a private company based in Israel. The firm has two independent contractors that swerve as representatives in the United States. Many of its customers are also U.S. citizens and/or based here.

Since January 2016 Tradent has operated a website – Tradenet.com – that offers educational programs to customers that can teach them to trade U.S. and other securities. Buyers can purchase a Day Trading Educational Package designed to teach them the basics. The contract the purchaser executes described the purchase and sale of securities, options and contracts for differences. Tradent did not purchase any securities however.

The firm also offered other packages to potential investors. By paying an additional fee, set at different levels for different packages, more services could be obtained. Specifically, four packages priced at different levels gave the customer the opportunity to fund an account from which they could obtain a 70% interest in the net profits of the funded trading account or no more than a specified amount of the losses which were limited by a mechanism which halted trading after a certain dollar level.

Over a three-year period, beginning in November 2017, over 5,000 customers in the U.S. purchased and operated Tradent accounts. Those customers received about $1.7 million in payouts. Those funds were transferred to U.S. accounts. The transactions were tracked through a software system licensed by a U.S. based company affiliated with Tradent. No registration was in effect.

The Order alleges that the contracts offered and sold by Tradent were security-based swaps. Those instruments are defined as any agreement or transaction that is a swap under the CEA and is based on either an index that is a narrow-based security index, a single security or loan or the occurrence, nonoccurrence or extent of an occurrence of an event relating to a single issuer of a security.

Tradenet offered to sell security-based swaps to U.S. customers when no registration statement was in effect. The persons to whom the contracts were sold were not eligible contract participants, that is one of the categories of entities and or individual designated in the statue and, in certain cases, persons who meet specified monetary limits. While there is value in the development of investing and trading games which do not require registration with the Commission, where the investors are provided a percentage of trading profits based on their securities selection, registration may be required as here. The Order alleges violations of Securities Act Sections 5(e) and 6(1).

In resolving the matter, Respondent took certain remedial actions and cooperated with the staff. The company 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 $130,000 which will be transferred to the U.S. Treasury.

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The Department of Justice published two reports this week. One detailed DOJ’s efforts to wage battle against MS-13. The Report to Congress details those efforts which have resulted in numerous persons being charged in cases involving substantial monetary losses.

A second DOJ report discussed the Department’s efforts in the area of Elder Fraud. The report reviews the actions brought and losses incurred in the area.

Finally, the CFTC executed an MOU with the Bank of England tied to cross boarder transaction. And, FinCEN solicited comments on possible amendments to record keeping and other requirements.

Be safe and healthy this week

SEC

Whistleblowers: The Commission announced the largest award in the history of the program – $114 million. The announcement was made in a release dated October 22, 2020.

DOJ

Report: The Department issued a report detailing its efforts to eradicate MS-13 on October 21, 2020 (here). The report was prepared for Congress. It states that 749 individuals have been charged to date.

Report: The Department issued its Annual Report to Congress on its Work to Combat Elder Fraud and Abuse on October 20, 2020. It discusses the Department’s Elder Fraud Sweep and the launch of the National Elder Fraud Hotline, managed by the Office of Victims of Crimes. The Report also discusses a Nursing Home Initiative which is designed to investigate and prosecute nursing homes that provide grossly substandard care to their residents (here).

CFTC

MOU: The Commodity Futures Trading Commission and the Bank of England announced the execution of a Memorandum of Understanding on October 20, 2020. It centers on cooperation and the exchange of information in the supervision and oversight of clearing organizations that operate on a cross-border basis in the U.S. and the U.K. (here).

FINCEN

Proposed regulations: The regulator has requested comments on proposals that would amend the record keeping and travel rule regulations under the Bank Secrecy Act (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 2 civil injunctive action and 1 administrative proceeding last week, excluding 12j and tag-along-proceedings.

Offering fraud: SEC v. Smith, Civil Action No. 249050 (C.D. Cal.) is a previously filed action which named as defendants Paul Horton Smith, Sr. and his companies, Northstar Communications, LLC and Planning Services, Inc., along with his registered investment adviser, eGate, LLC. The complaint claims that Defendants defrauded at least 35 senior citizen investors out of about $5.6 million. Investors were told they would receive guaranteed payments based on investments in specified products. The funds were not invested as represented. To the contrary, they were used to make Ponzi type payments to recruit new investors. A final judgment was entered by consent which permanently enjoined each defendant from violating Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). Defendants were also ordered to pay, jointly and severally, $4,238,059 in disgorgement and prejudgment interest and $4,238,400 as a civil penalty. Mr. Smith is awaiting trial on parallel criminal charges. See Lit. Rel. No. 24950 (Oct. 22, 2020).

Excessive fees: In the Matter of EDG Management Company, LLC, Adm. Proc. File No. 3-20133 (Oct. 22, 2020) is a proceeding which names as a Respondent the registered investment adviser. The operating documents provided that fees are calculated as 1.5% of investment capital with certain exceptions. One exception is where there are write downs. In a three-year period beginning in January 2016, and continuing until October 2019, there were certain write downs. Since those were not considered when calculating the fees; the limited partners were overcharged by about $83.9 million. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited and to a censure. In addition, the firm will pay disgorgement and prejudgment interest in the amount of $1,026,642.02 which will go to the affected limited partners. The firm, in addition, will also pay disgorgement of $901,760.91 into a segregated account for the benefit of EDG Partners Fund II, LP. If those entitled to the disgorgement cannot be located the remaining sums will be transferred to the Treasury. Respondent will also pay a penalty of $175,000.

Manipulation: SEC v. Sidoti, Civil Action No. 5:20-cv-02178 (C.D.CA Filed Oct. 19, 2020). Jillian Sidoti is partner in the law firm of Trowbridge & Sidoti LLP, Murrieta, California. Defendant Sidoti was key to the launch of Blake Insomnia Therapeutics, Inc. The microcap firm was incorporated in Nevada, had a claimed principal place of business in New York City and changed its name from BioHemp International, Inc. to Blake. Its shares were suspended from trading by the Commission in July 2019. Ms. Sidoti and others took a series of steps to take Blake from the drawing board to selling securities to the public. It began with a plan to populate the entity with fake executives and shareholders, continued with the preparation of the standard corporate documents which were false, moved forward with the completion of a fraudulent Form S-1 registration statement and ended with the sale of worthless shares to the public. At each step, according to the complaint, Attorney Sidoti enabled the fraud. 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. 24949 (Oct. 19, 2020).

Misappropriation: SEC v. Mizrahi, Civil Action No. 19-02284 (C.D. Cal.) is a previously filed action against Motty Mizahi and his firm, MBIG, which engaged in an investment fraud. The complaint alleged that Defendants raised $3 million by falsely claiming that the firm had sophisticated trading strategies that guaranteed risk free returns. In fact, the money was misappropriated. Defendants resolved the matter by consenting to the entry of a consent judgment enjoining future violations of Advisers Act Sections 206(1) and (2). The judgment also directed that Defendant Mizrahi disgorge $2,408,351, prejudgment interest of $519,077 and pay a penalty of $192,768. See Lit. Rel. No. 24948 (October 19, 2020).

Fraudulent account takeover: SEC v. Willner, Civil Action No. 17-cv-06395 (E.D.N.Y.) is a previously filed action which named as a defendant Joseph P. Willner. The complaint alleged that Defendant improperly accessed dozens of brokerage accounts and placed improper trades that falsely inflated stock prices. The complaint also alleged that Defendant disguised his real identity and the payments he made to others. To resolve the action Mr. Willner consented to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). He was also ordered to pay disgorgement and prejudgment interest totaling $418,581 which was deemed satisfied by the orders of forfeiture and restitution entered in the parallel criminal case. There Mr. Willner pleaded guilty to one count of conspiracy to commit securities fraud and computer intrusions. In addition, he was ordered to serve six months of incarceration followed by three years of supervised release. Mr. Willner will also forfeit $350,000 and pay restitution of $897,517. See Lit. Rel. No. 24947 (Oct. 19, 2020).

Offering fraud: SEC v. Rudden, Civil Action No. 18-cv-01842 (D. Colo.) is a previously filed action in which the Court entered a final judgment by consent against defendant Daniel B. Rudden and his firms known collectively as Financial Visions. The complaint alleged that over 100 investors were promised annual returns on their funds of 12% or more. It also asserts that Mr. Rudden did in fact make payments but only by using funds from other investors. A parallel criminal action was brought by the U.S. Attorney’s Office for the District of Colorado. There Mr. Rudden was sentenced to serve 121 months followed by three years of supervised release. He was also ordered to pay restitution of nearly $20 million to those who invested in his firms. In the Commission’s case the Court entered permanent injunctions against Mr. Rudden and his firm based on Securities Act Section 17(a) and Exchange Act Section 10(b). He was directed to pay disgorgement of $6,511,721 which is offset by the order of restitution in the criminal action. His frozen assets will be distributed to those who invested in the fraudulent scheme. See Lit. Rel. No. 24946 (October 16, 2020).

Criminal cases

Offering fraud: U.S. v. Zabala, (S.D.N.Y. Guilty plea Oct. 22, 2020) is an action which names as a defendant Craig Zabala, the Chairman and CEO of Concorde Group Holdings. Defendant raised about $4.38 million from 17 investors who were promised that the money would be used to expand the business by investing in, and buying, other financial services entities. In fact, the money was diverted to Mr. Zabala’s personal use. He pleaded guilty to conspiracy to commit securities fraud and wire fraud. Defendant also agreed to forfeit $4.380,000. Sentencing is scheduled for February 5, 2021. See also SEC v. Zabala, Civil Action No. 1:20 -cv-07880 (S.D.N.Y.).

False statements: U.S. v. Ziskind, No. No. 1:18-cr-00375 (S.D.N.Y.) is an action which named as a defendant, Vladimir Ziskin, a former representative. He was sentenced last week to serve 28 months in prison for selling worthless stock to largely elderly clients after previously pleaded guilty to one count of securities fraud and one count of securities fraud conspiracy. Specifically, over a period of years, beginning in 2014, Mr. Ziskind or his co-defendant used an alias to telephone elderly clients and convinced them with fabricated claims to purchase worthless stock. For example, at times the potential investors were told that the firm was about to conduct an IPO. Portions of the false pitches were recorded. In addition to the prison term, the Court directed Defendant to pay a forfeiture money judgment in the amount of $732,018.

FCPA

In the Matter of Goldman Sachs Group, Inc., Adm. Proc. File No. 3-20132 (Oct. 22, 2020) is a proceedings which names the global investment bank as a respondent. It centers around 1Malaysia Development Berhad, the Malaysian state-owned and controlled investment fund. Beginning in 2009, and continuing for about 5 years, about $6.5 billion was raised for the fund through three bond offerings executed with Respondent. Former executives of the investment bank authorized the payment of bribes to government officials in Malaysia and Abu Dhabi to obtain and retain lucrative business for the firm. The investment bank earned about $600 million in fees from the transactions. The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). The firm entered into a deferred prosecution agreement with the Department of Justice to resolve the criminal proceedings. To resolve the proceedings with the Commission, 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 $606,300 which is deemed satisfied by the payments previously made to the Government of Malaysia and IMDB in a parallel settlement. Goldman will also pay a $400 million penalty to the Commission which will go to the U.S. Treasury.

Australia

Report: The Australian Securities and Investment Commission issued its annual report for 2019 – 2020 on October 23, 2020 (here).

Singapore

Report: The Monetary Authority of Singapore published a report titled Consumer Price Developments in September. The Report updates the lasts consumer price developments in Singapore. It was prepared by MAS and the Ministry of Trade and Industry (here).

U.K.

DPAs: The Serious Fraud Office released guidance on Deferred Prosecution Agreements on October 23, 2020. The guidance will be a new chapter in its handbook which offers comprehensive discussion on the manner in which the Office handles DPAs (here).

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