On this Monday we pause to thank and salute all service members and veterans for their dedication and hard work. We all owe them a great debt for their sacrifice which is what makes this nation a great place for all.
A look forward – a look back:
The Enforcement Division’s Annual Report, discussed briefly below and in more detail last week, gives everyone a look forward. The Division continues to focus on retail investors with actions involving investment advisers at the top of the list along with the increasing use of data analytics and efforts to speed investigations. At the same time the Division faces significant headwinds from the usual lack of resources coupled with the Supreme Court’s decision in Kokesh and potentially this Term’s ruling in Lui which could end the ability of the SEC to seek disgorgement in its enforcement cases.
A look back at last week shows a typical mix of enforcement actions. Those included an offering fraud case, one focused on financial fraud and another concealed conflicts action involving an investment adviser.
Proposed rules: The Commission issued proposed rule amendments focused on improving the accuracy and transparency of proxy voting advice, Nov. 5, 2019 (here).
Proposed rules: The Commission issued proposals to modernize the advertising and cash solicitation rules for investment advisers. The proposals are designed to replace the current rules with principle based provisions, Nov. 4, 2019 (here).
Extension: The Commission extended the time relating to compliance with the EU Financial Instruments Directive II (MiFID II). Specifically, a no action letter designed to assist market participants regarding their U.S. regulated activities as they engage in efforts to comply with the directive stated that the staff would not recommend an enforcement action under the Investment Advisers Act against broker-dealers receiving payments in hard dollars or through research payment accounts from clients subject to MiFID II through July 3, 2020. The time period has been extended until July 3, 2023 in a letter discussed in a release Nov. 4, 2019 (here).
The Enforcement Report
The Division of Enforcement, by any measure, had a successful year despite facing significant headwinds, according to its FY 2019 Annual Report (here). Success stems from a variety of factors, not just the number of cases or the amounts of money ordered in actions. Factors discussed in the Report, and areas in which significant cases were brought, include: (1) Main street investors; 2) financial institutions and issuers;3) individuals;4) digital assets; and 5) cybersecurity.
The Report details a series of statistics. Those include the number of cases brought in FY 2019 compared to prior years. Last year 526 standalone enforcement actions were brought compared to 490 in FY 2018, 446 in FY 2017, 548 in FY 2016 and 508 in FY 2015. The table does not state that in FY 2019 a series of cases were brought as part of the Share Class cooperation initiative, a point noted in earlier reports regarding a similar cooperation program that yielded a significant number of cases.
Finally, in FY 2019 the largest number of cases were brought against investment advisers and investment companies. The second largest group of cases centered on securities offerings while actions involving issuer reporting and audit and accounting represented the third largest group of cases. In FY 2018 securities offering actions represented the largest group of cases following by those involving investment advisers and investment companies.
SEC Enforcement – Filed and Settled Actions
The Commission filed 4 civil injunctive action and 1 administrative proceeding last week, exclusive of 12j and tag-along actions.
Trading: SEC v. Gramins, Civil Action No. 15 Civ. 7045 (S.D.N.Y.) is a previously filed action against traders at Nomura Securities International. The complaint alleged that Defendants made misrepresentations in connection with transactions involving residential mortgaged backed securities. This action is one in a series of similar cases. The Commission moved to dismiss the action as to Defendant Tyler Peters following his acquittal on similar charges in a parallel criminal case. See Lit. Rel. No. 24661 (Nov. 7, 2019).
Improper revenue recognition: In the Matter of David Pruitt, CPA, Adm. Proc. File No. 3-17950 (Nov. 7, 2019) is an action which names Mr. Pruitt, formerly the Vice President of Finance for L3 Technologies, Inc. at its Army Sustainment Division. In 2013 and 2014 Respondent instructed subordinates to create 63 invoices related to certain unbilled work and ordered them hand delivered to the U.S. Army for approval. The vast majority were not actually delivered. Nevertheless, the invoices were recorded. After an internal investigation in October 2014 the firm filed a Form 10-K/A for the fiscal ear ended December 31, 2012 and a Form 10-Q/A for the first quarter of 2014. The firm disclosed that it made $15.4 million in adjustments to pre-tax income related to the invoices by reversing the revenue record and recording the related expenses as an asset on its balance sheet. The Order alleges violations of Exchange Act Sections 13(b)(2)(A). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. He also agreed to pay a penalty of $25,000.
Offering fraud: SEC v. Ruless Pierre, Civil Action No. 1:19-cv-10299 (S.D.N.Y. Filed Nov. 6, 2019) is an action in which Mr. Pierre conducted two offering fraud. The first began in March 2017 and targeted members of a claimed investment club, soliciting them to purchase promissory notes that supposedly would pay returns of at least 20% every 60 days from stock trades. About $2 million was raised from over 100 investors. The stock trades lost money. Investor returns were paid from capital supplied by other investors. The second scheme began in November 2018. There Mr. Pierre sold silent partnership interests in a fast food franchise. Investors were supposed to be guaranteed returns of 5% per month plus a profit sharing of 40%. As with his first scheme, it was a fraud. Defendant profited; investors lost. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(4) and 206(4)-8. The case is pending.
Conflicts: SEC v. Bolton Securities d/b/a Bolton Global Asset Management, Civil Action No. 4:19-cv-40143 (D. Mass. Filed Nov. 4, 2019) is an action which names as a defendant the registered investment advisor and broker-dealer. Defendant failed to disclose material conflicts with respect to two groups of transactions. First, with respect to the sale of mutual fund shares the firm failed to disclose 12b-1 fees paid through its affiliated broker dealer. Second, with respect to trading through the principal trading account at the broker-dealer there was no disclosure of the conflicts. The complaint alleges violations of Advisers Act Sections 206(2), 206(3) and 206(4). The case is pending. See Lit. Rel. No. 24660 (Nov. 6, 2019).
Improper transfers: In the Matter of Bethany Liou, Adm. Proc. File No. 3-19597 (Nov. 4, 2019) names as Respondents Bethan Liou and Golden California Regional Center, a firm that is connected to the EB-5 program owned by Ms. Liou. The Order alleges that Respondents sold at least $45,000,000 in limited partnership interests in connection with the program. Those funds were improperly transferred and subsequently used as collateral for a line of credit. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceedings Respondents consented to the entry of a cease and desist order based on the section cited in the Order. They also agreed to pay, on a joint and several basis, disgorgement in the amount of $49,306,893 and prejudgment interest of $988,339.
Advanced fee loan scheme: SEC v. North Star Finance LLC, Civil Action 15-cv-1339 (D. Md.) is a previously filed action which names as defendants the firm, Michael Martin, Capital Source Lending LLC and Thomas Vetter. The complaint alleged an advanced fee loan fraudulent scheme. Last week the Court entered orders as to each based on consents. The Court entered permanent injunctions as to Defendants Martin and Capital Source based on Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b) and directs the payment of disgorgement in the amount of $341,130 and imposed a penalty against each of $3,030,791. The Court also entered a final judgment as to Mr. Vetter, enjoining him from future violations of Exchange Act Section 15(a) and from aiding and abetting violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The injunction also precludes Mr. Vetter from selling any security not listed on a national securities exchange and requires him to pay disgorgement of $143,326, prejudgment interest of $19,722 and a penalty of $163,098. The firm and two other defendants previously settled with the Commission. See Lit. Rel. No. 24656 (Nov. 1, 2019).
Offering fraud: SEC v. Eden, Civil Action No. 2:19-cv-09358 (C.D. Ca. Filed Oct. 31, 2019) is an action which names as defendants Richard Eden and Christopher Neumann. Defendants solicited investors to purchase shares of a number of microcap firms. Investors were not told that Defendants were coordinating trades of the shares among themselves to enable the seller to offload his holdings without significantly affecting the market for the thinly traded securities. Defendants were paid transaction based compensation of 35% to 40%. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) and Exchange Act Section 10(b) and 15(a). Each Defendant settled, consenting to the entry of permanent injunctions based on the sections cited in the complaint. In addition, Mr. Eden will pay disgorgement of $777,272, prejudgment interest of $55,147 and a penalty of $125,000. Mr. Newman agreed to pay disgorgement of $124,100, prejudgment interest of $14,876 and a penalty of $50,000. See also SEC v. Pearlman, Civil Action No. 8:19-cv-02108 (C.D. Ca. Filed Nov. 4, 2019)(Action against Dale Pearlman based on substantially the same facts as above; Mr. Pearlman settled on essentially the same terms, agreeing to pay disgorgement of $115,000, prejudgment interest of $13,393 and a penalty of $50,000). See Lit. Rel. No. 24657 (Nov. 4, 2019).
Insider dealing: Ken Yiu Ka Lun, a former employee of Hong Kong Television Network Ltd., was convicted of insider dealing and sentenced to serve two and one half months in prison. He was also fined $165,000. The executive was working on HKTN’s acquisition of a mobile television license in his capacity as the firm’s senior regulatory affairs manager. He purchased 101,000 shares of the firm.