Insider trading has long been a staple of SEC Enforcement. Typically, the action centers on a corporate event such as a take-over or an earnings announcement. The trader usually obtained the information by either breaching his or her duty to the firm that owns the information or misappropriating it. The trades are placed shortly before the transaction and closed after its announcement. An illicit, riskless profit results. The Commission’s latest action may represent a new variation on the traditional scheme – trading in advance of the addition or deletion of stocks from indexes. SEC v. Yang, Civil Action No. 1:29-cv-04427 (E.D.N.Y. Filed Sept. 21, 2020).

Yinghang “James” Yang and Yuanbiao Chen, respectively, the Senior Index Manager of Company and his friend, a manager at a sushi restaurant, are defendants in the action. Mr. Yang has held his position since September 2018. In that position he helped manage the firm’s Indexes. He also served on the Index Committee during which there were discussions regarding the components of the various indexes. The firm had confidentiality procedures in place to protect their information as Mr. Yang knew.

Prior to the commencement of the scheme Mr. Chen opened a Brokerage Account at Broker. Mr. Chen informed the brokerage that he had five years of experience in trading options. He executed an agreement that would permit trading options through the new account.

Over a period of just over four months beginning on June 24, 2019 Defendants purchased options in the shares of fourteen stocks shortly prior to their addition or deletion from the Indexes. Following the announcement by Company of either the addition or deletion of the stock from an Index Defendants closed the transaction. The trades were placed while in possession of material, non-public information about the actions to be taken for various securities with regard to being added or deleted from the Indexes of Company.

Defendants placed the trade in Brokerage Account with computers using IP addresses at three locations. One was Mr. Yang’s home. A second was the Company. A third was at Mr. Chen’s place of employment.

The transactions netted illegal trading profits of 912.082. The profits were split by the two men. The complaint alleges violation of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24909 (Sept. 22, 2020).

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With the passing of Justice Ruth Bader Ginsburg the Supreme Court and the country suffer an irreplaceable loss. Her last wish was that she not be replaced on the High Court until a new president is elected. That would avoid a huge partisan battle. It would also obviate the prospect of the Republicans contradicting themselves since they refused to hold any hearings on President Obama’s last Court selection– Judge Merrick Garland — on the grounds that “the American people should have a voice in the selection of their next Supreme Court justice,” according to Senate Majority Leader Mitch McConnell. Hours after the announcement of RBG’s passing, Mr. McConnell announced he would quickly move forward with the conformation process. He did not mention the rule he established with respect to Judge Garland’s nom nomination. The Biden campaign can be expected to roll out a blocking strategy, arguing that the Republicans established the precedent which should be followed.

A Memorandum from the Executive Office of the President, dated August 31, 2020, and addressed to “The Deputy Secretaries of Executive Departments and Agencies circulated this week. The purpose of the memorandum is to implement Section 6 of Executive Order 13924 regarding “the principles of fairness in administrative enforcement and adjudication . . .” (internal quotations omitted). Essentially, the memorandum details a series of limiting principles that should be applied to agency enforcement matters. Those include limitations on executing tooling agreements, applying estoppel and res judicata principles to eliminate multiple enforce actions and similar matters (here).

While there are prior reports of a specialized task force focused on COVID-19 related issues, a new sweep also appears to be underway. This sweep keys to bank deposits. The issues under consideration are at best unclear.

Finally, SEC enforcement seems to be stepping up the number of cases being filed as the fiscal year end looms. Last week cases were brought based on claims of unregistered securities tied to crypto assets, insider trading, manipulation, misappropriation, undisclosed conflicts and offering frauds.

Be safe and healthy this week

SEC

Remarks: Chairman Jay Clayton delivered remarks titled “Perspectives on Oversight, Management and Performance” related to enforcement on September 17, 2020 at the Institute for Law and Economics, University of Pennsylvania Virtual Program (here). In his comments the Chairman focused on three key points: 1) The need to establish broad principles for both action and evaluation, 2) establishing an environment of deference, cooperation and support, and 3) the need to establish impactful initiatives.

Remarks: Stephanie Avakian, Director, Division of Enforcement, delivered remarks titled “Protecting Everyday Investors and Preserving Market Integrity” at the same program as Chairman Clayton (here). The Director reviewed actions in key areas including financial fraud such as those against JP Morgan Chase and Merrill Lynch; those which negatively impact market structure such as those involving pre-release ADRs; insider trading such as the action involving Congressman Collins; FCPA actions like the one against Novartis; Ponzi scheme cases; and those involving crypto assets.

Dissent: Commissioner Hester M. Peirce dissented from the settlement accepted in Unkrn (see below) by the Commission on September 16, 2020. The case centered on a crypto asset offering, alleging violations of Securities Act Section 5. The Commission noted that there was no fraud charge, no security involved and that her prior suggestion for a safe-harbor for such offerings should be considered (here).

Rules: The Commission adopted amendments to Exchange Act Rule 15c2-11 which is a key component of the OTC market structure. The rule has not been updated in 30 years. The amendments ensure that market professionals do not publish quotations for an issuer’s securities when there is no current quote in the market. This is a critical market gatekeeper function, according according to the September 16, 2020 release (here).

Whistleblowers: The Commission announced two awards this week. One was for $10 million. The second was for almost $250,000.

Distributions: The Commission announced the final distribution in the WG Trading Investment Fraud on September 11, 2020. Over $1 billion has been returned to harmed investors.

SEC Enforcement – Filed and Settled Actions

The Commission filed 8 civil injunctive actions and 7 administrative proceedings last week, excluding 12j and tag-along-proceedings.

Offering fraud: SEC v. Rogas (S.D.N.Y. Filed Sept. 17, 2020) is an action which names as a defendant Ada Rogas, the founder and CEO of NS8. Over a two-year period, beginning in 2018, Mr. Rogas defrauded investors in two securities offerings for private technology company NS8. Investors were shown falsified bank statements for the firm. The statements represented that the private tech firm was profitable. At least $123 million was raised from the offering. Mr. Rogas took a series of steps to conceal the actual finances of the firm. He pocketed at least $17.5 million of the investor proceeds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

Insider trading: SEC v. Sheinfeld, Civil Action No. 20-civ-01692 (M.D. Pa. Filed Sept. 17, 2020) is an action which names as a defendant Steven J. Sheinfeld, a 20 year employee of Rite Aid Corp. who implements their code of ethics. The case centers around a planned merger of Rite Aid and Walgreens Boots Alliance, Inc. which was scheduled to close on January 17, 2017. Prior to that date Defendamt learned while working on a special project at work that the deal would likely not close on time. In fact, the deal did not close and the stock dropped about 13%. Just prior to the announcement that it would not close Defendant sold all of his shares, avoiding a loss of about $140,000. He also sold firm shares held in the accounts of relatives, avowing over $15,000 in losses. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24903 (Sept. 17, 2020).

Misappropriation: SEC v. Fries, Civil Action No. 1:20-cv-00739 (S.D. Oh. Filed Sept. 17, 2020) is an action which names as a defendant Scott A. Fries, an employee of a registered broker dealer and investment adviser. Beginning in 2016, and continuing for the next three years, Defendant convinced seven firm employees to give him their investment funds to invest outside the firm. The clients furnished him with about $178,000. Mr. Fries misappropriated the funds. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 24902 (Sept. 17, 2020).

Misappropriation: SEC v. Geraci, Civil Action No. 18-cv-06432 (S.D.N.Y.) is a previously filed action which named as a defendant John Geraci. The complaint alleged that Mr. Geraci formed the Meridian Matrix Long Short Fund LP in 2015. He retained Nicholas Mitsakos and his firm, Matrix Capital Markets, LLC as the manager. Mr. Mitsakos claimed he had millions of dollars under management, although he actually had no assets. Mr. Geraci did not verify the claims. Over time $2 million was raised from investors. Although later Mr. Mitsakos misappropriated $800,000 he continued in his position. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the matter Defendant consented to the entry of a final judgment which imposed a permanent injunction based on each of the sections cited in the complaint. He also agreed to pay disgorgement of $1,098,971 and prejudgment interest of $229,740 which is deemed satisfied by a restitution and forfeiture order in a parallel criminal action. In addition, the judgment imposed an officer and director bar. In a parallel administrative proceeding, a life time bar from the securities industry was imposed. See Lit. Rel. No. 24904 (Sept. 17, 2020).

Procedures: In the Matter of Gilder Gagnon Howe & Co., Adm. Proc. File No. 34014 (Sept. 17, 2020) named as respondents the dual registered broker-dealer – investment adviser and Bonnie M. Haupt, the chief compliance officer and minority owner of the firm. The Order centers on two points. First, from 2017 through early 2018 the firm failed to conduct reviews of its accounts for excessive commissions as required by its procedures. Second, after conducting an exam in late 2016 FINRA informed the firm that its compliance program was deficient. Specifically, the firm failed to conduct reviews to monitor key ratios. Following the determination, the failure continued. The Order alleges violations of Advisers Act Sections 206(4) and the related rule. To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. The firm also consented to the entry of a censure. Ms. Haupt is barred from the securities business with the right to reapply based on certain conditions. The firm was directed to pay a penalty of $1.7 million. Ms. Haupt will pay a penalty of $45,000. Both amounts were transferred to the U.S. Treasury.

Net Capital: In the Matter of Navian Capital Securities LLC, Adm. Proc. File No. 3-20013 (Sept. 17, 2020) names as respondents the broker dealer and Robert Jenkins, the CFO of the firm. From July 2018 through May 2019 the firm was in violation of its net capital obligations. The Order alleges violations of Exchange Act Sections 15(c)(3) and 17(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. The firm was also censured. The firm will pay a penalty of $40,000 while Mr. Jenkins will pay $10,000. The funds were transferred to the U.S. Treasury.

Conflicts: In the Matter of Coordinated Capital Securities, Inc., Adm. Proc. File No. 3-20012 (Sept. 17, 2020) is an action which names as a respondent the registered broker-dealer and investment adviser. The Order alleges that over a four year period, beginning in January 2014, the firm failed to disclose that at times it purchased, recommended or held mutual fund shares that carried 12b-1 fees. That fact was not disclosed to the clients. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). 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 of $473,202, prejudgment interest of $38,759 and a penalty of $70,000. A fair fund was created for the monetary payments.

Manipulation: SEC v. Sargent, Civil Action No. 1:19-cv-114616 (D. Conn.) is a previously filed action which names as defendants attorneys Henry Sargent, Frederick Mintz, Alan Fraade and Joseph Tomasek, along with real estate agent Patrick Giordano. In 2014 Defendant Sargent recruited a number of friends and family to serve as nominal shareholders of BMP Holdings LLC. He subsequently filed a Form S-1 with the Commission for the firm. It falsely claimed the shareholders were not affiliates of the firm and acquired their shares for investment purposes. Two years later Francis Reynolds, president of PixarBio Corp, retained Mr. Giordano to locate a shell company for PixarBio to acquire and use as a vehicle to distribute unregistered shares. He identified BMP. A few months later Defendant Sargent sold his controlling interest in BMP to PixarBio for $325,000. The two firms were then merged. The attorney opinion letters prepared by Messrs. Mintz and Fraade falsely stated that the shares were free trading. Subsequently, over a period of several months, beginning at the end of October 2016, shares of the merged firm were sold to the public. Mr. Sargent had proceeds from the illegal distribution of about $631,000, Mr. Giordano $117,000 and Mr. Herod $910,000. The complaint alleged violations of Exchange Act Section 10(b) and Securities Act Sections 5(a), 5(c) and 17(a). Attorneys Frederick Mintz and Alan Fraade each resolved the claims as to them. Each lawyer consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Conduct based injunctions entered by the Court at the same time preclude each attorney from providing legal services regarding securities law exemptions to registration. The two attorneys also agreed to pay disgorgement and prejudgment interest, on a joint and several basis, totaling $28, 785.96. No penalty was imposed based on financial condition. An order was entered against each settling defendant in a separate Commission administrative proceeding, suspending the right of each attorney to appear and practice before the Commission. See Lit. Rel. No. 24900 (Sept. 16, 2020).

Misappropriation: SEC v. The Estate of Richard Ventrilla, Civil Action No. 5:20-cv-1102 (N.D.N.Y. Filed Sept. 14, 2020) is an action which names as defendants the estate and Cygnus Capital Management, LLC. Richard Ventrilla was the owner of the advisory prior to his death in early September 2020. Mr. Ventrilla convinced at least 22 investors to entrust him and his advisory with their funds based on the promise that the money would be properly invested and yield a guaranteed 7-8% profits. Most of the money was misappropriated by Defendants. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 24901 (Sept. 16, 2020).

Crypto: In the Matter of Unkrn, Inc., Adm. Proc. File No. 3-20002 (Sept. 15, 2020) is an action which names as a respondent the issuer of crypto tokens. Specifically, from June to October 2017 the firm, which operates an online eSports gaming and gambling platform, conducted a two step offering. Initially there was a pre-sale. It was followed by the offering. About $31 million was made through the sale of UnkoinGold or UKG digital coins. The firm told investors that the coins could be used to access a variety of products. Overtime additional features would be added that would increase the demand for and usage of the tokens. All of this would increase their value. The transactions were not registered with the agency and no exemption from registration was available. The Order alleges violations of Securities Act Section 5(a) and 5(c). To resolve the matter Respondent agreed to implement certain undertakings, consented to the entry of a ceases and desist order based on the sections cited in the Order, and agreed to pay a penalty of $6.1 million which will be put into a fair fund. The firm will also request that the coins be removed from listing on trading platforms.

Offering fraud: SEC v. Pryor, Civil Action No. 20-cv-01782 (D. Az. Filed Sept. 14, 2020) is an action which names as defendants Gary Pryor, Zipremit, Inc. and Lendaily, Inc. Mr. Pryor controlled each of the entity defendants. Potential investors were told that the two companies, which would be combined, were in the point-of-sale credit industry. Three milestones had to be met. The firm was far down the road on the metrics investors were told. Eventually about $4.3 million was raised by selling stock and convertible notes. Unfortunately, Mr. Pryor’s claims were false and the two firms were shams. The complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The case is pending. See Lit. Rel. No. 24898 (Sept. 15, 2020).

Offering fraud: SEC v. PixarBio Corp., Civil Action No. 18-cv-10797 (D. Mass.) is a previously filed action which named as defendants the firm, a biotech company, Kenneth Stromsland, the firm’s Chief Information Officer and M. Jay Herod, an information technology consultant and friend of Frank Reynolds, the CEO of the firm. The complaint alleged that prospective investors were solicited by the two defendants using a series of false statements initially articulated by Mr. Reynolds. Those representations concerned the finances of the firm and FDA approval about a drug. The claims were false. Defendants also manipulated the share price of the stock. Messrs. Stromsland and Harold each consented to the entry of permanent injunctions based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 9(a) and 10(b). The order as to Mr. Stromland is also based on Exchange Act Section 15(a). In an administrative proceeding he was also barred from the securities business. The final judgement as to each man imposes a penny stock bar and directs them to surrender their shares of the company. They were also directed to pay $27,500 and $126,845, respectively, in disgorgement and prejudgment interest. Those amounts were deemed satisfied by the restitution orders entered in the parallel criminal action. See Lit. Rel. No. 24897(Sept. 15, 2020).

Muni bonds: In the Matter of William W. Welsh, Adm. Proc. File No. 3-19998 (Sept. 14, 2020) is a proceedings which names Mr. Welsh, a registered representative at a municipal bond firm, Roosevelt & Cross, Inc. Over a three year period, beginning in March 2020, Respondent violated the purchase and sale rules for new issue municipal bond offering by selling to those who were “flippers,” who bought the bonds out of the required order and then immediately resold them. In addition, over a two year period, beginning in January 2014, Respondent purchase bonds from flipper for the account of Roosevelt. The Order alleges violations of Exchange Act Sections 15(a)(1), 15B(c)(1) and MSRB Rules G-11 and G-17. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the Sections and Rules cited and to a censure. The firm was also suspended for a period of six months. In addition it will pay a penalty of $25,000 of which $5,000 will be transferred to the MSRB and $20,000 to the U.S. Treasury, See also In the Matter of Thomas Vigorito, Adm. Proc. File No. 3-19997 (Sept. 14, 2020)(proceeding against representative at Roosevelt based on conduct similar to that detailed above; resolved with a cease and desist order based on same Sections and Rules as above; a suspension from the securities business and from any penny stock offering for 12 months; and the payment of a penalty of $40,000, of which $8,571.43 will be transferred to the MSRB and the balanced to the U.S. Treasury).

Offering fraud: SEC v. Remington Chase a/k/a William Westwood a/k/a William Elliot, Civil Action No. 2:20-cv-08343 (C.D. CA. Filed Sept. 11, 2020) is an action which names Mr. Chase, the principal and founder of Knightsbridge Entertainment, Inc., as a defendant. The complaint alleges that over a two year period, beginning in 2016, Mr. Chase raised $62 million from 100 investors who were told that the funds would be used in post-production for motion pictures handled by his firm. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and subsections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24895 (Sept. 14, 2020).

Conflicts: In the Matter of William D. King, CPA, Adm. Proc. File No. 3-19991 (Sept. 11, 202). Respondent is a business consultant. Over a three-year period, beginning in August 2015, Respondent solicited clients and provided investment advice. He did not disclose the compensation he was paid from the penny stock issuer and the mark-up he charged clients related to the investment question. He thus breached his fiduciary. The Order alleges violations of Exchange Act Section 15(a) and Advisers Act Sections 206(2) and 206(3). To resolve the matter Respondent consented to the entry of a cease and desist order based on the Sections cited in the order. He was also barred from the securities business and from participating in any penny stock offering with the right to apply for reentry after three years. He will pay disgorgement of $519,634, prejudgment interest of $33,388.13 and a penalty of $75,000. The funds are transferred to a fair fund.

Muni bonds: SEC v. Park View School, Inc., Civil Action No. 3:20-cv-08237 (D. Ariz. Filed September 14, 2020). Park View School, defendant, is an Arizona nonprofit corporation based in Prescott Valley, Arizona. The firm’s operations and finances were managed by Debra K. Slagle, also a defendant. This action is based on two offerings, the first in 2011 and the second in 2016. In 2011 Park View was a conduit borrower for a $6.625 million offering by Pima Industrial Development Authority. The bonds were issued subject to an indenture agreement that governed disbursement of the bond proceeds and repayment of the bond investors. The 2011 Indenture provided that the trustee deposit almost $250,000 of the bond proceeds into an Operating Reserve Fund to protect investors. The bonds were to build the school facilities. Monthly deposits were required to be made to cover the operating expenses under the terms of the 2011 bond offering to an Operating Reserve Fund. Ms. Slagle, however, made 12 requests over a four-year period, beginning in May 2012, to withdraw funds. While she certified that each request was permissible, that claims were incorrect. The school was unable to replenish the withdrawals despite efforts by Ms. Slagle to aid the project. By January 2016 Park View was essentially out of cash and owed $400,000. In 2016 Ms. Slagle decided to seek another bond offering to repay the 2011 bonds and other debt. The Official Statement for the offering was posted on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system in April 2016. The statement was based on a feasibility study for the next two years that contained projects showing Park View as profitable. The projections contained material errors. The offering materials did not disclose the operating difficulties of Park View. While the projections were based on an expense reduction program, it had not in fact been adopted or implemented. Without that program Park View’s on-going financial difficulties would preclude meeting the projections in the offering materials. No debt reduction was ever adopted. By early the next year Park View defaulted. It was April 2017, one year after the offering. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The action is pending.

Crypto: SEC v. Flik, Civil Action No. 1:20-cv-03739 (N.D. Ga. Filed Sept. 10, 2020) is an action centered on the two offerings of digital assets that collectively raised over $3 million by defrauding investors. Named as defendants are: Flik; Coinspark; Ryan Felton, the owner and sole officer of the entity defendants; William Sparks, a media manager; and Owen Smith and Chance White, each of whom works in the film editing industry. The first took place between August 2017 and September 2017. Mr. Felton and Flik, a claimed video streaming platform touted as “Netflix on the blockchain,” conducted an ICO of the coins. About 539 ether or ETH, a digital asset worth over $164,000 was raised in exchange for FLiK tokens. The tokens were promoted in the U.S. and abroad through a trading platform using a series of false statements. At its conclusion Mr. Felton transferred the offering proceeds to his accounts and diverted the funds to his personal use. Subsequently, Mr. Felton joined with Messrs. White and Smith to conduct a second offing of digital assets for a coin called CoinSpark. Over a thirty day period, beginning on February 14, 2018, the offering raised about 460 ETH based on a series of misstatements. Following the offering Mr. Felton transferred the ETH raised in the offering to an blockchain address he controlled where he engaged in manipulative trading. The complaint alleges violations of Securities Act Sections 5(a), 5(c), each subsection of 17(a) and Section 17(b) as well as Exchange Act Sections 9(a)(2) and 10(b). The case is pending. See also In the Matter of Clifford Harris, Jr., Adm. Proc. File No. 3-199990 (Sept. 11, 2020)(based on facts above; resolved with a cease and desist order based on Securities Act Sections 5(a) and 5(c) and the payment of a $75,000 penalty that will be transferred to the U.S. Treasury). The U.S. Attorney’s Office for the Northern District of Georgia brought a parallel criminal action against Mr. Felton. See also In the Matter of Clifford Harris, Jr., Adm. Proc. File No. 3-19990 (Sept. 11, 2020)(proceeding based on the facts above; resolved with certain undertakings, a consent to the entry of a cease and desist order based on Securities Act Sections 5(a) and 5(c); and the payment of a penalty of $75,000).

FinCEN

Proposal: The Financial Crimes Enforcement Network or FinCEN is seeking comments on enhancing the effectiveness of anti-money laundering programs. The announcement, dated September 16, 2020, contains a variety of proposals (here).

Singapore

Economic developments: The Monetary Authority of Singapore issued a Joint Statement of the 23rd ASEAN+3 Finance Ministers’ and Central Bank Governors’ Meeting dated September 18, 2020. The statement reviews the economic and financial developments in the region based on the exchange of views (here).

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