The Commission achieved a significant milestone last week, paying out over $1 billion to whistleblowers who have assisted the agency in enforcement actions.

Chair Gensler set the table for the future last week with his Congressional testimony, amplified in a CNBC interview. The testimony was more like a walk through the areas under the jurisdiction of the Commission coupled with a wish list of projects. After listing the areas the Chair directed the staff to explore, there is no doubt that everyone will be quite busy – and no reason to doubt that the agency needs additional funding to hire.

Be careful, be safe this week

SEC

Testimony: Chair Gensler Testified before the Senate Committee on Banking, Housing and Urban Affairs. His testimony covered a wide variety of topics for which he has directed the staff to conduct research. Those include: improving the efficiency in the treasury markets; enhancing efficiency in the equity markets; improving disclosure in the security-based swaps markets; improving investor protection in the crypto markets; evaluating the impact of predictive data analytics; enhancing disclosure for SPACs; and exploring the fund and investment management space (here).

Whistleblowers: The Commission made awards totaling $110 million and $4 million for two whistleblowers on September 15, 2021. With these awards the agency surpassed the $1 Billion in awards mark. The regulator added to its totals at week end by making two awards totaling $11.5 million.

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 3 civil injunctive actions and 7 administrative proceedings, exclusive of tag-along and other similar proceedings.

Fees/conflicts: In the Matter of Regal Investment Advisors LLC, Adm. Proc. File No. 3-20565 (September 16, 2021) is a proceeding which names as respondents the registered investment advisor, John Kailunas II, the firm founder, and Brian Yarch, the CCO. The Order alleges that beginning in mid-2015, and continuing through early 2021, the firm improperly charged certain clients over $85,000 in fees for services not received. That occurred because the firm failed to provide services after two IARs departed yet continued to charge fees. In addition, the firm failed to fully and fairly disclose to its advisory clients its financial interest in a firm that was recommend to certain clients. Policies and procedures of the firm were not implemented to prevent these issues. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and Rule 206(4)-7. Respondents each consented to the entry of a cease-and-desist order based on the Sections and Rule cited in the Order and to a censure. Respondent Yarch is also precluded from serving as CCO but may apply for reentry after three years. Each Respondent will pay disgorgement, prejudgment interest and penalties as follows: The two individual Respondents will each pay a penalty of $50,000; the firm will pay disgorgement of $595,899.59, prejudgment interest of $100,875, and a penalty of $150,000.

Conflicts: In the Matter of Berthel Fisher & Company Financial Services, Inc., Adm. Proc. File No. 3-20564 (September 16, 2021) is a proceeding which names as a respondent the dual registered investment adviser broker-dealer. Over a period of four years, beginning in 2014, the firm failed to adequately disclose certain matters. First, from January 2014 through March 2018 the firm failed to advise its clients that was paid 12b-1 fees on certain mutual fund shares. Second, from September 2016 through March 2018 the firm also failed to disclose fees paid to the firm by it on certain money market funds and clearing arrangements. And, from at least January 2014 the firm caused certain advisory clients to invest in higher cost shares of fund that paid 12b-1 fees. The firm also failed to adopt policies and procedures reasonably designed to prevent these violations. The Order alleges violations of Advisers Act Sections 206(2) and 206(4) and Rule 206(4)-7. To resolve the matter Respondent agreed to implement certain undertakings and agreed to the entry of a cease-and-desist order based on the Sections and Rule cited and to a censure. The firm will pay a penalty of $235,000. In addition, it will pay disgorgement of $128,460.12 and prejudgment interest of $25,968.01. A Fair Fund will be created.

Financial fraud: In the Matter of Sweetwater Union High School District, Adm. Proc. File No. 3-20560 (September 16, 2021) is a proceeding which names the San Diego school district as a respondent. The action centers on an April 2018 municipal bond offering by the District. At the beginning of the year a pay raise of 3.75% was passed. The district failed to build this into its projections. Rather, the firm continued with the existing budget despite the pay raise and other increased costs. As a result, the materials furnished to investors were false. The Order alleges violations of Securities Act Sections 17(a)(2) and (a)(3). The District agreed to implement a series of undertakings which include the retention of an independent consultant. To resolve the proceedings the District consented to the entry of a cease-and-desist order based on the Sections cited in the Order. See also SEC v. Michel, Civil Action No. 21CV1623 (S.D. Ca. Filed September 19, 2021)(Action against CFO of the District based on essentially the same facts as above; charges violations of Securities Act Section 17(a)(3); resolved with a consent to an entry of a permanent injunction based on Sections cited in complaint and payment of a $28,000 penalty).

Attorney opinion letters: In the Matter of Charles Parkinson Lloyd, Adm. Proc. File No. 3-20554 (September 15, 2021) is a proceeding which names as respondent an attorney with offices in Utah. In 2017 Mr. Parkinson issued attorney opinions stating that shares of Dolat Ventures Inc. could lawfully be sold. The shares came from a debt conversion and had never been registered. In issuing the opinions Mr. Parkinson ignored red flags which included indicia that the documents were forged or not accurately dated and that accompanying representations by the sellers were false. The Order alleges violations of Securities Act Sections 5(a) and (c). 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 disgorgement of $3,150, prejudgment interest of $501 and a penalty of $40,000. The Commission will hold the funds pending a determination as to their distribution.

Misrepresentations: In the Matter of App Annie Inc., Adm. Proc. File No. 3-20549 (September 14, 2021) is an action which names as respondents the firm and Bertrand Schmitt, respectively, a leading provider of data on apps and its founder. App Annie is one of the largest sellers of market data on how apps on mobile devices perform. Trading firms call data Alternative Data. Many trading firms pay for subscriptions and use it to make investment decisions. App Annie provides a free analytics product called Connect to companies that offer apps. It enables those firms to track how their apps are performing. App Annie assured users it aggregates the data and uses only an anonymized form to generate its estimates. Those representations were false. The firm also assured users it had comprehensive compliance policies and procedures to make sure the data collected was used properly. Those procedures, like the representations about data use, facilitated sales. The claims were false. The Order alleges violations of Exchange Act Section 10(b). To resolve the proceedings Respondents consented to the entry of a cease-and-desist order based on the Section cited in the Order. The firm will also pay a $10 million penalty. Mr. Schmitt will pay a penalty in the amount of $300,000.

Offering fraud: SEC v. Gilmann, Civil Action No. 3:18-cv-01421 (N.D.Tx.) is a previously filed action which named as defendants Paul Gillman and others. Mr. Gilmann is a self-dubbed “whale whisperer. He used his firms to solicit funds to develop what was supposed to be remarkable sound technology. Instead of using the funds as promised, they were for the most part misappropriated. Mr. Gilmann resolved the matter, agreeing to pay a civil penalty of $5,760,000 and disgorgement and prejudgment interest in the amount of $40,706.12. Three of his firms also resolved the action, agreeing to pay penalties totaling $21,700,000 and disgorgement and prejudgment interest of $2,483,650.58. The court previously entered permanent injunctions prohibiting future violations of the antifraud provisions of the federal securities laws as to these defendants. See Lit. Rel. No. 25204 (September 14, 2021).

Crypto/dollars offering fraud: In the Matter of GTV Media Group, Inc., Adm. Proc. File No. 3-2037 (September 13, 2021). The proceeding names as respondents GTV, its parent Saraca Media Group, Inc. (together with GTV the “G Entities”) and Voice of Guo Media, Inc. From April 2020 through June 2020 thousands of individuals were solicited to invest in GTV common stock. The G entities worked during the same period to solicit individuals to invest in G-Coins. The proceeds from the two offerings were commingled. About $487 million was raised by 5,000 investors. The memorandum for the stock offering claimed it would be the first ever platform which will combine citizen journalism and social news with state-of-the-art technology. It planned to be an uncensored bridge between China and the Western world. Information for the two offerings was disseminated through videos, websites and social media platforms. The Coin Offering was touted as an investment opportunity with the likelihood of significant returns based on the ability of the G Entities to develop an online platform through which investors would be able to engage in transactions using either G-Coins or G Dollars. The Order alleges violations of Securities Act Sections 5(a) and 5(c). To resolve the matter Respondents each consented to a cease-and-desist order based on the Sections cited in the Order. GTV and Saraca will jointly and severally pay disgorgement of $434,134,141, prejudgment interest of $15,776,488. Respondent BTV will pay a penalty of $15,000,000. Respondent Saraca will also pay a penalty of $15,000,000.

Unregistered broker: SEC v. Acosta, Civil Action No. 3:21-cv-01435 (D. Puerto Rico Filed September 13, 2021) is an action which names as defendant Eliseo Acosta, a resident of San Juan. From October 2015 to July 2018 Defendant acted as a broker for the Kinetic Funds, I, LLC which is managed by Kinetic Investment Group LLC. Over the period Defendant raised $22 million for the Group from the offer and sale of Fund securities to two investors. He was paid $105,300. Mr. Acosta has never been registered with the Commission. The complaint alleges violations of Exchange Act Section 15(a)(1). Defendant partially resolved the matter, consenting to the entry of a permanent injunction based on the Section cited in the complaint. Financial remedies will be considered at a later date. See Lit. Rel. No. 25205 (September 15, 2021).

Insider trading: SEC v. Ahn, Civil Action No. 1:21-cv-10203 (D. Mass.) is a previously filed action which named as defendant Mark Ahn. The complaint alleged that Mr. Ahn traded in the securities of Massachusetts based pharmaceutical company, Dimension Therapeutics, Inc. prior to an August 2017 merger announcement. In a parallel criminal action brought by the U.S. Attorney’s Office for the District of Massachusetts he pleaded guilty and was sentenced to serve six months of home detention followed by two years of supervised release and the payment of a fine of $5,5000, forfeiture of $49,421 and restitution in an amount to be determined at a later date. In the Commission action he consented to the entry of a partial judgment that enjoins him from violating Exchange Act Section 10(b) and bars him from serving as an officer or director of any public company. The Court’s entry of final judgment concludes the SEC’s action. See Lit. Rel. No. 25202 (September 10, 2021).

Misappropriation: SEC v. Hitt, Civil Action No. 18-cv-01262 (E.D. Va.) is a previously filed action against Todd E. Hitt. The action centered largely on a public offering that raised several million dollars to build an office building at the Silver Line Metro Station in Northern Virginia. Much of the money was comingled with other funds and part was misappropriated. In a second offering about $2.5 million was raised, portions of which were misappropriated. This part of the case focuses only on monetary relief. Defendant previously agreed to the entry of a permanent securities industry bar. Here the Court entered a final judgment requiring Defendant to pay disgorgement and prejudgment interest of $15,001, 498. In view of the fact that Mr. Hitt was convicted in the parallel criminal action and sentenced to serve 78 months in prison, the SEC dismissed its claim for a civil penalty. This matter is concluded. See Lit. Rel. No. 25201 (September 10, 2021).

Microcap fraud: SEC v. Gomes, Civil Action No. 1:20-cv-11092 (D. Mass.) is a previously filed action which named as defendants Nelson Gomes, and Shane Schmidt, among others. Originally there were eleven defendants. The case centered on a scheme that began in June 2020 in which Mer. Gomes worked with others to conceal control persons of public companies while their stock could be dumped. In some instances the shares were manipulated. Mr. Schmidt resolved the matter, consenting to the entry of a permanent injunction based on Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). A permanent penny stock bar was imposed. The Court will determine financial remedies at a future date. Mr. Gomes consented to the entry of a permanent injunction based on Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 10(b) and 13(d). Defendant was also ordered to pay disgorgement and prejudgment interest of $1,153,058 and a penalty of $390,094. Mr. Gomes also consented to the entry of a five year penny stock bar.

Conflicts: In the Matter of MML Investors Services, LLC. Adm. Proc. File No. 3-20536 (September 10, 2021) is a proceeding which is based on a breach of fiduciary duty by the dual registered adviser and broker-dealer. The firm is the product of a merger involving MML Investors Services Inc. and MSI Financial Services, Inc. First, the two firms, in 2017, failed to disclose their conflicts in connection with third party compensation received. Second, in relation to certain periods, beginning in 2015, the firms failed to seek best execution for certain clients in connection with the investment of their shares in mutual funds that paid revenue to the adviser. The firms also failed to properly implement policies and procedures designed to preclude conflicts. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings, Respondent agreed to implement certain under takings. The firm also consented to the entry of a cease-and-desist order based on the Sections cited in the order. It will pay disgorgement of $1,150,505 and prejudgment interest of $258,953.29, and a civil penalty of $700,000. A fair fund will be established.

Offering fraud: SEC v. Prosky, Inc., Civil Action No. 1:21-cv-07568 (S.D.N.Y. Filed September 10, 2021) is an action which names as defendants Prosky, a firm that claims to offering recruitment services through software and automation, and its Crystal Huang, its CEO. The complaint alleges that over a five-year period, beginning in February 2015, Defendants mislead investors who purchased interests in the private firm by making a series of misrepresentations regarding its financial condition. Investors sought to put their capital into minority owned entities. Potential investors were furnished with falsified bank records and customer lists. Much of the investor capital was diverted to personal use. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25203 (September 14, 2021).

Misappropriation: SEC v. Borges, Civil Action No. 20-cv-10051 (S.D.N.Y. Filed December 1, 2020) is an action which names a defendants Raquel Moura Borges and her fund, Global Access Investment Advisor, LLC. The complaint alleges that over a five-year period, beginning in 2013, Defendants misappropriated investor funds through a series of methods. Those including directing the sale of securities to misappropriate the proceeds, arranging loans against securities that eventually necessitated a sale, and stealing investment funds. All of these schemes were covered-up with falsified documents. The complaint alleges violations of each subsection 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. 25209 (September 16, 2021).

Hong Kong

Consultation: The Securities and Futures Commission concluded a consultation on anti-money laundering guidelines. The agency released the consultation conclusions on September 15, 2021. The conclusions are available here.

Singapore

Growth initiatives: Gan Kim Yong, Minister of Industry, announced a package of initiatives to support high-growth enterprises to raise capital in Singapore’s public equity market and broaden Singapore’s position as a financing hub on September 17, 2021 (here). r

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Chair Gensler testified on Capitol Hill earlier this week, outlining key initiatives he is exploring. The list of projects that Mr. Gensler is implementing is long and daunting. The day after his testimony the Chair appeared on CNBC where he reiterated a number of the projects mentioned in his testimony (here). He also suggested that the Commission needs a budget increase and more staff.

The projects identified by Chair Gensler included:

Market structure: The staff has been requested to look at five market structure projects. For the treasury market the staff has been asked to work with colleagues at the Department of the Treasury and the Federal Reserve on how to enhance resiliency and competition. He also requested that the staff reconsider some initiatives on Treasury trading platforms and to evaluate leveling the playing field by making sure that firms who are significant traders in the market are registered as dealers with the SEC.

Non-treasury fixed income market: Staff has been requested to consider how to improve efficiency and transparency in the fixed income markets – corporate bonds and municipal bonds.

Equity markets: Three projects are on tap here: 1) greater competition and efficiency; 2) how to address conflicts; and 3) ensure a level playing field.

Security-based swaps: Most of the projects here are in progress. The agency is currently implementing new rules here. Shortly, new post-trade transparency rules will go into effect. The Commission also has to finish the rules for registration and regulation of security-based swaps execution facilities. Finally, the staff has been asked to consider the implementation of new Exchange Act Section 10B which is concerned with disclosure of positions in the area.

Crypto: In this area the agency has several projects underway that may need Congressional assistance: the offer and sale of tokens; crypto trading and lending platforms; stable value coins; investment vehicles providing exposure to crypto assets or crypto derivatives; and custody of crypto assets. The Commission is also working with the CFTC in areas where the two overlap. In addition, the agency is reaching out to to the Federal Reserve, Department of Treasury and Office of the Comptroller. He is also encouraging platforms to come in and meet with the agency.

Predictive data analytics: Analytics are a key part of the transformative time in which we live, notes Chair Gensler. Advances here could inadvertently reflect historical biases from various data sets. The Commission just published a request for comment on digital engagement practices.

Issuer disclosure: The staff has been asked to develop proposals keyed to disclosure around climate risk, human capital, and cybersecurity.

SPACs, China and 10b-51 plans: Initially, the staff is developing recommendations to enhance disclosure around SPACs. Second, while Congress passed legislation last year regarding foreign entity disclosure, the agency is working to enhance disclosures regarding Chinese firms. There was no mention of requiring that Chinese firms comply with the SOX requirements regarding inspection of audit work papers. Finally, the agency is examining how to tighten the rules around the use of 10b-5-1 plans.

Funds and investment management: One project focuses on accountability for funds which, for example, label themselves as green or sustainable or with similar phrases. A second centers on private funds and conflicts of interest where enhanced disclosure may be key. Finally, Chair Gensler believes that the agency needs to build greater resiliency for money market funds and open-ended funds.

Enforcement and examinations. Despite all the projects, Enforcement continues to be the cop on the beat. At the same time Examinations is the ‘eyes and ears of the Commission.”

The list of projects underway is clearly long and ambitious. It is also incomplete, not mentioning topics like gamification and payment for order flow. Nevertheless, Chair Gensler is clearly engaging in a very ambitious list of projects.

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