This Week In Securities Litigation (Week of October 4, 2021)
The Commission has a full plate of issues to consider, ranging from payment for order flow to crypto. This past week, however, the focus was on how many cases were filed for the just ended government fiscal year. The Commission closed out the government fiscal year with a race to the finish for filing cases. While the numbers are essential for the budget hearings that often follow the end of the year, all state that the question is not the number of cases but the quality. Nevertheless, the list of cases below illustrates that numbers have been a concern recently.
Be careful, be safe this week
SEC
Proposed rules: The Commission proposed a package of amendments to Form N-PX to enhance the information mutual funds, exchange-traded funds and certain other funds report about their proxy votes, according to a release dated September 29, 2021(here). See also Chair Gensler’s remarks on these proposals (here).
Remarks: Chair Gensler delivered remarks before the Asset Management North America Conference (September 29, 2021)(here).
Whistleblowers: The Commission barred from the whistleblower program two individuals who have filed “hundreds of frivolous award applications.” These individuals have repeatedly over the years submitted applications that “bore no relation to the underlying enforcement action for which they were applying,” according to the September 28, 2021 release.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 14 civil injunctive actions and 8 administrative proceedings, exclusive of tag-along and other similar proceedings.
Causing wrongful conduct: LPL Financial LLC, Adm. Proc. File No. 3-20612 (September 30, 2021) is a proceeding which names as respondent the registered broker-dealer and investment adviser. This proceeding follows the action SEC v. Eugenio Garcia Jimenez, Jr., Civil Action No. 3:20-cv-01682 in which Mr. Garcia is alleged to have defrauded the city of Municipio Autonomo de Mayaguez, Puerto Rico in 2016. The action against LPL is based on the failure of Respondent to verify and respond to conflicting information when it opened accounts and transferred funds for Mr. Garcia when he approached LPL to open an account after misappropriating $4.1 million from the city. During the opening LPL failed to comply with its Customer Identification Program despite a series of questions internally. Respondent also processed wire transfers and was able to misappropriate an additional $3.1 million. The Order alleges violations of Exchange Act Section 17(a), Securities Act Sections 17(a)(2) and (3) and Advisers Act Section 206(2). To resolve the proceedings Respondent undertook certain remedial acts and consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, LPL agreed to pay a penalty in the amount of $750,000.
Custody rule: In the Matter of Redwood Wealth Management, LLC, Adm. Proc. File No. 3-20611 (September 30, 2021) is a proceedings which names as respondents the registered investment adviser and its majority owner, Benjamin Lincoln. The Order centers on the failure of Respondents to comply with the custody rule with regard to certain promissory notes. Specifically, in 2019 a Mortgage Company, controlled by one of Respondent Lincoln’s clients, raised funds through the sale of promissory notes. The notes were sold to Redwood clients. Since the CCO and CIO were not aware of the transactions, the notes were in the possession of the Mortgage Company and Redwood had direct access. The Order alleged violations of the custody rule and a failure to properly implement policies and procedures. The Order alleges violations of Advisers Act Section 206(4) and Rules 206(4)-2 and 206(4)-7. To resolve the proceedings Redwood agreed to implement certain undertakings. In addition, Respondents each consented to the entry of a cease-and-desist order based on the Section and Rules cited in the Order. Redwood also agreed to the entry of a censure. Mr. Lincoln will pay a penalty of $20,000. Redwood will pay a penalty of $50,000.
Manipulative trading: In the Matter of Adam Heimann, Adm. Proc. File No. 3-20614 (September 30, 2021) is an action which names as respondents: Mr. Heimann, co-founder and co-owner of MIDAN and EGAM; Michael Periontti, co-founder and co-owner of the two entity respondents; EGM Firm Inc., a firm paid by issuers for articles, newsletters and similar items; and MIDAN Ventures LLC, a firm in the same business as MIDAN. The Order alleges that over a three-year period, beginning in July 2016, Defendants conducted promotional campaigns for various microcap issues. During those campaigns which Defendants secretly controlled, they engaged in manipulative trading and failed to accurately disclose the compensation paid to the promoters. Respondents agreed to implement certain undertakings. The Order alleges violations of Securities Act Section 17(b) and Exchange Act Section 9(a)(2). To resolve the proceedings each Respondent consented to the entry of a cease-and-desist order based on the sections cited in the Order. MIDAM and EGM will each pay a civil penalty of $487,616; Mr. Perinotti will pay a penalty of $97,523; and Mr. Heimann will pay a penalty of $177,245.
Offering fraud: SEC v. Plumber, Civil Action No. 3:21-cv-02331 (N.D. Tx. Filed September 30, 2021) is an action which names as defendants: Mark Plummer, a securities law recidivist who settled an action with the Commission in 2019 and who controls Richmond Engineering; Emilio Barrera, Jr. who controls Petroleum Resources; Prt Consulting, LLC d/b/a Petroleum Resources of Texas; Todd Prince; George Rauch; and Todd Breitling. Beginning in November 2018, and continuing through September 2020, Defendants Plummer and Berrea, along with their respective companies, defrauded over 80 investors out of $7 million through the sale of unregistered shares based on false representations relating to oil and gas properties. Following the execution of the SEC consent decree however, Mr. Plumber chose to stay out of site. Defendant Berrea ran the deal with Mr. Plummer in the background. During the offering multiple misrepresentations were made. Those concerned their experience, and about the use of the investor money – it was supposed to go into the properties but did not. In fact, portions of the funds were misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 25235 (September 30, 2021).
Fraudulent fees: In the Matter of Donna M. Silverman, Adm. Proc. File No. 3-20609 (September 30, 2021) is an action which names as respondent the chief portfolio manager for the fund. The proceedings center on the inflation of the asset values of the TCA Management Group Corp., a registered investment adviser to TCA Global Credit Master Fund, LP and its two feeder funds. Over a three-year period, beginning in 2016, Respondent used non-binding transactions and fraudulent investment banking fees to calculate monthly NAV. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(4). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. She will be barred from serving in a supervisory capacity in the securities business with a right to apply for reentry after three years. She will also pay a penalty of $50,000. The funds will be transferred to a receiver appointed in a related enforcement action., SEC v. TCA Fund Management Group, Corp., Civil Action No. 1:20-cv-21964 (S.D.Fla.); See also In the Matter of Robert D. Press, Adm. Proc. File No. 3-20610 (September 30, 2021)(based on similar facts to above; the Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) 206(4) and 207; resolved the entry of a cease-and-desist order based on the Sections cited in the Order; with a bar from the securities business and from serving as an offer/director and the payment of $4,409,546 in disgorgement, $755,178 in prejudgment interest and a penalty of $22,570; payments will go to the receiver).
Fraudulent trading: SEC v. Wakefield, Civil Action No. 21-cv-5168 (N.D. Ill. Filed September 30, 2021) is an action which names as defendant Keith Wakefield, a registered representative at IFS Securities, Inc. From June 2019 through August 2019 Defendant engaged in unauthorized speculative trading in U.S. Treasury securities. To create the appearance of legitimate trading profits he disguised the unauthorized trading losses. Previously, from January 2017 through August 2019 he fraudulently obtained about $820,000 in commission payouts based on fictitious customer commissions that he fabricated and recorded on the firm books. His unauthorized trading and fictitious commissions in 2019 caused the firm to violate its net capital obligation. Ultimately the firm tumbled into bankruptcy. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The action is pending. The U.S. Attorney’s Office for the Northern District of Illinois filed a parallel criminal action. See Lit. Rel. No. 25239 (October 1, 2021).
Offering fraud: SEC v. Ciccone, Civil Action No. 2:21-cv-17768 (D.N.J. Filed September 29, 2021) is an action which names as defendants Gregory Ciccone and his firm, Platinum Travel And Entertainment, LLC. Over a period of less than two years, beginning in July 2018, Defendant offered and sold notes to investors for the claimed purpose of securing hotel reservations as part of the firm’s luxury travel business. Investors were told that the company would rent blocks of rooms and resell them at higher prices. As the scheme progressed Mr. Cicone recruited a friend to act as a sale agent. Rather than invest the funds as claimed, much of the money was misappropriated. 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.
Insider trading: SEC v. Sanchez, Civil Action No. 1:21-cv-08085 (S.D.N.Y. Filed September 29, 2021) is an action which names as defendants Mr. Sanchez, an employee in Poland of a major investment bank. The complaint alleges that from September 2020 to May 2021 Mr. Sanchez traded on inside information on 45 deals he learned about through his job. The trading netted him at least $471,700 in trading profits. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). The case is pending.
Misrepresentations: In the Matter of Soterira Capital, LLC, Adm. Proc. File No. 3-20607 (September 28, 2021) is a proceeding which names as respondents: the firm, previously a registered investment adviser; Derek Clark, the firm’s founder; and Laura Santos, its CCO. Respondents engaged in a series of violations which included: overstating client returns and thus fees; improperly registering the firm as an adviser; violating the custody rule by not having an annual audit or a surprise audit; failing to keep accurate records; and having misstatements in its advertising and filings. The Order alleges violations of Advisers Act Sections 203A, 204, 206(2), 206(4) and 207. To resolve the proceedings Respondents Soteria and Clark each consented to the entry of a cease-and-desist order based on the Sections cited in the Order. Respondent Santo also consented to the entry of a cease-and-desist order but based on Advisers Act Sections 203A, 206(4) and 207. Respondent Soteira is censured. Respondent Clark is barred from the securities business with a right to apply for reentry after 5 years while Respondent Santo will be barred with a right to apply for reentry after 1 year.
Misappropriation: SEC v. Salamah, Civil Action No. 3:21-cv-50371 (N.D. Ill. Filed September 28, 2021) is an action which names as defendant Naseem Mohammed Salamah, an adviser representative for a state registered adviser. Mr. Salamah, over a period of four years beginning in 2017, is alleged to have misappropriated about $968,582 from three elderly advisory clients. Those clients were told by Defendant that he was diversifying their holdings – a false statement. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). Defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. The question of monetary relief will be considered by the Court. The U.S. Attorney’s Office for the Northern District of Illinois filed parallel criminal charges. See Lit. Rel. No. 25233 (September 28, 2021). In addition, Respondents Soteira and Clark will, on a joint and several basis, pay disgorgement of $340,231 and prejudgment interest of $61,774. Respondent Clark will pay a penalty of $150,000. Respondent Santos will pay a penalty of $15,000. The penalties will be distributed through a fair fund.
Misappropriation: SEC v. Birnbaum, Civil Action No. 1:21-cv-08047 (S.D.N.Y. Filed September 28, 2021) is an action against attorney Jaeson Birnbaum, the owner and operator of Cash4Cases, a litigation funding firm. Over a ten-year period beginning in 2010, the firm extended loans to individual in tort litigation collateralized by the potential recoveries. At times the firm also turned to individuals to obtain funding, although the business was largely funded by institutional lenders. In seeking investors the firm made material misrepresentations to four individuals. Defendant also misappropriated portions of the client funds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25232 (September 28, 2021).
Trading – wash sales: SEC v. Gu, Civil Action No. 21-cv-17578 (D.N.J. Filed September 27, 2021) is an action which names two friends as defendants, Suyun Gu and Yong Lee. Defendants implemented a trading scheme in the first quarter of 2021 to utilize wash trades to take advantage of the maker-taker fees in the markets paid by some brokers. First, Defendants used accounts at a broker that passed back to clients the rebate collected for providing liquidity by placing limit orders for out-of-the-money options. Second, Defendants would go to a different broker that did not pass along take fees to place orders on the opposite side of the market for the same put options. This trade completed the wash trade since it effectively canceled out the first trade. Defendants profited by keeping the rebate. By implementing the scheme repeatedly, Defendants were above to make over $1 million in profits in a short period. Stated differently, what were actually riskless wash trades made a profit. To conceal their actions Defendants used the accounts of friends. Defendant Gu placed most of the trades. The complaint alleges violations of Securities Act Sections 17(a)(1) and (2) and Exchange Act Section 10(b). To resolve the case Defendant Lee consented to the entry of permanent injunctions based on the Sections cited in the complaint. He also agreed to pay disgorgement in the amount of $51,334, prejudgment interest of $515 and a penalty of $25,000. Defendant Gu, who placed most of the trades, did not settle. That action is in litigation.
Offering fraud: SEC v. C3 International, Inc., Civil Action No. 8:21-cv-1586 (C.D. Ca. Filed September 28, 2021) is an action which names as defendants Steele Clarke Smith III, a convicted felon who controls defendant C3 International, Inc. and is the husband of defendant Theresa Smith. Over a period of eight years, beginning in October 2011, Defendants raised about $2 million from 40 investors who purchased stock in C3 based on misrepresentations regarding the firm’s business and cannabis pill known as Idrasil. The funds raised were supposed to be used for the business but were not; the prior criminal conviction of Mr. Smith was not disclosed; and over $1 million of investor funds were misappropriated. Defendant Theresa Smith facilitated the fraud through the use of social media. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The complaint is pending. See Lit. Rel. No. 25231 (September 28, 2021).
Offering frauds: SEC v. Xia, Civil Action No. !:21-cv-05350 (E.D.N.Y. Filed September 27, 2021) is an action which names as defendants: Richard Xia and Fleet New York Metropolitan Regional Center, LLC. Defendant Xia is an immigrant from China; Fleet New York is a USCIS approved regional center. Over a seven-year period Defendants raise over $229 million from offerings of limited partnership interest focused largely on Chinese foreign nationals who wanted to participate in the EB-5 program. Under that program foreign nationals can obtain a green card for investing a designated sum in a project that creates a certain number of jobs. In this case Defendants pitched investments in two projects, one called the Eastern Mirange and the other the Eastern Emerald. Each was a building project that was supposed to be funded from a variety of sources. Defendants claimed that they had the expertise to manage the project and that it would be affiliated with the Weston Hotel chain. In marking the projects Defendants exaggerated their size and failed to disclose their conflicts. Defendants also concealed the manner in which the funds were handled, allowing $9.7 million to be diverted to personal use. While investor funds remain, the project is under strain as Defendants continue to misuse investor funds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25230 (September 28, 2021).
Transfer agent failures: SEC v. Ferguson, Civil Action No. 1:21-cv-08017 (S.D.N.Y. Filed September 27, 2021) is an action which names as defendants: Michael J. Ferguson, Jr.; Foreign Private Trust, a Commission registered transfer agent and a private trust; and Noble Mikhail Jabal Mohommet Fridaus El, the Trust’s CEO. Following its registration with the Commission in 2019 the firm essentially failed to file required reports with the agency. For example, it did not file its annual report for the first year of operation. Following an examination by the Division of Examinations the transfer agent was required to file certain reports. It failed. No annual reports were filed for 2019 and 2020. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3), 17A(d)(1) and 17(A)(c)(2). The case is pending. See Lit. Rel. No. 25227 (September 28, 2021).
Offering fraud: SEC v. Sky Group USA, LLC, Civil Action No. 1:21-cv-23443 (S.D. Fla. Filed September 27, 2021) is an action which named as defendants the firm, a finance company, and Efrain Betancourt, Jr., the firm’s CEO. The company specialized in what are known as pay day loans – those targeted to persons in lower economic circumstances. Over a four-year period, beginning in 2016, the company sold promissory notes to investors that were supposed to pay high rates of return and were represented to be safe. Investor were told that the firm was profitable. About $66 million was raised from over 500 investors. In fact, the firm was not profitable. In fact, it made a number of Ponzi type payments and portions of the investor revenues were misappropriated. The scheme unraveled when investors were told that repayments were suspended. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 25234 (September 29, 2021).
Offering fraud: SEC v. Verdegroup Investment Partners, Inc., Civil Action No. 2:21-cv-07663 (C.D.Ca. Filed September 27, 2021) is an action which names as defendants Thomas Gaffney, a recidivist who controlled Defendant Verdegroup Investment Partners, Inc. and Lisa Gordon. The action focused on the solicitation of investors in 2018 and 2019 to put money into the firm to fund a marijuana disguised. In making the solicitations Mr. Gaffney disguised his role and had the funds transferred to a third party which facilitated misappropriating portions of the money. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and 17(a) and Exchange Act Sections 10(b), 15(a) and 20(a). The case is pending. See Lit. Rel. No. 25228 (September 27, 2021).
Offering fraud: SEC v. Genovese, Civil Action No. 25226 (S.D.N.Y.) is a previously filed action which named as defendants: Nicholas J. Genovese; Willow Creek Investments, LP; and Willow Creek Advisors, LLC. The complaint alleged that Mr. Genovese and his Willow Creek entities conducted an offering fraud that raised over $5.3 million from six investors by misrepresenting his industry experience and the size of the business and concealing Mr. Genovese’s past criminal history. The matter was resolved as to Mr. Genovese and Willow Creek Investments, each of whom consented to the entry of by the Court permanent injunctions based on Securities Act Sections 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(1), 206(2) and 206(4). Mr. Genovese was ordered to pay a civil penalty of $1 million. See Lit. Rel. No. 25226 (September 27, 2021).
Offering fraud: In the Matter of Resolute Capital Partners LTD, LLC, Adm. Proc. File No. 3-20597 (September 24, 2021) is an action which names as respondents the firm, Homebound Resources LLC, Thomas Powell, the owner of Resolute Capital, also a Respondent, and Stefan Toth, the owner of Homebound Resources, LLC, also a Respondent. Over a three-year period, beginning in 2016, Respondents sold over $250 million in debt and equity securities in unregistered offerings based on working interest in oil and gas wells to retail investors. The disclosure was either insufficient or false. For example, Respondents provided projections with insufficient supporting facts regarding future production; made statements about potential tax benefits that were not available to certain investors; overstated cash reserves; and made incomplete disclosure regarding the potential use of the funds. The Order alleges violations of Securities Act Section 5(a), 5(c) and 17(a)(2) and (3) and Exchange Act Section 15(a). In resolving the proceedings, Respondents agreed to implement certain undertakings. In addition, each Respondent consented to the entry of a cease-and-desist order based each Securities Act Sections cited in the Order and, in addition the individual Respondents also consented to the entry of a cease-and-desist order based on the Exchange Act Section cited in the Order. Each of the individual Respondents also consented to the entry of an order barring them from: the securities business, serving in any capacity with an advisory firm or underwriter and from participating in any penny stock offering. Respondents Powell and Toth will each pay a penalty of $75,000; each firm will pay $225,000.
Offering fraud: SEC v. Star Chain, Inc., Civil Action No. 1:21-cv-03944 (N.D. Ga. Filed September 24, 2021) is an action which names the firm and Timur Efe a/k/a Omer Casurluk, a Turkish national, as defendants. Defendant Casurluk is the organizer of the defendant firm. Defendants, through 23 affiliated firms known as the US Star Companies, raised about $9 million from 30 investors who were told they were acquiring quick-serve restaurant franchises in the Southeastern part of the U.S. A number of misrepresentations were made to investors including a representation that the US Star Companies would make substantial investments in the operations. Acquisition costs were also overstated and misstatements were made as to the accounting of investor funds. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25225 (September 27, 2021).
Unregistered dealer: SEC v. Carebourn Capital, L.P., Civil Action No. 21-cv-2114 (D. Mill. Filed September 24, 2021) is an action which names as defendants: the firm; and Chip A. Rice, previously a licensed broker at Blinder Robinson. Over a four-year period, beginning in January 2021, Defendants operated a business model in which they purchased convertible notes from penny stock issuers and quickly converted and sold the shares for more than 100 issues. In operating this model Defendants acted as unregistered dealers. The complaint alleges violations of Exchange Act Section 15(a)(1). The case is pending. See Lit. Rel. No. 25223 (September 27, 2021).
FinCEN
Regulations: The agency issued an advanced notice of rule making in which it will solicit public comment on a range of questions to implement the amendments to the Bank Secrecy Act regarding the trade in antiquities (September 23, 2021)(here).
Australia
Report: The Australian Securities and Futures Commission published its Report on Competition in the Australian Funds Management Industry on September 24, 2021 (here).
ESMA
Program: The European Securities and Markets Authority published its 2022 Annual Work Program on September 28, 2021. The program sets out its priority work areas for the next twelve months (here).
Hong Kong
Bulletin: The Securities and Futures Commission of Hong Kong published its Takeovers Bulletin on September 2m 2021. It is a quarterly update on the activities of the Takeovers Team (here).
Singapore
New program: The Monetary Authority of Singapore announced on October 1, 2021 the introduction of a new digital platform and enabling regulatory framework for financial institutions. The purpose of the platform is to facilitate cooperation to prevent money laundering, terrorism financing and proliferation financing (here)