Trends in SEC Enforcement: 1Q 24 Part III
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Trends in SEC Enforcement: 1Q 24 Part III
This third part of the series focused enforcement actions filed during the first quarter of 2024 focuses on significant cases filed during the first quarter that were not in one of the major groups of actions. Those cases were discussed in Part I (here) and Part II of this series (here). Below are examples of those case in the order in which they were filed by the Commission.
The cases in this group range from those involving false statement to those centered on insider trading, whistleblower, crypto assets, municipal bonds, Regulation BI, unprofessional conduct and misrepresentations to insider trading. Each is an important topic. Consideration of the examples below in conjunction with the cases in the five largest groups detained in the earlier segments of this series illustrates the scope of the work done by the Commission in policing the markets in the first quarter of this year. The cases below are essentially listed in the order they were filed by the Commission.
False statements</p>
In the Matter of Northern Star Investment Corp.II, Adm. Proc. File No. 3-21838 (January 25, 2024) is a proceeding with names as Respondent an entity formed in 2020 which is a special purpose entity. It had no operations or business. In late January 2021 the firm completed an IPO of 40 million units priced at $10 each. In February 2021 the firm announced an agreement to merge with Apex Clearing Holdings, LLC. The Form S-1 filed for the deal denied that there had been substantive conversations involving the parities prior to the deal. In fact, the statement was not true. Conversations about a deal traced back months. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceedings Norther Star consented to the entry of a cease-and-desist or based on the Section cited in the Order. The firm also agreed to pay a penalty of $1.5 million. If, however, the company returns all the funds in its trust account to the investors by April 30, 2024 the Commission will not impose the penalty.
SEC v. Barbera, Civil Action No. 1:20-cv-10353 (S.D.N.Y.) is an action which names as defendant Carl Smith. The complaint alleged that over a three-year period, beginning in 2015, Defendant sold shares of Nanobeak Biotech Inc., using a series of false statements. The complaint also claimed that former company CEO, Jeremy Barbera, solicited and sold shares of the company using false and misleading statements. Mr. Smith resolved the matter, consenting to the entry of permanent injunctions based on Exchange Act Section 10(b). The final judgment imposed a penalty of $100,0900 and ordered the payment of disgorgement in the amount of $173,875 plus prejudgment interest of $23,470.5. See Lit. Rel. No. 25927 (January 18, 2024).
Trading
In the Matter of Pawan Kumar Passi, Adm. Proc. File No. 3-21826 (January 12, 2024) names as Respondent the Managing Director of Morgan Stanley & Co.’s Syndicate Desk during the relevant period. Over a three-year period, beginning in June 2018, Mr. Passi disclosed to select buy-side investors non-public, potentially market-moving information concerning impending block trades that the firm had been invited to bid on or was in the process of negotiating with the selling shareholders. This permitted the investors who received the information to preposition or take a short position in the stock that was about to become the subject of the block trade. Those disclosures violated the applicable confidentiality provisions regarding the treatment of confidential information. The Order alleges violations of Exchange Act Section 10(b). Respondent resolved the proceedings by consenting to the entry of a cease-and-desist order based on the Section cited in the Order. Respondent will be barred from the securities business and from participating in any penny stock offering. Respondent can apply for readmission after one year. Respondent is also subject to certain limitations on his activities. In addition, he will pay a penalty of $250,000. See also In the Matter of Morgan Stanley & Co. LLC, Adm. Proc. File No. 3-21825 (January 12, 2024 (proceeding naming as Respondent the firm which employed Respondent Passi; it failed to enforce written policies designed to prohibit the wrongful conduct; the Order alleges violations of Exchange Act Sections 10(b) and 15(g); resolved with entry if a consent decree based on the Sections cited, a censure and the payment of disgorgement in the amount of $138,297,046 and prejudgment interest of $28,057,775. Those amounts are offset amounts paid as forfeiture or restitution for the benefit of victims in the parallel non-prosecution agreement with the USAO for SDNY.
Whistleblowers
In the Matter of J.P. Morgan Securities LLC, File No. 3-21829 (January 16, 2024). From 2020 through July 2023 the firm engaged in conduct that violated the whistleblower protection provisions of the Exchange Act. Specifically, brokerage and brokerage clients to whom a credit or settlement of over $1,000 were asked to sign a confidential release agreement. It required clients to keep confidential the Release and all information relating to the specified account at the firm. The prohibition included all information relating to the specific account. The Release did permit clients to respond to inquiries from the Commission. It did preclude voluntary communications with the agency concerning potential securities law violations. The Order alleged violations of Exchange Act Rule 21F-17(a). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Rule cited in the Order. The firm was also censured. In addition, the firm will pay a penalty of $18 million.
Crypto assets
SEC v. Sewell, Civil Action No. 1:24-cv-00137 (D. Del. Filed February 2, 2024) is an action which names as defendants: Brian Sewell and Rockwell Capital Management LLC, respectively, the founder and CEO of the American Bitcoin Academy and Defendant Rockwell Capital Management, LLC. Beginning in May 2017, and continuing for the next year, Defendant Sewell convinced potential investors that he ran a school that taught courses about bitcoin assets and that he would invest their capital in crypto assets and make a profit. In fact, he did invest their money and lost it in trading. After about one year he furnished the 15 investors who entrusted them with their money false account statements. At one point he also persuaded some of the investors to “roll” their investment into Zion Traders, LLC, another firm he created. Again, the investor capital was lost. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendants have agreed to settle the charges, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. They also agreed to pay disgorgement and prejudgment interest in the amount of $1,602,089. Mr. Sewell agreed to pay a penalty of $223,229. See Lit. Rel. No. 25936 (February 2, 2024).
SEC v. Lee, Civil Action No. 24-cv-00296 (D. Md. Filed January 29, 2024). Named as defendants in this action are: Xue Samuel Lee, known as Sam Lee and Brenda Indah Chunga, known as Bitcoin Beautee. Sam Lee is an Australian national who resides in Dubai. He is the co-founder of HyperFund and Blockchain Global Ltd. Bitcoin Beautee resides in Maryland. Defendants operated a crypto asset, multi-level marketing pyramid and Ponzi scheme that is claimed to have raised over $1.7 billion worldwide through a series of projects called HyperFund. HyperTechGroup, supposedly a blockchain tech conglomerate, was founded by Defendant Lee and others in 2020. The sales pitch centered on claims that the firm had a decentralized or DeFi finance ecosystem for crypto asset market participants. Defendants’ goal was to brand and rebrand the schemes. Over a two-year period, beginning in 2020, Hyper Fund offered what were called Membership packages. Returns were passive, supposedly from crypto mining operations. The operation promised returns of 0.5% to 1% per day. Investors were told that they could triple an investment in 600 days. HyperFund was in fact a pyramid and Ponzi scheme. It had no actual source of income except investors. Contrary to claims, HyperFund did not engage in large scale crypto asset mining. The firm did hire an actor to pose as CEO when HyperVerse was launched. Since that time there has been no real revenue — investor returns were paid with new cash from other investors. Investor capital, the only real source of revenue, was generated by making a series of false statements. In 2022 the firms collapsed. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. In the parallel criminal investigation, being conducted by the U.S. Attorney’s Office for the District of Maryland, Defendant Chunge pleaded guilty to conspiracy to commit securities and wire fraud. See Lit. Rel. No. 25933 (January 30, 2024).
Mini bonds
SEC v. Comer Capital Group, LLC, Civil Action No. 19-cv-04324 (N.D. Ill.) is an filed action which named as defendants Comer Capital Group LLC and Brandon L Comer. The complaint alleged that defendants breached their fiduciary duty in connection with a $6 million municipal bond offering by the Harvey Public Library District of Harvey, Illinois. Specifically, the adviser failed to properly advise on the retention of an experienced adviser and the pricing of the bonds. Defendants consented to the entry of a final judgment based on Exchange Act Section 15B(c)(1). In addition, Defendant will pay disgorgement in the amount of $25,000 plus prejudgment interest and each Defendant will pay a penalty in the amount of $30,000 and $20,000 respectively. See Lit. Rel. No. 25935 (January 31, 2024).
Regulation BI
In the Matter of TIAA-CREF Individual & Institutional Services, LLC, Adm. Proc. File No. 3-21856 (February 16, 2024) is a proceeding which names as respondent the dual registered broker-dealer/investment adviser. Beginning at the end of June 2020, and continuing for over one year, the firm failed to comply with certain of its obligations under Regulation Best Interest or Reg BI when making recommendations to clients. Specifically, in recommending initial investments the firm focused on what it called “core investments.” What it failed to tell clients is that virtually the same investments were available at less cost. Similarly, when offering various types of funds only the more expensive ones were mentioned – clients were not informed that less costly but virtually the same funds could be acquired. The firm also failed to establish and maintain written policies and procedures to ensure that the Reg BI requirements were met. The Order alleges violations of Exchange Act Rules 15l-1(a)(1) & (2). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Exchange Act Rules cited. In addition, the firm agreed to pay disgorgement in the amount of $936,714, prejudgment interest of $103,424.91 and a civil penalty of $1.250 million. The Commission considered the remedial actions of Respondent.
Unprofessional conduct
In the Matter of Ellen McCarthy, Esq., Adm. Proc. File No. 3-21897 (March 21, 2024). Respondent McCarthy is an attorney admitted to practice in the state of New York in 1989. Her career centered on regulatory and compliance work. Early in her career she focused work for self-regulatory organizations. Later she served as a compliance professional in the private sector. Recently, she informed the staff that she is retired. This matter focuses on an order entered by the Commission in May 2018 directing that Manhattan Transfer Register Company comply with certain undertakings. It directed that the firm retain an independent consultant to prepare a report identifying deficiencies and weaknesses in its policies, procedures and supervisory controls. This included the implementation of those policies and procedures. Manhattan hired an independent consultant or IC who in turn retained Ms. McCarthy. IC and Ms. McCarthy submitted their independent consultant Report to the Commission on or about September 13, 2018. This completed their engagement. Under the terms of the engagement both IC and Ms. McCarthy were required to remain independent of Manhattan Transfer for two years following the completion of the Report. By late September 2018, however, Ms. McCarthy disregarded her obligation. Specifically, she continued to perform work for the company. Respondent did request that the Commission permit her to accept the engagement in August 2018, prior to commencing work. She did not wait for a response before commencing work, however. By September 21, 2018, the staff informed Ms. McCarthy that she had to honor her commitment to remain independent. Ms. McCarthy continued with her engagement. She did take steps to conceal her activities after the staff denied her request. The Division of Enforcement later opened an investigation into the matter. During her testimony Ms. McCarthy made false statements. The Order alleges violations of Rule 102(e)(1)(ii). The proceeding was resolved when the Commission accepted Ms. McCarthy’s settlement offer and entered an order denying her the privilege of appearing or practicing before the Commission.
Misrepresentations
In the Matter of Delphia (USA) Inc., Adm. Proc. File No. 3-21894 (March 14, 2024). Delphia is a registered investment adviser based in Toronto, Canada. The firm managed about $7 million for 29,000 individual retail account using robo-advisory services and about $180 million for five pooled investment vehicles. The advisory has now ceased its investment activities. In 2019, not long after registering with the Commission, the firm developed algorithms to manage retail client portfolios based on different investment objectives and risk profiles. Delphai intended to use artificial intelligence and machine learning to collect data from its clients as inputs into its algorithms. Over the last five years, however, the advisory did not collect the data. Nevertheless, the firm claimed in a press release that it was “the first investment adviser to convert personal data into a renewable source of investment capital . . . that will allow consumers to invest in the stock market using their personal data.” This happed, according to the advisory, because it used “machine learning to analyze the collective data shared by its members to make intelligent investment decisions.” By 2020 the firm expanded its claims, telling investors that it turns “your data into an unfair investment advantage.” The adviser supposedly did this by putting client data to work as inputs into its investing algorithms. The claims were false, a fact that emerged while the Division of Examinations was conducting an exam. While Delphia admitted its wrongful conduct and promised to stop, it did not. The claims about AI continued. The company also failed to create and implement the appropriate compliance programs. It did cooperate with the Commission. The Order alleged violations of Exchange Act Sections 206(2) and 206(4) and the related Rules. To resolve the matter, Delphia consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure. In addition, the firm agreed to pay a penalty of $225,000. See also In the Matter of Global Predictions, Inc., Adm. Proc. File No. 3-21895 (March 18, 2024).(Similar action; resolved with a cease-and-desist order based on same Sections and a penalty of $175,000).
Insider trading
SEC v. Qsar, Civil Action No. 24CV0570 (S.D.Cal. Filed March 26, 2024) is an action which names as defendants: Jordan Qsar; Grant Whitherspoon; Austin Bernard; and Chase Lambert. Each Defendant was a minor league baseball player. Defendant Qsar returned home during a break in the season in October 2021. During that period, he socialized with a close friend who was Finance Employee for Jack in the Box Inc. At the time Finance Employee was working on Jack in the Box’s acquisition of Del Taco, a fact he communicated to his friend Mr. Qsar. The information was supposed to be confidential. Nevertheless, Mr. Qsar traded in mid-October and late November while in possession of the inside information. In addition, he tipped Defendants Bernard, Witherspoon and Lambert. Each traded. After the deal was announced the share price increased 66%. The four men sold their shares and reaped $189,000 in profits. The complaint alleges violations of Exchange Act Section 10b. The case is in litigation. See Lit. Rel. No. 25956 (March 26, 2024).
Next: The conclusion to the 1Q24 series