The Commission continued to issue new rules last week. This time the proposals seeks to eliminate certain conflicts tied to the securitization process. At the same time investors are watching for the promised environmental disclosure rules which have been under consideration since early last year. Those proposals will supposedly be designed to harmonize disclosures on key topics, a result which could facilitate comparisons the approach to key climates being taken by various issues which may facilitate comparisons.

SEC

Proposed rule: The Commission proposed a rule to prohibit certain conflicts of interest in securitizations, according to a release issued on January 25 2023 (here).

Whistleblowers: The agency made a $28 million award to joint whistleblowers on January 25, 2023.

Be careful, be safe this week

SEC Enforcement – Filed and settled actions

During the last week the Commission filed 3 new civil injunctive actions and 1 new administrative proceeding, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.

Offering fraud: SEC v. Laura, Civil Action No. 1:18-cv-050785 (E.D.N.Y.) is a previously filed action which named as defendant Gil de Rubio and others. About 80 investors were defrauded out of over $3.7 million between June 2013 and January 2017, according to the complaint. Investors were induced to purchase shares in a company that falsely claimed to have exclusive rights to a crude oil processing technology. Defendant Gil de Rubio is alleged to have aided and abetted the scheme. The Court entered a final judgment by consent, enjoining Defendant from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The judgment also directs Defendant to pay a penalty of $160,000. See Lit. Rel. No. 25626 (January 26, 2023),.

Offering fraud: SEC v. Ellison-Meade, Civil Action No. 2:23-cv-00521 (C.D. Cal. Filed January 24, 2023) is an action which names as defendant Austin Danger Ellison-Meade. Defendant is the 24 year old “managing partner” of Baycap.io. He claimed to have developed a proprietary algorithm that could identify stocks poised for growth. Over a three-year period, beginning in February 2019, he convinced 31 investors to put about $2.8 million into the firm. In fact, much of the money was misappropriated. To conceal that fact, Defendant distributed false account statements to investors. 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). The action is pending. The U.S. Attorney’s Office for the Central District of California filed parallel criminal charges. See Lit. Rel. No. 2:23-cv-0521 (January 24, 2023).

Misappropriation: SEC v. Liddle, Civil Action No. 3:23-cv-54 (W.D. Wis) is a previously filed action which named as defendant Anthony Little, an employee of state registered investment adviser Prosper Wealth Management. Defendant Little induced at least 13 advisory clients over a period of a period of about 3 years, beginning in June 2019, to move their funds because the portfolios in which they were invested had become “less safe.” Defendant then advised the clients about where to place their funds. In reality, most of the $1.9 million in client funds was misappropriated by Defendant. A small portion was held to make periodic interest payments to clients. 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. 25622 (January 24, 2023).

Manipulation: SEC v. Abujudeh, Civil Action No. 1:21-cv-04110 (E.D.N.Y.) is a previously filed action which named as defendant Charlie Abujudeh. The underlying complaint alleges that Defendant conducted a pump-and-dump market manipulation involving the shares of several penny stocks from August 2019 through September 2020. Misleading statements were made to investors and paid emails were circulated to push-up the price of the shares. The Court entered a permanent injunction precluding Defendant from violating Securities Action Sections 5 and 17(a) and Exchange Act Section 10(b). The Order includes a 5 year penny stock bar and officer director bar in addition to requiring the payment of disgorgement in the amount of $5,423,045, prejudgment interest of $115,993 and a penalty of $414,366. See Lit. Rel. No. 25621 (January 23, 2023).

Manipulation: SEC v. Genovese, Civil Action No. 17-cv-5821 (S.D.N.Y.) is a previously filed action in which the Court entered a final judgement by consent against defendant Abraham Mirman, the former head of investment banking at a now defunct broker-dealer. Defendants were alleged to have implemented a scheme concerning Liberty Silver Corp., a penny stock. Defendant Mirman, the complaint claims, aided and abetted the manipulation and sale of 6.6 million unregistered shares of Liberty Silver to customers of the defunct brokerage. The Court entered a judgment which enjoins Defendant Mirman from future violations of Securities Act Sections 5(a), 5(c) and 17(a)(3). It also imposes a three-year penny stock bar and orders the payment of disgorgement in the amount of $278,519.45, prejudgment interest of $127,006.15 and a penalty of $125,000. See Lit. Rel. No. 25620 (January 20, 2023).

Disclosure: In the Matter of Bloomberg Finance, L.P., Adm. Proc. File No. 3-21284 (January 23, 2023). Respondent Bloomberg Finance is a subsidiary of Bloomberg I.P., a privately held financial, software, data and media firm based in New York City. The firm has long operated a pricing service known as BVAL. It provides daily price valuations to numerous subscribers and customers. Bloomberg Finance is an industry leader. Customers of the firm were told that when valuing fixed income securities it did so either by direct observation algorithm or observed comparable algorithm. The former includes market data about the target security. Those observations are filtered by Bloomberg to include only the highest quality observations. The approach requires that executable levels and indicative market quotes be statistically corroborated. The firm also uses what it calls the Evaluator Input or EIT. This approach incorporates into the algorithm a single data point about the target security. This can be a broker quote that may not have been automatically incorporated by BVAL. What Respondent did not explicitly disclose over a six-year period, beginning in 2016 however, is the fact that in certain circumstances the use of EIT could result in a valuation based on an uncorroborated single data input. This omission made the Bloomberg disclosure materially misleading, according to the Order Instituting Proceedings. This is because it conveyed that the prices of fixed income securities from the observed algorithm were based on value relative to comparable securities only. That in fact is not correct since a single broker quote for the target security might be the basis. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the matter, Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. In addition, Respondent will pay a penalty of $5 million.

Manipulation: SEC v. Eisenberg, Civil Action No. 1:23-cv-00503 (S.D.N.Y. Filed January 20, 2023) is an action which names as defendant Avraham Eisenberg. Beginning in mid-October 2022, Defendant manipulated the price of MNGO tokens, supposedly a “governance token” of Mango Markets that was purchased and sold as a crypto asset security. Using accounts he controlled, Mr. Eisenberg was able to buy and contemporaneously purchase purported perpetual futures (transactions in which one party agrees to pay another based on the performance of another asset) for about 488 million MNGO tokens of the 500 million in circulation. Transactions by Defendant caused the trading volume on one day to be over 2,000% higher than the average volume for the proceeding ten trading days. The transactions also increased the price of MNGO perpetual futures contracts by about 1,300%. The price increases permitted Defendant to withdraw about $116 million in various crypto assets from the platform, essentially draining it of all available assets. Once trading halted, the price declined. Defendant fled the country. The complaint alleges violations of Exchange Act Sections 9(a)(2) and 10(b). The case is pending. See Lit. Rel. No. 25623 (January 23, 2023).

Offering fraud: SEC v. Ridall, Civil Action No. 1:23-cv-20200 (S.D. Fla. Filed under seal January 18, 2023). Named as defendants in the action are: Jack Ridall and his firm, Guss Capital. Beginning in December 2020, Defendants raised at least $750,000 from four investors. The funds were supposedly invested through Mr. Ridall’s firm, an unregistered investment adviser. Beginning in late 2020 Defendants touted Mr. Ridall and Guss Capital as experienced fund managers. The firm was supposed to be an “equity long-short investment management company, according to its website. Defendants claimed their portfolio used “correlated market neutral spreads” to secure returns above 20% with minimal risk. Mr. Ridall had deep experience, according to the statements made to investors through family connections. Indeed, Defendant Ridall told one investor that he would waive the standard fee because the investor was “like an uncle” to him. Investors were also furnished documents that included favorable statements from accounting giant KPMG and international law firm K&L Gates. While investor funds were supposed to be put into “blue chip stocks” and a planned hedge fund, in fact they were put into the personal bank account of Mr. Ridall. The KPMG documents were fabricated; the K&L Gates letters were fraudulent; and the claimed investment history of Mr. Ridall was a lie. The complaint alleges violations of each subdivision of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2) and 206(4). The complaint is pending. See Lit. Rel. No. 25624 (January 24, 2023).

FinCEN

Remarks: Acting Deputy Director Jimmy Kirby delivered remarks on January 25, 2023, focused on three points: 1) Emerging threats; 2) responsible innovation; and 3) expanding partnerships and feedback (here).

ESMA

Consultation: The European Securities and Markets Authority is soliciting comments on “funds’ names using ESG or sustainability-related terms.” The consultation will continue until February 20, 2023 (here).

U.K.

Remarks: Jessica Rusu, FCA Chief Data, Information and Intelligence Officer, addressed the Alan Turning Institute, delivering remarks titled Framework for Responsible Adoption of Artificial Intelligence in the Financial Services Industry Event. She offered three points in her remarks: 1) AI should be built on a platform of collaboration; 2) principles of inclusion and diversity of thought are key; and 3) innovation will help lead to better AI regulatory outcomes (here).

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It is often difficult to determine if an investment opportunity is genuine. Those involved in fraudulent conduct are frequently skillful in crafting schemes which appear to be genuine investment opportunities when they are not. Consider, for example, the Commission’s latest offering fraud scheme. There potential investors were furnished a document signed by accounting giant KPMG LLP. They were given attorney letters from well-known law firm K&L Gates that supported representations used by those soliciting investments. Yet all was fraudulent. SEC v. Ridall, Civil Action No. 1:23-cv-20200 (S.D. Fla. Filed under seal January 18, 2023).

Named as defendants in the action are: Jack Ridall and his firm, Guss Capital. Beginning in December 2020, Defendants raised at least $750,000 from four investors. The funds were supposedly invested through Mr. Ridall’s firm, an unregistered investment adviser.

Beginning in late 2020 Defendants touted Mr. Ridall and Guss Capital as experienced fund managers. The firm was supposed to be an “equity long-short investment management company, according to its website www.guscap.com. Defendants claimed their portfolio used “correlated market neutral spreads” to secure returns above 20% with minimal risk.

Mr. Ridall had deep experience according to the statement made to investors. His experience was touted through family connections. Defendant Ridall told one investor he would waive the standard fee because the investor was “like an uncle” to him. Investor funds were supposed to be put into “blue chip stocks” and a planned hedge fund.

To take advantage of the offered investment opportunity, investors executed a subscription agreement. Under the agreement they became part of Defendants’ Guss Actium Fund. After being reassured about the stellar returns earned by prior investors, their funds were deposited in the personal bank account of Mr. Ridall. For example, Mr. Ridall convinced one investor, a childhood friend of his mother who is a single mother, to empty her 401(k) and invest all of her money with him. Mother’s friend was assured that the returns would be so large they would more than pay for the early withdrawal penalty she faced for taking all of her funds out of the account.

Investors were assured not just by Mr. Ridall but the documents he furnished. Those included a statement from KPMG touting the success of one prior investor. The statement claimed that the investor return was 81%. Later, to again assure investors, letters from international law firm K&L Gates were produced to investors touting the spectacular investment returns obtained by Mr. Ridall.

In fact, the KPMG documents were fabricated. The K&L Gates letters were fraudulent. The money had never been invested. The claimed investment history of Mr. Ridall was a lie. The complaint alleges violations of each subdivision of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2) and 206(4). The complaint is pending.

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