by T. GormanPosted on Posted in SECActions

Artificial intelligence is a key topic of conversation these days. From a one-time little discussed idea, it is now being bantered around as if AI were about to take over the world at any moment. There s in fact little doubt that significant research and work is being done in the area and its uses are expanding.

None of this has not been lost on the Commission. Always looking for the new thing as it patrols the marketplace, the agency has discovered investment advisers who claim to have AI on their side – and why not? With a superfast computer and a touch of AI perhaps new and more profitable investments could be developed for investors. Perhaps. Consider a recent case filed by the agency centered on AI. 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 servces and about $180 million for five pooled investment vehicles. The firm 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 year, 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 turned “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).

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by T. GormanPosted on Posted in SECActions

The Commission filed two new enforcement actions last week. One centered on a Ponzi scheme and involved 17 defendants. A second focused on an insider trading scheme. In addition, a default judgment was taken against former Coinbase manger Ishan Wahi, tied to insider trading claims.

Be careful, be safe this week.MS

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 2 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Financial fraud: SEC v. Evoqua Water Technologies Corp., Civil Action No. 1:23-cv-MSM-PAS (D.RI.) is a previously filed action against the company and its former finance director, Imran Parekh. The complaint alleged that over period of about two year, beginning in late 2016, Defendants falsely inflated the firm’s revenues. The final judgment as to Mr. Parekh enjoins him from future violations of the antifraud provisions of the Securities Act and the Exchange Act as well as the reporting provisions of that statute. He also agreed to pay disgorgement in the amount of $5,489, prejudgment interest of $1,342 and a penalty of $40,000. He will also be barred from serving as an officer or director for ten years. See Lit. Rel. No. 25950 (March 15, 2024).

Ponzi scheme: SEC v. Sanchez, Civil Action No. 4:24 -cv-00939 (S.D. Tx. Filed March 14, 2024) is an action which names as defendants Ismael Zarco, a resident of Conroe, Texas and 16 others. The complaint centers on a Ponzi scheme that began in May 2020 and continued through at least September 2022. CryptoFX, LLC, a Texas based firm involved here, was named as a defendant in SEC v. Mauricio Chavez, Civil Action No. in 4:22-cv-03359 (S.D. Tex. Sept. 19, 2022). A judgment was entered against Mr. Chavez enjoining him from future violations Securities Act Sections 5 & 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) & (2). Monetary relief will be decided by the Court. In this case Defendants raised over $300 million from over 40,000 investors. Those investors purchased securities from CryptoFX which promised returns ranging from 15% to 100%. Investor funds were not invested as promised. Rather, they were primarily put into a fund that made payments to other investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section Sections 10(b) & 15(a). Two defendant salesman – Luis Serrano and Julio Taffinder – resolved the claims, consenting to the entry of permanent injunctions based on the securities registration and broker registration sections of the securities laws. The two defendants also agreed to pay total penalties, disgorgement and interest totaling over $68,000. See Lit. Rel. No. 25949 (March 14, 2024).

Insider trading: SEC v. Cook, Civil Action No. 2:24-cv-00313 (March 12, 2024). Named as defendants are: Roy Cook, an independent member of Company board of directors and its audit committee; Jeffrey Natrop, a principle of an Architect Firm; Peter Renner, also a principle of the Architect Firm; James Rudolph, a retired friend of Mr. Cook; Peter Williams, an accountant and business associate of Mr. Cook; and Peter Williams, a friend and associate of Mr. Cook. The case revolves primarily around an offer by hedge fund Blackstone, which held a controlling interest in the general partner of the Company, to purchase all of the outstanding public shares of the Company made on August 27, 2019. Prior to the announcement of the offer, Mr. Cook, through his position as an independent director of the Company, obtained material non-public information about the offer that would be made by a Blackstone affiliate to purchase all of the outstanding public shares of the firm. Prior to the deal announcement each man told about the then potential Blackstone offer — Defendants Natrop, Renner, Rudolph and Williams – purchased shares of the company. The purchases caused the share price to increase significantly. Subsequently, on August 27, 2019, Blackstone announced an offer for all of the outstanding public shares of the Company priced at $19.50 per share. After three months of negotiations the parties agreed to a final offer price of $22.45. The deal was announced on December 16, 2019. Each man tipped by Mr. Cook listed above sold his shares. Collectively the group that had been tipped by Mr. Cook had profits of $613,000. Mr. Cook purchased 20,000 shares of the Company prior to the December announcement. When the shares were sold following that announcement, he had profits of $88,000. Mr. Cook also failed to file the required forms with the Commission. The complaint alleged violations of Exchange Act Section 10(b) and, in addition, Section 16(a) as to Mr. Cook. Each Defendant settled with the Commission, consenting to the entry of a permanent injunction based on the Section or Sections cited in the complaint as to him. Mr. Cook also agreed to disgorge his trading profits and pay a penalty of $801,742 and prejudgment interest. In addition, he agreed to the entry of an officer/director bar. Each other Defendant agreed to pay a penalty equal to the amount of their trading profits and to disgorge those profits along with prejudgment interest. See Lit. Rel. No. 25948 (March 12, 2024).

FinCEN

Disclosure: The Corporate Transparency Act, passed in 2021, was designed to combat money laundering and similar matters. In National Small Business United v. Yellen, Civil Action No. 5:22-c v-01448 (N.D. Ala.) the Court entered a final declaratory judgment, concluding that the Act contravened the constitution. The case has been appealed by the government. While it is on appeal FinCEN will continue with enforcement.

 

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