by T. GormanPosted on Posted in SECActions

One focus of agency enforcement actions is the prevention of future violations and the protection of investors and markets. This can be accomplished in part by notice, that is, informing the public what specific conduct violates a statute or rule.

One key method to accomplish this is the complaint or Oder entered announcing the wrongful conduct while another can be at least a brief identification of that conduct in subsequent orders. Viewed in this context, the purpose for an agency like the Commission to publish detailed complaintst or Order is to give notice to the public of what specific type of conduct the agency views as wrongful. Integral to that process is a statement of the reasons the conduct violated the statutory sections and rules alleged to have been violated and the remedies imposed not just as penalties but to help forestall similar conduct in the future. Stated differently, the purpose of filing a detailed complaint or Order is to prevent a reoccurrence of the wrongful conduct in the future to protect the markets and the public.

While the detail need not be repeated in each subsequent order, the description should include at least an identification of the conduct. Yet the Commission’s most recent Order in a multi-million dollar action that went on for years wholly fails to identify the wrongful conduct in any meaningful way which resulted in significant financial sanctions. In the Matter of Citigroup Alternative Investments LLC and Citigroup Global Markets Inc., Adm. Pro. Proceedings, File Ni, 3-16757 (March 26, 2025).

The Order issued this week by the Commission in the action cited above is the concluding segment of a years long proceeding. It transfers to the Department of Treasury the remaining funds and discharges the fund administrator. According to the Order, the wrongful conduct violated Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(2) & (4) and the related rules. The Order then goes on to specify that a plan was adopted which included the creation of a plan of distribution for the funds were collected. Those funds amounted to $184,864,153.

While the sum collected and distributed is significant, the description of the wrongful conduct is not with the exception of the initial Order issued years ago. In this regard the current Order only states that “the Commission found that Respondents made material misstatements and omissions between 2002 and 2008 relating to both the offer and sale of securities in the two now defunct hedge funds.

The readers that trace the history of the proceedings back years learn, however, learns not just that there were misstatements but that the underlying conduct is based on the repetition of misleading statements and unauthorized investor trades for a period of six years tied in part from deficient internal controls. Those trades resulted in millions of dollars in damages by a well know and leading U.S. financial institution.

If the investing public is going to learn one of the key lessons from this action – they must carefully monitor their investments and not just rely on others – at least the nature of the wrongful conduct should be specified beyond “false statements” or similar vague statements which actually say nothing meaningful about what generated years of litigation. That kind of statement is wholly missing here.

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by T. GormanPosted on Posted in SECActions

Last week the Commission held the first meeting of its Crypto Task Force Roundtable, a forum for discussing issues related to crypto assets. The agency also filed three new enforcement actions, one centered on an offering fraud, a second based on fraud during an audit and a third charging that corporate limitations were ignored.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the Commission filed 3 new civil injunctive actions and no new administrative proceedings. The agency also announced the resolution of two previously filed enforcement cases.

Offering fraud: SEC v. Nukarapu, Civil Action No. 5:23-cv-00503 (E.D.N.C.) is a previously filed action which names as defendants Dharma Teja Nukarapu and his two firms, SharkDreams, Inc. and D. Dollar Inc. Over almost a two-year period, beginning in January 2018, Defendant Dharma Teja Nukarapu, raised about $2.7 million from about 20 investors through securities offerings. Investors were told that they would double their money and that a large investor would buy out all remaining shares to infuse capital into the company. The claims were false. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Last week the court entered a final judgment based on the sections cited in the complaint. See Lit. Rel. No. 26275 (March 20, 2023).

Conflicts: SEC v. Cambridge Investment Research Advisors, Inc., Civil Action No. 4:22-cv-00071 (S.D. Iowa) is a previously filed action which names as defendant, the registered investment adviser. The complaint alleged that Defendant failed to disclose conflicts that arose from investing in certain sweep funds that generated millions of dollars in revenue sharing payments to an affiliated broker-dealer. The firm also avoided paying millions of dollars in transaction fees that also were not disclosed. The firm, in addition, failed to disclose that it received as a result of the investments certain forgivable loans for maintaining certain asset levels. The adviser resolved the matter, consenting to the entry of permanent injunctions based on Advisers Act Sections 206(2) and 206(4). The firm was also ordered to pay disgorgement in the amount of $10,164,698, prejudgment interest of $3,035,302 and a penalty of $1.8 million. See 26274 (March 20, 2025).

Offering fraud: SEC v. Meier, Civil Action No. 1:24-cv-12602 (D. Mass.) is a previously filed action which names as defendant Norman V. Meier, who is alleged to have obtained at least $7.9 million from 180 European investors and 3 U.S. investors. The money was raised by conducting a series of cold calls here and abroad selling shares of firms that Defendant Meier controlled. Much of the money raised was misappropriated. The court entered judgments by default against Defendant Meier and his firms. The court enjoined Mr. Meier from further violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. The judgment requires that Defendant Meier pay a total of $5,047,515 in disgorgement, prejudgment interest and civil penalties. The court also imposed a conduct-based injunction and an officer and director bar as to Mr. Meier. In addition, the order requires that each of Defendant Meier’s firms pay: Treuhand — $3,832,048 in disgorgement and prejudgment interest of $423,145; Windeco, disgorgement of $174,279 and prejudgment interest of $35,090; and Texxon $304,573 in disgorgement and $35,90 in prejudgment interest of $334,244. See Lit. Rel. No. 26273 (March 20, 2025).

Offering fraud: SEC v. Morbex Automation Logistics Corp., Civil Action No. 1:25-cv-21223 (S.D. Fla. Filed March 14, 2025). Named as defendants are the trucking firm; Danilo Monzon, a member of the firm and Vice President of Optimistic Services, who was also named as a relief defendant; Joshau Smith, also a member of the firm and an authorized signer of firm accounts; and Adrian Colon, a member of the firm. Over a period of months Defendants raised capital from investors using a pitch that the investors were sure to raise money. Investors were told to purchase semi-trailer trucks and then manage the operations across the U.S. Investors were assured that if they made an investment of between $75,0000 to $100,000, they would reap up to $800,000 monthly. The secret sauce to this investment was the retail companies with whom Defendants assured investors they were affiliated. Those firms included Walmart, Inc., Public Super Markets, Inc., and Costco Wholesale Corporation. Unfortunately, the statements were false. Defendants Smith and Colon directly misappropriated at least $930,000 of investor funds for themselves – investors were told to move the money into the bank accounts of Defendants. Other transfers of cash were also siphoned off from the company accounts for the benefit of members of the scheme. Overall, Defendants used much of the investor money for their personal benefit – there were no contracts with the supposed retail giants that were to make the scheme work. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), Rule 10b-5, and Section 15(a). See Lit. Rel. No. 26272 (March 18, 2025).

Audit fraud: SEC v. Leibowitz, Civil Action No. 25 Civ. 2155 (S.D.N.Y. Filed March 14, 2025) is an action which names as defendant Glen Leibowitz, the CFO of cannabis company Acreage Holdings, Inc. The complaint alleges that from December 2019 to May 2020 Defendant falsified the financial statements of his employer. Specifically, during the period Acreage caused an affiliated entity to transfer about $4.2 million to the firm and later transfer back the same amount. At the time the funds were sent back false documents were also created. The transaction initially falsely inflated the firm’s financial statements by about 15%. The complaint alleged violations of Exchange Act Section 13(b)(5), 13(b)(2)(A), and Rules 13b2-1 and 13b2-2. See Lit. Rel. No. 26271 (March 17, 2025).

Ignored governance limitations: SEC v. Chiueh, Civil Action No. 25 Civ. 1920 ((D.N.J. Filed March 17, 2025) is an action which names as defendants: David Yow Chiueh and Upright Financial Corp. Mr. Chiueh is the founder and CEO of the firm, a registered investment adviser. The complaint alleges that Mr. Chiueh operated the firm as a highly concentrated fund in violation of its limitations for years. In November 2021 the firm settled a matter with the Commission by agreeing not to operate the fund in a concentrated manner. Yet the firm continued to operate in the same manner. This harmed investors by increasing the fees. Defendants also operated the fund without an independent trustee as required, failed to provide key information to the board and hired auditors without obtaining approval by the Board as required. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3), Exchange Act Section 10(b) and Rule 10b-5 and Advisers Act Sections 206(4) and 206(b)-8(a)(1). The complaint also alleges that Mr. Chiueh engaged in aiding and abetting in violation of Investment Company Act Sections 13(a)(3) and 32(a). See Lit. Rel. No. 26270 (March 17, 2025).

Unregistered interests: SEC v. Arcturus Corp., Civil Action No. 3:13 -cv-04861 (N.D. Tx.) is a previously filed action which named as defendants Leon Ali Parvizian and his two firms, Arcturus Corporation and Aschere Energy LLC. The complaint alleged that Defendants defrauded investors, raising over $22 million between 2007 and 2011 through an unregistered offering and by acting as brokers when they were not registered. The complaint alleged violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), Rule 10b-5 and Section 15(a). Defendants partially resolved the proceedings by consenting top the entry of partial summary judgment based on the sections cited. Remedies will be addressed at a later date. See Rel. No. 26269 (March 17, 2025).

BaFin

Money laundering: The Federal Financial Supervisory Authority published an article titled “Money Laundering Prevention – Experience from On-Site Inspections, date Feb. 26, 2025 (here).

Hong Kong

Guidance: The regulator published an article giving additional guidance on IPO subscription and funding services, dated March 20, 2025 (here).

Singapore

Regulation: The Monetary Authority of Singapore published a Comprehensive Set of Measures to Strengthen Singapore’s Equities Market, dated February 18, 2025 (here).


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