by T. GormanPosted on Posted in SECActions

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The Commission filed five new cases last week. Two centered on offering frauds, one on a market manipulation, another on the block trading rules and one focused on the whistleblower protection rules.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 3 new civil injunctive action and 2 new administrative proceeding, excluding tag-along actions and those that present a conflict for the author.

Offering fraud: SEC v. Prosper E Beyond Moore, Civil Action No. 1:24-cv-00242 (N.D. Ga. Filed January 18, 2024) is an action which names as defendants: a resident of Loganville, Georgia who did business as Prosperity Investment & Solutions, LLC, and the firm. Over a two-year period, beginning in late 2021, Defendants raised over $1.4 million from over 60 individuals. Potential investors were told that the firm was a large, reputable financial organization that could generate profits of 50% per month through a diverse range of investments. In fact, Defendants use the money for other investments and personal expenses. Defendants created false documents showing investor returns of over 10% per week and 40% per month. To the extent investor funds were invested, there were losses of over $67,000. The complaint alleges violations of Securities Act Section 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Defendants resolved the action by consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, Mr. Moore is barred from participating in the issuance, purchase, offer or sale of securities except for his personal account and an officer/director bar. The court will determine monetary penalties. See Lit. Rel. No. 25928 (January 18, 2024).

Manipulation: SEC v. Farber, Civil Action No. 1:24-cv-00273 (S.D.N.Y. Filed January 12, 2024) is an action which names as defendants: Jonathan Farber, Aarif Jamani and Brian Keasberry. Over a four year period, beginning in September 2017, Defendant engaged in a scheme to manipulate the shares of a small California based company with little trading in its stock named County Line Energy Inc. To implement the scheme Defendants took the following steps: 1) they placed close associates or figureheads in senior manage positions at the firm; 2) they created the false appearance of investor interest in the shares; and 3) after the share price increased, they were sold. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Sections 9(a)(2) and 10(b) along with Rule 10b-5(a) & (c). The case is in litigation. See Lit. Rel. No. 25926 (January 16, 2024).

Offering fraud: SEC v. Medsis International, Inc., Civil Action No. 1:21-cv-11356 (D. Mass. ). The previously filed action named as defendants: the technology company, Joshua Cabrera and Paul Hess. The complaint alleged that over a five-year period Defendants raised over $12.9 million from about 150 investors. The solicitations were based on selling unregistered shares of the company, beginning in 2015, by making a series of misrepresentations. A default judgment was entered against the company, prohibiting future violations of Securities Act Sections 5(a) & (c). The judgment also ordered the payment of disgorgement in the amount of $11,842, 015, prejudgment of $2,943,045 and a penalty of $1,116, 140. A final judgement had been entered against Defendant Paul Hess. It directs the payment of disgorgement in the amount of $527,000, prejudgment interest of k$109,205 and a penalty of $1,116, 140. See Lit. Rel. No. 25925 (January 16, 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.

Offering fraud: SEC v. Barbera, Civil Action No. 1:20-cv-10353 (S.D.N.Y.) is an action which named as defendant Carl Smith. The action centered on a sale of shares in Nanobeak Biotech, Inc. by its former CEO Jeremy Barber, using a series of false statements. Mr. Smith resolve the matter by consenting to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). The judgment also requires the payment of disgorgement of $173,875 and prejudgment interest of $23,470.59. See Lit. Rel. No. 25927 (January 18, 2024).

BaFin

Standards: The Federal Supervisory Authority announced on January 19, 2024 its views on the EU Green Bond requirements, bringing greater clarity to those provisions which are required to be effective as of December 21, 2024. The EU standards stem from the Paris Climate Agreement of 2015 and are part of the EU Green Deal due 2050. The EU considers the sustainable bonds to be one of the most important instruments for financing sustainable investments. With greater clarity the idea is to foster more investment in the green bonds (here).

Hong Kong

Enforcement: The Hong Kong Securities and Futures Commission has teamed with Radio Television Hong Kong to produce a new series, SFC in Action. The series illustrates investment scams to educate the public using actual cases, according to the January 10, 2024 announcement (here).

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by T. GormanPosted on Posted in SECActions

The work of the SEC Enforcement Division during the third quarter of 2022 is impressive. The numbers and cases initiated during the period reflects a program reaching out to cover the vast U.S. capital markets. That effort should reassure not just the markets but also those who invest their funds in those markets. At the same time, questions remain as to whether the program creates the kind of omnipresence that is required to help ward off those who would try to ignore the rules and improperly skew investments and transactions in ways that can and do harm those markets and investors.

Filing 144 new enforcement actions during the quarter is noteworthy as stated in Part I of this series. That number of cases dwarfs similar statistics from the other quarters of 2023 and in other years, with one exception – the third calendar quarter of the year. That is because the third quarter of the year is the fourth quarter of the Government fiscal year when most enforcement actions are typically filed. Thus, if only those periods are considered, the number of cases filed in 3Q23 become typical.

Another widely followed measure of enforcement performance is the areas which constitute the largest groups of cases. For 3Q23 those were offering frauds, insider trading, crypto assets, manipulation and misrepresentations. The top two areas accounted for about 34% of the actions. The remaining three areas accounted for about 66% of the actions filed. Each of these areas represent traditional ones for SEC enforcement except crypto.

Crypto is a relatively new category. Nevertheless, cases in this area represent 9% of the total which is significant. To be sure, the agency has focused in this area by adding personnel to cover it. At the same time the percentage of total cases in the area represents not just a largely new focus but a significant effort. This suggests that the enforcement program is flexible and responsive to new trends in the market, a critical point for meeting new challenges presented in the markets.

Other measures of performance for the period yield similar results. For example, during the quarter the agency filed cases in approximately thirty different areas. Those cases range from offering fraud, the largest area of cases to smaller areas such as ensuring that Form NT regarding an inability to file a timely required report such as a 10Q are filed. While this only occurs in a relatively small number of cases, the focus suggests that the enforcement program is being carefully tailored to monitor and safeguard even relatively small corners of the markets.

The Commission also conducted a number of sweeps during the period. While the agency does not typically publish the number of these actions, it appears that at least four were conducted during the period. One focused on the new marketing rule for advisers which centers on monitoring the factual material being distributed to the markets and investors, clearly a critical investment point. The focus on that area, as well as the other sweep areas, yielded about 30 new enforcement actions.

Some might express concern that the top two categories equal such a large part of the overall number of cases. That point, however, is balanced by the fact that 66% of the cases were in other areas. Another balance point is the number of sweeps. While those only yielded a relative handful of cases, when viewed in the context of the overall number of cases, each focused on an important area. For example, two centered on investment advisers and their adherence to the new marketing rule and the requirements of the custody rule. The former is designed to ensure that potential investors are being furnished with meaningful and reliable information by advisers. The latter keys on safeguarding investor assets held by advisers. And, a focus on each of the sweep areas confirms for the market and investors that the Commission is on the job, safeguarding not just against large offering fraud and Ponzi scheme which is important, but also in more specialized areas which are critical to investor protection and confidence as well as the markets.

Read together, the statistics reflect a program being continually monitored and updated to safeguard the markets and investors in traditional as well as emerging areas and even small corners of the market. That type of efforts can and should create a perception of omnipresence in the markets which aids in effectively safeguarding the vast U.S. capital markets.

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