by T. GormanPosted on Posted in SECActions

The Commission and the Division of Enforcement published a release detailing the results of the Enforcement program for Fiscal Year 2023 (here). The headline asserts that 784 enforcement actions were filed during the period, nearly $5 million in financial remedies imposed and nearly $1 billion was distributed to harmed investors. By any standard, these are impressive numbers.

The balance of the release amplifies and clarifies the numbers by providing details and examples of the results in three areas. First, another table clarifies the 784 number. This table states that in FY 2023 the Division of Enforcement filed 501 enforcement action if follow-on administrative proceedings and delinquent filing cases are not included in the total number of cases. That number is the second highest over a period tracing back to FY 2018. The largest number of cases filed in that period was 526 in FY 2019. FY 2023 represents the second largest number of case initiated during the period while the 490, filed in FY 2018, was third.

A second amplification comes in a table which shows the number of cases filed broken down by category. This “Primary Classification” chart lists 13 categories of cases. Four classifications in FY 2023 were the largest: Securities offering at 33% of the total cases filed; Investment advisers/investment companies, a tie for second/third place at 14%; and in third place was broker dealers cases at 12% of the total. The remaining categories or classifications listed had relatively small percentages of the overall total number of cases filed.

Third, the press release discussed select cases in a number of broad areas which differed from those in the table discussed above. The first category, for example, is the protection of investors and the integrity of the markets. This category was broken down into a series of sub-areas. An example of market shaping actions – one subcategory in the group — are those brought to enforce the new marketing rule that applies to investment advisers. There the agency filed a series of actions against advisors who failed to have policies and procedures in place to ensure proper enforcement of the new rule. Similarly, the release highlighted cases brought to protect whistleblowers.

Another group of cases focused on “accountability and remedial measures against individuals.” Examples of actions filed here included one against a Wells Fargo executive who was barred from serving as an officer or director of a public company for misleading investors involving certain disclosures.

A third category was “holding fraudsters accountable for preying on retail investors.” The examples of cases initiated involved affinity frauds and Ponzi schemes.

Crypto was another key area of focus. Cases in this group were initiated, according to the release, for the sale of unregistered securities. Similarly, actions were filed against those who failed to register and market professionals.

A final example the categories cited involved the FCPA. Here the release discussed two significant cases in which violations of the statutes were uncovered involving large, international issuers who were sanctioned. Overall, the release cited to a series of examples to illustrate the breach and scope of the actions investigated and initiated in an effort to protect investors and the markets.

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by T. GormanPosted on Posted in SECActions

The Commission filed two new actions last week. One centers on an offering fraud; the other is based on a financial. The CFTC published its fiscal year statistics which show an increased focus on crypto assets. At the same time Australian regulators announced an initiative centered on unfair contract terms while European regulators announced a new focus on cybersecurity.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

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

Offering fraud: SEC v. Masanotti, Civil Action No. 3:23-cv-01481 (D. Conn. Filed Nov. 9, 2023) is an action which names as defendants John Masanotti Jr. and Middlesex Mortgage Group, LLC., respectively, the owner of Middlesex and the manager of a pooled investment vehicle. Over a period of about seven years, beginning in 2016, Defendant Masanotti solicited largely elderly investors to put their funds into Middlesex. That firm supposedly had a proprietary trading system that generated healthy returns. In fact, most of the investor funds were misappropriated. The scheme began to unravel as investors sought the return of their money which was not available – the financial accounts of Defendants were largely empty. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is in litigation.

Financial fraud: SEC v. Soberal, Civil Action No. 1:23-cv-01585 (Nov. 9, 2023 E.D.Ca.) is an action which names as defendants: Jake Soberal and Irma Olguin, Jr. Each Defendant is a co-founder of Bitwise Industries, Inc. and served the firm as CO-CEO. Bitwise is a California entity which has initiated its liquidated through Chapter 7 of the Bankruptcy code. In 2022 Bitwise conducted a Series B-2 offering based on fabricated documents. The firm was supposedly connected to the real estate business and had several offices. Specifically, Defendants inflated each of the firm’s key financial metrics. Investors were told that the company had significant revenue and a healthy cash balance. Defendants also lied about the results of an audit of the firm. The scheme unraveled in May 2023 when the company ran out of cash and could not pay its hundreds of employees. By late June the firm was forced to file a petition for Chapter 7 bankruptcy. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is in litigation.

Valuations: SEC v. Premium Point Investments LP, Civil Action No. 1:18-cv-04145 (S.D.N.Y.) is a previously filed action in which the Court entered a final judgment by consent as to Defendant Jeremy Shor, formerly a trader at the firm. The judgement entered enjoined him from future violations of Securities Act Sections 17(a)(1) & (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (3) & (4). The injunctions are based on a scheme in which the trader and firm received what were essentially kickbacks from a secret deal under which broker-dealer Premium Point received mortgage backed securities at false and inflated prices and used “imputed” values to enhance profits at the expense of its clients. No penalty was imposed based on financial condition. See Lit. Rel. No. 25890 (Nov. 8, 2023).

The CFTC

The CFTC published its annual enforcement statistics last week, highlighting its work during the Fiscal Year 2023. The releases focus on the number of cases initiated as well as specific actions filed and/or litigated during the year. Overall, the agency filed 96 enforcement actions during the period. That compares with 82 such actions initiated in FY 2022 and 113 during 2021. Key areas of focus included: 1) Crypto assets: An example of these actions is the one against Samuel Bankman-Fried, FTX Almeda, and others with fraud. The case, along with a parallel criminal action and others,centered on fraud claims involving billions of dollars and the actions of Mr. Bankman-Fried and his firm, FTX. In the parallel criminal action Defendant Bankman-Fried was found guilty. Sentencing has not taken place. 2). Trading platforms: Here the Commission filed, for example, an action against the company and its former CEO, Alex Mashinsky. It alleged fraud and misrepresentations involving commodity pool schemes tied to digital asset commodities and charged a trading platform with illegal operations. 3) Swap data: The cases in this group focused on actions such as the one involving prominent banks on Wall Street which centered on swap data reporting and related disclosure violations. 4) Confidential information: An example of these cases is the settled action filed against an introducing broker, its owners and affiliated firms, alleging the misappropriation of material, nonpublic information and use to take the opposite side in thousands of brokerage customer block trade orders without the consent of the customer. 5) Commodity pool operators: The cases here are typified by the one which charged advisors and their affiliates, along with the co-founder and former Co-CIO, with deception and manipulation in a $30 million scheme to illegally trigger payouts on two large binary option contracts that were swaps. 6) Protecting customers: Here the Commission filed, for example, its first case involving a “Pig Butchering,” which involved cultivating a friendly or romantic relation with a potential customer using false statements to ultimately solicit a customer to participate in a fraud.

Australia

Contract terms reform: The Australian Securities and Investment Commission (ASIC) published a release on November 9, 2023, detailing is new Unfair Contract Terms prohibition which will go into effect shortly. Under the provision, contract terms deemed unfair will be prohibited and subject to substantial penalties (here).

ESMA

Cyber risk: The European Market Authority (ESMA) announced an initiative to make cyber a risk under the Union Strategic Supervisory Priority in a release dated November 9, 2023)(here). Under the initiative the European Market authority will now give greater emphasis to cyber risk in connection with the Digital Operational Resilience Act.

Hong Kong

Remarks: Ms. Julia Leung delivered remarks on November 10, 2023 (here) at the Financial Street Forum, 2023, titled “Deepening Capital Market Reform. Her remarks focus on recent reforms in the IPO process in China.

Singapore

Paper: The Monetary Authority of Singapore (MAS) published on November 9, 2023 (here), the statement of The Financial Action Task Force, reviewing the processes for the Republic of Korea and Iran in view of the COVID pandemic; it concludes that each is a high risk jurisdiction.

U.K.

Statement: The Financial Conduct Authority (FCA) published an article on November 11, 2023 (here) calling for firms to strengthen anti-fraud systems and provide for better treatment of victims of fraud (here).

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