by T. GormanPosted on Posted in SECActions

Brokers and other professionals are frequently involved in situations where they have the authority to make choices on behalf of clients. In making those choices there is frequently a conflict between the best interest of the client and the self-interest of the person making the choice. The professional obligation of a person such as an investment adviser is governed by their fiduciary duty to act in the best interest of the client. Unfortunately, some professionals continue to make the wrong choice despite the fact that the Commission has brought numerous cases to reinforce the point. The most recent case of the agency on this point is In the Matter of Wilmington Investment Management, LLC, Adm. Proc. File No. 3-21780 (October 10, 2023).

Respondent Wilmington has been a registered investment adviser since 1992. The firm has about $599 million in regulatory assets under management. As of June 2021, the firm no longer served as the manager and investment adviser to the Wrap Program which is at the center of this case.

Beginning in February 2020, and continuing until August of that year, the firm offered a wrap program option for advisory clients. In conjunction with the program Respondent was responsible for paying client trading costs. The firm avoided incurring transaction fees for wrap program clients by investing client funds in higher cost mutual fund shares from no-cost share classes of the same funds that were available at a higher cost but which did not charge a fee. Clients thus incurred a higher cost for the same shares.

The adviser failed to fully disclose to clients the manner in which shares were selected for investment with their funds. The firm also breached its duty of care and to seek best execution as a result of the manner in which shares were selected for investment by clients in the wrap fund program. In addition, the advisor failed to implement written compliance policies and procedures to prevent the violations of the Advisors Act incurred here.

The Order alleges violations of Advisers Act Sections 206(2) and 206(4). Here the adviser reimbursed the clients involved. The firm also agreed to implement certain undertakings. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm also agreed to pay disgorgement in the amount of $999,559, prejudgment interest of $77,588 and a penalty of $250,000.

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by T. GormanPosted on Posted in SECActions

What a difference a week makes. Two weeks ago the Commission filed over 50 new enforcement actions. Last week three new actions were filed. There was, however, a renewal of sorts. Last week the agency filed a subpoena enforcement action against Elon Musk. Many will remember that not long ago a saga involving Mr. Musk unfolded.

Now the SEC is conducting an investigation involving what used to be called Twitter but is now known as X. Regardless, Mr. Musk appears to have a key role – he acquired the company. While Mr. Musk has testified twice during the investigation, the Commission has requested a third appearance which had been arranged under an agreement that apparently collapsed. Stay tuned to determine if the saga continues.

Have a great and safe week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 3 civil injunctive actions and no administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Subpoena enforcement: In the Matter of Certain Purchases, Sales and Disclosures of Twitter Shares, SEC File No. SF-4519 (Formal Order). The Commission is seeking under the Formal Order and Corrected Order to investigate if any persons or entities violated the federal securities laws in connection with Mr. Musk’s 2022 purchase of Twitter stock (now known as X) and his statements in SEC filings related to Twitter. Mr. Musk has appeared and given testimony as part of this investigation twice in July of 2022 for half day testimony sessions. Since that testimony the Commission claims to have received thousands of new documents from various parties. For example, following the last testimony session Mr. Musk produced documents to the staff. Others have also produced documents following the date of the last testimony session in 2022. As is customary, the staff and Mr. Musk’s counsel worked out a schedule for the testimony. Ultimately the parties agreed on September 14, 2023 for the testimony. It was to be conducted at the San Francisco regional office of the agency. The date was reset to September 15 at the request of Mr. Musk’s counsel. A subpoena was then served on Mr. Musk for testimony on September 15 at the San Francisco Office of the Commission. Two days before the scheduled testimony, Mr. Musk notified the staff he would not appear. The refusal was supposedly based on several objections not previously asserted which included to the venue – the San Francisco office. During subsequent discussions the staff supposedly offered to change the venue for the testimony to the Fort Worth, Texas office near the home of Mr. Musk. A variety of dates were proposed. Each offer by the staff was rejected by Mr. Musk. This action followed. No date has been set for the hearing.

Offering fraud: SEC v. Zera Financial LLC, Civil Action No. 8:23-cv-01807 (C.D. Cal. Filed September 27, 2023). The case names as defendants the firm, a California based entity, and Luis Romero, the CEO, sole owner and control person of Zera. Since the beginning of 2021 Defendants have raised over $2.2 million from about 170 investors. Those investors were solicited through a website, Instagram, a mobile application and word of mouth. The sales pitch was straight forward – good investment returns were promised. The website challenged investors with slogans such as “See How Much You Can Make.” The promise was 3% interest every month. Defendants offered three different programs. One was for 6 months for an investment of $500 to $15,000; a second was for one year for investments of $15,000 to $100,000; and the third was for two years if the investment was over $100,000. The interest from each program could be withdrawn and redeposited each month. The principal investment could not be withdrawn until the end of the term. The deposits were, according to the sales pitch, FDIC insured. Investor funds were deposited in crypto asset accounts. Some portions of the investor cash was used to make Ponzi type payments. Others were diverted to the personal use of Mr. Romero. He used substantial sums of investor capital to pay his personal expenses, purchase an electric truck and tropical fish. The complaint alleges violations of Exchange Act Section 10(b), and Securities Act Section 17(a). The case is in litigation. See Lit. Rel. No. 25878 (October 3, 2023).

Unregistered offerings: SEC v. Westhead, Civil Action No. 1:23 -cv- 23749 (S.D. Fla. 1:23-cv-23749 September 29, 2023) is an action which names as defendants Shannon Westhead, formerly an executive assistant at A Better Financial Plan and co-owner of Pisces; Aex Vagnozzi, a co-owner of Pices, a fund formed for the purpose of raising capital; Pisces Income Fund Parallel, LLC; Abert Vagnozzi; Capricorn Income Fund I, LLC, formed to offer promissory notes; Capricorn Income Fund Parallel, LLC, formed to participate in the unregistered offerings; Michael Tierne, formerly with a broker-dealer; and Merchant Services Income Fund, LLC. The case centers on the unregistered Complete Business Solutions Group or CBSG securities offering. It raised over $500 million from investors across the country through a network of Agent Fund Managers. Each of those persons conduct securities offerings in an orchestrated effort to funnel investor money to CBSG in exchange for its promissory notes. Defendants Westhead, Alec Vagnozzi and Albert Vagnozzi and Michael Tierney were Agent Fund Managers until July 2020 when the Commission filed an enforcement action against CBSG and others for registration and anti-fraud violations. Over a period of about one year, beginning September 2019, Defendants Westhead and Alec Vagnozzi operated the Agent Fund Pices Income Fund LLC or Pisces which they initiated for the purpose of raising investor money for CBSG. Over a two-year period, beginning in May 2018, Defendant Albert Vagnozzi operated Agent Fund Capricorn Income Find I LLC which was also formed to raise money for CBSG. Defendant Tierney operated Merchant Services Fund, LLC to raise funds for the CBSG offering. In return for their efforts, Defendants were paid transaction-based compensation. A series of misrepresentations were used to attract investors. In March 2020 certain Defendants notified investors that because of Covid-19 CBSG would default on its notes. The same group of Defendants offered their investors replacement notes from Pisces, Capricorn and MSI. Nearly all investors participated in the Parallel Agents’ notes and received lower investment returns. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. This is the fourth action initiated that is tied to the CBSG fraud. See also SEC v. ABFP Income Fund Parallel, LLC, Civil Action No. 1:23-cv-23721 (S.D.Fla. Filed September 29, 2023)(similar action by a series of funds). See L.Rel. No. 25877 (October 2, 2023).

FinCEN

Remarks: Andrea Gacki, Director FinCEN, Addressed during ACAMA: The Assembly, October 3, 2023 (here). His remarks focused on beneficial ownership information implementation and other anti-corruption initiatives centered on residential real estate and investment advisers.

ESMA

Consultation: The European Securities Market Authority published a second consultation on crypto market rules on October 5, 2023 (here).

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