by T. GormanPosted on Posted in SECActions

The sale of unregistered securities has long been a staple of the Commission’s enforcement program. Over the years dozens of cases have been brought. Likewise, millions of dollars have been paid by investors to purchase the unregistered securities. In many instances the investors were solicited with false statements. Those statements range from claims about the use that will be made of the funds to the nature of the entity in which an interest is being acquired to if commissions were being charged. In some cases, there is no entity to invest in – the shares being sold may be to an entity that is non-existent, a sham or a shell.

The Commission’s latest case in this area involves an entity with an attractive name which at one time conducted a business. That business is gone, however. Nevertheless, investors were induced to purchase shares with the hope of making a profit. SEC v. Native American Energy Group, Inc., Civil Action No. 1:23-cv-04455 (E.D.N.Y. Filed June 16, 2023).

Named as defendants are: the company, a firm reputed to have had operations in the Fort Peck Indian Reservation in Montana. Later the company sold five wells it had operated to Shell Trading (US) Company but now has no business; Joseph D’Arrigo, the long-time president of the firm who had been sanctioned by the Connecticut Banking Commission; and David Hudzik, at one-time a consultant to the company and also a former registered representative.

Over a six year period, beginning in October 2014, Defendants solicited investors to invest in what was called a subscription agreement, described as an “investment in the company” by Defendant D’Arrigo. Defendant Hudzik aided with the sale of the subscriptions. He told investors that commissions were not charged on the interests acquired. About $3.43 million was raised from the solicitations.

In fact, the representations were false. The funds were not an investment in Native American. Rather, much of the money went to Mr. D’Arrigo who diverted it to his personal use. He also misappropriated about $958, 500. The claims about no commissions were also false. In fact, Mr. Hudzik was paid a commission of 20% and 30%.

In the end, the sale of the interests was also prohibited. None were registered. 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. See Lit. Rel. No. 23-civ-4455 (June 16, 2023).

by T. GormanPosted on Posted in SECActions

Last week the Commission launched a public service campaign focused on making sure that older investors never stop learning. The agency also sought emergency relief to protect the assets of U.S. investors in Binance.

Be careful; be safe this week.

SEC

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 2 civil injunctive actions and 1 administrative proceeding, excluding 12j and tag-along proceedings as well as those presenting conflicts for the author.

False estimate: In the Matter of David Dickson, Adm. Proc. File No. 3021491 (June 16, 2023) is a proceeding which names as respondents Mr. Dickson and Stuart Spenser, respectively the CEO and CFO of McDermott International Inc. In the second quarter of 2018 Respondents approved an estimate for a project called the Cameron Project. The estimate was developed outside of the normal processes and approved a $490 million loss for Q2 2018 despite the fact that the initial estimate was over $1.1 billion. The estimate was filed on a Form 10K and caused the company to have an incorrect estimate and accounting. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(B) and 13(b)(2)(B) and the related rules. Respondents resolved the matter by consenting to the entry of a cease-and-desist order based on the Sections cited in the order. Respondent Dickerson will pay a penalty of $100,000. Respondent Spence will pay a penalty of $40,000.

Offering fraud: SEC v. Verne, Civil Action No. 2:23-cv-02259 (E.D. Pa. Filed June 13, 2023) is an action which names as defendant Josh S. Verne, who previously worked in the family furniture business. Beginning in 2018, and continuing for the next two years, he raised about $31 million from at least 110 investors. The funds were solicited for two start-ups, Ownable, LLC an online rent-to-own business and its affiliate, Ownable Capital Partners I, LLC. The solicitations were made to pool investor money in Ownable and two other firms. While Defendant touted his expertise, in fact the money was sought to fund his lifestyle. Only about half of the money raised was used to fund the companies. In three instances Defendant also sold the investors’ securities without their knowledge. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 27744 (June 14, 2023).

SEC v. Mintz, Civil Action No. 2:23-cv-03201 (D. N.J. Filed June 12, 2023). Named as defendants in the action are Hal Mintz and Sabby Management LLC, a registered investment adviser where Mr. Mintz was employed. The firm has been sanctioned by the Commission previously for violating Regulation M, Rule 105 which governs improper trading in connection with an offering. The complaint centers on a two-year period, beginning March 2017. During that period Defendants used their knowledge of the Commission’s rules governing trading — primarily short selling — to game the system with improper transactions facilitated by false statements to obtain illicit trading profits. The scheme had two main facets. The first centered on what the market-place was told were long trades made by private funds. In fact, those funds did not have actual net long positions. As a result, the positions should have been marked as short. Defendants, however, did not locate cover for the positions as required by the rules governing short sales because the positions had been mismarked. Defendants thereby violated Regulation SHO. The second facet of the scheme is similar. In this instance Defendants actually put on short positions. Yet Defendants again failed to locate cover for their positions by acquiring or borrowing the securities necessary. The transactions again violated Regulation SHO. Over the course of the scheme Defendants took steps to conceal their activities. This was done in part by making false statements about their trades and positions when dealing with other market professionals. At the same time Defendants were, at times, unable to deliver the securities necessary to cover their positions. When this occurred Defendants’ actually had a naked short position. Defendants ignored the dictates of Regulation SHO regarding cover because it was profitable. By ignoring the locate requirements Defendants avoided the expense associated with the locate rule. Defendants increased their illicit gains, at times by converting their positions in stock at a cheaper price than would have otherwise been available by artificially deflating the price. Overall Defendants profited by about $2 million. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 204 and 204(6). The case is in litigation.

FinCEN

AML: The agency joined a trilateral program that was part of the Drug Dialogue Workshop at the North American Drug Dialogue to address the question of money laundering activities associated with illegal drug trade, according to a release dated June 15, 2023)(here),

Australia

Remarks: ASIC Chair Joe Longo, speaking before the Committee for Economic Development of Australia on June 13, 2023, delivered remarks focused on his view that ESG is changing requiring that steps be taken to deal with those changes (here).

ESMA

Announcement: The European Securities and Markets Authority announced on June 15, 2023 that it is launching a Data Strategy for the next five years to facilitate the use of data (here).

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