by T. GormanPosted on Posted in SECActions

Part I of this series briefly discussed the overall enforcement results for 2022 and presented a discussion of the four largest groups of cases brought during 2022 – offering fraud cases, those involving crypto assets, and those concerned with manipulation and insider trading. Part II presented examples of the cases included in the four largest groups of cases filed in 4Q22.

This Part III of the series identifies examples of cases initiated during the period which are not included in one of the four largest categories of case. The actions are grouped by type and generally presented within the group in chronological order. Because of the number of cases this part was will be divided into two segments. The first segment was published yesterday. Below is the concluding segment of Part III.

D. Examples of other Significant Cases (final segment)

Policies and procedures

Policies and procedures – custody: In the Matter of Arcadia Wealth Management, Inc., Adm. Proc. File No. 3-21110 (September 19, 2022) is a proceeding which names the Commission registered investment adviser as respondent. Beginning in 2013, and continuing for the next five years, the firm failed to comply with the Commission’s verification requirements regarding custody. The adviser also failed to adopt and implement written policies and procedures designed to prevent violations of the Advisers Act and the rules thereunder. The Order alleges violations of Advisers Act Section 206(4) and the related Rules. To resolve the proceedings, Respondent will implement certain undertakings. It also consented to the entry of a cease-and-desist order based on the Section and related Rules cited in the Order and to a censure. The firm agreed to pay a penalty of $90,000. Arcadia Wealth also agreed that in any related action it is not entitled to an offset based on the penalty paid in this proceeding. See also In the Matter of Matthew W. Dreyer, CPA, Adm. Proc. File No 3-21111 (September 19, 2022)(accountant engaged by Arcadia in connection with surprise exams; failed to take the proper steps and, when contacted by Exams made misrepresentations regarding his work; alleges violations of Rule 102(e)(1)(ii); Respondent denied privilege of appearing and practicing before the Commission with right to re-apply after 5 years).

Privacy

Privacy: In the Matter of Morgan Stanley Smith Barney LLC, Adm. Proc. File No. 3-21112 (September 20, 2022) is a proceeding which names aa a respondent, the dual registered broker-dealer and investment adviser. The Order centers on two failures. First, the firm failed to protect customer records and information when disposing of consumer information. The company retained Moving Company which had no expertise in the area or experience to wipe or destroy any data on decommissioned devices. At some point Moving Company retained another firm to complete the task and stopped working with the firm which had been handling the matter. Moving Company sold about 4,900 information technology assets which contained thousands of records and failed to oversee the wipe process. Second, the firm failed to properly safeguard customer personal identifying information or PII. This occurred in 2019 with regard to 500 decommissioned devices. When the firm tried to cross-check and reconcile all the records from this process it was unable to locate those relating to 42 devices. While they should have been encrypted in fact the encryption failed to activate until 2018. Some data on the devices remained unencrypted. The Order alleges violations of Rule 30(a) and (b) of Regulation S-P. To resolve the proceedings Respondent agreed to the entry of a cease-and-desist order and a censure based on the provisions cited. It also agreed to pay a penalty of $35 million.

Stop order

Stop order: In the Matter of The Registration Statement of American CryptoFed DAO LLC, Adm. Proc. File No. 3-21243 (November 18, 2022). Respondent was established on July 1, 2021 as the successor to American CryptoFed, Inc. The firm has filed two registration statements with the Commission. The first was a Form 10 registration statement that sought to register the Ducat and Locke tokens under Exchange Act Section 12(g). The second was filed on September 17, 2021, on Form S-1. It sought to register the offer and sale of the tokens. Subsequently, the Commission issued an order Directing Examination and Designating Officers Pursuant to Section 8(e) of the Securities Act. The next day it issued an Order and Notice of Proceeding under Section 12(j) of the Exchange Act against American CypoFed. Respondent claims to be a Decentralized Atomos Organization. The tokens, according to the firm, are not securities but utility tokens. Essentially the Registration Statements fail to comply with the applicable rules – little information is actually contained in the filings. There are, however, misstatements and material omissions. Respondent is also alleged to have failed to cooperate with the Section 8(e) examination. The matter will be set for hearing.

Touting

Touting: In the Matter of Kimberly Kardashian, Adm. Proc. File No. 3-21197 (October 3, 2022). Ms. Kardashian was retained to promote a crypto token called EMAX. She was paid $225,000 to promote the token. The tokens were promoted beginning in May 2021 in social media and marketing material. Ms. Kardashian also posted about the coins on her Instagram account which included an introductory video. In the advertising materials, the company that issued the coins assured purchasers that the coins would be traded in a secondary market. The marketing materials also discussed the management of the company. Prior to the EMAX promotion the Commission had issued the DAO Report of Investigation on July 25, 2017 stating its views on crypto and what constitutes a security. The report defined the test for determining if an investment contract is a security under the Supreme Court’s determination in SEC v. Howey, 328 U.S 293 (1946). It also discussed what has now become known as the “ecosystem” surrounding the crypto coins – the efforts of others part of the Howey test that creates the hoped for profits with the pooled investor money. While it is clear that Ms. Kardashian promoted the coin as promised, what she did not do is disclose that she was paid to promote the coins and the amount. There was thus a violation of Section 17(b) of the Securities Act. Ms. Kardashian resolved the proceedings by cooperating with the Commission and agreeing not to receive any form of compensation for three years for promoting a crypto asset security. She also agreed to continue cooperating with the agency and consented to the entry of a cease-and-desist order based on the Section cited in the Order. In addition, Ms. Kardashian will pay disgorgement of $250,000, prejudgment interest of $10,415.35 and a $1 million penalty.

SPAC

SPAC: In the Mater of Perceptive Advisors LLC, Adm. Proc. File No. 3-21031 (September 6, 2022) is a proceeding charging a registered investment adviser tied to its activities with a SPAC. Specifically, the firm failed to disclose certain conflicts, made material misrepresentations, and did not adopt sufficient compliance policies and procedures. The firm also lost its status as a passive investor while negotiating a potential transaction involving a SPAC and a public company of which it was a greater that 5% shareholder. Respondent did not file a Schedule 13D. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and Exchange Act Section 13(d). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure. The firm also agreed to pay a penalty of $1.5 million.

Reg FD<

Reg FD: SEC v. AT&T, Inc., Civil Action No. 1:21-cv-01951 (S.D.N.Y. Filed March 3, 2021) is an action against the firm and three of its executives, Christopher C. Womack, Kent D. Evans and Michael J. Black. In March 2016 the firm learned that there would be a steep drop-off in the sale of smart phones. That in turn would cause revenue for the first quarter of 2016 to fall below the consensus estimate. The Chief Financial Officer instructed the head of the IR Department to “work” the analysts who had revenue estimates tied to equipment “to high.” The individual Defendants were then instructed to make calls to select analysts. Those calls were made to about 20 firms. During the calls material nonpublic information was disclosed, although there were efforts to disguise that fact. The complaint alleges violations of Exchange Act Section 13(a) and Regulation FD. To resolve the matter the company, and each of its executives, consented to the entry of a permanent injunction based on the Section and Regulation cited in the complaint. In addition, the company agreed to pay a penalty of $6.25 million while each executive will pay $25,000.

Unauthorized transactions

Unauthorized transactions: In the Matter of Sparklabs Global Ventures Management, LLC, Adm. Proc. File No. 3-21063 (September 12, 2022) is a proceeding which names as respondents: the firm, an exempt reporting adviser to the State of California; Sparklelabs Management, LLC, also an exempt reporting adviser to the State of California; and Bernard Moon, an owner and managing member of each entity. The proceeding centered on the unauthorized and undisclosed loans among the funds over a three-year period, beginning in 2016. By entering into the loans which were not authorized, and in violation of their agreements, the funds breached their fiduciary duties. Contrary to their operating agreements, committees were not formed to advise on such activity. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). Respondents consented to the entry of cease-and-desist orders and censures. The two firms will pay, on a joint and several basis, a penalty of $200,000. Mr. Moon will pay a penalty of $25,000.

Next: The concluding segment of the series

     

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by T. GormanPosted on Posted in SECActions

Part I of this series briefly discussed the overall enforcement results for 2022 and presented a discussion of the four largest groups of cases brought during 2022 – offering fraud cases, those involving crypto assets, and those concerned with manipulation and insider trading.

This Part III of the series identifies examples of cases initiated during the priod which are not included in one of the four largest categories of case. The actions are grouped by type and generally presented within the group in chronological order. Because of the number of cases this part will be divided into two segments. One will be presented today and the second on Friday.

Examples of other Significant Cases (opening segment)

AML

AML: SEC v. Danske Bank A/S, Civil Action No. 7:22-cv-10509 (S.D.N.Y. Filed December 13, 2022) names as defendant, a Danish financial institution. The complaint alleges that over a period of about six years, tracing back to 2009, the bank, through its branch in Estonia, provided services to suspicious customers despite the fact that those persons represented a high degree of risk regarding money laundering. During the period the bank was aware it had weak controls despite its public statements to the contrary. In 2017 the bank disclosed that it had major deficiencies in controls and governance regarding its AML policies. The firm’s stock price dropped significantly. The Bank has agreed to settle the action by consenting to a permanent injunction based on Exchange Act Section 10(b). It also agreed to pay disgorgement of $178.6 million, $55.8 million in prejudgment interest and a penalty of $178.6 million. The Commission deems the disgorgement and prejudgment interest satisfied by the forfeiture and confiscation ordered in the parallel criminal cases. Overall, the Bank agreed to pay over $2 billion as part of an integrated global resolution with the SEC, DOJ, USAO-SDNY and Denmark’s Special Criminal Unit.

B-D Records

Required B-D records: In the Matter of Barclays Capital, Inc., Adm. Proc. File No. 3-21164 (September 27, 2022) is one of 16 actions brought against Wall Street broker-dealers for failing to maintain proper records. Specifically, the Order in this action, and the others, alleges violations of the record-keeping obligations of registered broker-dealer. Over a three-year period, beginning in January 2018, those employed by the firm regularly used approved means of communication to conduct business. In those instances, the communications were monitored properly. In other instances, non-approved methods were used by firm employees at all levels. In those instances, the communications were not properly recorded. The Order concludes that the firm violated Exchange Act Section 17(a) and Rule 17a-4(b)(4). The Section and Rule require broker-dealers to preserve for at least three years all communications received and copies of all communications sent relating to its business. The failures in this and the other cases also resulted in a failure to reasonably supervise the firm’s employees, contrary to Exchange Act Section 15(b)(4)(e). The firm took remedial steps and agreed to implement certain undertakings in connection with resolving the matter. A compliance consultant will also be retained. The firm consented to the entry of a cease-and-desist order based on Exchange Act Section 17(a) and Rule 17a-4 and a censure. Barclays also agreed to pay a penalty of $125 million. Each of the other actions is similar.

Conflicts

Conflicts: In the Matter of S&P Global Ratings, Adm. Proceeding File No. 3-21240 (November 14, 2022). Respondent is an NRSRO based in New York City. In August 2017 Respondent had not rated any transactions for the issuer since 2015. The client requested that the firm rate certain senior tranches of RMBS. Initially, Respondent informed the client that the RMBS transaction met the minimum credit enhancement floor under the applicable criteria to be assigned a “AAA” rating. Later Respondent notified the client that there had been a calculation error – the tranches being considered were actually 10 basis points under the minimum for the AAA rating criteria. A few days later Respondent informed the client that after further analysis and discussion it had reached a different conclusion – the tranches did meet the minimum requirements to secure the AAA rating. The issuer repeatedly expressed disappointment with the process. During the communications between Respondent’s staff and that of the issuer, the latter threatened Respondent with a lawsuit. As Respondent’s employees re-evaluated the transaction over a five-day period in early August 2017 there were multiple discussions and emails along with meeting requests and telephone calls. There was an effort to pressure S&P analytical employees to find a way to rate the transaction AAA. All of the communications between the S&P commercial and analytical employees during the period were chaperoned by staff from the S&P compliance department. Nevertheless, some emails reflected sales and marketing considerations. Those included the fact that a quick decision was required if the transaction was to move forward with S&P. Exclusion of the firm would impact its future business. S&Ps analytical employees worked late the evening prior to a preliminary meeting of the rating committee. The group was considering a unique structural item as urged by the issuer. The analytical group concluded that the rating should be AAA based in part on an economic outlook that extended past the end point of the one prepared at the beginning for the transaction. The Order concludes that as “a result of the content, urgent nature, high volume, and compressed timing of the communications between the S&P commercial employees and the S&P analytical team . . .” the S&P commercial employees became “participants” in the rating process for the RMBS transaction being influenced by sales and marketing considerations. This violates Rule 17g-5(c)(8). In resolving the proceedings Respondent agreed to implement certain undertakings. Respondent consented to the entry of a cease-and-desist order based on Rules 17g-5(c)(8)(i) and 17g-5(c)(8)(ii) under Exchange Act Section 21F(g)(3). The firm agreed to pay a penalty of $2.5 million.

False statements

False statements: In the Matter of The Boeing Company, Adm. Proc. File No. 3-21140 (September 22, 2022) is a proceeding which names as respondent the aircraft manufacturer. The proceeding centers on the difficulties the company experienced with its then new 737 MAX aircraft. In October 2018 and March 2019 two 737 MAX aircraft crashed because a senser misinterpreted certain data that was read as part of a new Maneuvering Characteristics Augmentation System designed to avoid stalls. At the time of the crash each plane was climbing and not in danger of stalling. On each flight when the new system made adjustments the crews were unable to regain control. Subsequently, the FAA grounded the new plane. In late November 2018, when discussing the crashes, Boeing highlighted certain aspects of the preliminary accident report while downplaying others. The company also offered the public its assurances that the plane was safe. Yet the company had already begun redesigning the aircraft. The press release with the assurances made no reference to these facts. Later, in April 2019, then company president Dennis A. Mulenburg stated that there was “no surprise or gap of unknown . . that somehow slipped through [the] certification process” for the plane, a fact the company had reexamined. Yet prior to the statements, Boeing had produced a series of documents in response to a DOJ subpoena suggesting key facts that had not been disclosed to the FAA during the flight approval process. In addition, an internal compliance review identified certain documentation gaps and inconsistencies related to the plane and the certification process. Boeing offered and sold debt securities to investors after it issued the 2018 press release. The Order alleges violations of Securities Act Sections 17(a)(2) & (3). The company agreed to the entry of a cease-and-desist order based on the Sections. It also agreed to pay a penalty of $200,000,000. See also In the Matter of Dennis A. Muilenburg, Adm. Proc. Foile No. 3-21141 (September 22, 2022)(Proceeding naming then president of the firm as respondent; based on same facts and charging violations of same Sections; resolved with consent to entry of a cease-and-desist order and payment of a $1 million penalty).

Financial fraud

Financial fraud: SEC v. Pope, Civil Action No. 0:22-cv-02155 (D. Minn. September 2, 2022) is an action which names as defendant David Pope, the senior rail freight trader for a large Cooperative. Over a four-year period, beginning in 2014, Defendant manipulated the values of the contracts for freight and in some instances recorded numbers for phantom agreements. All of this activity caused a significant increase in revenue. In some instances, the adjustments he made were as much as 43% of previously reported net income figures. Ultimately the firm restated income. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)-5. The case is pending. The Cooperative settled in a separate action. See Lit. Rel. No. 25497 (September 2, 2022).

Financial misstatements: In the Mater of Mattel, Inc., Adm. Proc. File No. 4355 (October 21, 2022). Mattel is a California based toy maker whose shares are listed on NASDAQ. In August 2019 the company received a whistleblower letter. It stated that the firm’s financial statements may have material errors. The letter also claimed that the engagement partner for the audits conducted on the firm’s financial statements may not have been independent. The company took action. First, a then on-going offering of notes was halted. Second, the Audit Committee launched an investigation. Investigators determined that there were in fact errors in the company financial statements. Specifically, the investigators discovered that the tax-related valuation allowance for Q3 2017 was understated by $109 million. They also found that the tax expense for Q4 2017 was overstated by $109 million. The valuation understatement in Q3 resulted from Mattel’s Thomas the Tank Engine being classified as a definite lived asset that should be amortized. That conclusion was wrong. At the time the toy was classified as indefinite lived. In October 2019 Mattel announced that it would restate the financial results for Q3 and Q 4, 2017. While the under and over statements in Q3 and Q 4 were each $109 million, there were additional issues. Mattel’s Q3 2017 provision for income taxes was understated by 14% and net loss and net loss per share were understated for income taxes by 15%. Likewise, for Q4 2017 the firm’s provision for income taxes was overstated by 62% and net loss and net loss per share were overstated by 63%. The engagement partner also violated the auditor independence rules. A restatement was conducted in 2019. The errors resulted from two material weaknesses in internal control with regard to financial reporting. One resulted from a failure to design and operate an internal control over the review of the income tax valuation allowance analysis. That was remediated by the end of December 2018. The other weakness resulted from a failure to design and effectuate the internal controls to properly assess and communicate known financial statement errors and internal control deficiencies in a timely manner to those correcting the error. In the end, the outside auditors also restated their report on internal control over financial reporting, issuing an adverse opinion. A restatement of the financial statements for the periods was made in November 2019.The Order alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The company cooperated with the Commission’s investigation. The CFO also left the firm. Mattel resolved the proceedings, consenting to the entry of a cease-and-desist order based on the Sections cited in the Order. The company also agreed to pay a penalty of $1.5 million. See also In the Matter of Joshua Abrahams, CPA, Adm. Proc. File No. 321214 (October 21, 2022)(proceeding naming engagement partner as Respondent alleging violations of Rule 102(e)(1)(iv)(B); the matter will be set for hearing).

FCPA

In the Matter of Gol Linhas Aereas Inteligentes S.A., Adm. Proc. File No. 3-21094 (September 15, 2022) is a proceeding which names as Respondent the second largest domestic airline in Brazil. Its shares are listed on the NYSE and it files periodic reports with the Commission. The airline is based in Sao Paulo. The action centers on the period 2011 through 2013. Respondent during the period engaged in a bribery scheme. Specifically, officials were bribed in exchange for certain payroll tax and fuel tax reductions. The benefits went to Gol and other airlines. The Order alleges violations of Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B) and 30A. Respondents took remedial efforts. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The company also agreed to pay disgorgement of $51,940, prejudgment interest of $18,060,000 and payment of all but $24.5 million is waived based on financial condition.

Free Riding

Free riding: SEC v. Arbab, Civil Action No. 1:22-mi-99999 (N.D. Ga. Filed October 31, 2022). The complaint in this action is the most recent enforcement action against Mr. Arbab. It names as defendants: Syed Arham Arbab, a graduate of Georgia State University who is currently serving a 60 month in federal prison for securities fraud; Tomas Javier Jimenez, a friend of Defendant Arbab who at the time here was a cook; Blake Douglas McKinney, also a friend of Mr. Arbab who is now pursuing a degree at the University of Michigan-Dearborn; Mushfiqur Rahman, a friend of Defendant Arbab’s father who is now pursuing a degree at Hunter College; John Ryan Shows who attended UGA with Defendant Arbab; and William Carl Spagnoli who attended UGA with Defendant Arbab. Over a three-year period, beginning in May 2019, Defendants Arhab, Jimenex, McKinney, Shows and Spagnoli engaged in a free riding scheme. Ultimately the scheme generated millions in profits for defendants; the broker-dealers were left with losses. The scheme was created by Defendant Arbab. Not only did he run his own scheme, Mr. Arbab also solicited dozens of individuals through group text messages and social media to engage in this fraud. In doing this he patiently explained the mechanics of the scheme. Defendant Arbab and his associates perpetrated their scheme by focusing on two broker-dealers. Each afforded “instance credit” to certain deposits. It is that instance credit which Arbab and his co-defendants, as well as people he solicited, utilized to make the scheme work. The instance credit permitted immediate trading before it was discovered that the electronic transfers did not cover the trades. Overall Mr. Arbab and his co-defendants initiated over $2 million in fraudulent electronic fund transfers into various accounts used during the scheme. Ultimately this resulted in at least $7.8 million in profits while leaving losses of at least $146,660. The other Defendants collectively accounted for fraudulent EFTs of nearly $1.3 million, withdrew profits of over $3.3 million and left the broker-dealers with losses of $75,124. The free-riding scheme began on the heels of a Ponzi scheme orchestrated by Mr. Arbab for which he is service a sixty month sentence in prison. The Commission’s current complaint against Mr. Arbab alleges violations of Exchange Act Section 10(b). The case is pending.

Next: The second segment of Part III will be published Friday.

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