by T. GormanPosted on Posted in SECActions

Offering frauds have long been one of the staples of the Commission’s enforcement program. As the dozens of cases the agency has filed based on offering frauds, the only limits on stories and representations made in those cases to lure investors is the imagination of those who are dreaming them up. They range from the simple, such as telling potential investors a private company is about to be listed on a national exchange or that the company will shortly merger with a large and well known entity to much more complex tales that supposedly will lead to instant wealth.

The key to the frauds is to gain the trust of the investor so he or she will part with their funds. The approaches used to develop this trust are as varied as the schemes. One is church and religion. Schemes based on this approach frequently target members of their church reasoning perhaps that everyone can trust a fellow parishioner. Unfortunately the approach works all to often, as in the Commission’s most recent case in this area, SEC v. Bartlett, Civil Action No. 8:23-cv-00765 (C.D. Ca. Filed May 2, 2023).

Named as defendants in the complaint are: Brett Bartlett, the founder of the Dynasty entities named as defendant; Scott Miller, the brother-in-law of Mr. Bartlett; Dynasty Toys, Inc; The 7M Egroup Corp.; Concept Management Company LLC; and Dynasty Inc. The two individual Defendants were at one time members of the board of directors of each entity Defendant but resigned prior to the filing of this action.

This case centers on a two year period, beginning in June 1018. Messrs. Miller and Bartlett claim to share their Christian faith. They told potential investors that they were affiliated with a large church in Illinois and that their business model was based on family values.

Investors were assured that their funds would be used in three ways. One was for the purchase of toy inventory for resale. A second was to develop a pre-production gold mine. The third focused on acquiring and shipping face masks to government agencies and other organizations during the COVID pandemic. Based on these claims at least $20.5 million was raised from over 1,000 investors.

Contrary to Defendants’ representations about the use of the cash raised, about $1.1 million of the investor funds was misappropriated. Over $11 million of the investor funds was used to make Ponzi like payments. And about $21 million was supposedly used to back checks signed by Mr. Bartlett and sent to investors. The checks all bounced. In fact, the “rags-to-riches” story used to wrap the tales together regarding the business interests to be invested in were false. The interests purchased in the entities by the investors were not registered. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

Tagged with: ,

by T. GormanPosted on Posted in SECActions

The year 2022 was good by any measure for SEC Enforcement. To be sure limitations imposed on the investigative process by the great COVID pandemic persisted. Investigative testimony was taken by remote, not sitting across a conference room table from the witness. While the process for taking testimony by remote continues to improve, there is no substitute for facing the witness and watching the reaction to various questions and exhibits.

The same limitation impacted depositions in litigation. Depositions, like investigative testimony, was taken largely by remote rather than live in a conference room. Accordingly, evidence development in 2022 was impeded by pandemic caused restrictions during investigations and litigations.

Despite the limitations, the Commission filed just under 500 new enforcement actions. That is the largest number of enforcement actions filed in a calendar year in recent years. While it is undisputed that the number of enforcement actions initiated is not a measure of a program’s success, it is significant since initiating a large number of cases gives at least some indication of presence of the agency in the market-place to monitor events.

Perhaps the best indicator of the success of the enforcement program is the increasing number of areas in which enforcement actions were brought in 2022. A quick review of the cases discussed in earlier segments of this article gives some indication of the extensive reach of the enforcement division in 2022. That segment of this article lists cases in seventeen different areas. The examples cover topics ranging from free riding, touting, financial fraud and Reg FD to privacy. And, there were cases in more areas than those listed earlier.

While the Commission’s enforcement program has long been viewed as one of the best in Government, in recent years it has continued to improve. To be sure, the whistleblower program has been a great asset to the Division.

There is more, however. Data analytics and the Division’s investigative techniques continue to improve. Many consider the Commission’s use of data analytics and related techniques to be the best in government. The agency does not disclose just how its techniques work. The example of two new insider trading cases developed through data analytics cited in a press release last year does give some indication. There, despite the fact that the cases appeared to be unrelated while both were uncovered through data analytics at least suggests that a detailed analysis of the risks gleaned from the data may have aided in uncovering the cases.

Whatever the Division’s secret, however, it is effective. Increasing numbers of enforcement actions in a wide variety of areas is not just an interesting talking point but important to effective enforcement. This is because it helps create the impression of “omnipresence” – being everywhere. That kind of presence can only serve to reassure investors who seek to rely on the integrity of the market-place as they put their money at risk by making an investment.

Tagged with: