by T. GormanPosted on Posted in SECActions

Financial fraud cases were at one time a staple of the Enforcement Division. Cases alleging financial fraud were regularly uncovered and filed. In recent years, however, the Commission has had difficulty in bringing such cases despite significant initiatives. Nevertheless, the agency has persisted and had some success. Its most recent financial fraud action is In the Matter of Roadrunner Transportation Systems, Inc., Adm. Proc. File No. 3-21301 (February 14, 2023).

Respondent is a shipping and logistics firm based in Cudahy, Wisconsin. Roadrunner’s stock was listed on the NYSE and registered with the Commission. In 2020 the company filed a Form 25 withdrawing its common stock from listing. Subsequently, Roadrunner terminated its registration.

Roadrunner acquired over twenty transportations firms over a seven year period, beginning in 2010. Each company was consolidated into Roadrunner. The financial results of all the firms were consolidated into Roadrunner’s financial statements.

The company manipulated its financial results over a four-year period, beginning in mid-2013, according to the OIP. Roadrunner engaged in a fraudulent scheme to conceal major expenses, hide poor performance and avoid write-offs of impaired assets. The focus of the scheme was to meet earnings goals.

The scheme began when Roadrunner acquired Operating Company. The deal papers called for Roadrunner to pay the sellers an earnout that was contingent on the acquired firm’s future performance. The impact of the calculation depended on the performance of the acquired firm. Under GAAP Roadrunner was required to remeasure the fair value of the earnout at each reporting date. If the Operating Company could not meet the annual EBITDA thresholds to trigger the payment of the full earnout amount there were two effects: a) it provided a short term boost to net income but b) signaled investors the acquired firm was not meeting the EBITDA projections required by the deal. To avoid the latter, the numbers were manipulated.

Over the next four years, Roadrunner continued to alter certain financial metrics to avoid revealing that some properties were not performing as expected. At various times the firm hid major expenses, concealed poor performance and avoided required write offs.

In early 2017 Roadrunner announced in a Form 8-K that it had commenced an investigation. Discrepancies were uncovered and reported to the audit committee. The next year the firm announced the conclusions of the inquiry. Roadrunner terminated those responsible for the scheme, installed new controls and shared the findings from the investigation with the Commission.

The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited. The firm also agreed to pay disgorgement of $7,096,092 and prejudgment interest of $2,539,819.71. Payment was satisfied by paying $20 million to a parallel class action, $16 million of which was distributed to the shareholders.

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by T. GormanPosted on Posted in SECActions

The drinks were consumed; the food disappeared; and Super Bowl Sunday came to a close. Hope everyone enjoyed it!

The Commission continued to focus on traditional areas in the days leading up to the big game such as manipulation while bringing two new cases centered on crypto. The rate at which new cases are being filed, however, seems to be slowing, although it is early to make that determination.

Be careful, be safe this week

SEC Enforcement – Filed and settled actions

During the last week the Commission filed 3 new civil injunctive actions and no new administrative proceeding, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.

Offering fraud: SEC v. Dalius, Civil Action No. 2:18-cv-08487 (C.D. Ca.) is a previously filed action which named as defendants Eric J. Dalus and a number of entities he controlled, collectively known as Saivian LLC. Beginning in October 2015 Defendant Dalus operated a program under which investors were convinced to pay a fee of $125 every 30 days in return for a guarantee that they would get 20% of their retail shopping purchases returned every 28 days if their receipts were turned in. The program was supposedly funded by monetizing the point of sale receipt data turned in by investors. In fact, the operation was a Ponzi scheme. The action was settled as to Mr. Dalius and his firms, but Ryan Morgan Evans, a top scheme operator continues to litigate. The settlement required the entry of permanent injunctions and the payment, on a joint-and-several basis, of disgorgement in the amount of $20,080,784.41, prejudgment interest of $909,215.59 and imposed a penalty on each Defednant of $1.5 million. See Lit. Rel;. No. 25636 (February 7, 2023).

Crypto – offering fraud: SEC v. Gexcrypto Corp., Civil Action No. 2:23-cv-00191 (D. Nev. Filed February 6, 2023) is an action which names as Defendants Gexcrypto and Emiliano S. Ryn. Defendant Ryn founded the company, supposedly a crypto trading platform with a concierge service. Over a period of less than one year, Defendant Ryn defrauded 26 investors out of over $800,000. He claimed to be a successful Filipino entrepreneur in the crypto space. One part of the scheme centered on GexCrypto, a trading platform that was about to launch. The money to create the claimed trading venue came from an ICO of another coin. Investors were also recruited to invest in the mining operation. None of the promises materialized. When investors sought returns what they got was more false statements. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). Defendants resolved the matter, consenting to the entry of permanent injunctions based on the Sections cited in the compliant. In addition, they agreed to pay, on a joint-and-several basis, disgorgement of $825,994.37, prejudgment interest of $187,567.87 and a penalty of $1 million. Defendants also agreed to be enjoined from purchasing or selling any security except for their personal account. See Lit. Rel. No. 25634 (February 7, 2023).

Crypto: SEC v. Payward Ventures, Inc., Civil Action No. 23-cv-588 (N.D. Ca. Filed February 9, 2023) is an action which names as defendants Payward Ventures and Payward Trading LTD. Defendants are collectively known as “Kraken.” The firm operated what is called a Staking Program. The program required that investors turn over their crypto assets and allow them to be tied to a blockchain. The firm then used the assets as a marketing tool in order to lure additional investors. The investor obtained benefits from letting their assets be pooled such as advertising and better rates of return than they could achieve individually. Indeed, the Kraken Stating Program touted its better rates of return. At one point the program had over $45 million from U.S. investors, among others. The complaint alleges violations of Securities Act Sections 5(a) and (c). To resolve the proceedings, Defendants consented to the entry of permanent injunctions based on the Sections cited in the complaint and permanently enjoins them from participating in any staking programs.

Misappropriation: SEC v. Coleman, Civil Action No. 23-cv-459 (E.D. Pa. Filed February 6, 2023). Defendant Joshua W. Coleman formed Vesta Advisors in April 2018. Over a two-year period following the formation of the advisory, he served as an adviser representative. Defendant also held the position of Chief Compliance Officer and was responsible for the compliance program and its implementation. Over a four-year period, beginning in December 2018, Defendant Coleman executed a two-step scheme to defraud the advisory of over $200 million in illicit loan proceeds. The initial part of the scheme focused on cumulatively pledging over $160 million in client assets as collateral for personal loans. But, the clients did not consent to the loans; the clients had no knowledge of the loans. Ultimately one loan defaulted. About $20 million in pledged client assets were seized. Defendant Coleman targeted two private lenders in crafting a scheme to repay the lost funds. Defendant misrepresented the use of the loan proceeds and misrepresented the proposed use of the proceeds. Ultimately, he defaulted on the loans. The losses totaled over $50 million. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2) and 206(4). Defendant settled, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. He also agreed to the entry of an officer/director bar and a penny stock bar. In addition, Defendant Coleman will pay disgorgement and a penalty as determined by the Court in the future.

Division of Examinations Alert

The Division of Examinations has revamped and updated its exam priorities, according to its 2023 Exam Priorities (here). Consistent with its typical approach the Division plans to focus on a blend of topics and issues in its examinations. Those include points from last year as well as new items and wrinkles.

In the category of new and notable are three recently added rules: 1) The Marketing Rule for Advisors; 2) The Derivatives Rule for Investment Companies; and 3) The IC Valuation Rule. The focus here will be on compliance. The key question is how the firm and its professionals have implemented the new rule and assessed compliance. In addition, Exams will consider the trend of RIAs to private funds and evaluate the use of standards of conduct such as Reg BI, fiduciary conduct and Form CRS.

Finally, in conducting exams of RIAs, the Division will focus on the operations of the advisory and its compliance systems. For mutual funds and ETFs, Exams will evaluate firm operations and compliance programs. Overall the Division of Examinations, when executing its 2023 Exam Program, will build on its traditional approach. The Division will also add current business factors and evaluate the manner in which new rules are adopted and implemented to assess the operations of the business and its delivery of services to investors.

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