by T. GormanPosted on Posted in SECActions

It is often difficult to determine if an investment opportunity is genuine. Those involved in fraudulent conduct are frequently skillful in crafting schemes which appear to be genuine investment opportunities when they are not. Consider, for example, the Commission’s latest offering fraud scheme. There potential investors were furnished a document signed by accounting giant KPMG LLP. They were given attorney letters from well-known law firm K&L Gates that supported representations used by those soliciting investments. Yet all was fraudulent. SEC v. Ridall, Civil Action No. 1:23-cv-20200 (S.D. Fla. Filed under seal January 18, 2023).

Named as defendants in the action are: Jack Ridall and his firm, Guss Capital. Beginning in December 2020, Defendants raised at least $750,000 from four investors. The funds were supposedly invested through Mr. Ridall’s firm, an unregistered investment adviser.

Beginning in late 2020 Defendants touted Mr. Ridall and Guss Capital as experienced fund managers. The firm was supposed to be an “equity long-short investment management company, according to its website www.guscap.com. Defendants claimed their portfolio used “correlated market neutral spreads” to secure returns above 20% with minimal risk.

Mr. Ridall had deep experience according to the statement made to investors. His experience was touted through family connections. Defendant Ridall told one investor he would waive the standard fee because the investor was “like an uncle” to him. Investor funds were supposed to be put into “blue chip stocks” and a planned hedge fund.

To take advantage of the offered investment opportunity, investors executed a subscription agreement. Under the agreement they became part of Defendants’ Guss Actium Fund. After being reassured about the stellar returns earned by prior investors, their funds were deposited in the personal bank account of Mr. Ridall. For example, Mr. Ridall convinced one investor, a childhood friend of his mother who is a single mother, to empty her 401(k) and invest all of her money with him. Mother’s friend was assured that the returns would be so large they would more than pay for the early withdrawal penalty she faced for taking all of her funds out of the account.

Investors were assured not just by Mr. Ridall but the documents he furnished. Those included a statement from KPMG touting the success of one prior investor. The statement claimed that the investor return was 81%. Later, to again assure investors, letters from international law firm K&L Gates were produced to investors touting the spectacular investment returns obtained by Mr. Ridall.

In fact, the KPMG documents were fabricated. The K&L Gates letters were fraudulent. The money had never been invested. The claimed investment history of Mr. Ridall was a lie. The complaint alleges violations of each subdivision of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2) and 206(4). The complaint is pending.

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by T. GormanPosted on Posted in SECActions

Pricing services are frequently relied on by those trying to determine the value of a security. Frequently they are used to aid the valuation of thinly traded stocks. In some instances, the services are used to aid valuing more complex instruments. It is the use of these services, and what must be disclosed about them, which is at the heart a recent case brought by the Commission. In the Matter of Bloomberg Finance, L.P., Adm. Proc. File No. 3-21284 (January 23, 2023).

Respondent Bloomberg Finance is a subsidiary of Bloomberg I.P., a privately held financial, software, data and media firm based in New York City. The firm has long operated a pricing service known as BVAL. It provides daily price valuations to numerous subscribers and customers. Bloomberg Finance is an industry leader.

Customers of the firm are told that when valuing fixed income securities it did so either by direct observation algorithm or observed comparable algorithm. The former includes market data about the target security. Those observations are filtered by Bloomberg to include only the highest quality observations. The approach requires that executable levels and indicative market quotes are statistically corroborated.

The firm also uses what it calls the Evaluator Input or EIT. This approach incorporates into the algorithm a single data point about the target security. This can be a broker quote that may not have been automatically incorporated by BVAL.

What Respondent did not explicitly disclose over a six-year period, beginning in 2016, is that in certain circumstances the use of EIT could result in a valuation based on an uncorroborated single data input. This made the Bloomberg disclosure materially misleading, according to the Order Instituting Proceedings. This is because it conveyed that the prices of fixed income securities from the observed composable algorithm were based on value relative to comparable securities only. That in fact is not correct since a single broker quote for the target security might be the basis. The Order alleges violations of Securities Act Section 17(a)(2).

To resolve the matter, Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. In addition, Respondent will pay a penalty of $5 million.

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