by T. GormanPosted on Posted in SECActions

Today is the end of the government fiscal year. For the Commission it is also represents the last opportunity to file new cases prior to the year-end tabulation of the number of cases initiated for the fiscal year. While virtually everyone acknowledges that the number of cases filed during a period is not a measure of a good enforcement program or any indication of the quality of the program, the numbers remain significant and are used in a variety of settings.

While ach case filed by the Commission is significant regardless of the time of year, those initiated during the year end rush are frequently microcap fraud actions or those centered on misappropriation or false statements. SEC v. Eakes, Civil Action No. 3:22-cv-01055 (M.D. Fla. Filed September 28, 2022) is typical of these cases.

Named as defendants are: Jared D. Eakes, the owner president and an investment adviser representative of GraySail Advisors, LLC.; and James Daughtry, the operator of a small investment advisory business in Alabama. Over a period of about one year, beginning in January 2019, Defendant Fakes misappropriated over $2.6 million from clients of GraySail. This was done largely by inducing clients to purchase promissory notes that supposedly were issued by Small World Capital, LLC. In fact, that company did not issue the notes.

Several of the clients who purchased the notes had previously been a client of Defendant Daughtry prior to the time he joined \GraySail. Mr. Daughtry did not tell the clients that Mr. Eakes paid him to move his clients to GraySail.

At GraySail Defendant Daughtry expected to continue his existing practice of reviewing transactions in client accounts with them prior to execution by Defendant Eakes. In fact, he did not. Again, the clients were not told.

Defendant Daughtry also recruited new clients for GraySail after he sold his advisory business to Defendant Eakes. The new clients were assured by Defendant Daughtry that he would monitor their accounts. He did not. This facilitated fraud by Defendant Eakes. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3), Exchange Act Section 10(b), and Advisers Act Sections 206(1) & (2). The case is pending. A parallel action was filed by the Alabama Securities Commission against Messrs. Eakes and Daughtry. A bar from the securities business is being sought in that action. See Lit. Rel. No. 25533 (September 28, 2022).

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by T. GormanPosted on Posted in SECActions

Traders and investors are always looking for an edge, an approach that will give them to guaranteed or near guaranteed profits. When the edge is a new trading strategy, or a recently discovered bit of data that may point to a less risky approach to make more profits, it is fine. When, however, the edge involves deception it is a different matter. At that point it is contrary to the securities laws. The “edge” used by the traders in SEC v. Phan, Civil Action No. 4:22-cv-001 (M.D. Ga. Filed September 26, 2022) is called free trading; it seeks to take advantage of certain actions taken by some brokerage firms to facilitate trading, not provide riskless trading profits.

Defendants Sang Phan and Rich Phan are brothers residing in Columbus, Georgia. Sang is a former nail salon worked. Rich is a former restaurant and nail salon worked. During the first and second quarter of 2021 the brothers decided to implement a free riding scheme. That scheme sought to take advantage of the practice of certain brokerage firms which make “instant deposits” for investors — essentially credit extended to facilitate trading.

In this matter the brothers sought out brokers that made instant deposits, hoping to use the credit extensions to make trades and profit from the use of the broker’s funds. During the first and second quarter of 2012 the brothers used four brokerage accounts at two firms to purchase nearly $60,000 of shares in a biotech company. The idea was to profit from the pandemic from the stock by using the broker’s funds before the brokers discovered the scheme – that all the transactions would be funded only by the brokers and not the brothers. The brothers also sought to use over $30,0000 in securities purchases in Rich Phan’s online account in the same manner.

Fortunately, for the brokers involved, and unfortunately for the brothers, none of the trades were profitable. In each instance after the bogus fund transfers the brokers froze the accounts and liquidated the securities holding. Those steps left the brothers with over $12,800 in losses, not the hoped for riskless profits. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25522 (September 26, 2022).

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