In a shortened work week punctuated by the Thanksgiving holiday and Black Friday the Commission filed two new actions. One centered on the failure of an advisory to comply with the custody rule. The second involved two firms collectively known as Kraken to register their trading platform.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 2 new civil injunctive action and no new administrative proceeding, excluding tag-along actions and those that present a conflict for the author.

Accounting fraud: SEC v. SAExploration Holdings, Inc., Civil Action No. 20-CV-08423 (S.D.N.Y.) is a previously filed action that centered on the recording of about $100 million in revenue from a company that did not have the ability to make the payments. The result was the falsification of the financial statements. Defendant Brian A. Beatty settled the action based on his multi-year participation in the scheme. He consented to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)A, 13(b)(2)(B) and related rules as well as Section 304 of SOX. The judgment orders Mr. Beatty to pay disgorgement in the amount of $219,940, prejudgment interest of $41,763 and orders the reimbursement of SAE in the amount of $441,995 under SOX. The Court entered the judgment. See Lit. Rel. No. 25902 (November 22, 2023).

False statements – EB-5: SEC v. Ahmed, Civil Action No. 1:23-cv-10210 (S.D.N.Y. Filed November 21, 2023) is an action which names as defendants: Nadim Ahmed, Mehreen Shas, Mona Shah, Nuride Transportation Group, LLC, NYC Green Transportation Group, LLC, Med Trans EB-5 Fund, LLC, NYCEV Mobility LLC, Gravitas NYC Regional Center, LLC, and Mona Shah & Associates, PLLC. Defendant Ahmed is the Executive Chairman of NuRide while Defendant Shah is an attorney licensed in New York and the UK. The action centers on soliciting individuals to supposedly participate in the EB-5 program which grants a permanent green card to foreign nationals who create a certain number of jobs in the United States for individuals seeking permanent residence in this country. In this action Defendants have raised over $66 million from over 100 investors since 2014 based on representations that a permanent green card could be obtained permitting residence in the U.S. by investors. Misrepresentations were made to investors regarding the use of their funds which were supposed to be used for the program. To date none of the participants has received a green card. The stock offerings being made by Defendants were not registered with the Commission. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and 10(b). The case in in litigation. See Lit. Rel. No. 25897 (November 21, 2023).

Muni bonds: SEC v. Breland, Civil Action No. 3:22-cv-01467 (W.D. La.) is a previously filed action which names as defendant Vern A. Breland. The complaint centered on a municipal bond offering in 2017 and 2018 for the town of Sterlington, Louisiana. The financial statements involved were based on false financial projections. In addition, Defendant directed that portions of the offering proceeds be diverted to him. Mr. Breland resolved the matter, consenting to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). He also agreed to pay at $35,000 civil penalty. See Lit. Rel. No. 25901 (November 21, 2023).

Custody Rule: SEC v. Brite Advisors USA, Inc., Civil Action No. 23 Civ. 10212 (S.D.N.Y. Filed November 21, 2023) is an action which names as defendant the registered investment adviser. Since 2019 Defendant has failed to comply with the requirements of the Custody Rule which dictated that it obtain or receive from Brit Australia an annual internal control report from an outside auditor for assets for which it has custody as required. In addition, Brite USA has received millions of dollars in operational funding arranged by its parent company, Brite Advisory Group Ltd. These arrangements created a conflict of interest which should have been disclosed but was not. The complaint alleges violations of Advisers Act Section 206(a) and 206(4). See Lit. Rel. No. 25900 (November 21, 2023).

Breach of duty: SEC v. Shustek, Civil Action No. 2:21-cv-01416 (D. Nev.) is a previously file action which named as defendant Michael Shustek and his advisory firm, Vestin Mortgage LLC. The complaint alleged that since 2012 Defendant has drained about $29 million from the advisory firm to another he controlled. This was done by repeatedly buying and selling the same buildings. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3) and Advisors Act Section 206(2). To resolve the matter defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, Defendant agreed to pay a civil penalty of $300,000. See Lit. Rel. No. 25899 (November 21, 2023).

False statements: SEC v. Rio Tinto Ltd., Civil Action No. 25898 (S.D.N.Y.) is a previously filed action which named as defendants the mining firm and its former CEO Thomas Albanese. The complaint alleges that the firm’s filings contained misleading statements about the value of the firm’s assets. To resolve the matter the company consented to the entry of permanent injunctions based on Exchange Act Sections 13(a) and 13(b)(2)(A) and agreed to pay a penalty of $28 million. Mr. Albanese consented to the entry of a permanent injunction based on Exchange Act Section 13(b)(5). He will pay a penalty in the amount of $50,000. See Lit. Rel. No. 25898 (November 21, 2023).

Failure to register: SEC v. Payward, Inc. and Payward Ventures, Inc., Civil Action No. 3:23-cv-06003 (N.D. Ca. Filed November 20, 2023). Defendants are two entities based in San Francisco known as Kraken. Since 2013 Kraken has operated an online trading platform. Customers can purchase and sell crypto assets on the trading platform. Many are viewed by the SEC as investment contracts. Nevertheless, no registration is held by Kraken. To the contrary, the firm simultaneously acts as broker, dealer, exchange and clearing agency. The business practices of Kraken create risks for investors which may not be readily apparent. Not only does the firm operate without any registration, even where the crypto asset may be a security, internal controls and recordkeeping are deficient. The firm also frequently comingles customer crypto assets with its own. Its auditors identified this practice as one that creates a “significant risk” for customers. In addition, Kraken comingles customer cash with its own. At times Kraken has paid operational expenses directly from bank account that contain customer cash. And, its recordkeeping for customer assets resulted in material errors in 2020 and 2021. The firm’s deficient practices are the result of putting its own financial interests ahead of those of its customers, according to the complaint. This practice creates substantial risks for customers. The complaint alleges violations of Securities Act Sections 5, 15(a) and 17A(b). The case is in litigation. See Lit. Rel. No. 25896 (November 21, 2023).

Australia

Consultation: The Australian Securities and Investment Commission is consulting and soliciting feedback from the investment management industry on a proposal to remake Order CO 13/72 which extended certain relieve to facilitate the quotation of exchange traded funds on the ASX market. The agency is considering broadening the relief, according to the November 24, 2023 release (here).

BaFin

Discussion: Birgit Rodolphe, Chief Executive Director of Resolution and Prevention of Money Laundering, recently discussed the most important aspects of regulating decentralized financial and BaFin’s approach in a publication released on November 3, 2023 (here).

Hong Kong

Announcement: The Securities and Futures Commission of Hong Kong recently announced that it will launch China treasury bond futures in a release dated November 24, 2023 (here).