A look forward – a look back:
As we pause to remember the birthday of Martin Luther King we must remember the truly significant contributions he made to this country. His vision for a better society, a better future for all, perhaps best remembered in his “I have a dream” speech, continues to inspire all to strive for a better future for everyone.
Doctor King’s vision for a better future is particularly relevant today. As we look back there seems to be no end to rancor, bickering, arguments, gridlock and more. Perhaps the best thing about looking back is to recall that people in the past also had similar views of their times tracing back to the founding fathers. We can move past those if we simply follow the dream outlined by Doctor King. The dream, the vision, the future is all there if we have the courage to believe it and reach for it.
Capital call: The Office of the Advocate for Small Business Capital Formation will make its first ever “Capital Call” – a report on its findings regarding the state of capital formation for small business along with its recommendations. The public will also be able to ask questions. The Call will be held on January 23, 2020 (here).
Commission: Commissioner Robert Jackson announced he will step-down from the Commission, effective February 14, 2020. Commissioner Jackson plans to return to teaching at NYU Law School. He has been on leave while serving at the Commission.
SEC Enforcement – Filed and Settled Actions
The Commission filed 9 civil injunctive actions and no administrative proceedings last week, exclusive of 12j and tag-along actions.
Offering fraud: SEC v. Manor, Civil Action No. 2:20-cv-00597 (D. N.J. Filed Jan. 17, 2020) is an action which names as defendants Boaz Manor, a convicted criminal, Edith Pardo, CG Blockchain, Inc. and BCT Inc. The action centers on an offering of what Defendants called BCT Tokens. Over a period of about one year $30 million was made from hundreds of investors through the ICO. In conducting the offering the identify of Mr. Manor and his conviction were concealed as was his control over key entities. Investors were told that the offering was to raise capital for the development of tech for hedge funds. The representations were false. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending.
Offering fraud: SEC v. Markel, Civil Action No. 2:20-cv-00502 (C.D. Cal. Filed Jan. 17, 2020) names as defendant Daniel Markel, the principal and founder of Sobriety & Addition Solutions LLC. In PPMs Defendant promoted his firm as having an exclusive license to use a subcutaneous implant of Naltexone to treat alcohol and opioid dependencies. What investors were not told is that for about one year, beginning in March 2015, the implants were made and imported from China which violated FDA regulations. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(2) and 17(a)(3). To resolve the matter Defendant consented to the entry of a permanent injunction prohibiting violations of the Sections cited in the complaint. In addition, he agreed to pay disgorgement of $439,678, prejudgment interest of $65,224 and a penalty of $189,427. See Lit. Rel. No. 24721 (Jan. 17, 2020).
Books and records: SEC v. Hill International, Inc., Civil Action No. 20-cv-00447 (S.D.N.Y. Filed Jan. 16, 2020) is an action which names as defendants the firm, a project and construction management company, Ronald Emma, the firm’s chief accounting officer and Nicholas Tornello, director of internal reporting. In May 2018 the firm restated its financial statements for the period May 2014 to March 2017. The action resulted from the discovery of about $5 million of errors tied to foreign currency transactions. Rather than correct the errors, Defendants chose to “bleed” the amounts in overtime to smooth the impact. This is contrary to GAAP. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). To resolve the action the company and Mr. Emma consented to the entry of permanent injunctions and agreed to pay penalties of, respectively, $500,000 and $75,000. Mr. Emma also agreed to be permanently suspended from appearing and practicing before the Commission as an accountant. See Lit. Rel. No. 24720 (Jan. 16, 2020).
Unregistered broker: SEC v. Lundervold, Civil Action No. 0:20-cv-00236 (D. Minn. Filed Jan. 16, 2020) is an action which names as a defendant, Allan Lundervold. Over a four-year period beginning in 2011 Mr. Lundervold sold the securities of ARP Wave, LLC to over 100 people. He was paid a 10% commission for the sales. Defendant was not a registered broker. The complaint alleges violations of Exchange Act Section 15(a)(1). The case is pending. See Lit. Rel. No. 24719 (Jan. 16, 2020).
Unregistered broker: SEC v. Drake, Civil Action No. 2:20-cv-00405 (C.D. Ca. Filed Jan. 15, 20202) names as defendants Gregory Drake, Stephen Grossman, Stephen Moleskli, Jason St. Amour, and David Woldfson. Each of the defendants worked in call centers to solicit investors to enable them to sell shares without significantly impacting the market. The Defendants were paid transaction-based compensation. None of the Defendants were registered brokers. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 10(b) and 15(a)(1). See also SEC v. Brooks, Civil Action No. 1:20-cv-20176 (S.D. Fla. Filed Jan. 15, 2020)(based on similar conduct but only alleging violations of Exchange Act Section 15(a)(1); SEC v. Messier, Civil Action No. 20-cv-0105 (S.D.Ca. Filed Jan. 15, 2020)(named as defendants Scott Messier and Jay Scorato; Defendants negotiated the sale of microcap shares and coordinated trades among sellers for transaction based compensation; neither is a registered broker; the complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 10(b) and 15(a)(1)). Defendants Drake, St. Amour, Brooks, Messier and Scoratow consented to the entry of permanent injunctions and conduct-based injunctions from soliciting the purchase or sale of securities. They also agreed to pay disgorgement of ill-gotten gains and civil penalties. Mr. Wolfson has consented to the entry of a permanent injunction and a conduct based injunction but reserved monetary issues for determination by the Court. Messrs. Grossman and Moleski have not settled with the Commission. See Lit. Rel. No. 24718 (Jan. 16, 2020).
Insider trading: SEC v. Carr, Civil Action No. 3:18-cv-01135 (D. Conn.) is a previously filed action which named as defendants Robert Carr and Katherine Hanratty. Mr. Carr was the CEO of Hartland Payment Systems, Inc. In July 2018 Mr. Carr gave his girlfriend, Ms. Hanratty, $1 million and a tip that his firm was about to be taken over. She traded prior to the public announcement. Ultimately, she had profits of over $250,000. On January 10, 2020 the Court entered an order directing Mr. Carr to pay a penalty of over $250,000. That order followed the entry by consent of a permanent injunction as to Mr. Carr based on Exchange Act Section 10(b). At the time of the order imposing a penalty the Court also directed that Mr. Carr be precluded from serving as an officer or director of a public company for two years. Previously, Ms. Hanratty was permanently enjoined from future violations of Exchange Act Section 10(b) and ordered to pay disgorgement in the amount of $250,628, prejudgment interest of $27,351 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 24713 (Jan. 13, 2020).
Misappropriation: SEC v. Rothenberg, Civil Action No. 3:18-cv-05080 (N.D. Cal.) is a previously filed action which names as a defendant fund adviser Michael B. Rothenberg. Mr. Rothenberg marketed his advisory firm as uniquely positioned to identify millennial entrepreneurs and invest in “frontier Technology” companies. Defendant and his firm misappropriated substantial sums from the advisory. Based on consent the Court entered judgment precluding future violations of Advisers Act Sections 206(1), 206(2) and 20(4). Defendant also agreed to be barred from the securities business with a right to reapply after five years. The Court ordered him to pay disgorgement of $18,776,800, prejudgment interest of $3,663,323 and a penalty of $9 million based on the Commission’s motion. See Lit. Rel. No. 24714 (Jan. 13, 2020).
Unregistered offering: SEC v. Ciapala, Civil Action No. 20-cv-00008 (S.D.N.Y. Filed Jan. 2, 2020) is an action which names as defendants Ken Eth Ciapala and Blacklight S.A., respectively, a co-founder of the Swiss firm and an asset management firm. Defendants are alleged to have facilitated the deposit of millions of shares of EMSF Fund, Inc. The actions coincide with a pump-and-dump scheme involving the shares in 2015. When the manipulation was winding down defendants embarked on a new scheme involving manipulative trading. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. See also SEC v. Bajic, Civil Action No. 1:20-cv-00007 (S.D.N.Y. Filed Jan. 2, 2020)(related manipulation action). See Lit. Rel. No. 24712 (Jan. 10, 2020).
Offering fraud: SEC v. Todays Growth Consultant Inc., Civil Action No. 1:19c-cv-08454 (N.D. Ill. Filed Dec. 27, 2019). Defendant Todays Growth is a private Illinois company co-owned by Defendant Kenneth Courtright and his wife. The firm does business as The Income Store. Over the last two years, beginning in 2017, Defendants raised at least $75 million from over 500 investors. Investors were solicited to purchase what was called a Consulting Performance Agreement. Under that agreement the investor paid an upfront fee and gave the Income Store passwords to websites that Defendants built to generate income. Essentially, the solicitation was to purchase what looked like an annuity. Investors were guaranteed a minimum return on their investment, supposedly generated by the websites. Specifically, they were entitled to receive in perpetuity a month payment equal to 50% of the revenues generated by the website. The agreement contained a specified minimum amount that would be paid to the investor regardless of the actual income generated. For example, while the terms varied in different agreements, in one case the upfront fee was $150,000. The guaranteed minimum for the investor was $2,500 per month (18% of the investor’s upfront fee divided by 12). The guarantee was backed by a contract provision representing that the Income Store is debt free and in good financial condition. Over the two-year period of the scheme, the Income Store website generated about $9 million in revenues from the sale of third-party products. Payments to investors during that period, however, equaled at least $30 million, according to the Commission’s complaint. To cover the obvious shortfall, the Income Store had to raise more funds by selling additional agreements and diverting the funds to the earlier investors. Beginning in October 2019 the firm added a second source of income. The revenue from that operation was comingled with funds from the Consulting Performance Agreements. In addition, Defendants also appear to have obtained funds from loans secured from firms that specialize in distressed lending. During this period Mr. Courtright used investor funds to pay for his personal expenses. Ultimately, by December 2019 a moratorium on investor payments was declared. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a) and Exchange Act Section 10(b). The Court entered a TRO and a freeze order shortly after the complaint was filed. See Lit. Rel. No. 24717 (Jan. 15, 2020).
Manipulation: In the Matter of Mirae Asset Davwoo Co., Ltd., CFYC Docket No. 30-11 (Jan. 13, 2020). Respondent Mirae Asset acquired Daewoo Securities after the trading involved here. Daewoo was a brokerage and investment firm based in the Republic of Kora which engaged in proprietary futures contract trading in the U.S. During the period December 2014 to April 2016 Trader A, based in the Daewoo office in Seoul, Korea, traded futures contract, including the E-Mini contract on the CME. The trader used a number of strategies; at least one involved spoofing. To employ this strategy the trader took three steps: 1) Disproportionally large orders were entered on one side of the market. These orders were intended to give a misleading impression of market liquidity. The trader intended from the beginning to cancel these orders. 2) A small order was subsequently entered on the opposite side of the market. This order benefitted from the increased activity on the opposite side of the market created by the initial order. 3) Immediately after the second order was executed the trader cancelled the initial order. In this case by the time Enforcement’s inquiry began Daewoo had been acquired by Mirae Asset. That firm immediately began cooperating with the enforcement investigation. The firm retained U.S. counsel to conduct an internal investigation. Mirae also retained an expert to analyze the trading activity. The results from the expedited investigation were given to the CFTC’s Division of Enforcement. This action against the firm followed. The Order alleges violations of Section 4c(a)(5)(C) of the Act. That section makes it unlawful to engage in any trading or conduct that is known as spoofing. Since the trader engaged in that conduct Mirae, as the subsequent acquirer of Daewoo Securities, is liable for that activity, according to the Order. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order. The firm agreed to pay a civil monetary penalty of $700,000. The amount of the penalty was reduced by an unspecified amount based on the cooperation of Respondent.
Insider trading: U.S. v. Collins, No. 18 Crim 567 (S.D.N.Y.) is an action which named as a defendant former U.S. Congressman Christopher Collins. The case centered on trading in the shares of an Australian bio-tech firm following disappointing drug trials. Mr. Collins, who sat on the board, and learned of the news prior to its public disclosure and told his son and another who were shareholders. Each traded, avoiding significant losses. Previously, Mr. Collins pleaded guilty. Last week he was sentenced to serve 26 months in prison based on his participation in the scheme and for lying to law enforcement authorities. The Court also directed that the prison term be followed by one year of supervised release and that the former Congressman pay a fine of $200,000. See also SEC v. Collins, Civil Action No. 18-cv-7128 (S.D.N.Y) for a more detailed discussion of the facts (here).
Insider trading: U.S. v. Lavidas, No. 1:19-cr-00716 (S.D.N.Y. Verdict Jan. 15, 2020). Telemaque Lavidas is the son of a prominent Greek business man who serves as a director of Ariad Pharmaceuticals, Inc. The firm, based in Cambridge, Massachusetts, developed and marketed leukemia medication Iclusig. In three instances over a two-year period Mr. Lavidas transmitted inside information about the company to friend Georgios Nikas. The first occurred in October 2013. There Mr. Lavidas learned from his father that the FDA was concerned about potential adverse health effects from the leukemia drug. The information was transmitted to Mr. Nikas who had a large position in the stock. The shares were sold and Mr. Nikas established a substantial short position. When the firm released the information about the FDA’s concerns, the share price dropped 62%. Mr. Nikas closed the short position, realizing profits of over $3.2 million. He also avoided a loss of about $800,000. The second occurred later in the same year. In the last two months of 2013 Mr. Nikas was told by his friend, Telemaque Lavidas, that the pharmaceutical company was making good progress on returning Iclusig to market. The information had been given to Mr. Lavidas by his father. Mr. Nikas established a long position in the stock. When the company announced the drug was returning to market the share price increased. Mr. Nikas had profits of over $1.3 million. The third happened during the summer of 2015. At that time Ariad learned that an unsolicited takeover offer from another drug firm would be made. Mr. Lavidas obtained the information from his father. He passed it on to Mr. Nikas who purchased shares. When the bid was announced Araid’s stock price rose. Mr. Nikas had profits of over $2 million. Mr. Nikas received other tips from Mr. Lavidas. In each instance he traded. Overall, he had trading profits of over $15 million. Mr. Lavidas was found guilty by the jury following a one-week trial. Specifically, the jury returned guilty verdicts on one count of conspiracy to commit wire and securities fraud and three counts of securities fraud. Sentencing is scheduled for April 17, 2020.
Offering fraud: U.S. v. Padilla (S.D.N.Y. Plea Jan. 9, 2020) named as a defendant financial markets professional Jorge Padilla. Beginning in September 1014, and continuing for about three years, he targeted Argentine investors and solicited them to purchase shares in Dunatos Capital which he claimed was a very wealthy family office. During the period he raised about $900,000 from investors. Investors were told the office was very wealthy and monitored by U.S. financial regulators. The claims were false. The statements furnished to investors were also false. Mr. Padilla pleaded guilty to one count of wire fraud. The date for sentencing was not announced.
Sustainability risks: The Federal Financial Supervisory Authority of Germany published an English language version of its paper on Sustainability Risks. The paper focuses on risk management and provides guidance (here).
Securitization reporting: The European Securities and Markets Authority published a paper on its consultation regarding the use of the No Data options in securitization reporting, dated January 17, 2020 (here).
Report: ESMA issued a report on the values of EU Alternative Investment Funds. The regulator reported that the funds have a current value of about 5.8 trillion Euros. This is the second statistical report on European Union Alternative Investment Funds. It was issued on Jan. 10, 2020 (here).
Report: The Securities and Futures Commission published a report on the importance of risk management for brokers and investment firms on January 20, 2020 (here).
Report: The SFC noted the publication of the annual report by the Process Review Panel for the SFC. The report is for the period 2018 to 2019. It was published on January 16, 2020 (here).
Funds: The Monetary Authority of Singapore and the Accounting and Corporate Regulatory Authority announced on the launch of the Variable Capital Companies Framework, an alternative corporate structure that can be used for a variety of investment funds. It can be used across traditional and alternative strategies and with open-ended and closed-ended funds (here).