A look forward; a look back:
The Commission appointed a new member to the Board of the PCAOB this week in the wake of another member’s term expiring. SEC Commissioner Hester Price will lead the agency efforts with the Board. The Commission also formed a new Asset Management Committee to advise it on topics related to investing.
Enforcement focused on issues relating to markets and trading. One of the few new actions initiated centered on the sale of binary options. Those securities are generally considered to be very high risk. They are banned in some countries as gambling.
The agency also resolved a case involving a broker and its founder who were charged with aiding and abetting a market manipulation by a foreign national. The trader was layering, generally considered a form of manipulation. The broker was alleged to have aided and abetted the fraud by giving the trader market access.
Investors: The Commission announced new educational videos aimed at assisting investors spot and avoid fraud (Oct. 11, 2019)(here).
Committee: The Commission announced the formation of the asset management advisory committee. The Committee will advise the agency on topics such as trends and developments impacting investors, the impact of globalization and changes in the role of technology (Oct. 9, 2019)(here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 2 civil injunctive actions and 1 administrative proceeding last week, exclusive of 12j and tag-along actions.
Binary options/registration: SEC v. Senderov, Civil Action No. 19-cv-5242 (E.D. WA. Oct. 9, 2019). The action names as defendants Anto Senderov and Lior Babazar, both of whom are citizens of, and believed to be residents of, Israel. Defendants own or control two unregistered internet offering binary options brokers and a call center that solicits investors. The solicitations took place over a three- year period, beginning in January 2014. The two brokerage firms described binary options as profitable investments for all investors, including those with little or no experience. To persuade investors to put their capital into the options the call center made a series of misrepresentations. Investors were told by the call center that they could make large profits working with its experienced professionals. In fact, those at the call center were instructed to lie. Defendants also failed to disclose that the option firms had an interest in investors failing to make money. Through these solicitations Defendants obtained millions of dollars from investors. The complaint alleges violations of Securities Act Section 5 and Exchange Act Section 20(a) tied to violations of Exchange Act Sections 15(a) and 10(b). The case is pending. See Lit. Rel. No. 24641 (Oct. 9, 2019).
Conflicts/misrepresentations: SEC v. Conrad, Civil Action No. 1:16-cv-2572 (N.D. Ga.) is a previously filed action which named as a defendant Thomas Conrad, Jr., the operator of a hedge fund and feeder fund. Last week the Court entered a final judgment against Mr. Conrad based on its earlier grant of summary judgment in favor of the Commission. That ruling was based on allegations that Mr. Conrad permitted redemptions by family members while denying that right to other investors over a four-year period beginning in 2010. During the period he also failed to disclose conflicts arising from loans made to family members. The Court entered a final judgment enjoining Mr. Conrad from future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(4). The Court also imposed a penalty of $327,500. See Lit. Rel. No. 24640 (Oct. 10, 2019).
Manipulation: SEC v. Lek Securities Corp., Civil Action No. 17-1789 (S.D.N.Y.) is a previously filed action which named as defendants the securities firm and its owner, Sam Lek. Last week the Court entered a final judgment against Defendants by consent, enjoining each from future violations of Exchange Act Sections 9(a)(2) and 10(b) and Securities Act Section 17(a). The Court also entered a censure against the firm and a three-year injunction directing that it terminate relationships with foreign clients engaged in manipulative activity and largely prohibiting intra-day trading with those customers. In addition, the firm agreed to retain an independent consultant for a three-year period. The Court directed that the firm pay disgorgement and prejudgment interest of $525,892 and a $1 million penalty. Mr. Lek will pay a penalty of $420,000. The Commission’s complaint alleged that Defendants facilitated market manipulation for a foreign client in the form of layering by giving that client market access. See Lit. Rel. No. 24639 (Oct. 10, 2019). See also In the Matter of Lek Securities Corporation, Adm. Proc. File No. 3-19581 (Oct. 10, 2019)(tag-along Order based on case cited above, imposing censure as to firm and barring Mr. Lek from the securities business and participating in any penny stock offering with a right to apply for re-entry after 10 years).
Insider trading: SEC v. Rivas, Civil Action No. 17-civ-6192 (SD.N.Y.) is a previously filed action in which the defendants included Roberto Rodrigues, Jeffrey Rogers, Rodoifo Sablion, Michael Siva and Jhonatan Zoquier. The complaint alleged that over a three-year period, beginning in the fall of 2014, Mr. Rivas, a former IT employee at a large bank, accessed confidential information from his employer and tipped the other Defendants named above. Defendants traded based on information concerning over 30 corporate transactions, reaping millions of dollars in ill-gotten gains. In 2013 and 2014 each of the originally named seven defendants pleaded guilty in a parallel criminal case. Last week the Court entered final judgments enjoining each Defendant listed above from future violations of Exchange Act Sections 10(b) and 14(e). The Court also directed that each Defendant disgorge their trading profits, which is deemed satisfied by the payment of the forfeiture order entered in the parallel criminal case. See Lit. Rel. No. 24638 (Oct. 10, 2019). Similar judgments were entered as to Mr. Silva and another Defendant earlier.
Internal controls: In the Matter of Northwest Biotherapeutics, Inc., Adm. Proc. File No. 3-19582 (Oct. 10, 2019) is an action which names as Respondent the clinical stage biotechnology company that is focused on developing cancer vaccines designed to treat a broad range of solid tumor cancers. Respondent has repeatedly disclosed over the years weaknesses in its internal controls, including those concerning related party transactions. Despite the retention of a consultant, the difficulties have continued. In resolving the matter, the company agreed to implement certain undertakings that include the retention of an independent consultant. The Order alleges violations of Exchange Act Section 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease and desist order and agreed to pay a penalty of $250,000.
Bribery: SEC v. Aurbach, Civil Action No. 1:19-cv-05631 (E.D.N.Y. Filed Oct. 4, 2019). Named as defendants are: Jeffrey Auerbach, a former registered representative, once temporarily barred from the securities business by FINRA, who acted as an IR consultant to Nxt.IDd or NXTD whose shares were listed on Nasdaq Capital Markets; Jared Mitchell, also supposedly was an IR consultant to NXTD, who was recently sentenced to prison in connection with another matter; and Richard Brown, a registered representative who has been subject to a number of customer complaints, named as a defendant in another Commission action and indicted in a criminal case. Each of the Defendants in this action was named in a 2016 Commission action centered on a broker bribery scheme. The bribery scheme, which took place in 2014 and 2015, was based on paying bribes under the guise of payments for investor relations services, to secure the purchase of NXTD shares. Initially, in July 2014 Defendant Mitchell introduced Gino Pereira, CEO of NXTD, to Mr. Brown, a registered representative, who supposedly was interested in acquiring shares of NXTD. Subsequently, over a period of several months, beginning in July 2014, Defendant Pereira paid Mr. Mitchell about $74,000 through a consulting firm for investor relations advice. At least $15,000 was then paid by to broker Brown to purchase NXTD stock. The broker acquired 231,253 shares of the firm’s stock for his retail clients at a cost of over $566,079. Mr. Brown failed to disclose to his customers that he was paid to purchase the shares in their accounts. In January 2015 Mr. Pereira caused NXTD to enter into a “Consulting Agreement” with his firm. The consulting agreement was for investor relations services. Ultimately, over a ten-month period Mr. Pereira had the company wire his consulting firm over $62,000. Messrs. Auerbach and Mitchell paid broker Brown at least $5,000 in cash. An additional 107,640 shares of NXTD were purchased for his customers at a cost of $235,584. Mr. Brown again failed to inform his customers that he was paid to purchase the shares. The complaint alleges violations of Exchange Act Section 10(b). The action is pending. See also SEC v. Pereira, Civil Action No. 2:19-cv-05527 (E.D.N.Y. Filed Sept. 30, 2019)(same as above; settled with entry of an injunction and agreement to consider other remedies at a later date). The U.S. Attorney’s Office for the Eastern District of New York filed a parallel criminal action.
Offering fraud: U.S. v. Turner, No. 2:18-cr-00011 (N.D. Ga. Sentencing Oct. 10, 2019) is an action which Defendant Winston Turner previously pleaded guilty to one count of mail fraud. The charge was based on his solicitation of former brokerage firm clients to invest in a biofuel firm using promises of immediate returns and profits. In fact, the company was nothing but a shell. The Court sentenced him this week to serve two years and nine months in prison followed by three years of supervised release. He was also directed to pay $77,188 in restitution.
Remarks: James Shipton, Chair, Australia Securities Investment Commission, delivered remarks titled “Other people’s money” and changing global markets, as the keynote address at the Asia Securities Industry & Financial Markets Association Annual Conference, Tokyo, Japan (Oct. 10, 2019). His remarks focused on themes from the book Other People’s Money by John Jay, stressing that the numbers on the computer screens represent the money earned by investors (here).
Remarks: Jacqueline Loh, Deputy Managing Director, Monetary Authority of Singapore, delivered remarks titled The Changing World at The World Federation of Exchanges General Assembly and Annual Meeting (Oct. 9, 2019). Her remarks focused on the changing economic environment and reasons for local optimism (here).