Back to the Supreme Court is the story for SEC administrative proceedings. While many thought that the reforms implemented four years ago in the wake of the High Court’s decision in Lucia resolved the issues it turns out that there are more. Last week the Court agreed to consider an appeal from the Fifth Circuit centered the question of if the Exchange Act stripped district court’s of jurisdiction to consider constitutional challenges. Interesting, later the same week the Fifth Circuit again found in favor of a Respondent in an administrative proceeding, concluding that the courts could consider a constitutional claim regarding the right to a jury trial.
Be careful, be safe this week
Proposed rules: The Commission extended the comment period for its Proposed Rules on climate related disclosures last week. In addition the agency reopened the comment period for proposed rules regarding private fund advisers and Regulation ATS, according to a released dated May 9, 2022 (here).
Administrative proceedings. Four years ago it appeared that questions regarding the validity of administrative law judges and the proceedings they conduct had been resolved by the High Court in Lucia v. SEC, 138 S.Ct. 2044 (2018). Not so. The Fifth Circuit had decided two cases raising questions regarding the proceedings. One is Cochran v. SEC, No. 19-10396 (Decided December 13, 2021)(en banc). There the court concluded that the Exchange Act did not strip district courts of jurisdiction to hear certain constitutional claims regarding the propriety of those proceedings. Plaintiff claimed that the Commission was interfering with its right to a jury trial.
The second is Jaresy v. SEC, No. 20-61007 (5th Cir. Decided May 18, 2022). There an investment adviser named as a respondent in a Commission administrative proceeding was found liable for defrauding over 100 investors. On appeal the Fifth Circuit reversed and remanded the case. The Circuit Court concluded that the hedge fund manager had been denied the right to a jury trial and that there had been an unconstitutional delegation of authority in the appointment process. The case was remanded for further proceedings. Just before the Circuit Court the Supreme Court entered an order granting a petition for certiorari in Cochran
The Supreme Court granted certiorari in Cochran days before the decision was handed down in Jaresy. 202 U.S. LEXIS 2425 (May 16, 2022).
SEC Enforcement – Filed and settled actions
Last week the Commission filed 3 civil injunctive actions and 5 administrative actions, exclusive of 12j, tag-a-long and other similar proceeding.
Offering fraud: SEC v. Charlebois, Civil Action No. 3:22-cv-00223 (W.D. NC Filed May 19, 2022) is an action which names as defendants Wynn Charblebois who claims to be an investor, and his firm, WC Private LLC, through which investments are made. Beginning in the early 2000s Defendant Charlebois and his firm raised money from investors, often in the form of promissory notes. His banking records show a series of in and out transactions, cycling cash. many of which ultimately funded his lifestyle. None of the investor money was invested. Defendant’s communications to investors are a stream of misstatements centered on questions raised by investors regarding investment amounts and claimed gains. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The Commission filed a motion for emergency relief. The case is pending. See Lit. Rel. No. 25397 (May 19, 2022).
Fraudulent Crypto offering: SEC v. Sohrab, Civil Action No. 18-cv-02909 (S.D.N.Y.) is a previously filed action which named as defendants Sohrab Sharma, Robert Farkas and Raymond Trapani. The complaint alleged Defendants conducted a fraudulent ICO offering through Centra Tech Inc., an entity they control. Potential investors were told that the firm, which was marketing CTR tokens, had partnerships with Visa, MasterCard and The Bancorp. The claims were false. Fictitious bios for executives of the firm were also used. The firm raised about $32 million from investors. The complaint alleged violations Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). To resolve the action each defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, the judgements ordered the payment of disgorgement and prejudgment interest of $37,701,966, $2,608,869, and $394,908 against Defendants Sharma, Trapani and Farkas, respectively. Each obligation is deemed satisfied by the orders of forfeiture entered in the parallel criminal action against each individual. The court also entered officer-and-director bards against each Defendant and conduct based injunctions precluding each from participating in crypto offerings. See Lit. Rel. No. 25396 (May 19, 2022).
SEC v. Tournant, Civil Action No. 1:22-cv-04016 (S.D.N.Y. Filed May 17, 2022) names as defendants three Alliance senior portfolio managers who used AGI US’s Structured Alpha funds to defraud many of the largest pension funds through the use of a complex investment scheme. Named as defendants are: Gregoire P. Tournant, Chief Investment Officer of the U.S Structured Products Group for AGI US and lead portfolio manager for the Structured Alpha funds; Trevor L. Taylor, Managing Director at AGI US and Co-lead Portfolio Manager of the Structured Alpha funds; and Stephen G. Bond-Nelson, Managing Director at AGI US and Portfolio Manager for the Structured Alpha funds. At the center of the cases is Allianz Global Investors U.S. LLC and Structured Alpha funds. The former is a registered investment adviser. The latter is a group of 17 pooled investment vehicles. Structured Alpha offered investors a complex options trading strategy designed to generate profits by using a portfolio of debt or equity securities as collateral to purchase and sell options. Investors could get exposure to a variety of debt or equity securities tied to the options trading strategy which was designed to add profits with hedges to protect against loss. Over a period of about four years, beginning in early 2016, AGI US and Defendants marketed Structured Alpha funds to 114 institutional investors. About $11 billion was raised. Over time Defendants sought to and did manipulate key financial metrics and reports in an effort to conceal the scope of the financial risk and eventually the actual risk. Ultimately, the fund collapsed, causing millions in losses. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4).
Related proceedings and resolutions: In the Matter of Global Investors U.S. LLC, Adm. Proc. File No. 3-20855 (May 17, 2022)(Proceeding against the fund based on above; resolved with a cease-and-desist order based on Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4) and a censure; the firm will pay disgorgement of $315.2 million plus prejudgment interest of $34 million, deemed satisfied by the forfeiture and restitution order entered in the parallel criminal case; in addition a penalty of $675 million was imposed which will be paid by putting $131 million into a fair fund; see also U.S v. Allianz Global Investors U.S. LLC (S.D.N.Y.) in which the firm pleaded guilty); In the Matter of Stephen G. Bond-Nelson, Adm. Proc. File No. 3-20854 (March 17, 2022) (based on guilty plea in parallel criminal case; Respondent is barred from the securities business and participating in any penny stock offering); In the Matter of Trevor Taylor, Adm. Proc. File No. 3-20853 (May 17, 2022)(same as immediately above).
Misappropriation – IA: SEC v. Diver, Civil Action No. 19-cv-02771 (S.D.N.Y.) is a previously filed action which names as defendant Richard T. Diver, formerly the COO of a registered investment adviser. The complaint alleges that over a seven-year period, beginning in 2011, Mr. Diver misappropriated funds from his employer by inflating his pay by about $600,000 per year. He also over billed the firm’s clients to generate additional revenue so he could continue to inflate his salary. The clients were overcharged by about $750,000. The complaint alleged violations of Advisers Act Sections 206(1) and 206(2). To resolve the action Defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, Mr. Driver will also pay disgorgement of $734,558 and prejudgment interest of $70,618.53. Those amounts were deemed satisfied by the payment of restitution and a forfeiture ordered entered against Mr. Driver in the parallel criminal case. See Lit. Rel. No. 25395 (May 17, 2022).
Microcap fraud: SEC v. Sidoti, Civil Action No. 5:20-cv-02178 (C.D. Cal.) is a previously filed action which alleged attorney Sidoti took a series of steps to aid the owners of controlling interests in microcap issuers involved in a fraudulent cheme. Her efforts included signing false documents, securing the removal of restrictions on stock certificates through fraudulent means and concealing the identity of the control persons of the firms. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Section 10(b). To resolve the action Defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. The judgement also imposed a 5 year penny stock bar and a 5 year conduct based injunction conclusion precluding the preparation of opinion letters. Defendant was also directed to pay a penalty of $22,000. See Lit. Rel. No. 25394 (May 17, 2022).
Offering fraud: SEC v. Straightpath Venture Partners LLC, Civil Action No. 22 Civ. 3897 (S.D.N.Y. Filed May 13, 2022) is an action which names as defendants: Straightpath Venture is the fund manager; Straightpath Management LLC, the fund adviser; Brian Martinsen, one of the three owners of Straightpath; Michael Castillero, one of the three owners of Straightpath who has also been barred by FINRA; Francine Lanaia, the third owner of Straightpath has been suspended by FINRA; and Eric Lachow a part owner of Straightpath Management and a registered broker. Over a five-year period, beginning in 2017, Defendants marketed shares of entities that supposedly owned pre-IPO shares of specific firms. When an investor purchased shares from Defendants, they supposedly obtained shares of an entity that held a specific number of pre-IPO shares of a specific company selected the investor selected. In fact, the representations made to purchasers were false. Defendants often were unable to obtain the specific number of shares requested. Rather than return the money, Defendants kept it. Defendants also co-mingled all the investment money , contrary to the representations made to investors. Overall, about 2,200 investors purchased shares. Defendants were able to keep $75 million of the investor funds for themselves while paying their sales agents almost $48 million. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Sections 10(b) and 15(a) and Advisers Act Sections 206 and 204. The case is pending. See Lit. Rel. No. 25393 (May 16, 2022).
Conflicts: In the Matter of First Republic Investment Management, Inc., Adm. Proc. File No. 3-20865 (May 19, 2022) is a proceeding which names the registered investment adviser as a respondent. The adviser’s affiliate is First Republic Securities Company, LLC, a registered broker-dealer. Since early 2014 the firm has invested client funds in certain mutual funds and sweep products. Those investments resulted in the affiliated broker receiving certain revenue sharing payments from an unaffiliated clearing broker. Respondent did not adequately disclose those payments and the conflict. The adviser also failed to comply with its duty of best execution and to properly implement is policies and procedures tied to these issues. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). In resolving the matter Respondent will implement a series of undertakings. Respondent also consented to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. In addition, the firm will pay disgorgement of $1,332,664, prejudgment interest of $243,953 and a penalty of $250,000. A Fair Fund will be established.
Remarks: Associate Director, Enforcement and Compliance, delivered remarks during the Chainalysis Links Conference on May 19, 2022, titled The Intersection of Cryptocurrencies and National Security (here).
Remarks: Ravi Menton, Managing Director, Monetary Authority of Singapore, delivered remarks at the Singapore Financial Forum, May 19, 2020 titled A Future Ready Workforce for an International Financial Center. His remarks gave an update on economic conditions and prospects for growth in the future (here).