The Commission filed actions last week focused on insider trading, undisclosed conflicts and compliance. This is consistent with the approach that emerged from an analysis of the end of the year filings of the agency. Under that approach – called “back to the future” because it is similar to that used in earlier periods — enforcement will likely focus on traditional enforcement targets such as microcap fraud (largely offering frauds), investment advisers and insider trading. It will be bolstered by keying on gatekeepers to expand the limited budget and effective remedies which may include admissions.
Be careful, be safe this week.
Whistleblowers: The Commission made over $4 million in awards to two whistleblowers last week, according to a January 10, 2022 release.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 1 civil injunctive action and 4 administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.
Insider trading: SEC v. Roth, Civil Action No. 2:20-cv-05368 (E.D.N.Y.) is a previously filed action in which the Commission obtained a final judgment against Defendant Douglas Roth, formerly the CFO of Aceto Corporation. The complaint alleged insider trading by Defendant Roth in March 2018, just days prior to his retirement. At that time, he sold all of his firm shares vested upon his retirement after learning several negative developments regarding the company. The final judgment precludes future violations of Exchange Act Section 10(b) and from serving as an officer or director. Mr. Roth was also suspended under Rule 102(e)(2) from practice before the Commission. The U.S. Attorney’s Office for the Eastern District of New York filed a parallel case in which Mr. Roth pleaded guilty. He was sentenced to serve six months in prison and six months of home confinement followed by a year of supervised release. In addition, he was ordered to pay a fine of $100,000 and forfeiture of $147,802.64 See Lit. Rel. No. 25306 (January 13, 2022).
Compliance: In the Matter of CMG Management Group, Inc., Adm. Proc. File No. 3-20702 (January 13, 2022) is an action which names the registered investment adviser as a respondent. Over a period of about one year, beginning in April 2017, the firm advertised its backtested performance results for the CMG Opportunistic All Asset Strategy Fund. At the time its policies and procedures prohibited misleading advertising. Yet in advertising the CMG Opportunistic fund the advisory failed to distinguish between backtested and actual testing results – potential investors were not told the difference. The firm took remedial steps by adopting compliance standards requiring the disclosure about backtested results. The Order alleges violations of Advisers Act Sections 204(a) and 206(4). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited and a censure. In addition, the firm will pay a penalty of $70,000.
Insider trading: SEC v. Sargent, Civil Action No. 22-cv-168 (N.D. Ill. Filed January 11, 2022). The complaint centers on a May 4, 2020 earnings announcement for Chegg Inc. It names as defendants David Sargent and Christopher Klundt. Mr. Sargent is an attorney at Sargent Law Offices in Chicago, Illinois. He was also the vice president of a privately-held software firm based in Chicago and a member of the faculty of Loyola University School of Environmental Sustainability. In addition, Mr. Sargent was the general counsel of a privately-held business in the Windy City. Mr. Klundt, a resident of San Francisco, was the general manager of a Chegg subscription service, Chegg Prep. He was later promoted to Vice President of Content and Knowledge for Chegg. Messrs. Sargent and Christopher have been close friends since attending the University of Wisconsin-Madison where they founded a study platform for high school and college students. Chegg, based in Santa Clara, California, is the provider of online textbook rentals, tutoring and other educational services. On May 1, 2020, Mr. Klundt attended an earnings “preview” meeting for his firm. During the meeting senior management discussed the upcoming earnings release for the firm. Earnings, according to the draft, would be good. Following the meeting Mr. Klundt called his long-time friend. Within an hour Mr. Sargent purchased $40,000 worth of stock and options in Chegg. The attorney had never purchased any interest in the company. On May 4, 2020, the company issued its earnings release. The announcement stated that revenue for the first quarter had increase by 35% year-over-year to $131.6 million. Market expectations had been exceeded. The stock price soared. Mr. Klundt texted his friend a picture of a happy face with dollar signs for eyes. Attorney Sargent congratulated his friend. Mr. Sargent liquidated his options, netting over $100,000 in profits for his three-day investment; later he sold his stock for a profit of over $7,000. Subsequently, during a regulatory investigation Mr. Klundt was asked if he knew Mr. Sargent. He denied knowing the man. The complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney’s Office for the Norther District of Illinois filed parallel criminal charges against each man. The cases are pending. See Lit. Rel. No. 25305 (January 11, 2022).
Conflicts: In the Matter O.N. Investment Management Company, Adm. Proc. File No. 3-20701 (January 11, 2022) names the registered investment adviser as a respondent. The adviser is affiliated with broker-dealer and parent company O.N. Equity Sales Company. That firm received third-party compensation from client investments without fully and fairly disclosing the associated conflicts of interest. Specifically, since at least 2014 ONIMCO invested clients in: 1) mutual fund shares that paid 12b-1 fees; 2) certain funds that also generated no-transaction fee revenue ; and 3) certain mutual funds that also resulted in revenue sharing with the broker-dealer. Adequate disclosure was not made; the firm did not avail itself of the Commission’s self-reporting program. In resolving the matter, the firm agreed to implement certain undertakings. The Order alleges violations of Advisers Act Sections 206(2) and Ruler 206(4)-7. To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Section and Rule cited, and to a censure. In addition, the firm will pay disgorgement of $866,257 along with prejudgment interest of $162,396. The advisory will also pay a penalty of $210,000. A Fair Fund will be created.
Compliance: In the Matter of Comprehensive Capital Management, Inc., Adm. Proc. File No. 3-20700 (January 11, 2022) is a proceeding which names as respondent the registered investment adviser. The Order alleges that over a four year period, beginning in 2017, the firm failed to disclose conflicts of interest in its Forms ADV Part 2A regarding commissions paid to an affiliated broker-dealer and its associated persons in their capacity capacity as registered representatives of the affiliated broker-dealer. This resulted in the firm improperly receiving $66,635. The filings also contained language commonly known as a hedge clause which could lead clients to incorrectly believe that they had waved the conflicts. The firm also failed to maintain accurate records of its discretionary accounts and implement and maintain policies and procedures. In resolving the matter, the firm agreed to implement certain undertakings. The Order alleges violations of Advisers Act Sections 204(a), 206(2), and 206(4) along with Rules 204-2(a)(8) and 2065(4)-7. To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections and Rules cited in the Order and to a censure. In addition, Respondent will appoint an Independent Consultant who will implement duties specified in the Order and pay disgorgement and prejudgment interest of $75,654.04 that will be distributed to investors.
Misrepresentations: SEC v. Shillin, Civil Action No. 3:21-cv-00601 (W.D. Wi) is a previously filed action which names as defendant investment adviser Michael Shillin. The complaint alleged that Mr. Shillin made misrepresentations to investors when he stated to investors that shares in certain high profile IPOs had been acquired and encouraged certain investors to pay premiums for life insurance policies that had few benefits. The misrepresentations netted Defendant millions of dollars. The Court entered a final judgment, based on consent, which precludes future violations of Securities Act Section 17(a), Exchange Action 10(b) and Advisers Act Actions 206(1) and 206(2). The judgement also precludes Defendant from serving as an officer and director and orders the payment of disgorgement, prejudgment interest and a penalty in amounts to be determined at a later date. Mr. Shillin was, in addition, barred from the securities business in a separate order based on the judgement issued by the Wisconsin Department of Financial Institution, Division of securities and from participating of in any penny stock offering. See Lit. Rel. No. 25304 (January 10, 2022).
Alternative trading systems: In the Matter of tZero ATS, LLC, Adm. Proc. File No. 3-20699 (January 10, 2022) is a proceeding which names the registered broker-dealer as respondent. Over a period of about three years, beginning in December 2014, the firm failed to make all of the required disclosures regarding a third party’s display of order book information for certain NMS stocks. The disclosures concerned its subscriber’s display of order book information for certain Digitally Enhanced Securities. In two instances – June 2017 and from February 2020 to June 12, 2020 – it held the percentage in one or more non-NMS securities which mandated compliance with the Fair Access Rule but failed to establish written standards for granting access to the ATS as required. The Order alleges violations of Regulation ATS Rules 301(b)(2) and (5). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Rules cited in the Order, to a censure and to pay a penalty of $800,000.
Remarks: The Acting Director of FinCEN, Him Das, delivered remarks to the American Bankers Association/American Bar Association on January 13, 2022, which analyzed the transformation of money laundering/counter-terrorism efforts recently (here).
Identity: The Financial Crimes Enforcement Network and the FDIC announced an initiative to develop solutions for financial institutions and regulators to help measure the effectiveness of digital identity proofing – the process used to collect, validate, and very information about a person on January 11, 2022 (here).
Publication: The Monetary Authority of Singapore published a report titled Global CBDC Challenge: Safe, Sustainable and Inclusive Finance on January 7, 2022, which is a product of the World Bank, the IMF and others (here).
Announcement: The Financial Conduct Authority announced on January 13, 2022, a temporary change to reports regarding indications of short selling which new regulations are being considered (here).