A new report by Cornerstone Research and NYU compares the number of Commission enforcement actions involving public companies and their subsidiaries brought in the first have of fiscal 2019 with prior years. While the number of cases initiated during the period exceeds that of the comparable period in the prior year, it is below that of the same periods in 2017 and 2016 if actions from the Share Class Cooperation Initiative are excluded.
The Commission prevailed at trial last week, securing a jury verdict in its favor against a firm and two of its executives. The jury concluded there were violations of the antifraud provisions of the Securities Act and the Exchange Act centered on the fraudulent sale of securities.
Finally, Enforcement filed actions centered on a failure to file SARs and two offering frauds. As with earlier cases alleging a failure to file SARs, the action centered on penny stocks and the rapid deposit of share certificates and disposition of sale proceeds. The offering fraud in one case was based on a scheme supposedly tied to the sale of collectibles and in another the firm’s false claim in offering materials that certain prominent blockchain experts were consultants. The Commission also resolved another post Lucia case.
Proposed rules: The Commission proposed a package of rule amendments and interpretative guidance to improve the framework for cross-border security-based swaps and market participants. Specifically, the package seeks to pragmatically address implementation and efficiency issues and, in some instances, to further harmonize the regulatory regime governing security-based swaps administered by the Commission with those of the CFTC (here).
Proposed rules: The Commission proposed amendments to the accelerated filer and large accelerated filer definitions. The proposals are designed to reduce costs in some instances and the burden for smaller filers (here).
Proposed rules: The agency proposed rule amendments to improve the information available to investors regarding the acquisition and disposition of businesses. The proposals are designed to ensure that investors receive the necessary financial information while reducing unnecessary costs and burdens (here).
Enforcement statistics: Cornerstone Research and the NYU Pollack Center issued a report titled SEC Enforcement Activity: Public Companies and Subsidiaries (Midyear FY 2019 Update) (here). While the Report centers on statistics regarding SEC Enforcement Actions involving public companies and their subsidiaries, it is dominated by an Enforcements cooperation program discussed throughout known as the Share Class Selection Disclosure Initiative. Under that Initiative 79 investment advisers self-reported violations of the Advisers Act regarding the failure to disclose conflicts regarding compensation received in connection with the selection for clients of fund shares. Overall – Advisors self-reported. Included in that group were 27 public companies that are registered advisers. The Report counts the actions involving those 27 adviser/entities when tabulating SEC Enforcement activity involving public companies and their subsidiaries.
Key findings of the report are: 1) The Commission initiated 52 enforcement actions in the first half of fiscal 2019 which is the third most in any half year period tracked; 2) each of the cases was filed as an administrative proceeding; 3) 88% of the companies cooperated with the SEC; and 4) monetary settlements totaled $742 million.
If the cases garnered from the Cooperation Initiative are eliminated, an approach arguably favored by the Enforcement Division’s Annual Reports, the results differ. See, e.g., Annual Report, Division of Enforcement (2018) at 9 (presenting statistics re number of cases brought with and without MCDC but noting that initiatives such as that one “can skew the results for a particular year”). Eliminating the actions tied to the Cooperation Initiative reduces the number of actions brought in the first have of fiscal 2019 to 25 cases were brought in the first compared to 16 during the same period in 2018, and 46 and 44 during the comparable period for fiscal 2017 and 2016 respectively. At the same time the government shut-down from December 22, 2018 through January 25, 2019 clearly hindered the Division. While all of the actions were filed as administrative proceedings this is consistent with the approach used by Enforcement since the Lucia decision since all were settled. Indeed, during that period only one new contested administrative proceeding was filed. Since the Cooperation Initiative mandated disgorgement much of the money secured came from those proceedings — they constitute the majority of the cases filed during the period. Even setting aside the Initiative however, it is clear that an increasing number of SEC enforcement actions involve investment advisers – an approach that is consistent with the retail investor focus of the agency.
SEC Enforcement – Litigated Actions
Offering fraud: SEC v. American Growth Funding II, LLC, Civil Action No. 16-cv-00828(S.D.N.Y.) is an action which names as defendants American Growth; Portfolio Advisors Alliance, Inc., a registered broker dealer; Ralph Johnson, the managing member of the AGF entities; Howard Allen III, a registered representative and an indirect owner of PAA; and Kerri Wasserman, President of PAA. A jury returned a verdict in favor of the Commission finding Portfolio Advisors, and Messrs. Allen and Wasserman liable on all counts. The jury also concluded that they violated Exchange Act Section 10(b) and Securities Act Section 17(a).
The complaint alleged that American Growth, which supposedly provided loans to businesses, raised about $8.6 million from 85 investors through the sale of its units under a private placement memorandum from early 2011 through the end of 2013 based on a series of misrepresentations. During the period the primary asset of American Growth was a loan from an affiliate that had greatly deteriorated in value and for which the likelihood of repayment was imperiled. Nevertheless, investors were promised 12% returns. Previously, defendants American Growth and Johnson settled with the Commission.
SEC Enforcement – Filed and Settled Actions
The Commission filed 1 civil injunctive actions and 2 administrative proceedings this week, exclusive of 12j and tag-along actions.
Cherry picking: In the Matter of J.S. Oliver Capital Management, L.P., Adm. Proc. File No. 3-15446 (May 16, 2019) names as Respondents the firm, a registered investment adviser until 2016, and its founder and sole owner, Ian O. Mausner. The Order alleges two fraudulent schemes. The first took place over a period of about one year beginning in June 2008. During that time Respondents disproportionately allocated trades to six client accounts, benefiting the adviser. The three accounts not favored by the distributions were harmed in the amount of approximately $10.7 million. In the second scheme, which took place over a two year period beginning in early 2009, Respondents used over $1.1 million in soft dollar credits in a manner not disclosed to the clients. The Order alleges violations of Advisers Act Sections 204, 206(1), 206(2), 206(4) and 207. Respondents each resolved the matter by consenting to the entry of a cease and desist order based on the sections cited in the Order. Mr. Mausner is barred from the securities business and will pay disgorgement of $669,965.00. This case is on remand following Lucia.
SARs: In the Matter of Wilson-Davis & Co., Inc., Adm. Proc. File No. 3-19167 (Filed May 15, 2019). Respondent broker-dealer failed over a four year period, beginning in 2013, to file SARs despite a number of red flags regarding penny stocks. During the period the firm repeatedly had transactions involving the deposit of stock certificates, the liquidation of securities and the immediate transfer out of the funds. This type of transaction is identified in the firm’s AML policies. Nevertheless, the firm failed to file SARs. The Order alleges willful violations of Exchange Act Section 17(a) and Rule 17a-8 thereunder. In resolving the matter, the firm agreed to implement a number of undertakings which include the retention of an independent AML Compliance Consultant. Respondent consented to the entry of a cease and desist order based on the section and rule cited in the order. In addition, the firm was censured and will pay a penalty of $300,000.
Offering fraud: SEC v. Collector’s Coffee, Civil Action No. 19 CV 04355 (S.D.N.Y. Filed May 14, 2019) is an action which names as defendants the firm, d/b/a Collectors Cafe, a private company based in New York City, and Mykalai Kontilai, the founder of the company and its president. Over a period of years Collectors Café raised millions of dollars from investors. The firm told investors that the funds would be used to develop a website for the auction of collectibles such as sports memorabilia and an affiliated social network and television show. Instead, portions of the money was misappropriated by Defendants. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24469 (May 15, 2019).
Offering fraud: In the Matter of NextBlock Global Ltd., Adm. Proc. File No. 3-19164 (May 14, 2019). NextBlock Global is a Canadian entity co-founded and owned by Respondent Alex Tapscott. In June and July 2017 Respondents solicited investments through the private placement of convertible debentures, raising about $20 million CAD from over 100 investors in Canada, the United States and elsewhere. On August 11, 2017 the firm filed a Form D Notice of Exempt Offering of Securities with the Commission. The notice indicated that about $2.4 million USD of the convertible debentures were sold to U.S. investors. The form was signed by Mr. Tapscott as CEO of the firm. The slide decks used in Canada and the United States to solicit investors indicated that four individuals who are prominent in the blockchain industry were serving as advisers to the company. Three of those individuals are in the United States. Those representations were part of the selling points for the capital raise. The statements were false. When the firm tried to do another offering, newspapers published stories alleging that the initial sale of securities was fraudulent. The company halted the offering along with a proposed listing on the TSX and wound-up its affairs in court. Mr. Tapscott voluntarily surrendered his right to collect a $2 million USD share of the profits that resulted from the investment of the offering proceeds. The company included this amount in the distributions to debenture holders. NextBlock and Mr. Tapscott settled with the Ontario Securities Commission. The settlement included an acknowledgment of responsibility. The SEC noted the remedial acts of Respondents while the firm acknowledged that the SEC did not impose a civil penalty as part of its resolution of these proceedings based on the company payment of $700,000 CAD (about $520,000 U.S.) in the resolution with the OSC. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceedings, Respondents each consented to the entry of a cease and desist order based on the section cited in the Order. In addition, Mr. Tapscott will pay a penalty of $25,000.
Offering fraud: U.S. v. Roberson, Case No. 7:18-cr-0011 (S.D.N.Y. Guilty plea May 10, 2019). Brian Roberson and his Partner met Investor in late 2010. Mr. Roberson controlled Savant Capital Management LLC at the time. He had a trading algorithm under development by a firm. In early 2011 Mr. Roberson suggested that Investor wire funds to Savant for trading with the algorithm. The funds would be deposited with Clearing Firm. The investor wired $250,000. While Mr. Roberson did deposit about $233,000 of the transferred capital to the account as represented, the balance was moved to others for his personal use. By April Mr. Roberson stopped making payments to the vendor who was developing the trading algorithm. When Investor demanded the return of his funds, he only received $50,000. A substantial portion of Investor’s funds had been lost through trading. Other portions had been transferred to accounts for the benefit of Mr. Roberson and his family. The account with the broker was closed. The claim that it once had substantial balances was false. Mr. Roberson was charged with securities fraud. On May 8, 2019 he pleaded guilty to one count of securities fraud. Sentencing is scheduled for August 26, 2019.
Crypto currencies: The Financial Crimes Network, or FinCEN, issued an advisory titled Advisory on Illicit Activity Involving Convertible Virtual Currency, dated May 9, 2019 (here). The advisory appears to be a broad warning regarding the nefarious use of crypto currencies. It is addressed to CEOs, COOs, Chief Risk and Compliance Offers and Cybersecurity Units. It focuses of the dangers of convertible virtual convertible virtual currencies or CVCs and a subset of peer-to-peer or P2P exchanges, particularly those tied to the dark web. The Advisory includes a list of 30 “red flags” to consider. The real “red flag” is the Advisory – it should alert CCOs and others charged with compliance to carefully scrutinize transactions with the requirements for filing a SAR in mind.
Breach of duty: The Securities and Investment Commission banned David Cornford, an advisor at Kaz Capital Pty Ltd., from the securities business for six years. The SIC found that the advisor engaged in buying and selling from client accounts without authorization. The regulator also concluded that Mr. Cornford traded Contracts for Difference in a personal capacity in a manner that conflict with the interests of his clients.
Breach of duty: The Securities and Futures Commission banned Wang Can, formerly a representative of China Galaxy International Securities (Hong Kong) Co., for thirty months. The order stems from the fact that Mr. Wang became privy to information about the proposed acquisition of Linmark Group Ltd. in November 2014 when he assisted his securities firm with the preparation of certain documents. He then traded securities through the account of a friend prior to the deal and sold them after, reaping profits of $7,800. The transaction was not reported to his firm as required. A penalty equal to the amount of the trading profits was also imposed. The Commission considered Mr. Wang’s willingness to accept responsibility for his actions and his remorse.
Improper trades: The SFC suspended Oei Hong Eng, the chairperson and responsible officer of Gransing Securities Co., Ltd. for eight months. The Commission concluded that she had attempted to create a false appearance of trading with the assistance of a friend to match her trades in the shares of G-Vision between May 31, 2011 and August 5, 2011 and in the shares of Tianjin Tianlian Public Utilities Company Ltd. between April 27, 2011 and June 1, 2011. The SFC is of the view that Ms. Oei’s dishonest and intentional acts call into question her fitness and properness to be a regulated person.
Corruption: The SFC and the Independent Commission Against Corruption charged Cho Kwai Chee, the former Executive Director of Convoy Global Holdings Ltd., with conspiracy to defraud. The charges are based on findings that Mr. Cho attempted to defraud the Stock Exchange of Hong Kong Ltd. and the board of directors, shareholders and investors of Convoy Global by causing its subsidiary to acquire his investment company for over $89 million. The matter is being brought to the attention of the Eastern Magistracy for mention.
SEC 85th Anniversary Gala: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. Following a brief program featuring SEC Chairman Jay Clayton, there will be cocktails and dinner. For further information regarding tables, tickets and advertisements in the program please contact the Society here on or before May 17, 2019 (full disclosure Mr. Gorman is the President of the Society).