by T. GormanPosted on Posted in SECActions

This is the second part of a four part series tracing and analyzing trends in Commission enforcement actions filed during the second quarter of 2022. Part I, published on Tuesday, August 23, 2022 (here), noted that 101 enforcement were filed during the quarter five key areas of focus during the quarter. There were five areas of concentration: Offering fraud, transfer agents, manipulation and insider trading.

This segment of the series furnishes examples of the cases in the five areas of concentration. The third segment of this series will be published on Wednesday, August 31, 2020. It focuses on significant actions filed during the period that are not in one of the five areas that represent the largest concentration of cases. Part IV will be published on Thursday, September 1, 2022. It is the conclusion to the series.

Key Cases in Each Major Category

The cases discussed below under each caption are representative of those in each of the five groups which represent the largest concentrations of cases during the second quarter.

A. Offering fraud

Two cases below are typical of those in this group. The first centers on the claimed sale of cannabis products and cape pens that were oil infused. The second keys on the solicitation of residents in a retirement homes. The investors lost substantial sums in each case.

SEC v. Bunevacz, Civil Action No. 2:22-cv-02284 (C.D. CA. Filed April 5, 2022) names as defendants: David Bunevacz, who controls Caesarbrfutus LLC and CB Holdings and he pleaded guilty to two felony securities charges based on California law in 2017; Mary Hayca Bunevacz is the step daughter of Mr. Bunevacz; Caesarbrutus and CB Holding Group Corp. are firms controlled by Mr. Bunevacz; and Brutus California Ventures Corp. is controlled by Ms. Bunevacz and is co-issuer with CB Holdings. Over a two-year period, beginning in 2017, Defendant Bunevacz and the two entities he controls, raised over $32 million from at least 40 investors. Solicited investors were told that Mr. Buevacz was selling cannabis products and vape pens containing oil infused with Cannabidiol. The profits from the sale of these products were to be shared with Casearbrutus and CB Holdings. In making the solicitations Mr. Bunevacz did not disclose his criminal convictions. Brutus California was a co-issuer with CB Holdings. Both Ms. Hayca and that firm participated in the solicitations. In fact, the offerings were of unregistered securities and the entity Defendants had no actual business – the transactions were shams and the money was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25356 (April 5, 2022).

SEC v. Minuskin, Civil Action No. 22CV0483 (S.D. Cal. Filed April 8, 2022) is an action which names as defendants: Julie Minuskin, CEO of Retire Happy LLC; Dennis Diricco, CFO of Golden Genesis; Thomas Casey, CEO of Golden Genesis, Inc. and a Defendant in a prior Commission enforcement action he settled; Golden Genesis, Inc., ostensibly a business involving plasma; and Joshua Stroll, employed at Retire Happy. Over a seven-year period, beginning in early 2012, Defendants DiRicco and Casey raised about $15 million from about 300 investors, all of whom were clients of Retire Happy. That company to provide investors with financial education and strategies on how to leverage retirement accounts. In fact, the company did not have sufficient funds to make the kind of payments promised. Likewise, the UCC-1 Financing Statement that was promised on all of Golden Genesis’ assets was never filed. In fact, before recommending Golden Genesis as an investments to its clients there was no due diligence and the officers of the firm failed to disclose their conflicts. The complaint alleges violations of Securities Act Section 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending as to all Defendants except Mr. DiRicco who consented to the entry of a permanent inunction based on Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and also a from participating in any penny stock offering. See Lit. Rel. No. 25359 (April 11, 2022).

B. Transfer Agents

Each of the cases in this group centers on the failure to comply with the obligations of a transfer agent by maintaining record or completing required forms.

On June 30, 2022 the Commission instituted proceedings against seven transfers agents. The Orders allege that the agents failed to permit examination by the Commission staff of their books and records, that five failed to furnish statutorily required records, that four had deficient registration forms and that all failed to amend their registration forms when the information became inaccurate. The firms also failed to file at least one annual report. Each of the seven firms are also alleged to have violated the prohibition against transfer agents engaging in any activity as a transfer agent in violation of certain rules and regulations. The Orders alleged violations of Exchange Act Sections 17(b)(1), 17A(c)(2), 17A(d)(1) and the related rules. A public hearing will be held. See, e.g. In the Matter of The Brandon Rawls Trust, Adm. Proc. File No. 3-20915 (June 30, 2022). (filing inaccurate Form TA -1 when registering as a transfer agent).

C. Manipulation

The first case below centers on the manipulation of a firm’s share price by falsely announcing that Berkshire Hathaway had taken an interest in the company. The second involves a complex fact pattern involving the manipulation of security based swaps and other instruments held by Archegos.

SEC v. Passos, Civil Action No. 1:22-cv-03156 (S.D.N.Y. Filed April 18, 2022) is an action which names as defendant Fernando Passos, the executive vice president of finance and investor relations for Brazilian reinsurance company IRB Brazil Resseguros S.A. In February 2020 IRB’s stock price dropped following a letter by a short seller questioning the firm’s financial results. Defendant then planted a false news story claiming that Berkshire Hathaway Inc. had invested in the firm. Subsequently, in late February and early March the IRB stock price increased about 6%. After Berkshire denied the story the share price dropped about 40%. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25370 (April 18, 2022).

SEC v. Hwang, Civil Action No. 1:22-cv-03402 (S.D.N.Y. Filed April 27, 2022). The cases are based on the manipulation of ten different stocks held by Archegos and a series of lies about the financial condition of the fund which permitted it to completely overextend its credit – the firm collapsed. Those named as defendants are: Sung Kook Hwang, the founder and manager of Archegos who was responsible for all investment decisions; Patrick Halligan, the CFO of the firm; William Tomita, the head trader of Archegos; Scott Becker, the chief risk officer of Archegos; and the firm. Over a period of about one year, beginning in March 2020, at Mr. Hwang’s direction the firm rapidly grew, primarily through the use of security-based swaps with about a dozen counterparties. Those arrangements put the firm at risk from volatile prices. To sustain its growth trajectory, the firm chose not to rely on just market prices. Rather, it began manipulating the securities of its top ten holdings. This was done through purchases of issuer securities and entry into security-based swaps referencing those issuers. In effect, Archegos dominated the securities of those issuers through trading and by marking the close for those stocks – trading at the end of the day to set the closing price. A key part of the scheme involved maintaining the margin with Archegos’ counterparties. To achieve this the family office could not share its actual financial results with its counterparties as it pushed and strained the credit arrangements. To continue extending the lending arrangements Defendants Hwang, Halligan, Tomita and Becker misled the counterparties. False information regarding the composition of the firm’s portfolio was furnished as well as about its concentration and liquidity. Eventually, Defendants could not maintain the fraud. As the security prices began to fall in March 2021 the fraud unraveled and Archegos spiraled to collapse. Billions of dollars in losses resulted. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal charges. The CFTC also filed a civil action.

D. Financial Fraud

Financial fraud is a key staple of SEC Enforcement. In the examples here a firm manipulates certain metrics in an effort to sustain a long streak of continually increasing its quarterly results while the second action centers on creating two sham transactions.

Corporate/financial: In the Matter of Rollins, Inc., Adm. Proc. File No. 3-20824 (April 18, 2022). Respondents are Rollins and its CFO, Paul Northen. The Atlanta based firm provides termite and other pest control services to residential and commercial companies through brands such as Orkin. Its shares are traded on the NYSE. Mr. Northen served as CFO for seven years beginning in 2015. Rollins fostered the development of a culture focused in part on earnings consistency. In the first quarter of 2016 the quarterly report filed with the Commission announced that the firm was posting its “40th consecutive quarter of improved revenues and earnings. . .” The earnings release for the second quarter of 2017 announced the “45th consecutive quarter of improved earnings and revenue.” Each quarter the company made a determination as to the appropriate amount to reserve or accrue for several categories of lability accounts. Those included reserves for items such as a termite reserve which is an estimate of actual or potential damage claims by customers. The firm also had certain corporate-level reserve accounts. Those were determined after the results for reporting units were available. The CFO had the final determinative authority over the amount of the corporate-level reserves. In the second quarter of 2017 CFO Northen directed a reduction to certain corporate-level accounting reserves. The purpose was to enable the company to publicly report earnings per share in line with research analysts’ consensus estimates. Mr. Northen was aware at the time that the company earnings were close to but not at consensus estimates when directing that the adjustments be made. Without the adjustments for the first quarter of 2016 and the second quarter of 2017 the company would have been below the consensus by one cent. At the time of the reserve adjustments Rollins’ accounting personnel had significant discretion. The company failed to devise and maintain sufficient internal accounting controls. The Order alleges violations of Securities Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and 13(b)(5). The Commission considered the cooperation and remedial acts taken by Rollins. To resolve the proceedings the company consented to the entry of a cease-and-desist order based on each of the Sections cited in the Order except Exchange Act Section 13(b)(5). The firm will pay a civil penalty of $8 million. In addition, Mr. Northen resolved the proceedings as to him, consenting to the entry of a cease-and-desist order based on each of the Sections cited in the Order. He agreed to pay a civil penalty in the amount of $100,000.

SEC v. United Health Products, Inc., Civil Action No. 1:11-cv-03612 (D.N.Y. Filed June 8, 2022) is an action which names the firm, a manufacturer of certain medical products and two of its officers – Douglan Beplate, Chief Executive Officer — and Louis Schiliro, COO – as defendants. Defendants orchestrated two sham transactions to artificially inflate revenue. The first involved the purported sale of product to a customer using a back-dated purchase which the customer canceled. No product was shipped; no payment received. The transaction was booked. The second involved recognizing revenue from a sale to the firm’s largest customer when in fact there was no legitimate sale. To conceal the transactions the two officers of the company repeatedly gave the outside auditors false explanations. As a result, the Forms 10Q and 10-K doe 12017 and 2018 were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(A), 13(b)(5) and 16(a) along with Section 304(a) of SOX. The case is pending. See Lit. Rel. No. 25413 (June 8, 2022).

E. Insider trading

Insider trading is one of the key staples of enforcement. Below are two examples of classic insider trading cases.

SEC v. Sure, Civil Action No. 3:22-cv-01967 (N.D. Cal. Filed March 28, 2022). The action centers on trading in advance of the first quarter 2020 earnings release, published on May 6, 2020 of Twilio, Inc. The firm is a San Francisco based cloud computing communications company. Three of the defendants were employed at Twilio: Hari Sure, Lokesh Lagudu and Chotu Pulagam. Each was employed as a software engineer. Others named as defendants in the action are: Dileep Kamujula, Sai Nekkalapudi, Abhishek Dharmapurikar and Chetan Pulagam. Between late March and early May the employee Defendants each obtained inside information regarding the firm’s revenue for the period by accessing Twilio data bases. Each either tipped friends or traded for their personal account as follows: 1) Defendant Sure tipped Kamujula, a close friend; 2) Defendant Laguda tipped Nekkalapudi, his girlfriend: 3) Defendant Laguda also tipped Dhrmapurika, a former roommate; 4) Defendant Chotu Pulagam tipped Chetan Pulagam, his brother; 5) Defendant Kekkalapudi traded for his account; and 7) Defendant Dharmapurikar traded for his own account. Essentially each tippe traded while the tipper did not; each Defendant who did not tip anyone traded profitably. The trading ring netted over $1 million in illicit profits from trading Twilio securities prior to the announcement. The complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney’s Office for the Norther District of California announced criminal charges against Dileep Kamujula. See Lit. Rel. No. 25350 (March 29, 2022).

SEC v. Sheinfeld, Civil Action No. 1:20-cv-01692 (M.D. Pa.) is a previously filed action which named as defendant, Steven J. Sheinfeld, formerly employed by Rite Aid Corp. That and Walgreens Boots Alliance, Inc. at one point had discussions centered on a possible merger. When it was determined that it would not proceed, but prior to the time that information became public, Mr. Sheinfeld, who learned of the confidential determination, liquidated nearly $1 million if Rite Aid securities. Mr. Sheinfeld settled charged that he violated Exchange Act Section 10(b) by consenting to the entry of a final judgement precluding future violations of the Section cited. Last week the Court entered judgment by consent. The order also directed Mr. Sheinfeld to pay a penalty of $305,129. See Lit. Rel. No. 25428 (June 21, 2022).

Next: Part III of the series — Other significant cases filed during the quarter; to be published Wednesday, August 31, 2022

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by T. GormanPosted on Posted in SECActions

I. Introduction

Issues such as the never-ending pandemic continue to impact back to the office for all, including the Commission’s Enforcement Division. To date agency staff continue to work from home. Testimony continues to be taken largely on Webex rather than in person. And, soon the impact of the impending move of the Commission’s Head Quarters to New York Avenue in North East Washington may begin to impact operations.

Nevertheless, Enforcement continues to add to its capabilities; more positions were added that are dedicated to crypto assets; the use of data analytics was expanded as evidenced by a group of insider trading cases uncovered with data analytics. The statistics cited below, and the cases discussed, reflect an Enforcement program that is continuing to expand despite limitation.

This report is dividend int four sections: 1) Statistics tabulating the numbers of cases filed; during the quarter; 2) The Cases — examples of actions filed in each of the largest groupings of actions filed during the period; 3) Other significant cases illustrating the reach of the enforcement program; and 4) The Conclusion – an analyze emerging from the case filings, suggesting the future path of SEC Enforcement.

II. The Statistics

In the second quarter of 2022 the Commission filed 101 new enforcement actions, excluding matters that are based on Section 12j, tag along and defaults. The actions filed were primarily civil injunctive cases. This means that 154 new enforcement cases have been filed this year – 53 in the first quarter and 101 in the second.

The cases initiated in the second quarter were primarily civil injunctive actions. Specifically, 61 cases were filed in federal court while 41 new administrative proceedings were initiated. The largest number of cases were filed in June 2022. In that month 53 new actions were initiated. That compares to 26 in April and 22 in May. If new cases are filed over the second halve of the year at the same rate as in the first have or at the rate in second quarter, over 300 new enforcement actions will be initiated in 2022.

In contrast, in the second quarter of 2021 the agency filed new cases at a significantly slower rated. During that period only 75 new enforcement cases. That number significantly eclipsed the 48 new matters filed during the first quarter of 2021. Yet overall only 123 new enforcement cases were filed during the first half of 2021, less than the 154 actions filed in the first half of 2022.

The cases initiated during the second quarter were largely concentrated in five areas:

1) Offering fraud 8.9%

2) Transfer agents 6.9%

3) Manipulation 6.9%

4) Corporate/financial 4.9%

5) Insider trading 3.9%

Offering frauds is a category of cases that typically is one of the largest. Transfer agents is the result of a focus on transfer agent rules — all of the cases were filed on the same day as shown below. Market manipulation and insider trading are, like offering fraud cases, typical focal points for enforcement. Perhaps the only stand out category in the second quarter is corporate/financial fraud. While once a focal point of Commission enforcement, in recent years it has not been a large category of cases despite repeated efforts by the agency to focus in the area.

In contrast, the largest groups of cases initiated 1Q22 were:

1) Investment advisers 18.8%

2) Insider trading 13.2%

3) Offering frauds 13.2%

4) Corporate/financial 7.5%

The categories for 1Q2021 were:

1) Misrepresentations 27%

2) Offering frauds 22%

3) Investment advisers 14%

4) Unregistered brokers 8%

The largest difference among the groups of cases filed in the first and second quarter of this year is the complete absence of cases involving investment advisers in the second quarter. Investment advisers has long been one of the largest categories of cases each quarter and each year as reflected in the 1Q22 and 1Q21 statistics detailed above.

Finally, the difference in the percentage size of the leading categories cited above is significant. None of the leading categories of cases in 2Q22 equals or exceeds 10% of the total number of cases filed during the period. This contrasts sharply with the results from 1Q22 and 2Q21. For those periods virtually all of the leading categories exceeds 10% of the total number of cases.

The percentage differences for the groups – all under 10% of the total for 2Q22 and virtually all above that percentage for the other periods — reflects the breath of cases filed in the second quarter of 2022, particularly given the large number of actions initiated during the period. Stated differently, in the second quarter of this year Enforcement initiated a significantly wider variety of actions than in other periods. This means that the path of the Division is broader and less predictable that in earlier periods when the focus was “back to the future” enforcement – largely on traditional areas. This broader focus is reflected in the sample cases discussed below under the heading of “Other significant cases.”

Next: Key Cases in Each Major Category

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