by T. GormanPosted on Posted in SECActions

The Commission has long focused on cases involving corporate and financial fraud. While other cases, such as insider trading or large market manipulations, are often sensational and can garner significant attention., accounting fraud cases typically are not. Yet the failure to have proper internal controls, the failure to properly follow accounting standards, can cause significant harm to investors and disruption in the market. That is the situation with a case recently filed by the Commission, SEC v. iFresh, Inc., Civil Action No. 1:22-cv-3200 (E.D.N.Y. Filed May 31, 2022).

Named as defendants in this case are: iFresh, Inc., an Asian grocer operating stores in four states and had shares listed on the NASDAQ until late 2021 when they were delisted; now the stock is quoted on the OTC Expert Market. Long Deng, also a defendant, was the Chairman of iFresh’s board of directors until April 2022. He was also the firm’s CEO and COO through at least April 2022.

The complaint is built on self-dealing which shrouded the true financial condition of the firm from August 2016, when the firm’s initial registration statement was file, through the fiscal year ending March 31, 2020. From inception Defendant Deng was responsible for the firm’s operations and financial information. He also controlled a the firm’s financial transactions.

No transactions involving iFresh and as affiliate were properly disclosed in the firm’s financial statements. Yet in 2016, 2017, 2018, 2019 and 2020 transactions involving iFresh and an affiliate represented from 18% to 54% of the grocery firm’s accounts receivables. All of those transactions were related party transactions. All of those transactions should have been fully disclosed under the accounting standards. None were disclosed.

During the period 2016 through 2020 investors were not told that iFresh’s finances were heavily dependent Mr. Deng’s brother. Thus investors were not told that over $12 million in payments were owed to a company by Mr. Deng’s brother.

During the period not only did Mr. Deng control the financial records, the firm did not have adequate internal controls and those which relate to the identification of related party transactions. As a result, the Defendants violated Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The case is pending. See Lit. Rel. No. 23404 (June 1, 2022)

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by T. GormanPosted on Posted in SECActions

As we emerge from the holiday weekend, climate and ESG continue to be key topics. Last week the agency filed an enforcement action against a major bank centered on what some call greenwash claims.

The Commission also filed additional proposed rules focused on ESG. The proposals seek to add definition to ESG principles by seeking further definition from investment advisers and investment companies. Whether this process will yield clarity of the principles on which ESG is built remains to be seen.

Be careful, be safe this week

SEC

Proposed rules: The Commission issued proposed rules to enhance disclosures by certain investment advisers and investment companies about ESG investment priorities, according to a release dated May 25, 2022 (here). The proposals are designed to require advisers to broadly categorize the type of ESG strategies being used.

Proposed rules: The agency also issued proposed rule changes to prevent the use of misleading or deceptive fund names on May 26, 2022. The purpose of the “Name Rule” is to require that where the name suggests a certain kind of investing at least 80% of the funds be invested in accord with that suggestion (here).

SEC Enforcement – Filed and settled actions

Last week the Commission filed 3 civil injunctive actions and 1 administrative actions, exclusive of 12j, tag-a-long and other similar proceeding as well as those where the author’s firm has conflicts (three actions).

Insider trading: SEC v. Glassner, Civil Action No. 1:22-cv-04254 (S.D.N.Y. Filed May 24, 2022) is an action which names as defendant Frank Glassner, a business consultant. Defendant provided executive compensation advice to Kadnon Holdings, Inc. On September 8, 2021, that firm was acquired by Sanofi S.A., a global biopharmaceutical firm. Defendant first learned about the proposed transaction in late July 2021 from an executive at the company. Defendant and the executive had executed a confidentiality agreement which governed such disclosures. Nevertheless, Defendant Glassner revived his dormant brokerage account after the call and began purchasing stock and options of the company. As Mr. Glassner continued to work for the firm on the deal he also purchased stock and options. When the deal was announced the share price increased by 71% giving Defendant illicit profits of $405,000. The case is pending. See Lit. Rel. No. 25398 (May 24, 2022).

False statements: In the Matter of Tradezero America, Inc., Adm. Proc. File No. 3-20870 (May 24, 2022) is a proceeding which names as respondents Tradezero, a registered broker dealer, and Daniel Pipitone, a co-founder of the firm and a registered representative. In late January, during extraordinary trading volume, the firm’s clearing broker instructed all of its introducing brokers to halt trading in certain stocks. Respondents refused to comply until the last 10 minutes of trading. Later, when there was discussion of the halt Respondents made false statements about their actions, suggesting that they never halted trading. The Order alleges violations of Securities Act Section 17(a). Each Respondent consented to the entry of a cease-and-desist order which requires compliance with certain undertakings. The firm will also pay a penalty of $100,000 while Mr. Pipitone will pay $25,000. The undertakings require, among other things, the retention of a consultant with regard to the proper implementation of certain policies and procedures.

Offering fraud: SEC v. Charlebois, Civil Action No. 3:22-cv-00223 (W.D.N.C. Filed May 19, 2022). Defendants in this case are: Wynn A. D. Charbebois, supposedly a self-employed investor and consultant, and WC Private LLC, the holding company for Defendant Charbebois’ investments. For years Defendant Charbebois has successfully pitched potential investors with essentially the same story. Supposedly, he had provided consulting services for a number of companies. Each of those companies compensated him with stock options, according to the story. Investors in some instances were shown a list of companies. Since Defendant Charbebois was about to exercise the options, he decided to permit the investor to participate he claimed. The potential returns would be significant. Typically, a short time after investors turn over their capital, a series of questions are posed about how much profit would be paid and when the discussed returns would materialize. Mr. Charbebois usually deflected the questions with responses that at times offered a reason for a delay. In some instances, Defendant Charbebois fabricated documents to show the investors. The result was always the same – deflect; and investors waited for years. In fact, there were no stock options. The list of firms displayed to some investors were all private companies. No options had been issued to Mr. Charbebois. The investments did not exist. Nevertheless, since 2005 the scheme continued. In the last year it appears that the scheme unraveled. Five civil cases were initiated by investors against Mr. Charbebois. Demand letters were served alleging $1.345 million in investor losses. The Commission added to the growing list of suits by filing its case. 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. 25397 (May 19, 2022).

Offering fraud: SEC v. Middlebrooks, Civil Action No. 2:22-cv-11073 (D. Mich. Filed May 18, 2022) is an action which names as defendants: Andrew Middlebrooks and EIA All Weather alpha Fund 1 Partners, LLC. Beginning in mid- 2017 Defendant raised about $39 million from over 100 investors for a private fund Mr. Middlebrooks manages. In soliciting investors, Defendants misstated its performance and told investors that the fund had outside auditors and had been audited. In addition, bout $9 million was used to make Ponzi like payments while another $470,000 was misappropriated by Defendants. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). Disgorgement is sought under Section 6501 of the National Defense Authorization Act for Fiscal 2021. The case is pending. See Lit. Rel. No. 25399 (May 25, 2022).

Australia

Proposal: The Australian Securities and Investment Commission has issued a proposal under which its prior order precluding the sale of binary options to retail investors would continue. The release is dated May 26, 2022.

Hong Kong

Remarks: Ashley Alder, Chair, Securities and Futures Commission of Hong Kong, delivered remarks at the PRI China Conference titled Investing for Net Zero and SDGs on May 27, 2022 (here).

Singapore

Initiative: The Monetary Authority of Singapore launched 2022 Global FinTech Hackcelerator on Web 3.0 and Green Finance. This is the seventh edition of the initiative. The theme is accelerating a greener digital future. The focus is to leverage the potential of FinTech in accelerating the development of Web 3.0 and green finance in Singapore and the region, according to the May 27, 2022 release (here).

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