The Commission launched an enforcement action this week against family office Archegos. The Department of Justice and the CFTC also filed actions against the firm. While investment advisers have long been key targets of enforcement officials, the same cannot be said of family offices which are exempt from the registration provisions of the Advisers Act but not the fraud provisions, a point well illustrated by the suits filed last week.
Be careful, be safe this week
SEC
Whistleblowers: The Commission awarded $6 million to five whistleblowers, according to an April 25, 2022 release.
SEC Enforcement – Filed and settled actions
Last week the Commission filed 6 civil injunctive actions and 1 administrative actions, exclusive of 12j, tag-a-long and other similar proceeding.
False statements: SEC v. Vale S.A., Civil Action No. 1:22-cv-02405 (E.D.N.Y. Filed April 28, 2020) is an action which names a defendant the Brazilian stock corporation whose ADRs and notes are registered for trading with the Commission. The firm is one of the world’s largest iron ore producers. This action centers on the deception of the firm with regard to dams it built to hold the waste water from mining operations. In January 2019 the Brumadinho damn of Defendant collapsed. Nearly 12 million cubic tons of mining waste or tailings was released ultimately burying 150 people alive and killing 270. It was one of the worst mining disasters in history. Prior to the collapse, Vale deliberately manipulated multiple dam safety audits. The firm obtained numerous false stability declarations and regularly misled local governments and others about the integrity of the dam. Experts who examined the question in the wake of the collapse attributed it to “liquefaction, a condition that occurs when saturated waste deposits spontaneously lose strength which undermines stability.” This occurred here from consistent high-water levels and poor drainage. The firm was aware of the risks from the collapse of another dam in 2015. Indeed, since at least 2003 the company had been aware of the very fragile condition of the dam. Despite the risks, Vale continued its pattern of manipulation and deception regarding the mining reports and its ESG disclosures in the filings with the Commission, The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a). The case is pending.
Offering fraud – crypto: SEC v. Chiang, Civil Action No. 22-cv-0600 (S.D. Cal. Filed April 28, 2022) is an action which names as defendants Steven Chjaing, Cyrus Kong, Eric Tippetts, James Hardy and Maurice Chelliah. The complaint claims Defendants raised over $10 million through two fraudulent, unregistered digital asset securities offerings. The first took place beginning in December 2017 when the NASGO platform was launched which claimed to have a blockchain based on which clients could use digital securities known as NSG tokens. The solicitations were made with false statements about the tokens including their projected value. When interest in those tokens waned, a second offering was launched to market the platform. This involved SNP tokens. The tokens were marketed through direct contacts, multi-level marketing strategies and videos posed on social media. Defendants misappropriated about $4 million of the investor coins and certain crypto assets. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Defendants Tippets, Hardy and Chiang settled. Messrs, Tipppetts and Chelliah consented to bifurcated settlements under which they will each be enjoined from violating the provisions of the federal securities laws cited in this action. Mr. Tippetts also agreed to the entry of an injunction prohibiting participating in any offering of securities including digital assets except for his personal account. Mr. Cheiliah agreed to pay a penalty of $75,000. The Court will determine the amounts of disgorgement and prejudgment interest to be ordered as to Messrs. Tippetts and Cheiliah and the amount of penalty as to Mr. Tipets n the future. See Lit. Rel. No. 25377 (April 28, 2022).
Offering fraud – crypto: SEC v. Block Bits Capital, LLC, Civil Action No. 3:22-cv-2563 (N.D. Cal. Filed April 27, 2022) is an action which names as defendants: Block Bits Capital, LLC, a firm formed in 2017 and owned by Defendants Dillman and Mata, each of whom have 50% of the shares; Block Bits Capital GP I, LLC, also formed in 2017 is jointly owned by Messrs. Dillman and Matta; and Japheth Dillman, a co-founder and co-owner and Managing Member of Block Bits Capital and Block Bits GP. Mr. Meta is the co-founder, co-owner and Managing Member of Block Bits Capital and Block Bits GP and is a defendant in the action cited below. Defendants participated in an offering fraud primarily created by Mr. Dillman. In the scheme about $960,000 was raised from 22 investor between July and December 2017. The offering materials claimed that a proprietary trading bot had been developed that would trade hundreds of digital assets from different platforms based on certain parameters to maximize returns for the Block Bits Fund 1 LP in which the investors had shares. In fact, there was no trading bot. All trading was conducted by Mr. Mata through a digital asset trading platform. Mr. Dillman also told investors that about 40% of the Fund’s assets were in “cold storage” – that is, off-line. Portions of the investor funds were also put into a related firm’s initial ICO offering that is the subject of another Commission enforcement action. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10b and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending except as to Defendant Mata who settled, consenting to the entry of permanent injunctions and a conduct based injunction. He will also pay disgorgement in the amount of $75,000 plus prejudgment interest of $11,624. The amount of any penalty was reserved for future consideration. In addition, he agreed to the entry of an administrative order barring him from the securities business. See SEC v. Mata, Civil Action No. 3:22-cv-2565 (N.D. Cal. Filed April 27, 2022). See also Lit. Rel. No. 25376 (April 28, 2022).
Financial fraud: In the Matter of Medley Management Inc., Adm. Proc. File No. 3-20836 (April 28, 2022) is a proceeding which names as respondents: the company, a firm whose shares were traded on the NYSE until delisted in July 2021 after which it was traded over-the counter; Brook Taube was co chairman of the board co-CEO of the firm and CIO; and Seth Taube was co-chairman of the board, and CEO of Siserra Income Corporation, an affiliate of the company. Since August 2016 the firm negligently overstated AMV by including in the calculation amounts reflected in two fully non-discretionary separately managed accounts. The firm knew, or should have known that the amounts included would likely not be added into AMU. Since AMU was the predicate for management fees, the miscalculation also meant that fees and projected fees were incorrectly tabulated. Over a period of several months, beginning in August 2016, the firm’s operating affiliate, Medley LLC raised about $122 million from retail investors based on an offering registration statements that included the full amounts incorrectly added to AMU. The incorrect amounts included in the AMU calculation also materially impacted the finances and projections used by Medley LLC in filings with the Commission. The company, in addition, failed to maintain proper disclosure controls. To resolve the proceedings Medley Management consented to the entry of a cease-and-desist order based on Securities Act Sections 17(a)(2) and 17(a)(3) and Advisers Act Sections 206(2) and 206(4) and Exchange Act Sections 13(a) and the related Rules, and to a censure. The firm will also pay a penalty of $4 million to the extent not offset by payments made in the bankruptcy case captioned In re Medley LLC. Brook Taube consented to the entry of a cease-and-desist order based on the same Securities Act and Act Sections and, in addition, Exchange Act Section 14(a) and 13(a) and the related rules and to a censure. He will also pay a penalty of $4 million to the extend not off-set in the bankruptcy. Seth Taube consented to the entry of a cease-and-desist order based on the same Securities Act, Advisers Act and Sections as well as Exchange Act Section 14(a) and 13(a) and to a censure. He will pay a penalty of $2 million to the extent not offset in the bankruptcy. The offsets are based on certain payments made to the bondholders in the bankruptcy case cited above.
Offering fraud: SEC v. American Equities, Inc., Civil Action No. 3:22-cv-621 (D. Or. Filed April 27, 2022) is an action which names as defendants: the firm, the manager of 15 funds; American Eagle Mortgage Management, LLC, a firm that assumed the role of American Equities as to the funds; Ross Miles, the founder, sole owner and president of AET and co-owner of AEMM; and Maureen Wile, the secretary of AEI and co-owner and manager of AEMM. Defendants managed the funds by pooling the investment capital. Through the sale of promissory notes the funds were to invest in mortgages and trust deeds secured by real estate. Investor returns were to be paid primarily from the interest the receivables generated and profits when those were sold. By 2007 the funds were insolvent. To conceal this Defendants improperly comingled the funds’ assets and kept the operations moving forward with new investor money. About $15.5 million was raised. Messrs. Miles and Wile also misappropriated portions of the fund assets.. By May 2019 the Funds collapsed. A Washington state court ordered the funds into receivership. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Each Defendant resolved the matter, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. The Court will determine monetary relief at a future date. Defendants Miles and Wile each also consented to the entry of officer and director bars. See Lit. Rel. No. 25375 (April 27, 2022).
Manipulation: 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.
ESMA
Release: The European Securities and Markets Authority made recommendations designed to improve investor protection in a release issued April 29, 2022 (here). The recommendations are designed to increase retail participation in the financial markets while protecting investers from aggressive marketing practices. One concern identified is the gamification of trading. The recommendations include making materials machine readable so they can be word searched; addressing overload by defining what is vital and layering information; developing a format for fees and costs; requiring the use of certain risk warnings for some products; and addressing issues related to the impact of social media.
Hong Kong
Consultation: The Hong Kong Securities and Futures Commission has opened a consultation about position limits on futures contracts. Position limits are essential, according to the agency, to maintain stability. Comments can be submitted by June 27, 2022 (here).
Singapore
Report: The Monetary Authority of Singapore reported “strong enforcement outcomes” in its latest update on major investigations, published on April 27, 2022 (here).
Report: MAS reported on its “Approach to the Crypto Ecosystem” in a keynote interview by Ravi Menon, Managing Director of MAS at the Financial Times’ Crypto & Digital Asset Summit on April 27, 2022 (here).
