Investment advisers have long been one of the key focus area for SEC Enforcement. Today is no different. Investment advisers continue to be an important area for enforcement.

Cases against advisers frequently turn on undisclosed or inadequately disclosed conflicts of interest. Since advisers have a fiduciary duty to act in the best interest of their clients, an inadequately disclosed conflict breaches the duty. Other cases are based on the misappropriation of client assets. The Commission’s most recent case in this area is one based on misappropriation, SEC v. Boucher, Civil Action No. 20CV1650 (S.D.Ca. 2020).

Mark J. Boucher and his firm, Strategic Wealth Advisor Group Services Inc., are named as defendants in this case. Mr. Boucher has worked for an investment adviser for the last 19 years. He worked for Investment Adviser A from 2010 through 2016 and Investment Adviser B from 2016 through 2019. The firm was a state registered investment adviser in 2019.

The complaint is based on three multi-year frauds in which Mr. Boucher misappropriated over $2 million in client funds. While working for Advisers A and B Defendant Boucher defrauded Client A by misappropriating almost $700,000 from her advisory accounts. A variety of deceptive conduct was used, including forging checks and even withdrawing funds on margin when he wanted more cash than was available. In addition, about $60,000 was misappropriated from Client B’s advisory accounts by wiring sale proceeds from the account using a phone call in which Mr. Boucher impersonated the client.

After Client C passed away, Mr. Boucher misappropriated about $1.5 million from the trust accounts by moving the funds to his personal accounts. He also took steps to conceal his actions from the firms and later the staff during the investigation. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2).

Following discovery, the Court granted the Commission’s motion for summary judgment in an order dated On February 8, 2022. The Court concluded that the agency was entitled to judgment on each of its charges. In reach this conclusion the Court found that the undisputed facts established scienter and stole the client funds. That ruling was based in part the Court’s conclusion that Defendants, in their Opposition, failed to establish there were material facts in dispute because the documents offered and relied on were not authenticated. The Court also denied Defendant’s renewed motion to stay the action in view of an ongoing, parallel criminal proceeding. Remedies will be considered at a later date. See Lit. Rel. No. 25329 (February 11, 2022).

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The Commission may have a long list of possible rule writing project but that does not change the fact that enforcement is centered on traditional themes: false statements, manipulation and similar claims. While the agency researches and considers topics in a variety of areas, and is pushing the edge in insider trading actions at times, in other areas such as crypto it is calling for legislation.

Happy Valentine’s Day to all!!

Be careful, be safe this week.

SEC

Proposed rules: The Commission published a Proposal to Reduce Risks in Clearance and Settlement by contracting the time from T+2 to T + 1 pm February 9, 2022 (here).

Proposed rules: The agency proposed rules regarding cybersecurity related to risk for registered investment advisers and investment funds on February 9, 2022 (here).

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 2 civil injunctive actions and 1 administrative proceeding, exclusive of Section 12(j), tag-along and other similar proceedings.

False statements: In the Matter of Wahed Invest LLC, Adm. Proc. File No. 3-20750 (February 10, 2022) is a proceeding which names as respondent the registered investment adviser. In July 2019 the firm launched a Shari’ah-compliant business and ETF. Prior to that time the firm disseminated false and misleading marketing materials about its advisory business. It also failed to rebalance client accounts as promised. When the new Shari’ah compliant business was launched it failed to provide full disclosure. The firm also did not properly implement its compliance procedures. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). In resolving the proceedings, the firm agreed to implement a series of undertakings. Wahed also consented to the entry of a cease-and-desist order and a censure. In addition, the firm will pay a penalty of $300,000.

False statements: SEC v. Walczak, Civil Action No. 3:20-cv-00076 (W.D. Wisc.) is a previously filed action in which partial summary judgement was granted in favor of the Commission. Specifically, the Court concluded that Defendant, a former portfolio manager, was negligent when making representations to clients about using modeling software to stress test the fund he managed daily when in fact he did not. The Court also concluded that the misrepresentations were material. As a result, Defendant violated Securities Act Sections 17(a)(2) and (3). See Lit. Rel. No. 25327 (February 10, 2022).

Manipulation: SEC v. Booth, Civil Action No. 1:22-cv-1115 (S.D.N.Y. Filed February 9, 2022). Named as defendants in the action are: Robert Booth, previously charged with conspiracy to commit securities fraud for operating a boiler room; Daniel Wellcome Jr., recently arrested for his role in laundering money generated by various boiler rooms; Michael D’Urso, who apparently failed to appear for testimony during the Commission’s investigation; Anthonella Chiaramonte, the fiancée of Mr. D’Urso and the nominee owner of ATC Holdings and Transfer Corp., an entity used in connection with foreign boiler rooms; Alyssa D’Urso, the daughter of Mr. D’Urso and the nominee owner of BA Management Holding Corp. and Irving Management Transfers and Holdings Corp., two entities used in connection with money laundering from foreign boiler rooms; and Jay Garnock, a friend of Mr. D’Urso and the nominee owner of DT Holdings Management Corp., another entity used in connection with laundering money on behalf of foreign boiler rooms. Over a period of about nine months, beginning in April 2019, Defendants D’Urso and Welcome laundered over $8 million from about 140 investors defrauded by foreign boiler rooms. One of the boiler rooms was operated by Defendant Booth. That operation generated about $700,000 from 10 investors. Victims of the fraudulent conduct in the United States and abroad understood that they were investing in the shares of public companies. They wired their money to New York based shell companies controlled by Defendant D’Urso through nominees that included his daughter and fiancée and his friend Garnock. When the investor funds came in, Defendant D’Urso skimmed a portion for himself. Mr. Welcome and his nominees then wired the balance of the funds to overseas boiler rooms. To facilitate the scheme Defendants Chiaramonte, Alyssa D’Urso and Garnock opened bank accounts for the shell companies, deceiving the banks about the nature of the business of the various entities used in the scheme. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25326 (February 9, 2022). The U.S. Attorneys Office for the Southern District of New York filed parallel criminal charges.

Manipulation: SEC v. Beck, Civil Action No. 2:22-cv-00812 (C.D. Ca. Filed February 7, 2022). Defendant Michael Beck has a twitter account with the handle “@BigMoneyMike6”. He is also the founder of email group TeamBillionaire. Named as a relief defendant is Helen Robinson, his mother. Mr. Beck has as many as 3 million followers for his Twitter handle. Over a two year period, beginning in 2017, Defendant used his handle and a significant following to manipulate eight microcap stocks by conducting a scalping scheme. Key to scalping is acquiring a stock position with the firm, then moving the price up and later selling prior to the other investors – it is built on non-disclosure by the trader who does not reveal the stock about to be touted is one he owns. In this case Mr. Beck began each scheme by purchasing a block of shares of a penny stock. Typically, the shares were acquired by a nominee, in this instance, his mother. The second step of the manipulation was built on the Twitter following. Mr. Beck would tweet out to his followers and the public that he would soon be issuing a new stock recommendation or an Alert. Frequently, he would notify the members of TeamBillionaire to encourage them to purchase prior to other members of the public. In some instances, Defendant paid select investors to make favorable statements prior to his recommendation. Following these steps Mr. Beck would tweet out his stock recommendation. The share price would rise as the volume and trading climbed. Defendant Beck then sold his shares. By repeating this procedure with eight different stocks over the two-year period, Defendant Back realized gains of about $870,000. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is pending. See Lit. Rel. No. 25325 (February 7, 2022).

Offering fraud: SEC v. Blankenbaker, Civil Action No. 1:21-cv-00790 (S.D. Ind.) is a previously filed action which named as defendants, Mr. Blankenbaker and three of his companies. Defendants were alleged to have solicited investors to acquire shares by claiming the funds would be used to make short-term loans to food exporters in Asia that were backed by containers filled with food. In fact, Mr. Blankenbaker misused at least $8.1 million of the investor money by putting about $4 million into hemp companies, almost a million dollars to make Ponzi type payments and misappropriated at least $1.7 million. To resolve the action Mr. Blankenbaker consented to the entry of permanent injunctions based on Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). He was also ordered to pay disgorgement and prejudgment interest o $1,920,130 which is offset in part by the restitution order in the parallel criminal which leaves to be paid $739,626.08 by Defendants. The Court also imposed an officer-director bar against Mr. Blankenbaker. The three companies each consented to the entry of injunctions based on the same Sections as Mr. Blankenbaker. The companies are also jointly and severally liable with him for disgorgement and prejudgment totaling $5,199,808.02. See Lit. Rel. No. 25324 (February 8, 2022).

FinCEN

Statement: The agency issued a statement regarding beneficial ownership information reporting and next steps on February 8, 2022 (here).

Australia

Remarks: ASIC Chair Joseph Longo delivered remarks to the Joint Committee on Corporations and Financial Services – Opening Statement – on February 11, 2022 (here).

ESMA

Statement: The European Securities Market Authority published a paper titled Sustainable Finance Roadmap: ESMA Priorities Fight Against Greenwashing on February 11, 2022 (here).

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