by T. GormanPosted on Posted in SECActions

Chair Gensler outlined a series of principles for market professionals and others to consider in comments made at the Securities Enforcement Forum this week (here). The points covered by Mr. Gensler are not new or novel. They are worth considering however as everyone rushes off to the next meeting.

The principles:

1) Economic reality: Activities should be “subject to consistent regulation” the Chair declared. It is important that the actual substance of the regulation, case or matter be carefully considered. And, when a lawyer, accountant or other professional is consulted to determine if the transaction is “over the line,” perhaps it is just time to walk it back a bit.

2) Accountability: The agency plans to use its full arsenal of remedies when resolving matters. This includes admissions when appropriate. In this regard Mr. Gensler stated: “When it comes to accountability, few acts rival admission of misconduct by wrongdoers.”

3) High-Impact Cases: There are far too many fraudsters, penny stock scammers, Ponzi schemes and similar matters Mr. Gensler has learned in his first six months on the job. Nevertheless, the agency will “continue to pursue misconduct whenever” it is found. High-impact matters are important and will be brought – they help focus gatekeepers such as attorneys and accountants and they send a message.

4) Process: Timeliness and moving forward is important. While the defense bar may decide to burn the clock, the staff is being asked to reduce the number of meetings and move forward to conserve resources – employ a kind of “rocket docket.”

5) Other Law Enforcement Agencies: There is significant benefit from working with other agencies. One example is the DOJ announcement last week regarding proposed changes. Those include focusing on corporate history, strengthening guidance on items such as cooperation credit and evaluating if a non-prosecution/deferred prosecution agreement is appropriate for recidivists.

6) Sourcing cases. Other law enforcement agencies and self-regulatory organizations are great sources of tips. Another is self-reporting. Here Mr. Gensler noted that if a firm “messes up” it should come in and chat. All things being equal, the company will get a better result. And, cooperation means “more than meeting your legal requirements . . .” it means “taking steps that enhance our investigation, allow us to move quickly and, if appropriate help us to identify additional misconduct,” Mr. Gensler noted.

7) Position of trust: Here Mr. Gensler focused on the professionals – attorneys, bankers, investment advisers and others. All have clients; the SEC has clients – the public. All the professionals should think about the their responsibilities to the clients, the public – a point the Chair thinks of each morning.

None of the points discussed are new; all have been discussed before. Overall, however, they are thoughtful as well as useful – well worth considering, particularly the overall message.

by T. GormanPosted on Posted in SECActions

Offering frauds are continuing to be a key focus of the Commission’s enforcement program, despite the on-going discussions about crypto, the environment and other subjects. These cases have long been one of the staples of the division. While there are variations, typically the defendants market securities to the public with a “too good to be true” claim of quick riches for little risk. Unfortunately, the riches typically go to those conducting the offering and the low risk – well not for those who invested. The case below is an example of these cases.

SEC v. BNZ One Capital, LLC, Civil Action No. 8:21-cv-01788 (C.D.CA. Filed October 28, 2021) names as defendants Brett Barber and Louis Zimmerle, in addition to the firm. The action centers on the sale of interests in a firm that was involved in real estate.

Beginning in June 2019 Defendants raised at least $13.5 million from about 105 investors. Defendants told investors that they were in the business of making investments in real estate as well as alternative investments. Investors were promised that their money would be repaid, generally at 10% per year.

The difficulty was revenue – the firm was not profitable. That may have happened in part because much of the investor money was not actually invested. For example, from June 2019 through February 2020, Defendants raised about $6.9 million. Only $2.7 million was invested. About $5,000 in profits resulted – not sufficient funds to pay investors the promised return.

Some investors did, however, receive payments. Those came from Ponzi type payments using portions of investor capital. Significant payments were made to Defendants. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 15(a) and 20(a). The action is pending.

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