The debate at the Commission as July sizzled to a close is over complex products. The agency has brought enforcement actions in this area when investors purchased complex products recommended by a market professional and the firm’s policies and procedures were inadequate and/or not properly implemented. Perhaps the more pertinent question is what happens when the product is so difficult to understand that disclosure is not adequate. That is the question on the horizon.. It will however be addressed in this space next week.

Be careful, be safe this week

SEC Enforcement – Filed and settled actions

Last week the Commission filed 9 civil injunctive actions and 3 administrative actions, exclusive of 12j, default, tag-a-long and other similar proceedings.

Inside trading: SEC v. Klein, Civil Action No. 1:22-cv-6426 (S.D.N.Y. Filed July 28, 2022) is an action which names as defendants: Mark Klein, a member of the Ampio Pharmaceuticals, Inc, advisory board; Eduardo Rubinstein, defendant Pablo’s brother; and Pablo Rubinstein, defendant Klein’s brother-in-law. In August 2016 the FDA informed Ampio that a key drug’s trials were not acceptable. Prior to the public announcement Defendants Eduardo Rubinstein and Mark Klein sold all their shares in the firm. The inside information came from Pablo Rubinstein. When the information about the trials was released Defendant Eduardo Rubinstein avoided losses of $225,902 while Defendant Mark Klein avoided losses of $206,974 by each selling all of their shares. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendant Pablo Rubinstein consented to the entry of a permanent injunction based on the Sections cited in the complaint and agreed to pay a civil penalty of $226,000. The case will continue. See Lit. Rel. No. 25458 (July 28, 2022).

False statements: SEC v. Patent Access Solutions, Inc., Civil Acton No. 22 Civ. 4447 (E.D.N.Y. Filed July 28, 2022) is an action which names as defendants the firm, Bruce Weitzberg and Joseph Gonzalez. The action centers on a fake merger for the shares of Patent Access or PASO. The two individual defendants are former officials of that firm. To support their claim that a merger was coming for the firm, false documents were created about the fictitious merger. The point was to hype the share price. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Gonzalez settled with the Commission, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, Mr. Gonzalez agreed to pay disgorgement and prejudgment of $5,256 and a penalty of $120,000. He also agreed to the entry of an officer and director bar. The case continues as to the other defendants. See Lit. Rel. No, 25456 (July 28, 2022).

Offering fraud: SEC v. Murray, Civil Action No. 5:22-cv-01329 (N.D. Oh. Filed July 27, 2022). Defendant Robert F. Murray is a retired Navy Chief who at the time here lived in North Canton, Ohio. He operated Deep Dive Strategies, LLC as an unregistered, pooled investment fund from September 2020 to January 2022. Prior to soliciting investors, he touted his success as an investor during the pandemic on social media. When he began soliciting investors he told them – mostly former Navy personnel – that he planned to invest their money in equity stocks and after the first year it could be withdrawn, less their pro rata share of any trading losses. He was able to raise nearly $355,000 from 44 investors. Contrary to Defendant’s representations, investors could not withdraw their funds since Defendant almost immediately began misappropriating the investor cash. When ultimately faced with demands for withdrawal, Defendant wrote to the requestors stating he would shut the fund down. He did not; to date investors have not received any returns. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subdivision of 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. See Lit. Rel. No. 25455 (July 28, 2022),.

Financial fraud: SEC v. Okunak, Civil Action No. 22 Civ. 6389 (S.D.N.Y. Filed July 27, 2022) is an action which names as defendant, Frank Okunak who held prominent positions with the subsidiary of a global advertising and marketing company. Over a period of nine years, beginning in 2011, Defendant circumvented the firm’s internal accounting controls. During the period Defendant regularly had the firm issue false purchase orders for services to help conceal his misappropriation of about $16 million. The complaint alleges aiding and abetting violations of Exchange Act 13(b)(2)(A) and violations of 13(b)(5). The action is pending. The U.S. Attorney’s Office for Manhattan also filed parallel criminal charges. See Lit. Rel. No. 25454 (July 27, 2022).

Identity theft: In the Matter of J.P. Morgan Securities LLC, Adm. Proc. File No. 3-20936 July 27, 2022). Respondent is based in New York City. The firm is a registered broker-dealer and investment adviser. It is a wholly owned subsidiary of JPMorgan Chase & Company, a global financial services firm.

From January 2017 through the end of 2019 the firm failed to comply with Rule 201 of Regulation S-ID because its written identity theft prevention programs for the applicable lines of business failed to include reasonable policies and procedures to: 1) identify relevant red flags for the covered accounts; 2) respond appropriately to detected red flags; and 3) ensure that each program was updated periodically to reflect changes in identity theft risks to customers. Regulation S-ID requires that an identity theft program include reasonable policies and procedures to: identify relevant red flags; detect those red flags; respond appropriately to them; and ensure that the program is updated and includes evolving risks in the area.

The identification of red flags is key to the regulation. In this regard the firm must consider factors that are specific to it in order to identify red flags that are relevant to the business and the nature and scope of the pertinent activities. Factors to conside the type of accounts offered by the firm, the methods it provides to open covered accounts and access to them, and the firm’s experience with identity theft. The Appendix to the Regulation contains guidelines to assist firms in formulating and maintaining an identity theft prevention program that complies with the regulation.

The Appendix contains lists of red flags that a firm should consider when creating a program. The firm is required to incorporate those which are appropriate to its business and the risks. The Regulation also requires that the firm periodically consider the evolution of identity theft over time to update the red flags adopted as part of its program. The adopting firm must have a written program and implement it by methods such as training and appropriate oversight. In this proceeding Respondent had accounts under two lines of business covered with identity theft programs. Each program was deficient. For example, while each had red flags, they were not based on firm specific factors.

Here the programs were essentially restatements of the general legal requirements. Likewise, neither program had policies or procedures to ensure that the programs were updated periodically with new red flags based on customer experience. And, appropriate oversight was not conducted. In resolving this matter, the firm undertook remedial efforts by, in part, adopting improved polices and policies and procedures. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on Rule 201 of Regulation S-ID and a censure. The firm also agreed to pay a penalty of $1.2 million.

See also In the Matter of UBS Financial Services, Inc., Adm. Proc. File No. 3-20937 (July 27, 2022)(based on violation of same regulation; resolved with a cease-and-desist-order based on Regulation S-ID, a censure, and payment of a penalty in the amount of $925.000); In the Matter of TradeSatation Securities, Inc., Adm. Proc. File No. 3-20938 (July 27, 2022)(similar to above; resolved with the entry of a cease-and-desist order based on Regulation S-ID, a censure and payment of a fine in the amount of $425,000).

Offering fraud: SEC v. Robert, Civil Action No. 9:22-cv-81092 (S.D. Fla. Filed July 26, 2022) is an action which names as defendants Chalala Academy LLC, Lendvesting Academy Corp. and Alexandra Robert who formed and controled both entities. Beginning in May 2020, and continuing until August 2021, Defendants raised about $900,000 from about 80 investors largely of Haitian origin with promises of returns of up to 48%. Defendants claimed to be making loans to those who otherwise could not obtain one. Defendants also misrepresented their track record in raising funds. Part of the investor money was misappropriated. The complaint alleges violations of Securities Act Sections 5(a) & (c) and Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25452 (July 27, 2022).

Insider trading: SEC v. Buyer, Civil Action No. 1:22-cv-06279 (S.D.N.Y. Filed July 25, 2022). Defendant Stephen E. Buyer is the principal of Steve Buyer Group, a business Mr. Buyer founded in 2011 after leaving the U.S. House of Representatives. The firm attempts to leverage Mr. Buyer’s congressional experience. It aids clients with issues related to matters such as Veterans Affairs and the telecommunications industry. In 2018 and 2019, the former Congressman misappropriated material non-public information from two clients, using it to profitably trade.

First in 2018 Mr. Buyer acted as a consultant for T-Mobile US, Inc. During his work he learned that T-Mobile planned to acquire Sprint Corporation. The planned acquisition was not public. Mr. Buyer misappropriated the material, non-public information. Prior to the deal announcement Mr. Buyer purchased 112,675 shares of Sprint stock at a cost of $568,000. Following the April deal announcement, he had profits of $107,987.

Second, Mr. Buyer misappropriated material, non-public deal information the next year. In 2019 he acted as a consultant to Guidehouse LLP. The firm planned to acquire Navigant Consulting. Mr. Buyer misappropriated the inside information about the deal and used over $1 million to purchase 46,654 shares of Navigant stock. He used the accounts of his wife and son to make the acquisitions as well as one of a Friend. Following the deal announcement in August 2019 Mr. Buyer had profits of about $227,742. The complaint alleges violations of Exchange Act Section 19(b). The case is pending. See Lit. Rel. No. 25448 (July 25, 2022).

Insider trading: The Commission filed three insider trading cases involving three separate schemes and nine individuals last week. The cases are based on data analytics employed by Enforcement’s Market Abuse unit. The approach was used to detect suspicious trading patterns and identify the case. The new cases which are a product of this analytical methodology are:

SEC v. Bhardwaj, Civil Action No. 1:22-cv-06277 (S.D.N.Y. Filed July 25k 2022) is an action which names as defendants: Amit Bhardwaj, a manager of technical marketing at a software firm; the CISO of a subsidiary of Lumentum Holdings, Inc.; Dhirenkumar Patel; Srinivasa Kakkera, head of engineering and AI at a publicly-traded firm; Abbas Saeedi, CEO of a tax preparation firm; and Ramesh Chitor, director of alliances at a public company. This action involves two schemes. First, Defendant Bhardwaj, acquired inside information regarding Lumentum’s plan to acquire Coherent Inc. in late 2020. He traded through his wife Salwan’s account and his account. He also told friend Patel about the transaction and furnished him the money to trade in return for a portion of the profits. Following the deal announcement, the share price increased 29%. The Bhardwaj, Salwan and Patel accounts had trading profits, respectively of $448,000, $14,000 and $423,000. Second, ten months later Defendant Bhardwaj again misappropriated Lumentum’s inside information, this time about the acquisition of NeoPhotonics Corporation. In this instance he told friends Kakkera, Saeedi and Chitor about the deal. Prior to the deal announcement Defendant purchased shares of NeoPhotonics in his account and that of the Kakkera Trust. Defendant Saeedi ;purchased shares in his account and that of his entity, All US Tacos. His wife also purchased shares as did Defendant Chitor. Following the deal announcement, the share priced increased over 38%. Collectively the traders realized at least $5.2million in trading profits. The complaint alleges violations of Exchange Act Section 10(b). The case is pending.

SEC v. Goel, Civil Action No. 1:22-cv-06282 (S.D.N.Y. Filed July 25, 2022) is an action which names as defendant Brijesh Goel and Akshay Niranjan, respectively, an employee of a publicly traded global asset manager and a director of a global corporate banking institution. Defendants are alleged to have participated in an insider trading scheme for several months, beginning in early 2017, which netted them over $290,000. Defendant Goel tipped his friend Niranjan on four occasions regarding pending transaction. In each instance Defendant Niranjan traded in the securities of the targets through a personal brokerage account of his brother. The two men divided the trading profits. The complaint alleges violations of Exchange Act Section 10(b). The case is pending.

SEC v. Markin, Civil Action No. 1:22-cv-06276 (S.D.N.Y. Filed July 25 2022) is an action which names as defendants Seth Markin and Brandon Wong, respectively, an agent in training for the FBI and an employee of a tutoring firm. In early 2021 Defendant Markin misappropriated inside information from his romantic partner, an associate at a major law firm, with whom he frequently stayed. The information concerned a tender offer by Merck & Co., Inc. to acquire Pandion Therapeutics, Inc. Mr. Markin used the information to trade and tipped his friend, Defendant Wong who also traded. Following the deal announcement, the share price increased by 133%, yielding profits of $82,000 for Mr. Markin and $1.3 million for Mr. Wong. The complaint alleges violations of Exchange Act Section 10(b) and 14(e). The case is pending.

Australia

Report: The Australian Securities and Investment Commission released its enforcement and regulatory update for April 1 to June 30, 2022 (here).

Singapore

Report: The Monetary Authority of Singapore published its Annual Sustainability ainability Report 2021/2022 on July 28, 2022 (here).

Print Friendly, PDF & Email
Tagged with: , , , ,

Privacy, identity theft and similar issues can be key for firms that have files containing personal data of clients. The Commission addressed the question of identity theft with the adoption of Regulation S-ID in 2013. The first enforcement action was brought against a broker-dealer five years later.

On July 27, 2022, the Commission filed three settled actions against brokers centered on violations of Regulation S-1D. The proceeding brought against J.P. Morgan Securities LLC, Adm. Proc. File No. 3-20936 is typical.

Respondent is a broker based in New York City. The firm is a registered broker-dealer and investment adviser. It is a wholly owned subsidiary of JPMorgan Chase & Company, a global financial services firm.

From January 2017 through the end of 2019 the firm failed to comply with Rule 201 of Regulation S-ID because its written identity theft prevention programs for the applicable lines of business failed to include reasonable policies and procedures to: 1) identify relevant red flags for the covered accounts; 2) respond appropriately to detected red flags; and 3) ensure that each program was updated periodically to reflect changes in identity theft risks to customers.

Regulation S-ID requires that an identity theft program include reasonable policies and procedures to: identify relevant red flags; detect those red flags; respond appropriately to them; and ensure that the program is updated to evolving risks in the area.

The identification of red flags is key to the regulation. In this regard the firm must consider factors that are specific to it in order to identify red flags that are relevant to business and the nature and scope of the pertinent activities. Factors to consider include the type of accounts offered by the firm and the methods it provides to open covered accounts and access to them as well as the firm’s experience with identity theft.

The Appendix to the Regulation contains guidelines to assist firms in formulating and maintaining an identity theft prevention program that complies with the regulation. The Appendix contains lists of red flags that a firm should consider when creating a program. The firm is required to incorporate those which are appropriate to its business and the risks.

The Regulation also requires that the firm periodically consider the evolution of identity theft over time to update the red flags adopted as part of its program. The adopting firm must have a written program and implement it by methods such as training and appropriate oversight.

In this proceeding Respondent had accounts under two lines of business covered with identity theft programs. Each program was deficient. For example, while each had red flags, they were not based on firm specific factors. Rather, the programs were essentially restatements of the general legal requirements. Likewise, neither program had policies or procedures to ensure that the programs were updated periodically with new red flags based on customer experience. And, appropriate oversight was not conducted.

In resolving this matter, the firm undertook remedial efforts by, in part, adopting improved polices and policies and procedures. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on Rule 201 of Regulation S-ID and a censure. The firm also agreed to pay a penalty of $1.2 million. See also In the Matter of UBS Financial Services, Inc., Adm. Proc. File No. 3-20937 (July 27, 2022)(based on violation of same regulation; resolved with a cease-and-desist-order based on Regulation S-ID, a censure, and payment of a penalty in the amount of $925.000); In the Matter of TradeSatation Securities, Inc., Adm. Proc. File No. 3-20938 (July 27, 2022)(similar to above; resolved with the entry of a cease-and-desist order based on Regulation S-ID, a censure and payment of a fine in the amount of $425,000).

Print Friendly, PDF & Email
Tagged with: ,