Offering fraud cases are frequently the largest group of actions filed during any period by the Commission. Many of the cases have common elements: A scheme centered on some catchy product tied to crypto or some other trendy asset group; and promises of outsized profits and assurances against loss. All to frequently it is the Main Street investors who are convinced to put their life savings, 401-K funds or similar money into the offering and who in the end suffer the huge losses.

Mr. & Mrs. Mainstreet are not the only investors that fall prey to the hucksters that peddle high risk and often worthless securities in offering fraud actions. The point is will illustrated by the cases filed Tuesday by the Commission and the Department of Justice against Allianz Global Investors and three former senior portfolio managers. There a complex product was used in conjunction with a series of misrepresentations to dupe some of the largest pension funds into purchasing shares in what turned out to be an offering fraud.

SEC v. Tournant, Civil Action No. 1:22-cv-04016 (S.D.N.Y. Filed May 17, 2022) names as defendants three Alliance senior portfolio managers who used AGI US’s Structured Alpha funds to defraud many of the largest pension funds through the use of a complex investment scheme. Named as defendants are: Gregoire P. Tournant, Chief Investment Officer of the U.S Structured Products Group for AGI US and lead portfolio manager for the Structured Alpha funds; Trevor L. Taylor, Managing Director at AGI US and Co-lead Portfolio Manager of the Structured Alpha funds; and Stephen G. Bond-Nelson, Managing Director at AGI US and Portfolio Manager for the Structured Alpha funds.

At the center of the cases is Allianz Global Investors U.S. LLC and Structured Alpha funds. The former is a registered investment adviser. The latter is a group of 17 pooled investment vehicles.

Structured Alpha offered investors a complex options trading strategy designed to generate profits by using a portfolio of debt or equity securities as collateral to purchase and sell options. Investors could get exposure to a variety of debt or equity securities tied to a complex options trading strategy that was designed to add profits with hedges to protect against loss.

The debt or equity component was designed to be the beta component; the options trading strategy the alpha component. Investors could choose among various combinations of alpha and beta targets. For example, one fund provided exposure to 90-day T Bills; it had an alpha target of 10% per year; another fund offered exposure to the S&P 500 Index with an alpha target of 5% per year.

The option trading strategy had three components: Range-bound and directional spreads, each designed to generate profit by collecting premiums from selling put and call options that expired out of the money; and hedges, designed to protect against short-term market crashes.

Over a period of about four years, beginning in early 2016, AGI US and Defendants marketed Structured Alpha funds to 114 institutional investors. About $11 billion was raised.

Over time Defendants sought to and did manipulate key financial metrics and reports in an effort to conceal the scope of the financial risk and eventually the actual risk. Mr. Tournant, for example, materially misrepresented to investors the levels at which hedge positions were put into place. He also caused the portfolio management team not to implement a risk manage program agreed to with the largest investor. In addition, Mr. Tournant manipulated certain reports provided to AGI US and the largest investor, regarding the risk mitigation program.

The funds performed reasonably well until the COVID pandemic took hold in March 2020 and the market drop. At that point Defendants sought to conceal the impact from the SEC. For example, initially Defendant Bond-Nelson provided false testimony during the investigation at the urging of Mr. Tournant. Later Defendant Bond-Nelson recanted the false testimony and cooperated with the staff investigation as did Defendant Taylor. Ultimately, the fund collapsed causing millions in losses.

The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). See also In the Matter of Global Investors U.S. LLC, Adm. Proc. File No. 3-20855 (May 17, 2022)(Proceeding against the fund based on above; resolved with a cease-and-desist order based on Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4) and a censure; the firm will pay disgorgement of $315.2 million plus prejudgment interest of $34 million, deemed satisfied by the forfeiture and restitution order entered in the parallel criminal case; in addition a penalty of $675 million that will be paid by putting $131 million into a fair fund; see also U.S v. Allianz Global Investors U.S. LLC (S.D.N.Y.) in which the firm pleaded guilty); In the Matter of Stephen G. Bond-Nelson, Adm. Proc. File No. 3-20854 (March 17, 2022 (based on guilty plea in parallel criminal case; Respondent is barred from the securities business and participating in any penny stock offering); In the Matter of Trevor Taylor, Adm. Proc. File No. 3-20853 (May 17 2022)(same as immediately above).

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Much of the business world is fascinated with Elon Musk and Twitter. The speculation is rampant – will he buy it now that the share price has dropped significantly, drop the deal, renegotiate it or . . . it goes on.

Another favorite topic of discussion is the extension the Commission took on its climate related proposed rules. Again, the speculation is running high as many hover, looking for some hidden agenda in the proposed rules that many do not seem to understand. Yet aside from giving all would-be commentators more time to think about their position, as well as the opportunity to consider all of the proposals made this year simultaneously, little in the way of something new has emerged.

Be careful, be safe this week

SEC

Rules: The Commission extended the comment period for the rule proposals proffered earlier this year tied to climate related issues. This includes the period for rules regarding climatre disclosures, private fund advisers and Regulation ATS, according to a release dated May 9, 2022.

Whistleblowers: The agency paid out about $3.5 million to four whistleblowers, according to a release dated May 6, 2022.

Enforcement: The Commission nearly doubled the size of the Enforcement Division’s Crypto Assets and Cyber Unit, adding twenty new positions.

SEC Enforcement – Filed and settled actions

Last week the Commission filed 3 civil injunctive actions and 2 administrative actions, exclusive of 12j, tag-a-long and other similar proceeding.

Microcap fraud: SEC v. Sharp, Civil Action No. 1:21-cv-11276 (D. Mass.) is a previously filed action which named as defendant Frederick L. Sharp, a Canadian citizen. In August 2021 the Commission filed an action against Mr. Sharp which charged him with leading a fraudulent scheme in which owners of controlling interests in microcap stocks concealed their identity and position while dumping their stock. The scheme began in about 2011 and continued to 2019. It facilitated over a billion dollars in share sales during the period. A default judgment was entered on May 12, 2022. The judgment imposes permanent injunctions based on Securities Act Section 17(a), and Exchange Act Section 10(b). It also directs the Canadian resident to pay disgorgement and prejudgment interest in the amount of $289,934,433 and a civil penalty of $23,990,781. In addition, a penny stock bar and a conduct-based inunction restricting Mr. Sharp’s future trading in stocks was imposed. See Lit. Rel. No. 25392 (May 12, 2022).

Offering fraud: SEC v. Parnas, Civil Action No. 1:21-cv-00995 (S.D.N.Y.) is a previously filed action which named as defendants Lev Parnas and David Correia. The case was based on an offering fraud centered on a firm named Fraud Guarantee. Potential investors were told the money being raised which would be invested to pay those who had been defrauded. In fact the scheme was a fraud. The scheme went on over a period of six years beginning in 2013. Defendant Correia previously settled. Mr. Parnas settled, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 25391 (May 11, 2022).

Offering fraud: SEC v. Romero, Civil Action No. 3:220-cv-02067 (N.D. Ca.) is a previously filed action which named as defendant Manuel A. Romero, the former CFO of a real estate investment and management company what was actually a Ponzi scheme. The complaint alleged a scheme over a four-year period, beginning in 2016, by selling shares in Professional Financial Investors, Inc. While investors believed the funds would be used to acquire real estate in fact much of the money raised was used to pay prior investors. The complaint alleged violations of Securities Act Sections 17(a) and Exchange Act Section 10(b). Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to pay disgorgement of $91,819, prejudgment interest of $6,655 and a penalty of $50,000. See Lit. Rel. No. 25389 (May 10, 2022).

Misappropriation – IA: SEC v. Muntin, Civil Action No. 5:21-cv-12607 (E.D. Mich.) is a previously filed action which names as defendant Steven Muntin, a former investment adviser representative. Over a four-year period, beginning in March 2016, Defendant solicited one elderly investor and had her write checks totaling $305,750 which he took for his personal benefit. Defendant also overcharged the client at least $9,000 in assets under management fees. To settle this matter Defendant consented to the entry of permanent injunctions based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). In addition, Defendant will pay disgorgement of $314,799, prejudgment interest of $46,121 and a penalty of $258,557. See Lit. Rel. No. 25388 (May 9, 2022).

Insider trading: SEC v. Sareshar, Civil Action No. 20-civ-06865 (S.D.N.Y.) is a previously filed action which named as a defendant Sepehr Sareshar. Defendant learned in February and March of 2015 through his position at Auspex Pharmaceuticals, Inc. that Teva Pharmaceuticals and others were considering a bid for his firm. He told this confidential information to his family and friends who traded. Eventually Teva did conduct a tender offer. To resolve the matter Defendant consented to the entry of a permanent injunction based on Exchange Act Section 14(e). In addition, he agreed to pay a civil penalty of $56,222. See Lit. Rel. No. 25387 (May 9, 2022).

Offering fraud: SEC v. MCC International Corp., Civil Action No. 2:22-cv-14129 (S.D.N.Y. Filed April 7, 2022) is an action which names as defendants: MCC International Corp., a Florida based firm operated through its President, Defendant Luiz Carlos Capuci, Jr.; CPTLCoin Corp., a Massachusetts based firm; Luiz Carlos Capuci Jr., previously a resident of Florida but is now believed to be in Brazil; and Emerson Sousa Pires, MCC’s co-founder. The sales pitch focused on two points. First, investors were offered the opportunity to invest in MCC which supposedly had a phalanx of trading robots who continually located and exploited arbitrage opportunities in stock, foreign exchange and crypt markets. Part of this plan was guaranteed returns with a 1% per day profit share return paid weekly on a $10,000 investment with withdrawals permitted. In addition, there was an opportunity to get into a new Capital Coin token firm. In short order Defendants were able to raise at least $8 million from investors. In the end, however, while investors could put funds in, they could not take them out. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Court entered a TRO. The case is pending.

Disclosure: In the Matter of NVIDIA, File No. 3-20844 (May 6, 2022) is an action which names as respondent the firm which has two segments, GPUs and Tegra processors. The GPUs, designed for desktops, notebooks, or crypto-mining, reported revenue through that segment. The firm also reported revenue from specialized market platforms that include gaming and original equipment manufacturer. During two consecutive quarters in 2018 the firm failed to disclose the impact of crypto-mining on the growth of revenue from the sale of graphics processing unites or GPUs. During the second and third fiscal quarters of 2018 as certain crypto assert prices rose, t firm’s revenues were also were also increasing. The firm had information that this revenue was significant. Nevertheless, it was not disclosed in MD&A and in accord with the pertinent provisions of Regulation S-K. The firm also had inadequate disclosure controls. The Order alleges violations of Securities Act Sections 17(a)(2) and (3), Exchange Act Section 13(a) and Exchange Act Rules 12b-20, 13a-13 and 13a-15. To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections and Rules cited. In addition, Respondent will pay a penalty of $5.5 million.

Offering fraud: SEC v. TKO Farms, Inc., Civil Action No. 8:22-cv-00941 (C.D. Ca. Filed May 6, 2022) is an action which names as defendants: TKO Farms, ostensibly in the exotic hardwood business from a farm in Belize; Agravitae, Inc., a firm that supposedly marketed the hardwoods of TKO; Kenneth Owen, a twice convicted criminal who has control over TKO, Agravitae and certain solicitors; James Brian Blaylock, a resident of Folsom State Prison who is also subject to certain administrative orders from California agencies; Reynaldo Aguilar who was involved in the solicitations; Ross Erskine who was involved in some of the solicitations in the matter and is a defendant in a CFTC enforcement action; and the Estate of Gilbert Penhollow who, prior to his death, had been retained with respect to certain solicitations. The action centers on two offering conducted over a four-year period, beginning in May 2017. Each offerings centered on solicitating investors for TKO. The offerings raised about $20 million from approximately 200 investors. In making the solicitations, investors were not told that outsized commissions would be paid to the solicitors or that parts of their money would be misappropriated to pay for the personal expenses of those involved in the deal. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 25386 (May 9, 2022).

Enforcement of disbarment order: SEC v. Hackman, Civil Action No. 22-c v-01234 (D. Nev. ) is an action which names as defendant Shawn F. Hackman. The action was initiated to enforce an order entered in 2002 by the agency precluding attorney Hackman from practicing before the Commission as an attorney. Subsequently, he was employed by Nevada attorneys Elaine Dowling and Harold Gewerter as a paralegal. In that role he gave legal advice to “scores” of persons. The Court entered an order directing Mr. Hackman to comply with the Commission’s order and pay nearly $1 million as disgorgement of the sums he earned from practicing law since the entry of the order as disgorgement. The agency also entered orders precluding Ms. Dowling and Mr. Gewerter from appearing or practicing before the Commission as attorneys. See Lit. Rel. No. 25385 (May 6, 2022).

BaFin

Remarks: BaFin President Mark Branson reminded firms that financial stability cannot be taken for granted, in remarks made on May 3, 2022. Specifically, Mr. Branson noted that in view of the war in the Ukraine, multiple layers of sanctions and inflation, the impact of these and other matters must be evaluated in the context of evaluating financial reports (here).

ESMA

IFRS: The European Securities and Market Authority published a reminder to issuers of the IFRS requirements amid the war in the Ukraine. In particular, the regulator pointed to issues that may be considered regarding assets, risks and uncertainties in the current context (here).

Singapore

Climate: The Monetary Authority of Singapore published a report of an industry taskforce consult, second version, of green and transition taxonomy. Specifically, the regulator published a release detailing the thresholds and criteria for economic activity in the energy, transport and real estate sectors. It also incorporates a user guide for financial institutions and companies to apply the taxonomy (here).

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