This is the concluding segment of a three part series focused on the actions filed by the Commission during 4Q21. Part I categorized the actions brought by the Division of Enforcement during 4Q21(here). Part II provided examples of the actions which are part of the four largest groups of cases filed during the quarter (here). This concluding segment presents examples of other types of cases filed during the period and offers concluding thoughts on the overall trends reflected by the filings made during the period which suggest the future directions of SEC enforcement.

Other Significant Cases

Manipulative trading

Manipulative trading can take many forms. In Gallagher the defendant was charged with front running or scalping, a form of manipulation in which the trader profits by, for example, purchasing a security and then recommending that others acquire the same stock without disclosing that the person’s earlier purchases will benefit.

SEC v. Gallagher, Civil Action No. 1:21-cv-08739 (S.D.N.Y. Filed October 26, 2021) is an action which names as defendant Steven Gallagher. Defendant controls a twitter account, Alexander Delage 655321. Beginning in late 2019 Mr. Gallagher used his twitter account to engage in a scalping scheme – one in which a holder of securities recommends them to others without disclosing that he planned to sell. Here Mr. Gallagher repeatedly recommended shares of microcap stocks he owned through the use of his twitter account and then sold the shares. By engaging in this practice with respect to at least 60 issuers reaping at least $3.39 million is illicit profits. During the period Defendant received repeated warnings from his broker about engaging in such conduct. Nevertheless, Mr. Gallagher persisted. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. See Lit. Rel. No. 25248 (October 26, 2021).

Disclosure

Disclosure violations can take many forms. In the case below an exchange traded product that tracked certain items was required to alter its typical trading pattern in a manner that would preclude its use for a period as a tracker but failed to disclose this fact, potentially injuring those who rely on it.

In the Matter of United States Commodity Funds LLC, Adm. Proc. File No. 3-20648 (November 8, 2021) is a proceeding which names as respondents the firm, a CFTC registered commodity pool operator which provides services to eight SEC registered funds, and United States Oil Fund, LP, a CFTC registered pool that is also registered with the SEC –conducts a continuous offering of common shares that can be purchased on NYSE Arca, Inc. In April 2020 the oil markets were in turmoil. On April 20, 2020, as the COVID pandemic unfolded, the near-month oil futures contract went negative – it breached zero and settled negative at –$37.63 for the first time. At the same time USO, an exchange traded product that seeks to track changes in its net asset value with the spot price of crude oil, received record investor cash inflows. The firm filed a Form 8-K noting it was about to exhaust its inventory of shares; then it filed an S-3 registration statement. The next day the firm filed a second Form 8-K noting it exhausted its shares. Two days later the FCM for the firm told the firm that it would inhibit investment in new USO shares through the FCM since that would increase its risk profile, a determination called the New Creation Limit. By prohibiting this new investment, USP as an ETP could only invest the proceeds not in new shares as usual but in US treasuries or cash equivalents or let them remain in cash. This created the risk of a tracking error between USO’s investment objective and its NAV when the suspension of New Creation was lifted. While USO made a number of additional filings, and was the subject of an inspection, the New Creation Limit and its impact was never fully disclosed. The Order alleges violations of Securities Act Section 17(a)(3). Respondent resolved the proceedings, consenting to the entry of a cease-and-desist order based on the Section cited in the Order. In addition, the firm agreed to pay a penalty of $2.5 million which is off set up to any amount paid in resolving a parallel CFTC action up to $1.250 million. See also In the Matter of United States Commodity Funds LLC, CFTC Docket No. 22-06 (November 8, 2021)(resolved with a cease-and-desist order and the imposition of a penalty of $2.5 million ).

Crypto offering

Issues regarding crypto range from conducting a coin offering that actually involves a security without registering it with the Commission to fraud. The example below contains elements of each.

SEC v. Ginster, Civil Action No. 5:21-cv-01957 (C.D. Ca. Filed November 18, 2021) is an action against Ryan Ginster, who implemented two Bitcoin offering frauds, one under the name of Social Profimatic and the other under the name of MyMicroProfits.com. Over a two year period, beginning in March 2018, Defendant raised about $3.6 million in BTC. The schemes focused on offering impossible rates of return. For example, in the SP scheme Defendant offered an 8% per day rate of return which analyzes to a rate of 1,583,692,108,826%. The MMP scheme for a period offered a rate of return of 0.13% per hour or 3.12% per day. Eventually Defendant transferred the Bitcoin from the digital wallets to his personal digital asset wallet. Defendant then converted the BTC to U.S. dollars. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending.

Mismanagement

Mismanagement can take many forms. In many cases, such as Upright Financial below, the firm fails to adhere to its disclosed policies and procedures. In the example here the firm is a registered investment company which failed to operate in accord with its classification and disclosed policies.

In the Mater of Upright Financial Corp., Adm. Proc. File No. 3-20664 (November 24, 2021) names as respondents the registered investment company and David Yow Shang Chiueh, the firm’s founder and COO. Over a three-year period the firm and its portfolio manager made investments in the fund that were inconsistent with its classification as a diversified investment company and its disclosed policies. It also miscalculated NAV for June 30, 2020 and in some instances overstated NAV. The firm has agreed to implement a number of undertakings, including the retention of an independent compliance consultant. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a)(1), 13(a)(3), 20(a) and 34(b), and Advisers Act and Rules 206(4)-7 and 206(4)-8. To resolve the proceedings Respondents consented to the entry of cease-and-desist orders based on the Sections and Rules cited in the Order and to censures. The firm also agreed to pay disgorgement of $390,704.92 along with prejudgment interest of $36.505. Respondents will pay, in addition, a penalty, on a joint and several basis, of $90,000.

Hacking

Hacking systems is growing problem that can implicate personal and business data. In Kliushn the point was to obtain non-public corporate information from firms that had pre-release copies of corporate filings.

SEC v. Kliushn, Civil Action No. 1:21-cv-12088 (D. Mass. December 20, 2021) is an action which names as defendants: Vladislav Kilushin, a Moscow, Russia resident who founded a media information technology company called IT Company in the complaint; Nikolai Rumiantcev, also a Russian citizen residing in Moscow who is a director of IT Company; Miklai Irzak, a Russian citizen who a resident of Saint Petersburg employed at a telecommunication company; and Igor Sladkov, also a resident of Saint Petersburg who works with information technology. Beginning in 2018, and continuing for about two years, the two firms that provide services to public companies preparing releases for Edgar, were hacked by Defendant Yermakov. He is a hacker who is named in two pending federal indictments. Mr. Yermakov hacked the two firms using a variety of approaches, including compromised credentials, malware and other approaches. Once the hack was successful Mr. Yermakov furnished the pre-release information to the other defendants for trading. About $82.5 million was obtained from the trading. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(b). The case is pending. See Lit. Rel. No. 25295 (December 22, 2021).

Conclusion

The cases filed during 4Q21 suggest a “back to the future” approach to enforcement. That does not mean there is nothing new. Rather, it suggests that the focus of enforcement in the last calendar quarter of 2021 was based on bringing actions in traditional areas of concentration by the agency – offering fraud, investment advisers, insider trading and others. That contrasts with other approaches which focused largely on one area such as insider trading or corporate mismanagement. It also differs from, for example, the approach taken during earlier quarters of 2021 when a wide variety of actions were initiated.

The back to the future approach is also consistent with the remarks made by Enforcement Director Gurbir Grewal in October 2021. There the Director stressed trust, fairness and a focus on gatekeepers as key guiding principles for the program he directs. Those basic principles have been the hallmarks of SEC enforcement for decades.

This, of course, does not suggest that the program will not be aggressive. To the contrary, focusing on gate keepers as a key principle is not just a standard approach to expanding the resources of the division – essentially enlisting professionals to assist with enforcement – it can be very effective. Focusing on effective remedies and mentioning admissions as the Director suggested in his remarks serves to bolster the approach. Presumably these notions will be built on the continuing use of data analytics which has become key for enforcement. This blend of traditional principles with an updated emphasis and analytics posits a more effective and focused SEC enforcement program in the future.