The retail investor focus of SEC Enforcement has spawned a series of actions involving investment advisers. Many of those cases centered on undisclosed conflicts such as the series of actions filed in the run up to the end of the Government fiscal year. Moving forward in the new fiscal year brokers, as well as other market professionals may find themselves the targets of the “retail investor” focus of enforcement. Two recent cases center on brokers involved in a bribery scheme. In the end however, the cases differ little from the advisor actions failed last year – they center on undisclosed conflicts such as payments to a broker to purchase a certain stock for unsuspecting retail investors who are the losers. SEC v. Aurbach, Civil Action No. 1:19-cv-05631 (E.D.N.Y. Filed Oct. 4, 2019).

Named as defendants are: Jeffrey Auerbach, a former registered representative temporarily barred from the securities business by FINR A who acted as an IR consultant to Nxt.IDd or NXTD whose shares were listed on Nasdaq Capital Markets; Jared Mitchell, also supposedly was an IR consultant to NXTD, who was recently sentenced to prison in connection with another matter; and Richard Brown, a registered representative who has been subject to a number of customer complaints, named as a defendant in another Commission action and indicted in a criminal case. Each of the Defendants in this action was named in a 2016 Commission action centered on a broker bribery scheme.

The bribery scheme, which took place in 2014 and 2015, centered on paying bribes under the guise of payments for investor relations services, to secure the purchase of NXTD shares. Initially, in July 2014 Defendant Mitchell introduced Gino Pereira, CEO of NXTD, to Mr. Brown, a registered representative, who supposedly was interested in acquiring shares of NXTD. Subsequently, over a period of several months, beginning in July 2014, Defendant Pereira paid Mr. Mitchell about $74,000 through a consulting firm for investor relations advice. At least $15,000 was then paid by to broker Brown to purchase NXTD stock. The broker acquired 231,253 shares of the firm’s stock for his retail clients at a cost of over $566,079. Mr. Brown failed to disclose to his customers that he was paid to purchase the shares in their accounts.

In January 2015 Mr. Pereira caused NXTD to enter into a “Consulting Agreement” with his firm. The consulting agreement was for investor relations services. Ultimately, over a ten-month period Mr. Pereira had the company wire his consulting firm over $62,000. Messrs. Auerbach and Mitchell paid broker Brown at least $5,000 in cash. An additional 107,640 shares of NXTD were purchased for his customers at a cost of $235,584. Mr. Brown again failed to inform his customers that he was paid to purchase the shares. The complaint alleges violations of Exchange Act Section 10(b). The action is pending. See also SEC v. Pereira, Civil Action No. 2:19-cv-05527 (E.D.N.Y. Filed Sept. 30, 2019)(same as above; settled with entry of an injunction and agreement to consider other remedies at a later date).

The U.S. Attorney’s Office for the Eastern District of New York filed a parallel criminal action.

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A look forward; a look back:

The Commission filed over 35 new cases in the final few days of the Government fiscal year. Yet there is no doubt that the cupboard is not bare. There is a deep pool of pending enforcement investigations at various stages which can be expected to keep the Enforcement Division occupied and the flow of cases steady as the new fiscal year begins to unfold.

If the last few days are any indication, the cases brought in the new year will continue to focus on retail investors. Primary among those actions will be those involving investment advisers with undisclosed conflicts such as the share case selection actions. Offering frauds and insider trading will also no doubt continue to be key areas of concern along with cyber security, market access and SARs.

SEC

Proposed rule: The Commission proposed considering an amendment to a national market system plan that would establish or charge a fee to be subject to the standard procedure for NMS plan amendments (here).

SEC Enforcement – Litigated Actions

Conflicts: SEC v. Westport Capital Markets, LLC, Civil Action No. 3:17-cv-02064 (D. Conn.) is a previously filed action which names defendants the registered investment adviser and its principal, Christopher McClure. The complaint alleged that Defendants profited from large undisclosed mark-ups paid on client securities trades. The Court concluded that Defendants were at least negligent with respect to the transactions and granted summary judgment on the point in favor of the Commission. All other issues were reserved for trial. See Lit. Rel. No. 24633 (Oct. 2, 2019).

SEC Enforcement – Filed and Settled Actions

The Commission filed 2 civil injunctive actions and no administrative proceedings last week, exclusive of 12j and tag-along actions.

Crypto currency: SEC v. PlexCorps, Civil Action No. 1:17-cv-07007 (E.D.N.Y.) is a previously filed action which names as defendants the firm, Dominic Lacroix and Sabrina-Paradis-Royer, the proprietors of the ICO. The complaint claimed that Defendants fraudulently raised millions of dollars in fiat and crypto currency, selling unregistered securities by using false and misleading statements. To resolve the action each Defendant consented to the entry of permanent injunctions based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The two individuals are also enjoined from participating in future crypto offerings.

Manipulation: SEC v. Lek Securities Corp., Civil Action No. 17-cv-1789 (S.D.N.Y.) is a previously filed action which alleged that the firm and Sam Lek, CEO, assisted a Ukraine based client with manipulative trading in the form of layering over a three year period. The complaint alleged violations of Securities Act Section 17(a)(1), and Exchange Act Sections 9(a)(2) and 10(b). It alleged that Defendants made the scheme possible by giving the foreign client access to the U.S. markets. To resolve the matter the firm agreed to admit that the conduct of their client violated the federal securities laws. The firm agreed to the entry of a three year injunction requiring that it terminate relations which foreign persons who may be engaged in manipulative conduct and which largely precludes it from intra-day trading with foreign clients, to the imposition of a monitor for the same period and to pay a $1 million penalty along with $525,892 in disgorgement and prejudgment interest. Mr. Lek consented to the entry of permanent injunctions based on the sections cited in the complaint along with the firm. He will also pay a penalty of $420,000. Defendants were ordered to pay, on a joint and several basis, $4,563,468 along with prejudgment interest of $348,145.

Insider trading: SEC v. Jung, Civil Action No. 1:18-cv-04811 (S.D.N.Y.) is an action which named Woojae Jung as a defendant. The action alleged that as an employee of an investment bank, Defendant repeatedly used his access at the firm to obtain inside information and trade. He previously pleaded guilty in a parallel criminal action. Here Defendant consented to the entry of a permanent injunction based on Exchange Act Sections 10(b) and 14(e). In addition, he was ordered to pay disgorgement of $140,000. Payment is satisfied by the forfeiture order entered in the parallel criminal case. See Lit. Rel. No. 24634 (Oct. 2, 2019).

Negligent statements: SEC v. Spencer, Civil Action No. 1:19-cv-9070 (S.D.N.Y. Filed Sept. 30, 2019) names as defendants Christopher Spencer and John Brusshaus, respectively, the former CEO and CFO of FAB Universal Corp.’s business in China. Over a one-year period, beginning in 2012, the two executives repeatedly made statements about certain Kiosks used in connection with the business, significantly over stating their capabilities and, in fact, the number in operation. While a series of red flags appeared during the period indicating that Defendants failed to comply with the applicable standards in making the representations, those were ignored. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3). Each Defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. The questions of monetary relief are reserved for consideration by the Court at a later date. See, Lit. Rel. No. 24636 (Oct. 4, 2019).

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