Chair Gensler recently stated that regulation for crypto assets may be years in the future. Others do not agree, many of whom are in Congress. At the same time the actual question may be if crypto assets need or require more regulation. Currently, the CFTC regulates coins, the SEC regulates when the asset is a security and other regulators step in as required. So, the question might be asked if more regulation of these assets is required?
Be careful this week, be safe
SEC

Testimony: Chair Gensler testified before the Senate Committee on Banking, Housing and Urban Affairs on September 15, 2022. His testimony covered a series of topics including market structure, the bond markets, the equity markets, security based swaps markets, crypto markets, predictive data analytics and issuers and disclosure.

Proposed rules; The Commission proposed rule changes to enhance the risk management practices for central counterparties in the U.S. Treasury market. The proposed rules, issued on September 14, 2022, would update the membership standards required of covering clearing agencies. They are also designed to reduce the risks faced of clearing agencies (here).
SEC Enforcement – Litigated Actions

Share class selection: SEC v. Ambassador Advisors, LLC, Civil Action No. 5:20-cv-02274 (E.D. Pa.) is an action in which Court entered partial summary judgment and later a jury verdict in favor of the Commission and against the advisory and its principals. The claims were based on a breach of duty tied to mutual fund share class selection. Judgments were entered as follows: 1) Bernard Bostwick will pay $136,620 in disgorgement, $35,273 in prejudgment interest and a $349,395 civil penalty; 2) Robert Kauffman $349,395 in disgorgement, $95,972 in prejudgment interest and a $349,395 civil penalty; 3) Adrian Yound $136,627 in disgorgement, $35,275 in prejudgment interest and $136,627 civil penalty; and 4) the firm must pay a $622,642 civil penalty. The Court also directed the firm to correct its website and Form ADV. See Lit. Rel. No. 25501 (September 9, 2022).

SEC Enforcement – Filed and settled actions<br />
Last week the Commission filed 9 civil injunctive actions and 13 administrative action, exclusive of 12j, default, tag-a-long and other similar proceedings.

Pay-to-play: In the Matter of Starvest Management Inc., Adm. Proc. File No. 301002 (September 15, 2022) is a proceeding involving the exempt reporting adviser and the pay-to-play provisions of the Advisers Act, Section 206(4) and Rule 206(4)-5. Generally, those provisions are designed to address advisers and their covered associates who make contributions to government officials in a position to influence the selection of investment advisers i for public pension funds. In this matter two covered associates of the adviser made contribution to a candidate for elected office in New York City in December 2020 and April 2021 which had influence over the selection investment advisers for New York pension funds. Within two years Respondent provided advisory services for compensation to the pubic pension system. That violates the Section and Rule. To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Section and the Rule cited above and to a censure. In addition, Respondent will pay a penalty of $70,000. See also In the Matter of Highland Capital Partners, Adm. Proc. File No. 3-21081 (September 15, 2022)(covered associate of exempt reporting adviser in May 2021 and within two years adviser renders advisory services for a fee; resolved with cease-and-desist order based same Section and Rule, a censure and payment of $95,000 penalty); In the Matter of Asset Management Group of Bank of Hawaii, Adm. Proc. File No. 3-21080 (September 15, 2022(same; resolved with cease-and-desist order based on same Section and Rule, censure and payment of penalty of $45,000); In the Matter of Canaan Management, LLC, Adm. Proc. File No. 3-21079 (September 15, 20229(same; resolved with cease-and-desist order based on same Section and Rule, censure and penalty of $95,000).

Crypto – offering fraud: SEC v. Edelman, Civil Action No. 1:22-cv-07892 (S.D.N.Y. Filed September 15, 2020 is an action which names as defendants Gabriel Edelman and his two firms, Creative Advancement LLC and Edelman Blockchain Advisors, LLC. Over a period of about four years, beginning in 2017, defendants sold securities to at least four investors, raising about $4,390,000. The sales were made by telling investors that the money raised would be invested in crypto assets and that they could obtain a discount. In fact, much of the investor money was diverted to the personal use of Mr. Edelman. The complaint alleges violations of Securities Act Sections 17(a) and Exchange Act Section 10(b). The action is pending. See Lit. Rel. No. 25509 (September 15, 2022).

Misrepresentations: SEC v. Secured Income Group, Inc, Civil Action No. 8:22-cv-01690 (C.D. CA. Filed September 15, 2022) is an action which names as defendant the firm and two of its executives, Max McDermott and Stacey Porter. Mr. McDermott owned the firm; Ms. Porter was the director of investor relations. The complaint alleges that over a four year period, beginning in 2017, the firm and its owner, Defendant McDermott, sold over $100 million of what were claimed to be secured debentures of high quality to investors. While the firm did originate loans, as a consequence of sales of the notes the value of the collateral lagged far behind that of the debentures. At one time the value gap was as much as 70%. During the period Mr. McDermott has been liquidating the assets to pay other creditors. 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 firm and Mr. McDermott each consented to the entry of permanent injunctions based on the Sections cited. Mr. McDermott also consented to the entry of and officer/director bar. Financial penalties will be resolved by the Court. See Lit. Rel. No. 25508 (September 15, 2022).

Registration Muni advisors: In the Matter of Loop Capital Markets, LLC, Adm. Proc. File No. 3-21075 (September 14, 2022) is a proceeding naming the registered broker-dealer as repsondent. Over about a two year period, beginning in September 2017, the firm provided advise to a municipal entity regarding the investment of municipal securities proceeds. During the period the firm was not a registered municipal adviser although it had been one for a brief period. The firm undertook remedial efforts. The Order alleges violations of Exchange Act Section 15B(c)(1). The firm consented to the entry of a cease-and-desist order based on Exchange Act Sections 15(B)(a)(1)(B) and 15B(c)(1) and MSRB Rule G-27. The firm will pay disgorgement of $4,555.37, prejudgment interest of $901.36 and a penalty of $100,000.

Crypto: SEC v. Chicago Crypto Capital LLC, Civil Action No. 22-cv-2975 (N.D. Ill. Filed September 14, 2022) is an action which names as defendants: the firm, Brian Amoah, Darcas Young and Elbert Elliott. Over a period of several months, beginning in August 2018, Defendants conducted an unregistered offering of BXY securities, raising about $1.5 million. About 100 investors participated in the offering. It was not registered; the sellers were not registered. In addition, misstatements were made regarding the investments, the offering, the issuer and the financial and management issues of the firm. 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. 25506 (September 14, 2022).

Muni offerings: In the Matter of Jefferies LLC, Adm. Proc. File No. 3-21070 (September 13, 2022) is a proceeding against the registered broker dealer. It centers on 18 municipal offerings in which the firm served as underwriter. The offerings were limited. The securities were sold to brokers and investment advisers. In doing so, the firm failed to comply with Rule 15c2-12 which is the “continuing disclosure undertaking” rule. It requires that underwriters in certain primary offerings obtain disclosure documents from issuers and reasonably determine that the issuer of the municipal securities or an obligated person has undertaken to provide certain information to the MSRB. There is an exception. Here Respondent failed to undertake to comply with the rule and did not have properly established and implemented compliance rules to determine if the exception to the rule applied. The Order alleges violations of Exchange Act Section 15B(c)(1) and Rule 15c2-12 and MSRB Rule G-27. Respondent resolved the proceedings, consenting to the entry of a cease-and-desist order based on the provisions cited and a censure. In addition, the firm will pay disgorgement of $38,00867, prejudgment interest of $5,206.55 and a penalty of $100,000. See also In the Matter of TD Securities (USA), LLC, Adm. Proc. File No. 3-21072 (September 13, 2022)(same; resolved with consent decree, censure and payment of disgorgement of $45,891.72; prejudgment interest of $7,064.20 and a penalty of $100,000); In the Matter of Major NY Bank LLC, LLC,. Adm. Proc. File No. 3-21071 (September 13, 2020)(same; resolved with consent decree and payment of $609,908,.93, prejudgment interest of $46,924.63 and a penalty of $300,000). See also SEC v. Oppenheimer & Co., Inc., Civil Action No. 1:22-cv-07801 (S.D.N.Y. Filed September 13, 2022)(same as above; 354 offerings were involved; the case is in litigation). See Lit. Rel. No. 254505 (September 13, 2022). These are the first cases enforcing these rules.

Cherry picking: In the Matter of Buckman Advisory Group, LLC, Adm. Proc. File No. 3-21069 (September 13, 2022) is a proceeding which names as Respondents the firm, a registered investment adviser, and Harry J. Buckman, Jr., its CEO. Over a five year period, beginning in 2012, a representative engaged in a cherry picking scheme, putting profitable trades in his account and unfavorable ones in disfavored accounts. Mr. Buckman was supposed to supervise these activities but failed to do so. The Order alleges violations of Advisers Act sections 206(2) and 206(4). The firm consented to the entry of a cease-and-desist order based on the Sections cited and a censure. It also agreed to pay a penalty of $400,000. Mr. Buckman consented to the entry of a cease-and-desist order based on the Sections cited. He also agreed to pay a penalty of $75,000. See also SEC v. Brander</em>, Civil Action No. 2:22-cv-05506 (D.N.J. Filed September 12, 2022)(action against the registered representative based on same facts as above; Defendant consented to the entry of a permanent injunction based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) &(2) and will pay disgorgement of $812,876, prejudgment interest of $169,0890.83 and a penalty of $200,000). See Lit. Rel. No. 25502 (September 13, 2022).

Misappropriation: SEC v. Frankel</em>, Civil Action No. 2:22-cv-06500 (C.D. Ca. Filed September 12, 2022) is an action which names Marc Frankel as Defendant. He is the owner of MJF Advisors, LLC. In December 2017 he began stealing from one client, a MLB player. He created an account to which the funds were transferred; the money was used for his personal benefit. It totaled over $700,000. When questions arose and the account was scrutinized in May 2020 Defendant concealed his actions but switched to stealing from another client. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 25503 (September 13, 2022).

Earnings management: In the Matter of VMware, Inc., Adm. Proc. File No. 3-21065 (September 12, 2022) is a proceeding which names the firm as respondent. It is engaged in cloud based services. Beginning in FY 2019, when a new accounting standard was adopted, the company began to manage its “backlog,” by timing when orders were recorded. This was done in FY 2019 and 2020. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Securities Act Section 13(a). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, Respondent will pay a penalty of $8 million.

Unauthorized transactions: In the Matter of Sparklabs Global Ventures Management, LLC, Adm. Proc. File No. 3-21063 (September 12, 2022) is a proceeding which names as respondents: the firm, an exempt reporting adviser to the State of California; Sparklelabs Management, LLC, also an exempt reporting adviser to the State of California; and Bernard Moon, an owner and managing member of each entity. The proceeding centered on the unauthorized and undisclosed loans among the funds over a three-year period, beginning in 2016. By entering into the loans which were not authorized and in violation of their agreements, the funds breached their fiduciary duties. Contrary to their operating agreements, committees were not formed to advise on such activity. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). Respondents consented to the entry of cease-and-desist orders and censures. The two firms will pay, on a joint and several basis, a penalty of $200,000. Mr. Moon will pay a penalty of $25,000.

Fees: In the Matter of Hudson Advisors L.P., Adm. Proc. File No. 3021062 (September 12, 2022) is a proceeding which names as Respondents two registered investment advisers, Hudson Advisors and Lone Star Global Acquisitions, Ltd. Beginning in 2005, and continuing for the next 12 years, the firms estimated the tax liability of the founder when calculating the advisory fees. The tax liability was then added to the fees without disclosing this fact. The Order alleges violations of Advisers Act Sections 206(2) and 206(4) and the related rules. Each Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the order. In addition, Respondents were directed to pay, on a joint and several basis, $11.2 million.

Offering fraud: SEC v. Profile Solutions, Inc., Civil Action No. 1:22-cv-22881 (S.D. Fla. Filed September 9, 2022). Named as defendants in the action are: the firm, Dan Oran and Leonard Tucker. The firm, initially formed in 2006, later reformulated into Profile Solutions, Inc., a Florida firm. Defendant Oran is the CEO and president of the firm. He owns 38.3% of its shares. Mr. Tucker claims to be a consultant but in fact acts as an executive officer of the firm. Previously, he pleaded guilty to three felony counts — securities fraud, conspiracy to commit securities fraud and RICO. He has also settled a securities fraud suit filed against him by the Commission. Over a two-year period, beginning in 2018, Defendants engaged in a fraudulent scheme built on false statements regarding marijuana. CEO Oran, for example, authorized Profile to issue press releases claiming the company had obtained “preliminary approval” to grow and process medical cannabis and hemp in Kingdom of Eswatini, a nation in Africa formerly known as Swaziland. In fact, the claims were false. At the time the CEO gave the authorization, it was illegal to grow cannabis in Eswatini. That fact was not disclosed to investors. Defendants then made the same misrepresentations about Eswatini to the public. Defendants also filed a false registration statement with the Commission. While the filing requires that all individuals acting in a management or executive capacity be disclosed, they were not. The position of Mr. Tucker was not disclosed. Defendants’ scheme was concealed behind a web of lies. Those included: 1) the false clam about Eswatini; 2) the false claim that third parties were ready to distribute the cannabis products of Profile in Central and South America; and 3) the role of convicted felon Tucker. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b). The company and Mr. Oran settled with the Commission. Each consented to the entry of permanent injunctions based on the Sections cited in the complaint. Mr. Oran also consented to the entry of a five-year office/director bar and agreed to pay a penalty of $150,000. See </em>Lit. Rel. No. 25500 (September 9, 2022).

Unregistered brokers: SEC v. TBG Holdings Corp., Civil Action No. 0:22-cv-61689 (S.D. Fla. September 9, 2022) is an action which names as defendants the firm, supposedly a venture capital company, and Neil Swartz and Timothy Hart, respectively the firm’s CEO and CFO. Over a two-year period, beginning in 2018, the firm and its principals hired and directed a group of unregistered sales agents to market shares of MediXall Group, Inc. Some members of the group had been suspended and/or permanently barred by financial industry self-regulatory organizations. About $3 million was raised selling the shares to over 200 investors. The sales agents were paid over $500,000. The complaint alleges violations of Exchange Act Section 15(a)(1). The firm settled, consenting to the entry of a permanent injunction based on the Section cited in the complaint and agreeing to pay a penalty of $100,000. The two individual Defendants also consented to similar relief. Mr. Romeo agreed to pay disgorgement of $468,523 and $63,733 in prejudgment interest along with a penalty of $150,000 and a bar from participating in a penny stock offering. Mr. Dickerson settled on a similar based but will pay disgorgement of $25,193 with prejudgment interest of $3,710 and a penalty of $25,000. He also agreed to the entry of a bar from participating in any penny stock offering but only for three years. See also SEC v. Caputo, Civil Action No. 0:22-cv-61693 (S.D. Fla. Filed September 9, 2022) based on similar facts and alleging the same violations. This action is in litigation. See Lit. Rel. No. 25504 (September 13, 2022).

Financial fraud: SEC v. Granite Construction, Inc. Civil Action No. 5:22-cv-04857 (N.D. CA. Filed August 25, 2022) is an action which names the infrastructure construction firm as a defendant. Over a three -year period, beginning in 2017, executive Dale Swanberg, sought to improve the financial results of the struggling company. He did so by recognizing revenue but improperly deferring its expenses. As a result, the firm overstated revenue in 2017 and 2018 by about $62 million. Following the discovery, the stock price for the firm dropped from a high of about $32 per share to about $12. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The complaint credits the firm with self-reporting and cooperation. The company, settled, consenting to the entry of a permanent injunction based on Exchange Act Section 10(b) and other provisions of the federal securities laws. The firm will pay a penalty of $12 million. See also SEC v. Swanberg, Civil Action No 5:22-cv-0459 (N.D. Ca. Filed August 25. 2022)(Action naming firm executive Dale Swanberg as defendant based on conduct above; based on each of provisions cited above except Exchange Act Section 13(b)(2)(B); action is pending); executives James Roberts, Laurel Krzemeniski and Jigisha Desha also reportedly settled with the Commission. See Lit. Rel. No. 25507 (September 15, 2022).

FCPA

In the Matter of Gol Linhas Aereas Inteligentes S.A., Adm. Proc. File No. 3-21094 (September 15, 2022) is a proceeding which names as Respondent the second largest domestic airline in Brazil. Its shares are listed on the NYSE and it files periodic reports with the Commission. The airline is based in Sao Paulo. The action centers on the period 2011 through 2013. Respondent during the period engaged in a bribery scheme. Specifically, officials were bribed in exchange for certain payroll tax and fuel tax reductions. The benefits went to Gol and other airlines. The Order alleges violations of Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B) and 30A. Respondents took remedial efforts. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The company also agreed to pay disgorgement of $51,940, prejudgment interest of $18,060,000 and payment of all but $24.5 million is waived based on financial condition.

Singapore

Agreement: The Monetary Authority of Singapore and the IFSCA executed a Co-operation Agreement to facilitate regulatory collaboration and partnership in FinTech, according to a release dated September 18, 2022.

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Offering fraud actions are one of the largest categories of cases brought by the Enforcement Division. While they are based on a wide variety of claims, many are keyed to whatever is popular in the market place. Recently, for example, a number have focused on crypto assets. Others tie to more traditional themes like quick profits and safety. Still others just go with standard themes like the Commission’s most recent case in the area—marijuana. SEC v. Profile Solutions, Inc., Civil Action No. 1:22-cv-22881 (S.D. Fla. Filed September 9, 2022).

Named as defendants in the action are: the firm, Dan Oran and Leonard Tucker. Mr. Oran is the CEO of the firm; Mr. Tucker, a recidivist, tried to stay in the background as a consultant.

The firm, initially formed in 2006, later reformulated into Profile Solutions, Inc., a Florida firm. CEO and president Oran owns 38.3% of its shares. Mr. Tucker claims to be a consultant but in fact acts as an executive officer of the firm. Previously, he pleaded guilty to three felony counts –securities fraud, conspiracy to commit securities fraud and RICO. He has also settled a securities fraud suit filed against him by the Commission.

Over a two-year period, beginning in 2018, Defendants engaged in a fraudulent scheme built on false statements regarding marijuana. CEO Oran, for example, authorized Profile to issue press releases claiming the company had obtained “preliminary approval” to grow and process medical cannabis and hemp in Kingdom of Eswatini, a nation in Africa formerly known as Swaziland. In fact, the claims were false. At the time the CEO gave the authorization, it was illegal to grow cannabis in Eswatini. That fact was not disclosed to investors. Defendants then made the same misrepresentations about Eswatini to the public.

Defendants also filed a false registration statement with the Commission. While the filing requires that all individuals acting in a management or executive capacity be disclosed, they were not. The position of Mr. Tucker was not disclosed.

Defendants’ scheme was concealed behind a web of lies. Those included: 1) the false clams about Eswatini; 2) the false claims that third parties were ready to distribute the cannabis products of Profile in Central and South America; and 3) the role of convicted felon Tucker. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b). The company and Mr. Oran settled with the Commission. Each consented to the entry of permanent injunctions based on the Sections cited in the complaint. Mr. Oran also consented to the entry of a five-year office/director bar and agreed to pay a penalty of $150,000. See Lit. Rel. No. 25500 (September 9, 2022).

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