by T. GormanPosted on Posted in SECActions

The current volatility of the world’s markets, spawned by the COVID – 19 crisis, has been something of a call to arms for the Commission and its counterparts around the world. The Commission, for example, stepped-up early with targeted relief designed to aid those who may experience regulatory difficulties because of the crisis. In the wake of those steps the New York Stock Exchange transformed if only for now into an electronic medium from its traditional trading floor walked by specialists with a book. Investment advisers and transfer agents obtained exemptions from certain obligations where the crisis may hinder full compliance (here).

A reminder and warning was also published by the Co-directors of the Enforcement Division cautioning issuers about their obligations arising from having material non-public information: “We wish to emphasize the importance of maintaining market integrity and following corporate controls and procedures . . . in these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances . . . Trading in a company’s securities on the basis of inside information may violate the antifraud provisions of the federal securities laws.” Statement from Stephanie Avakian and Steven Pelkin Regarding Market Integrity (March 23, 2020)(here). The statement, a reminder not just to issuers but to all market professionals, come in the wake of multiple reports of trading by those holding significant government positions.

Other regulators around the globe have taken steps keyed to their particular markets, in view of the COVID-19 crisis. The U.K. Financial Conduct Authority, for example, issued a statement on March 23, 2020 noting that while volatility persists as a result of COVID – 19, the markets continue to operate in an orderly fashion. Nevertheless, the U.K has instituted certain short selling bans in line with its standard practice under which it applies, when requested, those of other European National Competent Authorities with respect to certain securities (here). The regulator also urged issuers who intended to publish preliminary financial statements in the next few days to assess if the current unprecedented events warrant delay (here). Other regulators across Europe and the world have also taken steps consistent with the requirements of their markets to deal with the crisis (here).

While issuers and market professionals have been repeatedly confronted with the fall-out from the virus generated crisis, the public and the small investors are no doubt experiencing extreme difficulty with damage imposed daily by gyrating stock prices as savings and retirement funds drop in value and often disappear. Enter the charlatan seeking to take advantage of the pain suffered by others for personal profit with “get-it-back quick,” sure thing, schemes — and it all gets much worse for the small investor. While this is clearly a place for the Commission and other regulators, it is also when all market professionals must step-up and act as guardians and gatekeepers consistent with their professional obligations. We are all in this together.

Print Friendly, PDF & Email
Tagged with: , ,

by T. GormanPosted on Posted in SECActions

The COVID – 19 virus continued to rip across the U.S. this week, essentially closing New York, Illinois and California. A primary election in Ohio was postponed. The Commission issued two orders over the weekend. One deals with transfer agents; the other trading on the NYSE. These follow the orders issued last week (here). In addition, FinCEN issued a warning. Regulators around the globe also issued statements regarding the pandemic and/or the volatility of the markets.

SEC enforcement continued. The agency prevailed in two jury trials, one centered on concealed conflicts and another tied to sham transactions used to misappropriate and ultimately dump stock. The Enforcement Division also continued to file actions. Those included a case against a recidivist for violating a cease and desist order, two offering fraud actions, insider trading and misappropriation.

As the virus pandemic continues, however, completing investigations may become more difficult for the agency. The restrictions being imposed coupled, with social distancing present, obvious difficulties for scheduling and taking testimony in investigations.

Be safe everyone.

SEC

Transfer agents: Transfer agents were granted temporary relief from certain obligations in view of the market conditions resulting from the COVID- 19 pandemic and the extremely volatile market conditions prevailing. Transfer agents will remain subject to their basic obligations and must take certain steps regarding reporting to the Commission to utilize the relief. The Order, entered on March 22, 2020, extends relief through May 30, 2020 (here).

NYSE trading: The agency noticed for immediate effectiveness a proposed rule filing from the Exchange which temporarily closes its trading floor, effective Monday, March 23, 2020. Trading will be conducted electronically, according to the proposed rule noticed on March 21, 2020. The change follows in the wake of the market volatility tied to COVID – 19 (here).

SEC Enforcement – Litigated Actions

Undisclosed fees: SEC v. Westport Capital Markets, LLC, Civil Action No. 3:17-cv-02064 (C.D. Cal. Verdict March 16, 2020). Westport is a dually registered investment adviser and broker-dealer. The advisory was paid fees for investment advice and the management of client accounts. Defendant Christopher McClure is the President CEO, CFO and COO of the advisory. He also personally advised certain clients and had authority to make investment decisions for select clients. Defendants, according to the complaint, charged clients for undisclosed mark-ups on certain securities and 12(b)-1 fees on select mutual fund shares without disclosing these facts to the advisory clients involved. First, beginning in 2011, and continuing for about four years, Westport acquired certain shares at a discount from a group of underwriters. Specifically, the advisory entered into an arrangement with the underwriters pursuant to which it was able to purchase shares in underwritten offerings at a discount. Those shares were then sold to certain advisory clients at full price. The mark-ups were not disclosed to the clients. Over the period the advisory clients paid the firm $1.7 million in advisory fees. In addition, the advisory received about $650,000 in undisclosed mark-ups from Mr. McClure’s advisory clients who purchased shares held in the firm’s account that had been acquired from the syndicate at a discount. Mr. McClure was paid by the firm from the net profits. Second, during approximately the same period, certain advisory clients purchased mutual fund shares that carried 12b-1 fees. The fees were not disclosed to the clients despite the conflict of interest. The advisory received about $130,000 from those fees. The complaint alleged violations of Advisers Act Sections 206(1), 206(3), 206(3) and 206(7). A jury returned a verdict in favor of the Commission and against Westport and Mr. McClure. Remedies will be considered at a later date.

Sham transactions: SEC v. Curative Biosciences, Inc., Civil Action No. 18-cv-925 (C.D. Cal. Verdict March 11, 2020). Curative Biosciences is a microcap issuer with a long and checkered past. Additional defendants in the action included William Alverson, a securities law recidivist who pleaded guilty in 2015 to criminal violations of Securities Act Section 5 and was sentenced to prison; Stephen Patton, the owner of Charlie Don’t Surf, Inc. and Surfside; and Katherine West Alverson. Mr. Alverson was the Chairman of the Board of Curative Biosciences. Ms. Alverson, the Chairman’s wife, was the CEO of the firm. In the fall of 2013 Curative Biosciences filed a Form 10-K with the Commission which stated in part that the firm had previously registered and issued 20.5 million shares under an equity compensation plan on Form S-8. In fact, over 17 million shares were issued to Mr. Patton. The services he performed in exchange for the shares were negligible. Most of the funds from the sale of the shares were sent to Mr. Patton’s firm, Northeast Capital. Much of the money ended up with Defendant Alverson. The filings also claimed that Curative Biosciences could issue 19.1 million shares of common stock under Securities Act Section 3(a)(10) with the approval of a reviewing court to discharge $95,000 in claims against the company by a third party and non-party to a legal action filed against the firm. The third party was Mr. Patton’s Surfside. The shares issued had a value of about 18 times the amount of the debt. The shares were sold with most of the funds being routed back to Mr. Alverson. Months before the Form 10-K filings, the Company, and its COB and CEO, sold about 7 million shares of the stock supposedly under Securities Act Section 3(a)(10). The terms and conditions of the issuance should have been disclosed to a reviewing court when seeking authorization for the issuance. There was no disclosure. Overall about 33 million shares of Company stock was sold. Most of the proceeds were routed back through Mr. Patton and or his entities to the Chairman and his wife. The jury found the defendants liable for violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 10(b) and 20(a). Remedies will be considered at a later date.

SEC Enforcement – Filed and Settled Actions

The Commission filed 5 civil injunctive actions and no administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.

Recidivist: SEC v. Copeland, Civil Action No. 1:20-cv-00589 (N.D. Ohio Filed March 18, 2020). Defendants in the action are Brandon Copeland and his advisory firm, E.G. & Copeland Capital, Inc. Mr. Copeland is the founder, sole owner, CIO and a director of the management firm. It advises E.B. & Copeland Capital L.P or the Fund. This action was brought to enforce an administrative order previously entered by the Commission as to Mr. Copeland. Specifically, in July 2019 Mr. Copeland resolved an administrative proceeding with the Commission. The Order in that proceeding alleged that Mr. Copeland and another individual made false and misleading statements in Form ADV filings for a prior investment adviser formed by Mr. Copeland. The false statements concerned the amount of assets under management, the number of clients, asset allocation, eligibility for registration with the SEC and the expertise of the managers. In resolving the proceedings Mr. Copeland consented to the entry of a cease and desist order based on Advisers Act Sections 206(1), 206(2), 206(4) and 207. The order also barred Mr. Copeland from the securities business and imposed a $25,000 penalty. Mr. Copeland was planning a new advisory that would violate the consent order almost at the time of the July 2019 cease and desist order. Specifically, Mr. Copeland established a new advisory firm – defendant Copeland Capital – and began soliciting investors. In soliciting new investors Defendants detailed the successful history of the firm and Mr. Copeland’s industry expertise. The representations were false. Perhaps more importantly, there was no disclosure of the settlement of the prior action or the order barring Mr. Copeland from the securities business issued by the Commission. The complaint seeks to enforce the 2019 order, an injunction, civil penalties and disgorgement along with prejudgment interest. It alleges violations of Advisers Act Sections 209(d), 203(f) and 204(4). The action is pending. See Lit. Rel. No. 24773 (March 19, 2020).

Insider trading: SEC v. Hirsch, Civil Action No. 9:20-cv-80435 (S.D. Fla. Filed March 17, 2020) is an action which names as defendants Scott Hirsch and Kenneth Friedman. Mr. Friedman is a long time friend of the manager at PedMed Express, Inc., a publicly traded company. In early 2017, prior to the release of the fiscal fourth quarter earnings results, the senior manager furnished the key financial data for that quarter to his friend Mr. Friedman prior to its release. Mr. Friedman furnished the information to Mr. Hirsh. Both men traded profitably, obtaining gains of, respectively, $501,697 and $74,536. Mr. Hirsh also furnished the information to others who traded. The complaint alleges violations of Exchange Act Section 10(b). To resolve the matter each man consented to the entry of a permanent injunction based on the section cited in the complaint. Mr. Hirsch agreed to pay disgorgement, prejudgment interest and a penalty of $74,536, $9,585 and $95,472. Mr. Friedman agreed to pay $501,697, $64,517 and $501,697. See Lit. Rel. No. 24772 (March 19, 2020).

Offering fraud: SEC v. Sotnikov, Civil Action No. 2:20-cv-02784 (D.N.J. Filed March 13, 2020) is an action which names as defendants: Denis Georgiyevich Sotnikov, a Russian national who organized and controlled the entity defendants, and the controlled entities which include Adaptive Technology LLC, AGQ Business Group LLC, ATL Business Group LLC, BO&SA Corporation, DN Industrial LLC and Expert Digital LLC. Defendants used a series of “spoofed websites” – fraudulent sites that appear similar to actual sites – to market CDs. Specifically, Defendants ran ads on the two major web internet search companies. A team took calls from potential clients, giving them instructions on how to purchase the instruments that supposedly were guaranteed by the FDIC, FINRA, SIPC or the NYSE. Since November 2014 the overall scheme has resulted in the spoofing of at least 24 actual financial firms and 8 fictitious financial firms, yielding over $26 million in known investor losses. Defendants in this action have raised over $1.8 million. The complaint alleges violations Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24770 (March 16, 2020).

Offering fraud: SEC v. Beane, Civil Action No. 520-cv-00095 (E.D.N.C. Filed March 12, 2020) is an action which names as defendants Stacey Beane, Justin Deckert and Travis Laska. The complaint here centers on a fraud conducted by Stephen Peters and his investment adviser firm, VisionQuest Wealth Management, LLC – essentially a Ponzi scheme. In connection with that scheme Mr. Peters fraudulently offered and sold about $10.1 million in promissory notes issued by VQ Capital to at least 60 investors. Defendants in this action are alleged to have aided and abetted the violations of Mr. Peters and his firm. The complaint alleges aiding and abetting books and records violations of investment advisers in violation of Advisers Act Section 204 and the related rules. Mr. Deckert resolve the claims as to him, consenting to the entry of a permanent injunction based on the sections cited in the complaint, agreeing to be barred from the securities business and paying a penalty of $30,000. A parallel criminal action is also pending. See Lit. Rel. No. 24769 (March 12, 2020).

Misappropriation: SEC v. Reifler, Civil Action No. 2:20-cv-090511 (D. Nev. Filed March 12, 2020) is an action which names as defendants Bradley Reifler, Forefront Partners, LLC, Forefront Capital Services and Port Royal-NCM, LLC. Defendant Bradley Reifler controls the entity defendants. He has been sanctioned by the CFTC and FINRA and filed for bankruptcy in 2017. In late 2014 he raised $6 million from an investor and misappropriated the funds by claiming they would be used to establish short-term financing for telecom firms. Instead he diverted the funds to his real estate projects and a Reinsurance Trust with a $34 million portfolio of assets. The next year he misappropriated millions from the Reinsurance Trust. He also invested substantial portions of the Trust assets in illiquid and highly risky investments. When this was discovered Mr. Reifler forged documents and counter-party signatures in an effort to conceal the truth. As a result of these actions Mr. Reifler and his entities obtained over $16 million in ill-gotten gains. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1) and 206(2). The action is pending. See Lit. Rel. No. 24768 (March 13, 2020).

Criminal cases

Manipulation: U.S. v. Chartier, No. 17-cr – 372 (E.D.N.Y. Verdict March 18, 2020) is an action in which the jury returned a verdict against Jeffrey Chartier and Lawrence Isen after a six week trial based on their roles in a conspiracy to manipulate and promote shares of four microcap issuers. Each Defendant was convicted of money laundering conspiracy, securities fraud conspiracy, securities fraud and money laundering. The charges tie to a four year conspiracy that began in 2012. Messrs. Chartier and Isen, along with others, ran two boiler rooms. Through that activity they fraudulently inflated the shares of the four issuers and used lies and high-pressure tactics to sell the shares and artificially inflate the stock price of each company. Eventually they dumped nearly $2 million worth of shares on the victims. Mr. Chartier also lied to officials after being arrested. Mr. Isen is a barred broker who was previously convicted of wire fraud conspiracy and orchestrating a manipulation of shares of another company. Previously fourteen others were convicted in this action. The date for sentencing has not been set yet.

FinCEN

COVID – 19: The regulator issued a release urging Financial Institutions to communicate concerns related to COVID-19 while remaining alert to related illegal financial activity on March 16, 2020.

Australia

COVID – 19: The Australian Securities and Investment Commission announced on March 20, 2020 that it is coordinating closely with other regulators on the COVID -19 crisis. The regulator has directed certain large issuers to limit the number of trades of their shares executed each day until further notice. All market participants are required to have business continuity plans in place. The regulator intends to continue closely monitoring the markets.

BaFin

COVID – 19/ Markets: The Federal Financial Supervisory Authority of Germany published a release compiling the prohibitions on short-selling imposed by other authorities in the EU on March 18, 2020. Those included the Spanish CNMV, the Italian CONSOB, the French AMF, the Belgian FMSA, the Greek HCMC and the Austrian FMA (here).

Esma

COVID – 19/Markets: The European Securities and Markets Authority issued a decision on March 16, 2020 temporarily requiring holders of net short positions in shares traded on a European Union regulated market to notify the relevant national competent authority if the position reaches or exceeds 0.1% of the issued share capital after the entry into force of the decision.

Hong Kong

COVID/Markets: The Securities and Futures Commission and the Stock Exchange of Hong Kong published a joint statement for issuers having difficulty with publishing their 2019 year end financial statements in view of the COVID – 19 pandemic on March 16, 2020. Essentially the regulator and exchange urged issuers to consult with the Exchange if they are unable to obtain agreement from the auditors on preliminary results with a view to minimizing disruptions to trading while enduring that the investing public receives sufficient information to make informed decisions (here).

Singapore

COVID – 19/Markets: The Monetary Authority of Singapore announced a US $60 billion swap facility with the U.S. Federal Reserve on March 19, 2020. The facility comes in the wake of strain from the widespread COVID – 19 outbreak. Four days earlier six central banks, including the Federal Reserve, announced the enhancement of the standing US Dollar liquidity swap line arrangement to ease strains in global USD funding markets.

Print Friendly, PDF & Email