by T. GormanPosted on Posted in SECActions

Offering frauds have become a key focus of SEC enforcement, a point illustrated in earlier posts. All too often, those conducting the offerings craft cleaver catch lines to lure in trusting investors. Those range from simple claims of quick and safe profits to others which attempt to tie their fraud to the latest hot item such as crypto or marijuana.

While it often appears that imagination knowns no bounds in offering fraud actions, the most recent case may test that notion. The new action is based on the “vision” of one Defendant which could not be executed until technology advanced. SEC v. Contxt, Inc., Civil Action No 2:21-cv-00013 (D.Ut. Filed Jan. 7, 2021).

Named as defendants are: ConTXT, Inc., a firm formed in 2016; Thomas Robbins, an undisclosed owner of ConTXT; Daniel Merriman, also an undisclosed owner of ConTXT; Mark Wiseman, chief marketing officer of ConTXT; and Clark Madsen, President and CEO of ConTXT.

The case centers on two interrelated offering frauds created by Messrs. Robbins and Merriman who met while in prison for unrelated securities fraud cases. The two men were behind the each of the offerings in this action.

The first centered on a trading program tied to ARC Holdings, a firm controlled by the two recidivists. Investors solicited to put their funds into the firm were told that Mr. Robbins had a “spiritual revelation” in 2008 about an exclusive algorithm for trading currencies, commodities, indices, stocks, bonds, ETFs and other instruments. The vision would become a reality in 2011 when technology would catch up with it.

Potential investors were also told that the trading program had virtually no risk. In addition, it had phenomenal rates of return. Those were tied to the proprietary algorithmic trading program. The program supposedly had a history of 20% to 50% per month returns.

Messrs. Robbins and Merriman frequently referenced their religious faith to investors when marketing the trading program. That was consistent with the fact that it was based on a revelation. It also tied to the claim that the LDS Church was a trading client.

To participate in the program, investors executed an agreement with either ARC Holdings or Bot FXD, an affiliate. Under the terms of the agreement 50% of the profits were retained by the firm and 50% was distributed to the investors. Many investors were solicited through finders. In many instances the funds were never invested. Rather, they were diverted to other purposes.

The second program centered on the sale of shares in ConTXT. In 2017 Defendants Madsen and Wiseman, along with their firm, entered into an agreement with Messrs. Robbins and Merriman to raise funds for ConTXT. The firm and its executives were aware that Defendants Robbins and Merriman had criminal records which would have to be concealed.

Under the terms of the agreement between ConTXT and its two executives and Defendants Robbins and Merriman, the two recidivists would receive 37.5 million shares of the company in exchange for a payment of at least $1,018,769.41. The funds would come from selling shares of ConTXT and the trading program.

The ConTXT shares were marketed through the use of a PPM and related documents. Those documents falsely attributed the corporate duties of Messrs. Robbins and Merriman to a nominee. The PPM also contained false financial information for the company.

Defendants Robbins and Merriman continued to solicit investors for their trading program while simultaneously acting as brokers for the sale of ConTXT securities. The same false statements about the “vision” as the predicate of the trading program and its profits were repeated. While making those representations, Defendants Robbins and Merriman told investors about ConTXT, representing that the investment funds would be used for operations – a false statement. In fact, the funds raised were often diverted to repay other investors or to other purposes. The complaint alleges violations of Securities Act Section 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a).

To resolve the action each Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, Defendant Robbins and Merriman agreed to the entry of conduct based injunctions. Each Defendant also agreed to pay disgorgement and prejudgment interest as follows: Robbins, $828,567 and $142,714; Merriman $744,191 and $121,869 along with a penalty of $192,384; Madsen $29,00 and $3,531 and a penalty of $96,384; Wiseman $68,500 and $8,341 and a penalty of $96,187; and ConTXT $269,187 and $32,779.

In the parallel criminal case based on the trading program Mr. Robbins pleaded guilty to securities fraud and money launderings. He was sentenced to serve five years in prison and ordered to pay $10,170,700.69 in restitution. See Lit. Rel. No. 25005 (January 8, 2021).

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by T. GormanPosted on Posted in SECActions

Legislation passed at the close of 2020 reaffirmed the ability of the Commission to seek and obtain disgorgement under a provision added to the Exchange Act. The new provision also extended the statute of limitations to 10 years.

The Office of Inspections issued a Risk Alert based on an executive order focused on investments involving certain PRC based firms. Specifically, the Alert cautions investors regarding transactions involving PRC firms tied to the military in that country.

Be healthy; be safe

Legislation

Statute of limitations: The adverse rulings the Commission suffered in the Supreme Court’s Kokesh and Liu decisions were legislatively overruled in part by a provision tucked into the recently passed National Defense Authorization Act. Section 6501 of the Investigations and Prosecution of Offenses for Violations of the Securities Laws, incorporated in the National Defense Authorization Act, modified Exchange Act Section 21(d), adding language authorizing the agency to obtain disgorgement and reach back up to 10 years rather than the current five years. See e.g., Section 6501(a)(7)(Commission can obtain disgorgement); (a)(8)(extends statute of limitations to 10 years); (a)(8)(B)(can seek equitable remedies including an junction, bar, cease and desist order for up to 10 years).

SEC

Program: The Acting Chairman, joined by the other three Commissioners, ssued a statement regarding the status of a proposed 2011 fraud detection program, announced in a release dated January 7, 2021. Specifically, under an opinion prepared by the DOJ Office of Legal Counsel, the agency previously approved a 2012 proposal for select staff members to be trained by the DOJ to pose as interested investors in responding to telephone, mail or electronic communications by individuals suspected of violating the federal securities laws. The program was an exception to the Privacy Act of 1974. Ultimately the program was not implemented. If the program is implemented in the future, it will have to be approved by the Commission with appropriate restrictions. Those who wish to comment can email to privacyactopinion@sec.gov.

Whistleblowers: The Commission issued over $1.1 million to multiple parties under an order dated January 7, 2021.

Risk Alert: The Division of Examinations issued a Risk Alert dated January 6, 2021. It focuses on Executive Order 13959 (Nov. 12, 2020) which states that beginning on January 11, 2021, U.S. persons will be prohibited from transacting in certain securities and derivatives of Communist China military companies unless the transactions are for the purpose of disinvestment and took place on or before November 11, 2021. The Treasury Department’s Office Foreign Asset Control has published guidance concerning the Executive Order (here).

SEC Enforcement – Filed and Settled Actions

The Commission did not file any new civil injunctive actions or administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters. Note: Two actions filed Friday that will be reported later this week.

Misappropriation: SEC v. Connell, Civil Action No. 17-cv-00831 (S.D.N.Y.) is a previously filed action which named as defendant Barry F. Connell, formerly an employee at a major financial institution. Over about a one year period, beginning in late 2015, Mr. Connell moved approximately $5 million between client accounts and wired funds from others. About 100 transactions were involved. Defendant misappropriated the funds. To resolve the matter Mr. Connell consented to the entry of a permanent injunction based on Advisers Act Sections 206(1) and 206(2). He was also ordered to pay disgorgement of $5,148,651 that is deemed satisfied by the restitution ordered in the parallel criminal case. The Commission issued an order barring him from the securities business and from participating in any penny stock offering. Previously, Mr. Connell pleaded guilty in the parallel criminal action and was sentenced to time served which was approximately 36 months. He was also ordered to pay forfeiture and restitution in that case. See Lit. Rel. No. 25004 (Jan. 5, 2021).

CFTC

MOU: The Commodity Futures Trading Commission and the European Securities and Markets Authority or ESMA announced the signing of a new Memorandum of Understanding regarding certain derivative clearing organizations on January 7, 2020. The agreement enhanced cooperation as to large U.S. Central Counterparties operating in the EU. The new agreement builds on the 2016 CFTC-ESMA MOU (here).

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