by T. GormanPosted on Posted in SECActions

Phillip Kenner began his career as a Boston based financial advisor. He developed a list of clients which included professional hockey players from the National Hockey League. Today he might be continuing to build his investment advisory business by adding to his all-star client list. He is not.

Today Mr. Kenner is preparing to serve 17 years in federal prison. He is also forfeiting $17 million along with all of his right, title and interest in assets that include an oceanfront resort in Mexico, real property in Hawaii and a Falcon 10 jet airplane. U.S. v. Kenner, No. 13-CR-607 (E.D.N.Y. Sentencing Oct. 5, 2020).

Defendant Kenner was convicted on counts of conspiracy and securities fraud at a trial where 40 witnesses testified and over 1,000 exhibits were introduced. The exhibits included audio recordings made by several victim investors memorializing how the one-time investment adviser siphoned millions of investor dollars into a web of holding companies from which he diverted funds for his enterprises, real estate ventures and car racing ventures.

The convictions centered on two schemes. The first began in 2003. It centered on a Hawaii real estate investment scheme. Mr. Kenner convinced a number of investors to put up $100,000 each for land development for luxury estates. The investors also opened personal lines of credit collateralized by their personal stock, bonds and saving accounts worth at least $10 million. The investors were assured the lines would only be used for development. Those lines were to be replenished since Lehman Brothers Holding, Inc. agreed to loan the project up to $105 million in August 2006.

In fact, Mr. Kenner borrowed nearly all of the funds available on investor lines. The cash was diverted to his personal ventures.

Another scheme involved Eufora LLC, founded by a co-defendant. While the co-defendant testified that in May 2009 the venture was nearly worthless, Mr. Kenner convinced clients to invest. Subsequently, Mr. Kenner and the co-defendant wired about $1.5 million of investor capital to accounts he and others controlled. The money was used for their benefit.

Finally, by early 2009 the Hawaii investor credit lines received notices of default. Mr. Kenner has successfully concealed for years the fact that he had wiped out the investor funds. Despite the defaults Mr. Kenner and a co-defendant convinced the investors to invest in a Global Settlement Fund. More than $2.9 million dollars was put into the fund. Defendant Kenner and his co-defendant diverted the investor money to themselves. No more – or at least not for 17 years.

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by T. GormanPosted on Posted in SECActions

SEC Enforcement may be continuing a trend that seemed emerge at the end of the Government fiscal year – filing financial fraud cases. As the bevy of cases were filed to close the fiscal year, a number were based on financial fraud claims. That seems to be continuing as the new fiscal year is launched. One new financial fraud action was filed while two others were resolved. A fourth case initiated centered on promoting crypto ICOs.

Be safe and healthy this week

SEC

Proposed order: The Commission filed a proposed order on October 9, 2020 under which there would be a conditional limited exemption to the requirements of Exchange Act Section 15(a) for finders. Specifically, the proposal suggests that there be two tiers of finders based on the notion that finders are important for capital formation and investor protection, particularly for small investors (here).

Staff report: A staff report on U.S. Credit Market Interconnectedness and the Effects of the COVID-19 Economic Shock was released on October 5, 2020 (here)

SEC Enforcement – Filed and Settled Actions

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

Financial fraud: SEC v. SAExploration Holdings, Inc., Civil Action No. 1:20-cv-08423 (S.D.N.Y. Filed Oct. 8, 2020) is an action which names as defendants the firm, whose shares are listed on NASDAQ and which provides seismic data acquisition and logistical support. Others named as defendants are the firm’s CEO, Jeffrey H. Hastings, its CFO, Brent N. Whiteley, the firm founder, Brian A. Beatty, and the executive v.p. of operations, Michael J. Scott. Over a four-year period, beginning in 2015, Defendants orchestrated a financial fraud which permitted SAE to recognize about $100 million in revenue from transactions that supposedly involved a customer. In fact, the deals were with a firm named Alaskan Seismic Ventures, LLC, set up by company executives and controlled by Defendants Hastings and Whiteley. Alaskan Seismic was established to have a data library that was purportedly unrelated to SAE. That company was established with about $5.8 million in funds misappropriated from SAE. A portion of the misappropriated funds were kept by the executives. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) and SOX Section 304(a). The case is pending. See Lit. Rel. No. 24943 (Oct. 9, 2020).

Financial fraud: SEC v. Nanotech Engineering, Inc., Civil Action No. 19-cv-3633 (D.D.C.) is a previously filed action which named as defendants the firm, its CEO David Sweaney, the CFO Michael J. Sweaney and the COO Jeffery Gange. The firm was supposedly involved with solar energy and claimed to have a revolutionary panel it called the “Nanopanel.” The Court entered a final judgement by consent against the CEO, David Sweaney. The judgement imposed a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). It also imposes a permanent officer/director bar and directs the payment of disgorgement and penalties as determined on motion by the Commission. The litigation will continue since the Commission is filing an amended complaint which alleges that the Nanopanel does not exist and the firm is a sham. See Lit. Rel. No. 24942 (Oct. 8, 2020).

Crypto offerings: SEC v. McAfee, Civil Action No. 20 Civ. 8281 (S.D.N.Y. Filed Oct. 5, 2020) is an action which names as defendants John McFee and his body guard Jimmy Watson Jr. The complaint alleges that Defendant McAfee promoted multiple ICOs on Twitter. In those communications, and others with investors, he falsely appeared to be independent, claimed he did not profit from promoting the offerings and that he had invested in some of the offerings. The claims were false. He was paid about $23 million in digital assets and had not invested in the offerings. Mr. Watson was paid at least $316,000. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and 17(b) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office filed a parallel criminal action against Mr. McAfee. See Lit. Rel. No. 24941 (Oct. 6, 2020).

Financial fraud: SEC v. Hill International, Inc., Civil Action No. 1:20-cv-02143 (E.D. Pa.) is a previously filed action which named as defendants the firm, former senior accountant Nicholas Tornello and others. The complaint alleged that the firm attempted to “bleed” losses out that were suffered as a result of foreign currency transactions rather than make the correct entireties. Mr. Tonello consented to the entry of a permanent injunction based on Exchange Act Sections 13(a) and 13(b)(2)(A). In a related administrative action Mr. Tornello was suspended from appearing and practicing before the Commission as an accountant with the right to reapply after 1 year. The company and its former chief accounting officer previously settled with the Commission. See Lit. Rel. No. 4185 (Oct. 5, 2020).

DOJ

Report: The Department of Justice published a report titled The Cryptocurrency Enforcement Framework on Friday, Oct. 9, 2020 (here). This is the second edition of the work. It provides an overview of the assets, discusses various legal and regulatory tools the government may use and reviews difficulties that may be encountered with these assets.

FinCEN

Ransomware: Treasury issued, on October 1, 2020, an advisory regarding ransomware to increase awareness and thwart cyber attacks (here).

BaFin

Trading: The Federal Supervisory Authority of Germany published guidelines for trading CFD or Contracts For Difference on September 30, 2020 (here).

ESMA

Program: The European Securities and Markets Authority published its 2021 Work Program on October 2, 2020 (here). The Program details the regulator’s priorities and areas of focus over the next twelve months in support of its mission to enhance investor protection and promote stable and orderly financial markets.

U.K.

Remarks: Lisa Osofsky, the Director of the Serious Frauds Office, delivered remarks at the Royal United Services Institute, October 8 2020. Her remarks focused on the future challenges in economic crime (here).