by T. GormanPosted on Posted in SECActions

Raymond J. Lucia, owner of a Commission registered investment adviser, concluded an administrative proceeding that charged him with various violations of the Advisers Act in September 2012. In the Matter of Raymond J. Lucia Companies, Inc., Adm. Proc. File No. 3-15006 (June 16, 2020). While surely not the longest running administrative proceeding, it is clearly one of the most significant.

The case centered around marketing efforts by Mr. Lucia and Raymond J. Lucia Companies, Inc., the registered adviser, regarding their “Buckets of Money” investment program. Specifically, at various seminars investors were shown a slide presentation regarding the strategy which keyed to allocating assets to short, medium and long term buckets. Part of the strategy involved periodically reallocating assets. The approach was supposedly based on historical tests that were called “backtests” presented as tests of the strategy over years.

While the backtests were supposed to be an accurate presentation of the historical performance of the strategy, the Commission alleged that they were materially misleading. Specifically, the agency alleged that the backtests did not follow the buckets of money approach and failed to disclose key issues regarding fees and other matters. The Order alleged violations of Advisers Act Sections 206(1), 206(2) and 206(4).

Following a hearing before an ALJ and an appeal to the Commission Respondents were found to have violated the sections alleged. A cease and desist order was entered as to the firm and Mr. Lucia based on the sections cited. The firm was directed to pay a penalty of $250,000 while Mr. Lucia was ordered to pay $50,000. Mr. Lucia was also barred from the securities business and the investment adviser registrations were revoked. The agency rejected the claim that the ALJs were constitutional officers subject to the Appointments Clause. The Court of Appeals denied the petition for review.

The Supreme Court reversed. The question decided was whether SEC ALJs must be appointed in accord with the Constitution’s Appointments Clause. The Court held that their retention is subject to the provision. Thus, the Court concluded that Petitioner Raymond J. Lucia and his firm were entitled to a new hearing before a different ALJ appointed in accord with the Constitution. Raymond J. Lucia, vs. Securities and Exchange Commission, 138 S.Ct. 2044 (June 21, 2018).

On remand the Commission entered an order making finding, based on consent, detailing the failings of the Buckets of Money presentations. The agency also concluded that there were violations of the Sections of the Advisers Act cited above. Accordingly, the Commission entered a cease and desist order as to Mr. Lucia and his firm based on the statutory sections cited and barred Mr. Lucia from the securities business with the right to apply for reentry after three years from the effective date of the original Commission Opinion, September 3, 2015. Mr. Lucia was also directed to pay a penalty of $25,000.

The ruling in Lucia by the Supreme Court is significant. It represents a key interpretation of a Constitutional provision which required the way Administrative Law Judges had been retained by the Commission and countless other agencies to be altered. Yet little has changed for Mr. Lucia and his firm. To be sure, the remedies imposed on remand from the Supreme Court are less severe than those initially imposed by the agency. Mr. Lucia still must apply for reentry — the battle continues.

One final question remains. What would have happened if the Commission had adopted the ruling of the court in Hill v. SEC, 1:15-cv-01801 (N.D. of Ga. Filed June 8, 2015). There the court concluded for the first time that the agency had violated the Constitution’s Appointments Clause with regard to the retention of its ALJs. The court gave the Commission a period to conform its practices to its ruling regarding the appointment of ALJs before entering an injunction. The Commission refused. Years later – and following a number of court battles and decisions across the country – the agency was essentially required to confess error by the Solicitor General as the briefs were being prepared for Mr. Lucia and the agency in their Supreme Court battle. Mr. Lucia – and all of us – can only wonder.

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by T. GormanPosted on Posted in SECActions

Pump-and-dump schemes taking advantage of unsuspecting investors have long been a Commission staple. Over the years the agency has brought an almost continuous stream of these cases, all with a familiar pattern: The manipulator secretly gets control of the shares, moves the stock price up either with manipulative trading and/or false information in the form of press releases, emails or statements, and then dumps the secretly held shares once the price reaches a sufficient level. The manipulator has huge profits; the retail investors who thought they were buying a sure thing have nothing.

The Commission’s latest case in this area is a variation on a theme using a complex structure but based on the same nuts and bolts elements. The scheme is run by Canadian citizens using off-shore entities who conceal the fact that the shares are held by insiders. Thus it could only be sold if registered or dribbled out in limited quantities under Rule 144. It was then tied to the current pandemic. The end result – manipulators makes money while retail investors lose. SEC v. Gomes, Civil Action No. 1:20-cv-11092 (D. Mass. Filed June 9, 2020).

The Commission’s complaint, announced June 11, 2020, names five individuals and six offshore entities as defendants. The scheme generated over $25 million in profits from the illegal sales of shares in a number of microcap entities. Although the Commission suspended trading in the shares of four of the entities, the orders were not in time to save the retail investors.

Named as defendants were five Canadian citizens: Nelson Gomes, Michael Luckhoo, Shane Schmidt, Douglas Rose and Kelly Warawa. A series of entities based in Hong Kong with one exception were also named as Defendants. The manipulation involving Sandy Steele shares, a firm formed in Minnesota decades ago, is typical of each. Defendant Schmidt had the firm make filings in early 2019 regarding a claimed change in control to a person named John Scott — actually Defendant Schmidt.

The next step was to issue millions of shares of stock. Defendant Schmidt, in conjunction with other individual defendants, had the firm issue millions of what purported to be unrestricted shares of stock. The stock was supposedly from a promissory note Sandy Steele had entered into with Arectex Capital, Inc. about three years earlier. The note was then sold in four equal segments to the original four Sandy Steele shareholders. The firm’s transfer agent issued 3 million shares to each of the four shareholders under the terms of the notes based on a lawyer’s letter. The shares were not restricted. The shares eventually were moved to Mr. Schmidt who also arranged to have a block of restricted preferred shares issued to Mr. Scott – actually Mr. Schmidt.

By mid-September a stock which had been trading for a few cents per share was about have a share and volume increase. Mr. Schmidt created a corporate website for the firm, IP address Vancouver, Canada. The website falsely claimed the company was manufacturing and selling garments, as reflected in the attached pictures. The stock price began to move up.

By March 2020 the group employed an email marketing service to further boost the stock price. An email was sent at the behest of the group from “PennyStockTomorrow.com” noting that investors who wanted to capitalize on COVID-19 should acquire shares since they were set to increase in value by 200%. Volume in the stock spiked up in late March to over 3 million shares per day. Defendants began dumping their shares. Although the Commission eventually halted trading many of the shares had been sold.

The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 10(b), 13(d), 15(b) and 20(e). The case is pending.

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