by T. GormanPosted on Posted in SECActions

The first quarter of 2020 ended with the markets plummeting to new lows and much of the country shuttered in an effort to avoid transmitting a the COVID – 19 virus. SEC Enforcement finished the quarter by not filing any new cases in the final days of the period.

During the first quarter the agency prevailed in four jury trials while filing a series of actions. The cases involved a range of issues including those focused on investment advisers, manipulation, insider trading, financial fraud and the FCPA. While the number cases initiated during the first quarter of the decade would not suggest a record setting pace, what is more important is the type and quality of the cases. The focus was, and in probability will continue to be, the protection of main street investors. If, as has been repeatedly stated, that is the goal, then the question is whether the types of cases being investigated and brought is accomplishing that goal.

The answer, at least in part, should be apparent from an examination of the cases brought. Below is a sampling of those action.

Offering frauds: This was far and away the largest category of cases initiated during the quarter. The actions were based on a variety of fraudulent schemes. Some were simple frauds that were little more than Ponzi schemes. Others were more sophisticated but ended with the same result – the investors lose. In SEC v. Findley, Civil Action No. 3:20-cv-00397 (D.Conn. March 25, 2020) Bernard Findley used a firm called Halitron, Inc. that he controlled to fleece investors and enrich himself through a debt offering. Investors were solicited to purchase the corporate debt of a firm that appeared to have assets but really had little to offer except the opportunity to buy discounted shares. At the time of the sales Mr. Findley manipulated the share price, using a series of false press releases. The result: Investors purchased the debt; Mr. Findley took the cash.. The investors got the shares. While the deal had some of the hallmarks of a corporate transaction, in reality it was a sham. See also SEC v. Curative Biosciences, Inc., Civil Action No. 18- cv-925 ((C.D. Cal. Verdict March 11, 2020)(insider used a variety of devices to secretly sell shares into the market and recycle the money back to himself; jury returned a verdict in favor of Commission).

Perhaps more typical of many of the cases in this area is SEC v. ARO Equity, LLC, Civil Action No. 1:20-cv- 10027 (D. Mass. Filed Jan. 8, 2020). Defendant Thomas Renison was a state licensed insurance agent who had been barred from the securities business by the state of Maine and from associating with investment advisers by the Commission. Nevertheless, Mr. Renison sold notes in his firm, ARO Equity, primarily to senior citizens, stressing safety but omitting mention of his past. The safety seemed to be missing as the investor capital was used to fund other businesses – they failed. Large fees were paid prior to that time to others, however. In the end the investors got nothing. The complaint alleges violations of Exchange Act Section 10(b) , Securities Act Section 17(a), and Advisers Act Section 206(1) and 206(2). The case is on-going.

Investment advisers: Another group of cases centered on investment advisers. This category of enforcement actions has continued to grow in recent years and is at least equal in size to what had been for year the focus of Enforcement – corporate actions. The cases in this area center on a series of topics including the overcharged fees, undisclosed conflicts, a failure to adhere to or implement disclosed policies and the misappropriation of client funds.

Typical of these cases is SEC v. Westport Capital Markets, LLC, Civil Action No. 3:17-cv-02064 (C.D. Cal. Verdict March 16, 2020), an action in which the Commission secured a favorable jury verdict. Westport is a dual registered investment adviser and broker-dealer controlled by Christopher McClure, also a named defendant. The case centered on two points. First, Defendant made a deal with an underwriter to secure shares being underwritten at a discount. Those shares were taken into the firm’s inventory and later resold to advisory clients at face value without disclosing that the seller was the firm or the arrangements. Second, mutual fund shares were sold to advisory clients on which the firm was paid 12b-1 fees without disclosure. The jury concluded that the Defendants had violated Advisers Act Sections 206(1), 206(2), 206(3) and 206(7).See also In the Matter of Nay Ventures, Adm. Proc. File No, 3-19728 (March 12, 2020)(Exempt Texas adviser failed to properly comply with the policies and procedures it told investors had been adopted); In the Matter of Cannell Capital, LLC, Adm. Proc. File No. 3-19689 (Feb. 4, 2020)(Registered adviser failed to maintain and implement an effective insider trading policy).

Insider trading: The agency has long focused on cases in this area. SEC v. Chen, Civil Action No. 1:18 – cv-1657 (D. Mass. Verdict Feb, 3, 2020) is typical of the actions brought during the first quarter. In this case two couples lived in the same small town, Mr. & Mrs. Charlie Chen and a second Couple. Each couple had two daughters attending the same high school. Husband of Couple was employed at VistaPrint and regularly obtained inside information about the firm and its financial results. Over a two-year period Mr. Chen repeatedly purchased options VistaPrint’s stock. In every instance except two he had profitable trades. He had, however, correctly predicted the price movement of the stock in the two instances which were exceptions, he just did not make a profit. When the FBI questioned Mr. Chen about the trading, he denied knowing anyone at VistaPrint. When the agents asked about Husband, Mr. Chen claimed he only knew him through his daughters. Later, when quested by the SEC staff during its investigation, Mr. Chen invoked the Fifth Amendment. The jury returned a verdict in favor of the Commission.

Manipulation: This is another traditional focus of SEC Enforcement. An example of the cases brought during the quarter in this area is SEC v. Bajic, Civil Action No. 120-CV-00007 (S.D.N.Y. Filed Jan. 202020), an international market manipulation allegedly executed by a series of defendants. Those defendants included Steve Bajic, Rajesh Taneja, Blacklight S.A. and eleven other individuals and off-shore entities. Mr. Bajic is Canadian; Mr. Taneja is a citizen of Vietnam; Blacklight is a controlled foreign corporation; each entity defendant is off-shore. Various off-shore entities were used to disguise the public company insiders of various firms who participated in the scheme. Their stock was dumped on the public as the scheme progressed and the share price was manipulated. Overall about $7.7 million was reaped as profits over a four-year period. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). See also SEC v. Ciapala, Civil Action No. 1:20-cv-00008 (S.D.N.Y. Filed Jan. 2, 2020)(companion action). Each case is in litigation.

FCPA: The Foreign Corrupt Practices Act is another long time focus of SEC Enforcement, a trend that continued in the first quarter of 2020 with the filing of In the Matter of Cardinal Health, Inc., Adm. Proc. File No. 3-19718 (Feb. 28, 2020). Cardinal is a global healthcare firm based in Ohio. It entered the Chinese market in 2010, acquiring a firm that was the exclusive distributor in that market for a large European dermo cosmetic company. After determining that the risk was low, Cardinal decided not to impose its full array of internal controls, which included FCPA provisions, on the firm. Over a four year period, beginning in 2013, employees of the new subsidiary were given about $250 million in marketing funds. There was little documentation or control. Significant portions of those funds were transmitted to state officials. Over the period Cardinal profited by about $5.4 million. Its subsidiary has been enriched. The Order alleged violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). The action was resolved with a consent to a cease and desist order based on the sections cited in the Order and payment of disgorgement in the amount of $5.4 million along with prejudgment interest of $916,887. The firm will also pay a penalty of $2.5 million. The Commission considered the fact that Cardinal self-reported, cooperated and undertook remedial acts.

Conclusion: The first quarter of the new decade opened with promise and ended with the United States and much of the world effectively at war with a virus. The shift from promise to survival has been difficult to say the least.

No doubt that same shift has been difficult for the Commission. Nevertheless, the agency filed a series of actions. Some were complex. Others were simple. Some were in traditional areas like insider trading and FCPA. The focus over the quarter has been the retail investors, a point clearly addressed by some of the cases as illustrated above. If that is the litmus test rather that numbers of cases brought the question is if the goal was achieved. The answer to that question is, like many things, in the eye of those who behold the actions above. The trends being etched by the program are also evident from the cases above – the work output of the Division of Enforcement.

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by T. GormanPosted on Posted in SECActions

Those who had the opportunity to work with him or just know him, morn his loss. While many in corporate America will join, there are some who may not. Regardless, everyone should be able to agree that Stanley Sporkin was a dedicated public servant during his tenure at the Commission and in other parts of the government the likes of which we may not see again.

As the COVID -19 pandemic continues, the Commission and other regulators are repeatedly stepping – up to provide targeted relief to those in need. While there is no end in site at the moment, there is no doubt it will come to a conclusion. Whenever that occurs, and whatever the world looks like then, preparation will be key. That will begin by properly conducting business now to the extent possible and with careful preparation. Now is the time to begin.

SEC Enforcement, with a warning the co-directors of the Division of Enforcement cautioned against the misuse of inside information. The agency also filed an insider trading action. Be safe; be healthy.

SEC

In Memory: Ret. Fed. Judge Stanley Sporkin, former Director of the Division of Enforcement, passed away on Tuesday, March 23, 2020. He served as the Director of the SEC’s Enforcement Division its early days in 1970s, as the General Counsel of the CIA during the Iran-Contra incident and as a distinguished jurist on the federal district court bench for years. To say he will be missed is not nearly sufficient. While many are called irreplaceable, few actually are. Stanley was and is. Rest well.

Relief – COVID – 19: Additional temporary regulatory relief and assistance was extended to market participants impacted by the virus on March 26, 2020 by the Commission. Specifically, certain temporary relief was extended relating to Form ID, to Regulation A, for crowdfunding and for those obligated to file annual updates to Form MA for municipal advisors (here).

Relief – COVID – 19: The Commission extended certain conditional exemptions from the reporting and proxy delivery requirements for issuers, funds and investment advisers impacted by the COVID – 19 virus. The Division of Corporation Finance issued related disclosure and other guidance on March 25, 2020 (here).

COVID – 19: The Commission Provided Temporary Additional Flexibility to Registered Investment Companies re COVID – 19 on March 23, 2020 (here)

Statement: The Co-Directors of the Division of Enforcement, Stephanie Avakian and Steven Pekin, issued a statement regarding the handing of material non-public information (here).

Whistleblowers: The Commission awarded over $570,000 to two whistleblowers who were instrumental in bringing charges that halted on-going, wrongful conduct.

SEC Enforcement – Filed and Settled Actions

The Commission filed 7 civil injunctive actions and no administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.

Offering fraud: SEC v. Root, Civil Action No. 24783 (Mach 26, 2020) is an action which names as a defendant Adam Root, one of the founding partners of unregistered investment adviser Tricent Capital, LLC. Over a period of about one year, beginning in early 2016, Mr. Root is alleged to have misled potential investors when soliciting investments for the firm. The inaccurate statements concerned the nature of certain investments that had to be “committed to others,” the number of start – up entities for which there were investments and the other uses of capital. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3). To resolve the action Mr. Root consented to the entry of a permanent injunction based on the sections cited in the complaint and the entry of a 10 year officer and director bar. He also agreed to pay a penalty of $10,000. See Lit. Rel. No. 24783 (March 26, 2020).

Insider trading: SEC v. Mahan, Civil Action No. 1:20-cv-00487 (M.D. Pa. Filed March 26, 2020) is an action which names Rite Aid employee David M. Mahan as a defendant. The case centers on the proposed acquisition of Walgreens Boots Alliance, Inc. by Rite Aid which was scheduled to close by January 27, 2017. One day before a news article was published which stated the deal likely would not be approved by the FTC, Mr. Mahan sold all of his shares and employee options. When the article appeared the next day, the stock price dropped 13%. Mr. Mahan avoided a potential loss of over $87,000. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the matter Mr. Mahan consented to the entry of a permanent injunction based on the sections cited in the complaint. He also agreed to pay disgorgement of $87,277, prejudgment interest of $12,107 and a penalty of $87,277. See Lit. Rel. No. 24782 (March 26, 2020).

Offering fraud: SEC v. Findley, Civil Action No. 3:20 – cv- 00397 (D. Conn. Filed March 25, 2020) is an action which names as defendants Bernard Findley and Halitron, Inc. Mr. Findley is the Chairman and CEO of Halitron, an issuer which claims to be an “equity holding company” but has no apparent business. Over a two year period Defendants engaged in a scheme that enabled them to raise funds from investors through the sale of debt. In 2016 Halitron claimed to have about $300,000 in revenue. By the next year that amount decreased to zero. Nevertheless, Mr. Findley published over the period a series of press releases discussing an about to be completed audit of the firm, a stock repurchase program and other financial transactions. Each was false. Yet Defendants were able to induce investors to purchase debt in return for the opportunity to acquire discounted shares. The funds raised benefitted Mr. Findley, not the investors. The complaint, which is pending, alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 24781 (March 25, 2020).

Bared broker: SEC v. Hunter, Civil Action No. 3:20-cv-00391 (D. Conn. Filed March 24, 2020) is an action against Donald Hunter, a former registered broker who was barred from the brokerage business by FINRA in 2012. Following that action Mr. Hunter established a firm named Your Angel Finance, a private fund. He solicited investors claiming that the fund would acquire shares of start-ups with the investment capital. In fact, Mr. Hunter acquired the shares of a drug research firm and was actually selling them to shareholders without disclosing that fact. He also did not disclose the fact that he had been barred by FINRA for defrauding his brokerage clients. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), 206(3) and 206(4). The case is pending. See Lit. Rel. No. 24780 (March 25, 2020).

Unregistered dealer: SEC v. Keener, Civil Action No. 20-cv-21254 (S.D. Fla. Filed March 24, 2020) is an action which names as a defendant Justin Keener. Over a three year period, beginning in January 2015, Mr. Keene repeatedly purchased convertible notes from microcap issuers, converted the notes at a discount to market and then sold the shares into the market. By repeatedly engaging in this conduct, and maintaining a stable of about 20 employees, Mr. Keener was able to generate over $21.5 million in profits. The complaint alleges violations of Exchange Act Section 15(a) since he was not a registered dealer as required. The case is pending. See Lit. Rel. No. 24779 (March 24, 2020).

Offering fraud: SEC v. Lahr, Civil Action No. 5:20 (E.D. Pa. Filed March 24, 2020) is an action which names as defendants Todd Lahr and Thomas Megas. Defendant Lahr is an attorney licensed to practice in Pennsylvania. He was also a Commission registered investment adviser for several years and is the founder of THL Holdings, LLC and co-founder of Merran Global Holdings, Inc. both private Nevada firms. Defendant Megas, a British National resident in Switzerland, is the co-founder of Ferran. In early 2012 Mr. Lahr began soliciting investors to purchase interests in THL Holdings. Those solicited are primarily clients from his law practice and friends. Potential investors were told that THL had indirect mining interests in Canada and New Guinea. Over a two-year period about $1.4 million was raise from 20 investors in THL Holdings. Those investor were assured that their funds would be invested in the company. Nevertheless, a large portion was misappropriated. In 2015 Defendants began implementing a plan for the sale of Ferran shares. Part of the plan was to use portions of the offering proceeds to repay some of the THL Holdings investors. About $140,000 was raised from four investors, one of which had purchased shares in THL Holdings. The investors were assured their funds would be utilized in connection the same foreign mining interest discussed with the THL Holdings share purchasers. Again, portions of the offering proceeds were misappropriated. The complaint, which is pending, alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) and Exchange Act Section 10(b). See also Lit. Rel. No. 24778 (March 24, 2020).

Offering fraud: SEC v. Tarver, Civil Action No. 5:20-cv-00056 (N.D. Tx. Filed March 10, 2020). Named as defendants in the action are Joe Leland Tarver, Rock and Roll Cycles, LLC and Cycle for Life, Inc. Mr. Tarver is the managing member of each entity. Over a three-year period, beginning in July 2014, Mr. Tarver raised just under $500,000 from 18 investors who purchased promissory notes from one of the entity defendants. Those notes carried interest rates that ranged from 6% to 9%. Investors were told that the funds would be used to manufacture custom tricycles for disabled children and adults. Interest on the notes would be paid from the profits. When the promised interest was not paid, some investors filed suit. Nevertheless, the note sales continued. There were no profits to pay investors. The complaint, which is pending, alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 2477 (March 23, 2020).

Insider trading: SEC v. Kendricks, Civil Action No. 2:18-cv-04739 (E.D. Pa.) is a previously filed action which named as a defendant professional football player Mychal Kendricks and his friend Hamed Ettu. The complaint alleged that on August 29, 2018 Defendants received inside information from a co-defendant, an analyst at an investment bank, about several pending mergers. Mr. Kendricks traded profitably on the basis of the information, securing about $1.2 million in illegal profits. Mr. Ettu had about $93,000 in trading profits. The Court entered final judgments, based on consent, enjoining each Defendant from future violations of Exchange Act Sections 10(b) and 14(e). Mr. Kendricks was directed to pay disgorgement of $1,188,075 while Mr. Ettu will pay $73,244 (adjusted for $20,000 paid to a co-defendant). The amounts ordered were deemed paid by the forfeiture ordered in the parallel criminal case in which both men pleaded guilty. Mr. Kendricks has not been sentenced. Mr. Ettu was sentenced to probation for a term of 3 years, including 9 months of home detention. See Lit. Rel. No. 24776 (March 23, 2020).

Australia

Best interest: The Australian Securities and Investment Commission concluded that Anthony Hilsley failed to furnish advice to a client that was in his best interest. At the time Mr. Hilsley was a registered representative of RI Advice Group Pty Ltd. More recently he has been affiliated with Fiducian Financial Services Pty Ltd. In rendering the advice Mr. Hilsley did not identify or make sufficient inquiries into his client’s personal circumstances or properly consider his investment objectives and needs. In some instances the representative also failed to consider existing products when rendering advice. Accordingly, the Commission banned him from the business for a period of four years.

Singapore

COVOD-19: The Monetary Authority of Singapore issued an advisory to all financial institutions telling them to implement safe distancing measures in all aspects of their business operations, particularly those involving customers. The statement is part of a national effort to reduce the risk of further local transmission of the virus.

U.K.

Banks: The Financial Conduct Authority issued a statement noting that banks and building societies should keep branches and contact centers open where possible “as they are deemed essential for civil and commercial functions.”

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