This long holiday weekend will long be remembered as a sad one. David Ruder, former Chairman of the Securities and Exchange Commission, and Dean of Northwestern School of Law, passed away on February 15, 2020.
He served as Chairman of the Commission from August 7, 1987 to September 30, 1989. During his term the former Chairman confronted the largest one day drop in the history of securities markets on October 19, 1987. Subsequently, new methods to protect the markets were instituted, including circuit breakers which are still used today. He also initiated the Mutual Fund Directors Forum which he chaired. The Forum is dedicated to educating independent mutual fund directors. The former Chairman is, in addition, one of the co-founders of the SEC Historical Society, a non-profit organization that operates a virtual museum dedicated to the history of financial regulation.
David Ruder joined the faculty of Northwestern University in 1961. He served as Dean of the law school from 1977 to 1985. He will long be remembered by all those he touched. A memorial service will be held at the law school on April 18, 2020 at 2 p.m.
SEC
Proposal: The Commission has proposed to modernize the collection, consolidation and dissemination of market data for exchange listed national market stocks. The goal is to expand the content of NMS data to meet the requirements of the diverse group of investors in the markets today. The proposal seeks to amend 17CFR 242, Rules 600 and 603 and adopt new Rule 614 of regulation NMS. The rule was last updated in the late 1970s (Feb. 14, 2020)(here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 1 civil injunctive action and 1 administrative proceeding last week, exclusive of 12j and tag-along actions.
Conflicts: In the Matter of BPU Investment Management, Inc., Adm. Proc. File No. 54444 (Feb. 13, 2020) is an action which names the dual registered investment adviser/broker-dealer firm as a Respondent. Over a period of at least three years, beginning in late 2013, the firm purchased mutual fund shares for clients that carried 12b-1 fees without adequately disclosing that fact to clients or that the same shares were available at a lower price but for which that the firm would not receive any compensation. The Order alleged a breach of duty and a failure to obtain best execution tied to violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. Respondent also agreed to pay disgorgement in the amount of $582,178, prejudgment interest of $109,929 and a penalty of $235,000. The firm agreed to a series of undertakings which include revamping its internal procedures and disclosing the violations to clients.
Offering fraud: SEC v. Ackerman, Civil Action No. 1:12-CR-1181 (S.D.N.Y. Filed Feb. 11, 2020). Defendant Michael Ackerman, a former registered representative, formed the Q3 Trading Club with two business partners in July 2017. One of those partners was a member of a private Facebook group called Physicians Dads Group. A post on the group web page by that member explained that he was part of a club in which members pooled their funds to trade crypto currencies. Members of the Facebook group could request or be invited to participate. For those who joined the trading profits would be split, 50% with new members and 50% with the three founders. All investment capital was forwarded to an offshore digital trading platform. A second offering began about one year later. It centered on an entity known as Q3 1. Over a 60 day period in late 2018 about $33 million was raised from over 150 investors using a PPM. That offering document told investors that their funds would be invested in a successful crypto trading program that was based on the use of a proprietary algorithmically driven software program. Profits would be split in the same manner as the club described above. Mr. Ackerman, who directed the trading program, made a series of misrepresentations in connection with the offering that focused on the amount of investor cash in the trading program and its results. Only a fraction of the investor cash was used and the published results were vastly overstated. Mr. Ackerman also misappropriated about $7.5 million. The complaint alleges violations of each subsection of Securities Act Section 17(a), and Exchange Act Section 10(b). The case is pending. A parallel criminal action was filed by the Manhattan U.S. Attorney’s Office.
Compliance: SEC v. The Nutmeg Group LLC, Civil Action No. 09-cv-1775 (N.D. Ill.) is a previously filed action against the firm and David Goulding, the former CCO of the organization. The Court entered a final judgment against Mr. Goulding on January 30, 2020, enjoining him from future violations of Advisers Act Sections 204, 206(1), 206(2) and 206(4). He was also ordered to pay a total of $28,935 in disgorgement and prejudgment interest. Mr. Goulding was previously barred by the Commission from association with any registered investment adviser. In the underlying case the Court found that Mr. Goulding helped the firm commingle investor funds with personal assets, misled investors regarding the value of their investments and transferred money to entities controlled by the family. See Lit. Rel. No. 24736 (Feb. 11, 2020).
Financial fraud: SEC v. Shah, Civil Action No. 19-cv-07528 (N.D. Ill.) is a previously filed action against, among others, Ashik Desal. The Court entered a final judgment against Mr. Desal, enjoining him from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The question of a monetary penalty will be considered by the Court at a future date. The underlying action centered on a scheme in which the audited financial statements were falsified in 2015 and 2016 by inflating revenue. Those statements were used in connection with an offering in which over $487 million was raised from investors. See Lit. Rel. No,. 24735 (Feb. 11, 2020).
Financial fraud: SEC v. Crawford, Civil Action No. 19-cv-1022 (S.D. Ohio) is a previously filed action against Timothy W. Crawford and his firm. The Court entered a final judgment by consent, enjoining Mr. Crawford from future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(d)(1), 14(c) and 16(a). It also directed that he pay disgorgement of $5,478, prejudgment interest of $487 and a penalty of $50,000. In addition, the Court imposed a five year officer and director bar and a permanent penny stock bar. The underlying action centered on the sale of interest in oil and gas wells after the firm had lost leases that were its primary source of income, a fact not disclosed to investors. See Lit. Rel. No. 24734 (Feb. 10, 2020).
FinCEN
Remarks: Jamal El-Hindi, Deputy Director, Financial Crimes Network or FinCEN, recently delivered remarks at the SIFMA 20th Anti-Money laundering and Financial Crimes Conference. Those remarks provide an overview of FinCEN’s obligations and AML (NYC, Feb. 6, 2020)(here). His remarks also reviewed the importance of transparency while illustrating the uses of the data collected.
