In this first week of a new year, the question is “what direction will SEC enforcement chart as 2022 unfolds?” The answer is critical to those conducting any type of risk analysis or evaluating the creation of a compliance system or modifying an existing one.

Direct comments from the Chair and Commissioners can give clues but more often than not focus on areas of interest to the agency for a variety of reasons but not necessarily on those on Enforcement can pursue. A good example is crypto. Much has been said about this area. In fact the agency has little regulatory authority in the area as Chair Gensler has admitted beyond the cases typically brought – unregistered securities, unregistered brokers, and similar matters. And, a quick review of recent statistics shows few cases are being brought that center on the area.

At the same time, comments from the agency do give some indication of the future path for the Division of Enforcement. For example, it seems clear that gatekeepers will receive more attention. Thus, there may be more cases brought involving professionals. Whether the new actions will rival those brought initiated during the early years of the Division when a number of very high profile cases were brought against attorneys and other professionals remains to be seen.

To try and chart the future direction of the Division, upcoming articles will analyze the results from the recently completed year, focusing on those cases and other factors which may offer clues to any new approach or initiative being utilized by Enforcement.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 5 civil injunctive actions and 4 administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.

Financial fraud: SEC v. Medallion Financial Corp., Civil Action No. 1:21-cv-11125 December 29, 2021) names as defendants the financial firm, its CEO and president Andrew Murstein, and Lawrence Meyers and his firm, Ichabod’s Cranium, Inc. Over a three year period, beginning in 2014, CEO Murstein tried to boost the valuation of the firm. Traditionally the firm had made loans to tai drivers collateralized by their “medallions – their right to operate. But Uber and others had eaten into the profits of taxi firms. The stock, one traded at about $17 per share had fallen to around $3 per share. To try and push the value of the firm up Mr. Murstein first hired Lawrence Meyers and his firm to secretly tout the firm. They, however, failed to properly disclose the payments received for touting the company. Second, Defendant Murstein tried to essentially force the valuation up. Eventually he found someone who in fact did increase, but it was fraudulent. As a result of his scheme the Bank’s valuation 2016 increased from $166 million in the second quarter of 2016 to $193 million in the third quarter and then to $280 million in the fourth quarter of the same year. The filings for the last two quarters of 2016 and all four quarters of 2017 failed to tell investors the truth about the increases in value. And, in the fourth quarter of 2017 the value of the taxi loans was incorrect. The complaint alleges violations of Securities Act Sections 17(a) and (b) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The case is pending. See Lit. Rel. No. 25297 (December 29, 2021).

Offering fraud: SEC v. Burroughs, Civil Action No. 4:21-cv-994 ((E.D. Tx. Filed December 27, 2021) is an action which names as defendants: Timothy Burroughs, a recidivist who concealed that fact in the transactions here; Jay Holstine — managed one of the vehicles used in the offering, although he has no experience; John Griffin — participated in the management of one of the investment vehicles; and Michael Oswald Williams — acted as the sales manager for one of the vehicles. Over a one-year period, beginning in early 2016, about $3.2 million was raised from investors who purchased interests in one of two oil and gas joint ventures – Petrobridge South Louisiana Joint Venture and Petrobridge Starks # 12 Joint Venture. Defendant Burroughs, in conjunction with Defendant Holstine, solicited investors with promises of outsized returns. During the solicitations the litany of charges brought over the years against Mr. Burroughs was concealed. The offering materials repeated false, outsized claims regarding the investment returns. The complaint alleges violations of Securities Act Section 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). Defendants Holstine, Griffin and Williams settled, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, Mr. Holstine agreed to pay $335,219.67 plus prejudgment interest and a penalty of $85,000. Mr. Williams will pay $284,860.76 in disgorgement plus prejudgment interest and a $50,000 civil penalty. Mr. Griffin will pay $150,469.84 plus prejudgment interest and a penalty of $50,000. Mr. Burroughs will litigate the case. See Lit. Rel. No. 25296 (December 27, 2021).

Offering fraud: SEC v. Siniscalchi, Civil Action No. 19-cv-3792 (S.D.N.Y.) is a previously filed action in which defendant James Siniscalchi promised to put investor funds into tickets for Broadway shows and similar events to make a profit. The money was diverted to personal use. The business was initial operated by Defendant’s cousin, Joseph Meli. In the parallel criminal action Defendant pleaded guilty in June 2021 to one count of conspiracy to commit securities fraud and wire fraud. He was also ordered to pay forfeiture in the amount of $2,082,425. Defendant was sentenced to serve three years probation, one year of which was home confinement. To resolve the Commission’s action the Court entered a final judgment against Mr. Siniscalchi.

Misrepresentations: In the Matter of Peachcap Tax & Advisory, LLC, Adm. Proc File No. 3-20689 (December 22, 2021) names as respondents the registered investment adviser and its owner, David Miller. Over a period of months in 2016, the advisory sold some clients interests in The Pessego Long Short Fund LP, an entity formed by Respondent Miller. The fund was designed to generate attractive risk-returns over various markets with a “fundamental long/short equity approach. Contrary to the stated approach, the fund engaged in high risk trading and lost over 90% of its value before closing in December 2017. In addition, over a period of about one year, beginning in May 2017, Respondent also engaged in 492 principal trades with 6 advisory clients without providing the required transaction-specific consent. The advisory also failed to implement and adopt the required compliance procedures. The Order alleges violations of Securities Act Section 17(a)(3) and Advisers Act Sections 206(2), 206(4) as well as the related rules. In resolving the proceedings, the advisory agreed to implement a series of undertakings. The firm consented to the entry of a cease-and-desist order based on the Sections and Rules from the Advisers Act cited in the Order and a censure. Mr. Miller consented to the entry of a similar order except that it was based on each Section and Rule cited in the Order. He is also barred from the securities business and from participating in any penny stock offerings, although Respondent is given certain limited exceptions to implement the order to divest his interest in the advisory. In addition, the advisory will pay disgorgement of $3,054.74, prejudgment interest of $759.35 and a penalty of $135,000. Mr. Miller will pay a penalty of $65,000

Misrepresentations: In the Matter of Nokola Corporation, Adm. Proc. File No. 3-20687 (December 21, 2021) is a proceeding which names the provider of zero emissions transportation systems and, more recently, battery operated trucks, as a respondent. Beginning in March 2020 the firm, largely through its CEO and later Executive Chairman Trevor R. Milton, began a PR effort based on tweets and media appearances which created a false image of the firm. That false image was built on claims regarding the firm’s technological advancements, in-house production capabilities reservation book and financial outlook. Specifically, the misstatements related to the refueling time of its prototype vehicles and similar matter. The firm failed to maintain disclosure controls and procedures as required by the Exchange Act. In offering to settle the matter the firm undertook certain remedial acts and agreed to implement a number of undertakings. The Order alleges violations of Exchange Act Section 10(b) and Rules 10b-5 and 13a-15a and Securities Act Section 17(a). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm also agreed to pay a penalty of $125,000,000.

Aiding-and-abetting: In the Matter of Nicholas Abbate, Adm. Proc. File No. 3-20688 (December 21, 2021) is a proceeding which names Mr. Abbate as a respondent. He formerly held the position of COO and Portfolio Manager for a fund for a three year period beginning in 2016 and CIO and Portfolio Manager for a different advisor from 2020 to present where he had the title of Money Laundering Reporting Officer. The Order alleges that Respondent engaged in fraudulent conduct involving a now-defunct U.S. mutual fund and its advisor. It also alleges violations of Securities Act Section 17(a)(3) and Advisors Act Sections 206(2) and 206(4) and Rule 206(4)-8. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, he has been ordered to comply with his undertakings and pay a civil penalty of $30,000.

Improper management fees: In the Matter of Global Infrastructure Management, LLC, Adm. Proc. File No. 3-20683 (December 20, 2021) is a proceeding which names the registered investment adviser as a respondent. The Order alleges that the adviser failed in certain instances to apply offsets to fees, in other instances made misleading statements to investors about those offsets and failed to implement policies and procedures. First, the offering and governing documents for Global Infrastructure Partners Fund I and III provide that certain portfolio company fees paid to Global and its affiliates are subject to an offset against fund-level management fees. The offsets were not made. Second, the offering and governing documents for Global I and II contain inconsistent provisions concerning the management fee calculation. The inconsistencies were not resolved. These issues are the result of deficiencies in the firm’s compliance program. In resolving the matter, Global took certain remedial acts. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and Rules 206(4)-7 and 206(4)-8. To resolve these proceedings Respondent consented to the entry of a cease-and-desist order and a censure. In addition, the firm agreed to pay a penalty of $4.5 million.

Deceptive hacking: SEC v. Kliushn, Civil Action No. 1:21-cv-12088 (D. Mass. December 20, 2021) is an action which names as defendants: Vladislav Kilushin, a Moscow, Russia resident who founded a media information technology company called IT Company in the complaint; Nikolai Rumiantcev, also a Russian citizen residing in Moscow who is a director of IT Company; Miklai Irzak, a Russian citizen who a resident of Saint Petersburg employed at a telecommunication company; and Igor Sladkov, also a resident of Saint Petersburg who works with information technology. Beginning in 2018, and continuing for about two years, the two firms that provide services to public companies preparing releases for Edgar, were hacked by Defendant Yermakov. He is a hacker who is named in two pending federal indictments. Mr. Yermakov hacked the two firms using a variety of approaches, including compromised credentials, malware and other approaches. Once the hack was successful Mr. Yermakov furnished the pre-release information to the other defendants for trading. About $82.5 million was obtained from the trading. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(b). The case is pending. See Lit. Rel. No. 25295 (December 22, 2021).

Insider trading: SEC v. Catenacci, Civil Action No. 21-cv-6718 (N.D. Ill. Filed December 20, 2021) is an action which names as a defendant Daniel V.T. Catenacci, an associate professor of medicine specializing in oncology and hematology at a major medical school in the Chicago area. He served as a consultant to Five Prime Therapeutics, Inc. on a drug trial for a flagship cancer drug. After the firm obtained positive results in early November 2020, and prior to the public announcement he purchased shares of the company. Following the public announcement of the trial results the share price increased over 300%, yielding illicit profits of $134,142.38. The complaint alleges violations of Exchange Act Section 10(b). Defendant has agreed to be permanently enjoined from violations of the Section cited in the complaint. He also agreed to pay a penalty in an amount to be determined in the future. The U.S. Attorney’s Office for the Northern District of Illinois filed parallel criminal charges. See Lit. Rel. No. 25291 (December 20, 2021).

Offering fraud: SEC v. Perez, Civil Action No. 21 -cv-00238 (W.D. Tex. Filed December 14, 2021) is an action which names as defendants Marco “Sully” Perez and Permian Basin Properties, Inc. Since June 2018 Defendants – Mr. Perez and his company – have operated a Ponzi scheme that has raised at least $9.25 million. A key focus was the military and veterans. Mr. Perea was presented as a successful veteran-entrepreneur who went from “military to millionaire.” Rates of return were represented as running from 10% to as much as 100%. To help conceal the scheme Defendants furnished investors with fabricated account statements. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Sections 17(a), 5(a) and 5(c). See Lit. Rel. No. 25293 (December 22, 2021).

Hong Kong

Publication: The Securities and Futures Commission noted the publication of their annual report by the Process Review Panel for the SFC. The report published December 30, 2021, is based on a comprehensive analysis of 60 cases (here).

Publication: The Hong Kong Securities and Futures Commission published its Takeovers Bulletin for December 2021 (here).

Announcement: The Hong Kong Securities and Futures Commission announced on December 23, 2021 that it had concluded a joint enforcement meeting with CSRC, the China securities regulator (here).

Singapore

Announcement: The Monetary Authority of Singapore announced on December 29, 2021 that it has strengthened its financial cooperation with China through new initiatives. Those included an ETF connect, bond platform linkage, commodity derivatives collaboration and green finance (here).

UK

New approach: The Financial Conduct Authority announced a new approach for 2021. This approach, according to the December 31, 2021 release, will focus on protecting consumers, enhancing the integrity of the UK’s financial system, and promoting competition (here).