The speculation is on. When will Jay Clayton leave his position as Chair of the SEC? By January 20, 2021 is the obvious answer. Many think that Mr. Clayton may resign sooner so he can return to New York. If he does that may leave the agency suffering from grid lock.

The Commission has adopted a number of initiatives based on a 3-2 vote of the Commissioners led by Mr. Clayton. With the Chairman gone those votes become 2-2 even if one of the sitting members of the Commission become Acting Chair. While the President could try and fill the slot, given the small amount of time remaining prior to the change of administration. These points my persuade Mr. Clayton to remain.

Last week Commission filed one new enforcement action. It centered on the sale of securities by individuals who failed to register with the Commission as required. The Commission also filed a series of actions based on its new Exchange-Traded Products Initiative which will be analyzed later this week.

Be safe and healthy this week

SEC

Whistleblowers: The agency made an award of over $1.1 million, according to a release dated Nov. 13, 2020.

OCIE Alert: The Commission’s Office of Compliance Inspections and Examinations or OCIE issued a Risk Alert on November 9, 2020 (here) centered on questions keyed to supervision and compliance in the context of multiple branch advisory firms. The Alert is a combination of observations and deficiencies identified stemming from nearly 40 examinations of multi-office advisory operations. The Alert provides a good overview of how multi-office advisory operations function and their deficiencies.

Alternate compliance: The Commission published a notice of substitute compliance application by German securities regulator BaFin. The application centers on the fact that German firms registered with the Commission as security-based swap dealers or major security-based swap participants will substitute compliance with certain Exchange Act requirements by complying with comparable German and EU Requirements. The notice was published on November 9, 2020 (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 civil injunctive action and no administrative proceedings last week, excluding 12j, tag-along-proceedings and other similar matters.

Misappropriation: SEC v. Coggins, Civil Action No. 70-cv-23444 (S.D. Fla.) is a previously filed action which named as defendants David C. Coggins and Coral Gables Asset Management LLC, an investment adviser he controlled. Beginning in 2015 Defendants solicited investors using a series of lies about the nature of the investments, how the money would be invested and the performance of the funds. About $1.85 million was raised. A substantial portion of the investor money was misappropriated. The portion that was invested performed poorly. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2) and 206(4). The Court entered final judgments based on consent, against each Defendant. The injunctions are based on the sections cited in the complaint. The question of monetary penalties was reserved for consideration by the Court at a later date. The Commission, in a separate administrative proceeding, barred Mr. Coggins from the securities business. See Lit. Rel. No. 24959 (Nov. 9, 2020).

Offering fraud: SEC v. Morgan, Civil Action No. 19 civ. 661 (W.D.N.Y.) is a previously filed action which named as a defendant Robert C. Morgan, a New York residential and commercial real estate developer. Defendant is alleged to have sold securities to over 200 retail investors who invested through their retirement accounts. The funds were supposed to be used to improve multifamily properties. Defendant and his controlled entities diverted the capital raised to pay prior investors while making misrepresentations regarding fund performance. To resolve the matter Mr. Morgan consented to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). Earlier Mr. Morgan liquidated assets to generate over $66 million which went to a receiver and was distributed. The settlement does not require any additional monetary relief. See Lit. Rel. No. 24960 (Nov. 9, 2020).

Unregistered broker: SEC v. Graham, Civil Action No. 1:20-cv-02505 (N.D. OH Filed Nov. 6, 2020) is an action which names as defendants Hugh D. Graham, Donald Lee Howard and Larry L. Matyas. Over about two years, beginning in October 2017, the four defendants promoted an investment in the equity securities of US Lighting Group, Inc. The four defendants solicited the investors who purchased the shares. Defendants were generally paid commissions of about 40% of investor proceeds totaling at least $443,127. None of the defendants were registered. The complaint alleges violations of Exchange Act Section 15(a)(1). The case is pending except as to Mr. Matytas who consented to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to pay a penalty of $367,916. See Lit. Rel. No.

Fraudulent expenses: SEC v. Rashid, Civil Action No. 1:17-cv-8223 (S.D.N.Y.) is a previously filed action which named as a defendant Mohammed Ali Rashid, a former senior partner at Apollo Management L.P. He was charged with billing personal charges to the funds and being reimbursed. In September the action was tried for nine days to the Court. Thirty-three witnesses testified. The Court found in favor of the Commission, concluding that Defendant had violated Advisers Act Section 206(2). The Court imposed a civil penalty of $240,000 on Defendant. Prior to the trial Apollo reimbursed the clients. See Lit. Rel. No. 24957 (Nov. 9, 2020).

Criminal Cases

Offering fraud: U.S. v. Constantine, No. 13-CR-607 (E.D.N.Y. Sentencing) is an action in which Tommy Constantine and Phillip Kenner are named defendants. Mr. Constantine was sentenced to serve 10 years in prison based on three investment schemes. The jury found him guilty of one count of conspiracy to commit wire fraud, five counts of wire fraud, and one count of conspiracy to commit money laundering. A forfeiture money judgment in the amount of about $8.5 million was also entered. The Court directed that $5.2 million be paid as restitution. Mr. Kerner was sentenced to serve 17 years in prison. A restitution hearing has been scheduled for him. The charges for each Defendant were tied to three investment schemes marketed to professional athletes and others. One centered on real estate in Hawaii, a second on a prepaid debit card scheme and a third a global settlement scheme. Essentially, Defendants were charged with stealing millions of dollars from their investors through the schemes.

FinCEN

Ransomware: The agency held a virtual conference on November 12, 2020, centered on ransomware. The meeting involved financial institutions, technology firms, third party providers and government agencies. The focus of the conference was the increasing concern regarding ransomware attacks which are designed to block access to computer systems or data, often by encrypting data or programs. Ransom payments are frequently extracted. Last month the regulator issued indicators of ransomware and associated money laundering activities to financial institutions in an alert.

Australia

Remarks: Sean Hughes, Australian Securities Investment Commission Commissioner, delivered remarks at the Australian Retail Credit Association Conference on November 13, 2020 (here). His remarks reviewed key recent events. Specifically, he reviewed the response of the ASIC to the pandemic, current priorities in the credit industry and possible credit reform in 2021.

Singapore

Consultation: The Monetary Authority of Singapore held a consultation on November 10, 2020 and issued a paper designed to strengthen the identity verification processes of financial institutions (here).

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Investment advisers have been a key focus of SEC Enforcement in recent year. Beginning several years ago the number of cases brought each year involving advisers began to climb. At the time the leading category of actions was typically corporate financial fraud and disclosures. No longer. Now it is actions involving investment advisers, often keyed to conflicts and similar issues. The Commission’s most recent settlement involving an advisor and his firm took a different turn however – it focused on fraudulent investing. SEC v. Coggins, Civil Action No. 70-cv-23444 (S.D. Fla. Settled Nov. 9, 2020).

David C. Coggins and Coral Gables Asset Management LLC, an investment adviser he controlled, were named as defendants. Beginning in 2015 Defendants solicited investors using a series of lies about the nature of the investments, how the money would be invested and the performance of the funds. While about $1.85 million was raised, a substantial portion of the investor money was misappropriated. The portion that was invested performed poorly. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206 (1), 206(2) and 206(4).

The Court entered final judgments based on consent, against each Defendant. The injunctions were based on the sections cited in the complaint. The question of monetary penalties was reserved for consideration by the Court at a later date. The Commission, in a separate administrative proceeding, barred Mr. Coggins from the securities business. See Lit. Rel. No. 24959 (Nov. 9, 2020).

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