by T. GormanPosted on Posted in SECActions

This is the first part of a two part series reviewing the results of the Commission’s enforcement program for the first two quarters of 2021. The second part of this article will be published tomorrow.

Introduction

If the theme for the first quarter of 2021 was “Acting,” the theme for the second quarter might be “revolving.” As the first quarter began the Chair of the Commission had resigned. By early in the quarter virtually every senior staff position was filled by someone who was “Acting” but had not been officially appointed to the position.

That began to change in the second quarter as Mr. Gensler became Chair of the agency. But then the “revolving” began at the helm of the Enforcement Division. First the Director was “Acting;” then there was an appointment of a candidate from outside the agency followed by a quick resignation; then there was the appointment of an Associate Director to the position; and now there is an appointment of the Attorney General of New Jersey to the position; revolving.

Perhaps now there will be stability at this crucial position, although the long lingering question is still what ever happened to promoting from within, a practice largely followed in the early days of the Division when the Commission’s enforcement program was considered to be the best in Government.

The Statistics

The enforcement program continued to improve in terms of the number of cases brought during the second quarter. During that period the program initiated 75 new enforcement cases. While eight of these cases were based on a failure to file a Form 12b-25 or Form NT of late filing, the total still significantly eclipses the first quarter 2021 when 48 new civil injunctive actions and administrative proceedings were brought.

During the first half of 2021 the Commission initiated a total of about 123 enforcement cases. At this pace the total for the year would fall far below other years except for the fact that during the third quarter of the calendar year — fourth quarter of the Government fiscal year – typically large numbers of cases are filed.

The mix of cases initiated in the second quarter is substantially similar to that of the first quarter. For the second quarter the leading categories of cases were as following:

Offering frauds 31%

Investment Advisers 18%

Filings 9%

Misappropriation 8%

With the exception of the cases centered on failing to file Form NT, the mix of actions is substantially similar to that of the first quarter as reflected by comparing the table below with the one above:

Misrepresentations 27%

Offering frauds 22%

Investment advisers 14%

Unregistered broker 8%

The key focus of the program clearly appears to be offering fraud cases and those involving investment advisers, many of which are based on undisclosed conflicts of interest.

What is perhaps most surprising is the lack of corporate and financial fraud actions. This category of cases traditionally is a focus of Enforcement. While in recent years the agency has experienced difficulty identifying new cases in this area, by the end of 2020 that appeared to have changed. At year end 2020 almost 11% of the actions filed represented corporate and financial fraud actions. Interestingly, many of those actions were not based on a restatement of the financial statements as in years past but data analysis, an approach the Commission has used in many areas with signification success.

Selected Cases from the leading categories

The cases detailed below are typical of those in each category.

Offering fraud

SEC v. The Premier Healthcare Solution, LLC, Civil Action No. 2:21-cv-11460 (D.N.J. Filed May 19, 2021) names as defendants the firm and Josiah David, a man with an extensive criminal and regulatory history who changed his name. Beginning in 2017 Defendants sold membership interests in Premier. The sales pitch excluded the long and sordid history of Mr. David, a consultant to the board. The pitch also misrepresented the nature of the interests being marketed, the financing the firm claimed it had with the bank and the key points of the business model. About $3.9 million was raised from approximately 131 investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25094 (May 21, 2021).

Investment advisers

SEC v. Elstun, Civil Action No. 4:21-cv-00206 (W.D. MO. Filed March 29, 2021) is an action which names as a defendant Douglas Elstun, an investment adviser and the former owner of advisory Crossroads Financial Management, Inc. The complaint alleges Defendant defraud certain high income athlete clients by charging a higher percentage fee than agreed. For other clients he applied the management fee to accounts which he did not manage. In addition, a number of clients were put into very high risk investments such as reverse ETFs for significant periods despite the fact that the instruments were designed only for short term investments. Finally, a number of clients were put into unsuitable investments. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 204. The case is pending. See Lit. Rel. no. 206 (March 30, 2021).

Misappropriation

SEC v. Shkreli, Civil Action No. 15-cv-7175 (E.D.N.Y. Settled April 5, 2021). The settlement in this action involved defendant Evan Greebel, former counsel to Retrophin, Inc., a publicly traded pharmaceutical company founded by Martin Shkreli. The founder was sentenced to serve seven years in prison after being convicted on fraud charges tied largely to his conduct concerning two hedge funds. See U.S. v. Shkreli, No. 15-cv-07175 (S.D.N.Y.). The Commission’s action centered on the period 2013 and early 2014 when Mr. Shkreil orchestrated a fraud involving the pharmaceutical firm and his hedge funds. Specifically, Mr. Shkreli induced investors from his hedge funds to enter into agreements with the company of which he was CEO stating that certain payments they received from the company were for consulting services. In fact, the payments were for the release of potential claims against Mr. Shkreli. Mr. Greebel is alleged to have aided the scheme. To resolve the matter with the Commission Mr. Greebel consented to, and the Court entered, permanent injunctions based on Exchange Act Section 10(b). Mr. Greebel was also barred from serving as an officer or director of a public company. No monetary relief was ordered in view of the penalties imposed in the related criminal action. See Lit. Rel. No. 25065 (April 6, 2021).

Tomorrow: Part II of this series reviewing the results of the Commission’s enforcement program for the first two quarters of 2021 will be published tomorrow.

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by T. GormanPosted on Posted in SECActions

Spin, spin, the revolving door to the office of the Director of the Division of Enforcement continues spin, ushering in yet another new person from outside the agency to assume command of the Division. This time, as noted below, the Attorney General of New Jersey entered.

The question at this point is not who, however, but why? Why does the Director of what is arguably one of the most important Divisions at the agency have to come from outside the Commission? With all due respect to the man selected, why not promote from within? The talent pool on the staff is large and deep.

Why not follow the tradition established at the time the Division was created in 1972 and appoint someone from the staff, promote from within? For years the Division Director was selected almost exclusively by promoting from within. That approach put at the helm of the Division a person who knew the agency, understood its policies and procedures, and perhaps most importantly had worked with the men and women who are the Division of Enforcement.

Equally important is the fact that such an approach is good for staff morale. There is no doubt that this is a key reason successful companies like Amazon use such an approach. It is time for the Commission to stop the revolving door and start promoting from within.

Be careful, be safe this week

SEC

Appointment: Gurbir S. Grewal, Attorney General of New Jersey, was appointed Director of the Division of enforcement, effective July 26, 2021, according to a release dated June 29, 2021. His background is detailed here.

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 7 civil injunctive actions and 3 administrative proceedings, exclusive of tag-along and other similar proceedings.

Crypto: SEC v. Dropil, Inc., Civil Action No. 8:20-cv-00793 (C.D. Cal.) is a previously filed action which names as defendants: Jeremy McAlpine; Zachary Matar; and Parick O’Hara. The underlying complaint alleged that over a three month period in early 2018 Defendants marketed DROP tokens, claiming that investor money would be pooled after purchasing the tokens and traded by a bot called Dex. While investors were supposed to receive profits, in fact their money was diverted to other projects and to the founder. Defendants resolved the matter in part with each consenting to the entry of permanent injunctions based on Securities Act Sections 5(a) and 17(a) and Exchange Act Section 10(b). Questions regarding monetary relief will be decided by the Court at a later date. In a parallel criminal action Messrs. McAlpine and Matar agreed to plead guilty to criminal violations of Sections 10(b) and 32 of the Exchange Act. See Lit. Rel. No. 25136 (July 2, 2021).

Misappropriation: SEC v. Carter, Civil Action No. 20-cv-02112 (D. Md.) is a previously filed action against Michael Carter, a former employee of a major financial institution. Mr. Carter misappropriated over $6 million largely from accounts of elderly clients. To resolve the Commission’s charges, he consented to the entry of, and the Court entered, permanent injunctions based on Exchange Act Section 10(b) and Advisers Act Section 206(1) and 206(2). He also agreed to pay disgorgement of $4,010,568.39 and prejudgment interest of $225,393.52. Those amounts are deemed satisfied by the restitution ordered in the parallel criminal action. Mr. Carter was, in addition, barred from the securities business. In a parallel criminal action brought by the U.S. Attorney’s Office for the District of Maryland, Mr. Carter pleaded guilty to criminal charges, was sentenced to serve 60 months in prison and ordered to pay forfeiture and restitution. See Lit. Rel. No. 25135 (July 2, 2021).

Offering fraud: SEC v. Tuig, Civil Action No. 2:21-cv-05831 (C.D. Cal. Filed July 2, 2021) is an action which names as defendants Ben Schachtschneide and securities fraud recidivist Lambert Vander Tuig. Over a two year period, beginning in 2018, defendants concealed their identities and past while raising about $763,500 from 28 investors for what they called a pharmaceutical or nutraceutical company. Investors were told they would obtain extraordinary returns and that there were significant agreements with major retailers. The claims were false. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25134 (July 2, 2021).

Offering fraud: SEC v. Karlsson, Civil Action No. 20-cv-04615 (E.D.N.Y.) is a previously filed action which named Roger Nils-Jones as a defendant. The complaint alleged that Defendant raised millions of dollars from over 2,000 investors for his firm, Eastern Metal Securities. Investors were told that the firm was a “Pre-Funded Reversed Pension Fund” run by award-winning economists and there was no risk of loss. In fact, Defendant misappropriated at least $1.5 million of the investor funds. The matter was partially resolved with Defendant consenting to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b) and agreeing to pay monetary relief in amounts to be determined by the Court at a later date. See Lit. Rel. No. 25133 (July 2, 2021).

Insider trading: In the Matter of Mounir N. Gad, Adm. Proc. File No. 3-20382 (June 30, 2021) is an action which names as a respondent, Mr. Gad, an employee at a large bank. On three occasions in 2015 and 2016 Respondent furnished material non-public information he obtained from his employer to friend Nathan Guido who works in real estate management. Two of those tips involved take-over deals, one with Procera Networks, Inc. and the other with Imprivata, Inc. In each instance Mr. Guido traded netting a total of $51,700 ill-gotten gains. He shared $11,000 of those gains with his friend Mr. Gad. The Order alleges violations of Exchange Act Sections 10(b) and 14(e). 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 agreed to pay a penalty of $51,700 which will be transferred to the Treasury. See also In the Matter of Nathan E. Guido, Adm. Proc. File No. 3-20383 (June 30, 2021)(action against tipee; resolved with consent to entry of a cease-and-desist order based on the same Sections as above and payment of a penalty of $40,700). In addition, see U.S. v. Gad, No. 5:21-cr-0061 (N.D. Cal. Filed June 28, 2021)(Mr. Gad agreed to plead guilty to two counts of securities fraud in connection with the scheme detailed above).

Disbarred: SEC v. Hackman, Civil Action No. 2:21-cv-01234 (D. Nev. Filed June 30, 2021) is an action which names as a respondent Shawn Hackman, a disbarred Nevada attorney who was also denied the privilege of practicing and appearing before the Commission as an attorney in 2002 after being disbarred by Nevada where he had been admitted to practice; basis of the action was the misappropriation of client funds in 1996. Following an investigation, the Commission determined that Mr. Hackman had been retained recently by issuers to prepare documents for filing with the agency. The Application seeks an order enforcing the Commission 2002 order, the payment of $817,438 in disgorgement and continuing jurisdiction by the Court to enforce the order. The application is pending. See Lit. Rel. No. 25130 (July 1, 2021).

Manipulation: SEC v. Phillips, Civil Action No. 20-cv-08017 (S.D.N.Y. Filed Sept. 28, 2021) is an action which names as a defendant Ronald Phillips, an attorney and former president of Royal Energy Resources, Inc. Defendant Phillips resolved charges that he manipulated the securities of Royal Energy in 2018, consenting to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). Mr. Phillips was also ordered to pay disgorgement of $2,305.39, prejudgment interest of $331.37 and a penalty of $30,000. He was, in addition, suspended from appearing and practicing before the Commission as an attorney under Rule 102(e)(3)(i). See Lit. Rel. No. 25129 (June 30, 2021).

Conflicts: SEC v. Skihawk Capital Partners, LLC, Civil Action No. 21-CV-01776 (D. Colo. Filed June 29, 2021) is an action which names as defendants: Skihawk, a state registered investment adviser; the Convergence Group, LLC, a Puerto Rico based unregistered investment adviser; Clement M. Borkowskis, half owner of Skihawk and holder of a minority interest in Convergence; Sean Hawkins, owner of a half interest in Skihaws and of an interest in Convergence; and Joseph Schiff, a CPA and holder of a minority interest in Convergence. Beginning in 2016, SkiHawk and the others repeatedly defrauded three private funds they advised and their investors. First, without making proper disclosure of the conflicts, private fund ASI Healthcare Capital Partners I, LP was advised to invest in companies owned by Defendants Borkowski and Hawkins; caused to pay a company partially owned by Messrs. Borkowski and Hawkins; and caused to enter into agreements with other firms owned by the two men. Second, SkiHawk, Converse, Borkowski and Hawkins made misleading statements to investors in another private fund they managed. Third, Defendants, while serving as investment adviser to the Income Fund and another private fund made false statements to investors by overvaluing investments. The complaint alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4), each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

Offering fraud: SEC v. Skinner, Civil Action No. 2:21-cv-5273 (C.D. Ca. Filed June 29, 2021) is an action which names as defendants: Matthew J. Skinner; Empire West Equity, Inc.; Longacre Estates, LP; Bayside Equity, LP; Freedom Equity Fund LLC; and Simple Growth, LLC. Mr. Skinner has been convicted of assault and exercises control over each of the entity defendants. Over a five year period, beginning in 2015, Mr. Skinner and the entity defendants raised over $9 million through four real estate solicitations: 1) Longacre which raised $2.4 million by claiming to purchase four hilltop residential lots in Granada Hills, California for development. A substantial portion of the money was diverted to personal use. 2) Bayside which raised $3.1 million where the investment was supposed to be two waterfront homes in Newport Beach. The projected returns were inflated while about $1.1 million of the investor capital was used to pay Mr. Skinner’s personal expenses. 3) Freedom Fund, a project in which $2.6 million of investor capital was used to purchase and renovate an Arizona apartment building. Ultimately about $1.1 million was sent to Empire West while Defendant Skinner failed to repay 16 retail investors about $800,000. 4) Simply Growth where about $1.3 million was raised from investors for a multifamily real estate deal which guaranteed double-digit returns. In fact, much of the capital was used for personal expenses and Ponzi-like payments. The complaint alleges violations of Exchange Act Sections 10(b) and 15(a) and Securities Act Sections 5(a), 5(c) and 17(a). The case is pending. See Lit. Rel. No. 25127 (June 29, 2021).

Cherry picking: SEC v. Paris, Civil Action No. 21-cv-03450 (N.D. Ill. Filed June 28, 2021) is an action which names as defendants Gregory Paris, a v.p. and CCO of the state registered investment adviser Barrington Asset Management, Inc. From 2015 through 2019 Defendants engaged in a cherry picking scheme. During the period an omnibus account was used to allocate profitable trades to themselves and unprofitable trades to the 45 discretionary accounts it managed, securing about $630,000 in ill gotten gains. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25126 (June 29, 2021).

Unregistered broker: In the Matter of Neovest, Inc., Adm. Proc. File No. 3-20375 (June 29, 2021) is an action in which the operator of a platform that provides certain services to investment advisers and others settled charges that it operated as an unregistered broker. The proceedings, their resolution and the dissent of one Commissioner to the institution of the proceedings are discussed in detail here.

Offering fraud: SEC v. Jones, Civil Action No. 3:21-cv-00098 (N.D. Ga. Filed June 28, 2021) is an action which names as defendant John R. Jones, Jr. who was associated with a number of firms including a registered broker-dealer. Beginning in late 2017, and continuing for over a year, Defendant induced investors to put their money into two private funds he controlled. Investors were told there was limited downside risk because investments were insured and the program was created by a national financial organization. The claims were false. Nevertheless, about 24 investors put $5.1 million into the two funds. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(4). The case is pending. See Lit. Rel. No. 25125 (June 29, 2021).

Offering fraud: SEC v. Princeton Alternative Funding LLC, Civil Action No. 3:21-cv-12971 (D.N.J. Filed June 24, 2021) is an action which names as defendants: Princeton, an unregistered investment adviser; Microbilt Corporation, the majority owner of Princeton; Philip Burgess, a former executive of Microbilt who pleaded guilty to tax evasion; Walter Wojciechowski, a former CEO of Microbilt; and John Cook Jr., the COO and CCO of Princeton. Over a two year period, beginning in 2015, Defendants induced investors to acquire limited partnership interests in Princeton Alternative Income Fund LP and its offshore feeder fund. False statements were made to investors regarding the management team, the method for selecting investments, and the satisfaction and continued investment of the fund’s primary investor. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25124 (June 25, 2021).

Insider trading: SEC v. Wang, Civil Action No. 19-cv-12557 (D. Mass.) is a previously filed action against Songjiang “Sam” Wang and his friend Jason Chan. Mr. Wang is a former biopharmaceutical executive. He exchanged inside information with his friend Mr. Chan, also a former biopharmaceutical executive but at a different firm. Each man traded. Mr. Wang settled the charges against him, consenting to the entry of a permanent injunction based on Exchange Act Section 10(b). He also agreed to pay a penalty of $50,000. The court previously granted summary judgment against Mr. Chan and entered an order imposing a permanent injunction and directing him to pay disgorgement, prejudgment interest and a penalty. He was also barred from serving as an officer or directors for five years. Messrs. Wang and Chan were each previously convicted on criminal insider trading charges. Mr. Wang was sentenced to serve six months in prison while Mr. Chan was ordered to serve 36 months. Each man was ordered to pay restitution. See Lit. Rel. No. 25122 (June 25, 2021).

Hong Kong

Report: The Securities and Futures Commission of Hong Kong published its Annual Report for 2020 – 2021 on June 30, 2021 (here).

Singapore

Remarks: Ravi Menon, Managing Director of Monetary Authority of Singapore, delivered remarks at the MAS Annual Report 2020/2021 Virtual Media Conference, June 30, 2021(here). His comments highlighted the rebound of larges segments of the world economy.

U.K.

Remarks: Lisa Osofsky, Director of the Serious Fraud Office, delivered remarks titled We’re Defending the UK as a Safe Place for Busines, June 30, 2021. The director spoke about the integrity of the country, focusing on actions brought recently (here).

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