by T. GormanPosted on Posted in SECActions

A look forward; a look back:

The Commission filed over 35 new cases in the final few days of the Government fiscal year. Yet there is no doubt that the cupboard is not bare. There is a deep pool of pending enforcement investigations at various stages which can be expected to keep the Enforcement Division occupied and the flow of cases steady as the new fiscal year begins to unfold.

If the last few days are any indication, the cases brought in the new year will continue to focus on retail investors. Primary among those actions will be those involving investment advisers with undisclosed conflicts such as the share case selection actions. Offering frauds and insider trading will also no doubt continue to be key areas of concern along with cyber security, market access and SARs.

SEC

Proposed rule: The Commission proposed considering an amendment to a national market system plan that would establish or charge a fee to be subject to the standard procedure for NMS plan amendments (here).

SEC Enforcement – Litigated Actions

Conflicts: SEC v. Westport Capital Markets, LLC, Civil Action No. 3:17-cv-02064 (D. Conn.) is a previously filed action which names defendants the registered investment adviser and its principal, Christopher McClure. The complaint alleged that Defendants profited from large undisclosed mark-ups paid on client securities trades. The Court concluded that Defendants were at least negligent with respect to the transactions and granted summary judgment on the point in favor of the Commission. All other issues were reserved for trial. See Lit. Rel. No. 24633 (Oct. 2, 2019).

SEC Enforcement – Filed and Settled Actions

The Commission filed 2 civil injunctive actions and no administrative proceedings last week, exclusive of 12j and tag-along actions.

Crypto currency: SEC v. PlexCorps, Civil Action No. 1:17-cv-07007 (E.D.N.Y.) is a previously filed action which names as defendants the firm, Dominic Lacroix and Sabrina-Paradis-Royer, the proprietors of the ICO. The complaint claimed that Defendants fraudulently raised millions of dollars in fiat and crypto currency, selling unregistered securities by using false and misleading statements. To resolve the action each Defendant consented to the entry of permanent injunctions based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The two individuals are also enjoined from participating in future crypto offerings.

Manipulation: SEC v. Lek Securities Corp., Civil Action No. 17-cv-1789 (S.D.N.Y.) is a previously filed action which alleged that the firm and Sam Lek, CEO, assisted a Ukraine based client with manipulative trading in the form of layering over a three year period. The complaint alleged violations of Securities Act Section 17(a)(1), and Exchange Act Sections 9(a)(2) and 10(b). It alleged that Defendants made the scheme possible by giving the foreign client access to the U.S. markets. To resolve the matter the firm agreed to admit that the conduct of their client violated the federal securities laws. The firm agreed to the entry of a three year injunction requiring that it terminate relations which foreign persons who may be engaged in manipulative conduct and which largely precludes it from intra-day trading with foreign clients, to the imposition of a monitor for the same period and to pay a $1 million penalty along with $525,892 in disgorgement and prejudgment interest. Mr. Lek consented to the entry of permanent injunctions based on the sections cited in the complaint along with the firm. He will also pay a penalty of $420,000. Defendants were ordered to pay, on a joint and several basis, $4,563,468 along with prejudgment interest of $348,145.

Insider trading: SEC v. Jung, Civil Action No. 1:18-cv-04811 (S.D.N.Y.) is an action which named Woojae Jung as a defendant. The action alleged that as an employee of an investment bank, Defendant repeatedly used his access at the firm to obtain inside information and trade. He previously pleaded guilty in a parallel criminal action. Here Defendant consented to the entry of a permanent injunction based on Exchange Act Sections 10(b) and 14(e). In addition, he was ordered to pay disgorgement of $140,000. Payment is satisfied by the forfeiture order entered in the parallel criminal case. See Lit. Rel. No. 24634 (Oct. 2, 2019).

Negligent statements: SEC v. Spencer, Civil Action No. 1:19-cv-9070 (S.D.N.Y. Filed Sept. 30, 2019) names as defendants Christopher Spencer and John Brusshaus, respectively, the former CEO and CFO of FAB Universal Corp.’s business in China. Over a one-year period, beginning in 2012, the two executives repeatedly made statements about certain Kiosks used in connection with the business, significantly over stating their capabilities and, in fact, the number in operation. While a series of red flags appeared during the period indicating that Defendants failed to comply with the applicable standards in making the representations, those were ignored. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3). Each Defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. The questions of monetary relief are reserved for consideration by the Court at a later date. See, Lit. Rel. No. 24636 (Oct. 4, 2019).

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by T. GormanPosted on Posted in SECActions

The Commission appears to have made the typical year end push to file cases. On Wednesday Part I of this series reviewed a number of those actions, primarily civil injunctive actions filed on the last day of the fiscal year. On Thursday Part II reviewed primarily civil injunctive actions filed on Friday, September 27th. Today’s concluding segment reviews primarily administrative proceedings filed on Monday, September 30th.

Digital assets: In the Matter of Block.one, Adm. Proc. File No. 3-19568 (Sept. 30, 2019) is an action which names as a Respondent, the Cayman Islands registered firm that has offices in Hong Kong and Blacksburg Va. The firm conducted an ICO for the ERC-20 coin over a one year period, beginning in June 2018. About 900 million digital assets were offered and sold in exchange for Ether, a digital asset, to raise capital for the development of the EOSIO software and promote the launch of EOSIO based blockchains. Several million dollars was raised in the offering, including from U.S. investors. The offering was not registered with the Commission despite offering investment contracts within the meaning of Howey. The Order alleges violations of Securities Act Sections 5(a) and 5(c). 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 $24 million penalty.

Deficient audit: In the Matter of Marla P. Manowitz, CPA, Adm. Proc. File No. 3-19566 (Sept. 30, 2019) names as Respondents Ms. Manowitz, a principal at her accounting firm, Schulman Lobel Zand Katzen Williams & Blackman, LLP, along with Thomas R. Vreeland and Kenneth Garlak, respectively, co-principals on the engagements for QFOR in 2013, 2014 and 2015 and the engagement quality reviewer. Each audit failed to comply with PCAOB standards since it did not identify and properly review related party transactions, use conduct appropriate procedures to determine if there were material misstatements caused by fraud, and to properly plan the engagements. The Order alleges violations of Exchange Act Sections 10A(a)(2) and Rule 2-02 of Regulation S-X. To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. Respondents Manowitz, Vreeland and Garlak were each denied the privilege of appearing and practicing before the Commission with the right to reapply after, respectively, 3, 2 and1 years. Each will also pay a penalty in the amount of, respectively, $25,000, $15,000 and $9,472. See also Schulman Lobel Zand Katzen Williams & Blackman, Adm. Proc. File No. 3-19564 (Sept. 30, 2019)( Order alleges violations of Rules 155(a), 220(f), 221(f) and 310 of the Rules of Practice; the matter will be set for hearing).

Unregistered broker: In the Mater of Outset Global LLC, Adm. Proc. File No. 3-19565 (Sept. 30, 2019) is a proceeding which names the UK broker as a Respondent. Over a two year period from 2014 to 2016 the firm repeatedly solicited and executed transactions for U.S. clients. The firm was not registered in the U.S. The Order alleges violations of Exchange Act Section 15(a). The firm undertook remedial actions. To resolve the proceedings Outset consented to the entry of a cease and desist order based on the section cited in the Order and a censure. The firm also agreed to pay disgorgement of $135,000, prejudgment interest of $22,409.97 and a penalty of $50,000.

ATS: In the Matter of Virtu Americas LLC, Adm. Proc. File No. 3-19563 (Sept. 30, 2019) is a proceeding which names the registered broker dealer as a Respondent. In late 2015 and after the firm operated a trading system known as Match-it, a dark pool. Under Regulation SCI when trading in such a pool reaches designated levels it must comply with the regulation. Here the firm had an automated system that was designed to ensure that trading was limited to a level that was under the Regulation. The system malfunctioned, however, and for a period starting on November 3, 2015 the limits were surpassed and the firm was required to comply. It failed. To resolve the proceedings Respondent consented to the entry of an order based on the Regulation and a series of rules under it and to a censure. The firm will also pay a penalty of $1.5 million.

Unregistered securities: In the Matter of Nebulous, Inc., Adm. Proc. File No. 3-19569 (Sept. 30, 2019) is a proceeding which names the firm, a privately owned developer of decentralized cloud data storage technology, as Respondent. Over a one year period beginning in 2014 the firm sold unregistered securities. The Order alleges violations of Securities Act Sections 5(a) and 5(c). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and agreed to pay disgorgement of $120,000, prejudgment interest of $24,601.85 and a penalty of $80,000.

Share-class selection: In the Matter of Michigan Advisors, Inc., Adm. Proc. File No 3-19562 (Sept. 30, 2019) is an action in which the registered adviser inadequately disclosed the fact that certain classes of mutual fund shares carried 12b-1 fees. Nevertheless, the advisor put clients into those shares. The firm self-reported. This proceeding is based on that report. Respondent consented to a series of undertakings. The Order alleges violations of Advisers Act Section 206(2). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. The firm also agreed to pay disgorgement of $295,580.55 and prejudgment interest of $32,396.17. The funds will be returned to the clients. See also In the Matter of Investment Partners, LTD., Adm. Proc. File No. 3-19561 (Sept. 30, 2019)(same as above; resolution is also the same with the payment of disgorgement in the amount of $39,418.90 and prejudgment interest of $3,965.91); In the Matter of Hilltop Securities, Inc. and Hilltop Securities Independent Network, Inc., Adm. Proc. File No. 3-19560 (Sept. 30, 2019)(same; payment of disgorgement in the amount of $736,497.48 and prejudgment interest of $74,287.92); In the Matter of Essex Financial Services, Inc., Adm. Proc. File No. 3-19559 (Sept. 30, 2019)(same; pay disgorgement and prejudgment interest of $2,986,589.94 which is waived except for $645,000 based on an affidavit of financial condition); In the Matter of Folger Nolan Fleming Douglas Capital Management, Inc. Adm. Proc. File No. 3-19558 (Sept. 30, 2019)(same; payment of disgorgement and prejudgment interest of $59,479. 27); In the Matter of Bill Few Associates, Inc., Adm. Proc. File No. 3-1555 (Sept. 30, 2019)(same; payment of disgorgement and prejudgment interest of $191,304,81); In the Matter of Mid Atlantic Financial Management, Inc. Adm. Proc. File No. 3-19554 (Sept. 30, 2019)(same except firm did not self-report but undertook remedial efforts; charges are Sections 206(2) and 206(4) of Advisers Act; disgorgement of $900,069 and prejudgment interest of$126,933; firm will also pay a penalty of $300,000); In the Matter of Wedbush Securities, Inc., Adm. Proc. File No. 3-19553 (Sept. 30, 2019)(same; firm self-reported; payment of disgorgement and prejudgment interest in the amount of $1,852,540.97); In the Matter of Saxony Capital Management, LLC, Adm. Proc. File No. 3-19552 (Sept. 30, 2019)(same; payment of disgorgement of $212,324.53 and prejudgment interest of $1,869.31); In the Matter of IPG Investment Advisors, LLC, Adm. Proc. File No. 3-19551 (Sept. 30, 2019)(same; payment of disgorgement of $76,962. 71 and prejudgment interest of $8,331.61); In the Matter of Independent Financial Group, Inc., Adm. Proc. File No. 3-19550 (Sept. 30, 2019)(same; payment of prejudgment interest and prejudgment interest of $1,426,150.64); IC Advisory Services, Inc., Adm. Proc. File No. 3-19549 (Sept. 30, 2019)(same; payment of disgorgement of $1,052,473.02 and prejudgment interest of $142,713.17); In the Matter of Henley & Co. Wealth Management, LLC, Adm. Proc. File No. 3-19548 (Sept. 30, 2019)(same; payment of disgorgement of $32,657 and prejudgment interest of $4,209); In the Matter of Comprehensive Capital Management, Inc., Adm. Proc. No. 3-1547 (same; payment of disgorgement in the amount of $83,401.41 and prejudgment interest of $10,632.11).

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