by T. GormanPosted on Posted in SECActions

The EB-5 immigration program was designed to encourage wealthy foreign nationals to immigrate to the U.S. and invest in the country. Under the program a foreign national can secure a green card by investing at least $500,000 to $1 million dollars in the United States in a project that creates a specified number of jobs in this country. Since the program often attracts investments in the construction of buildings, it has become popular in the construction industry –it can be an economical way to secure investment. At the same time, it has also resulted in a series of Commission enforcement actions. Critical issues in those cases typically center on the question of whether the investment is in fact a security and if the promoter acted as an unregistered broker. Each of these questions was addressed and resolved by the Ninth Circuit in favor of the Commission in a recent opinion. SEC v. Feng, No. 1756522 (9th Cir. August 23, 2019).

Mr. Feng conducted an immigration law practice in New York City. Over a six year period, beginning in 2010, he had about 150 clients who participated in the EB-5 program. Most were Chinese nationals. Clients were solicited through a website as well as overseas finders. The clients paid legal fees that ranged from $10,000 to $15,000. The attorney also had marketing agreements with the regional centers that were part of the program. Under those arrangements he sought to place clients in the program in return for a commission. Overall Mr. Feng was paid about $1.2 million.

Clients in the program made their investment under a PPM as well as the immigration laws. In general, the PPM called for the payment of the investment and required the investor to pay an administrative fee that ranged from $30,000 to $50,000. The PPM stated that the fees were for operating and marketing costs. The fees were not part of the investment and did not earn interest.

The Commission filed a complaint alleging violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). In the District Court the parties filed cross-motions for summary judgment. That Court ruled in favor of the Commission concluding, among other things, that the investments were securities and that Mr. Feng had acted as an unregistered broker. The Ninth Circuit affirmed.

First, the Circuit Court concluded that the investments by the EB-5 participants were securities within the meaning of Section 3(a)(10) of the Securities Act because they were investment contracts. While that term is not defined by the statute, the Supreme Court’s seminal decision in SEC v. W. J. Howey Co., 328 U.S. 293 (1946) defines the term as referring to an investment in a common enterprise with the expectation of profits from the efforts of others.

In this action it is undisputed that Mr. Feng’s clients invested money in a common enterprise managed by a third party. Nevertheless, Mr. Feng claims the transactions did not involve a security because the clients did not expect a profit. This occurs when the amount of the investment plus the administrative fee is considered, according to the attorney. The Court found this claim “unpersuasive.”

Here the PPM specifically states that the investments are “securities,” explaining that the offering is made pursuant to the federal securities laws. Indeed, the transactions were structure as limited partnership interests that paid a fixed annual return ranging from 0.5% to 5%. This is sufficient to comply with the expectation of profits for Howey.

The payment of the administrative fee does not change this fact as Mr. Feng claims. Rather, the PPM specifically distinguishes between the investment and the administrative fee. Perhaps more importantly, the documents and the program require that the investment, but not the administrative fee, be at risk as Attorney Feng agrees. Viewed in this context, it is clear that the investment is a security.

This conclusion is not changed by the motivation of the investor as claimed by Mr. Feng. Key to the EB-5 program is a successful at risk investment. Investors are motivated to make this type of investment to comply with the program. Attorney Feng thus marketed his program as one tied to a successful investment.

Second, the Court affirmed the District Court’s conclusion that Mr. Feng violated Section 15(b) of the Exchange Act. In assessing this question, the Court considered the totality of the circumstances surrounding the transaction. In this case, while Mr. Feng was not an employee of the issuer, he sought investors through his website and other means, negotiated with the regional centers regarding the terms of the transaction and was paid transaction based compensation.

While Mr. Feng disputes this conclusion, claiming that he was acting as an attorney and not a broker, in fact the advice he gave was beyond that of what an attorney would render. Rather, it involved the investment and the success of the program. When these facts are viewed in the context of Mr. Feng’s efforts to secure the type of client that would fit the program, its clear that the attorney was acting as an unregistered broker.

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by T. GormanPosted on Posted in SECActions

A look forward; a look back:

Can crypto replace the U.S. dollar as the world’s reserve currency? Mark Carney, U.K. Minister of the Bank of England and chair of its Monetary Policy Committee, suggested this week that Libra, a crypto currency, might replace the U.S. dollar as the world’s reserve currency in remarks made at the Jackson Hole economic forum. The remarks were made at the current Federal Reserve meetings being held at Jackson Hole.

The suggestion, which if adopted would have huge economic and policy implications around the world, illustrates the rapid transformation taking place in the crypto markets. Initially the crypto was an “off-the-grid” type alternative to the standard currency markets. Now, with an alphabet soup list of regulators claiming jurisdiction over crypto, and some trading platforms advertising that “the revolution needs” rules the idea seems to be moving into the main-stream.

Last week the SEC continued largely with the enforcement trends it has pursued during the last fiscal years. The Division brought the usual assortment of offering fraud and manipulation cases. The sole exception seems to be a Reg. FD action, the first since the Netflix case years ago.

SEC Enforcement – Filed and Settled Actions

The Commission filed 3 civil injunctive actions and 5 administrative proceedings this week, exclusive of 12j and tag-along actions.

Unprofessional conduct: In the Matter of Michael Filkoski, CPA, Adm. Proc. File No. 3-19368 (August 21, 2019) is a proceeding which names as respondents Mr. Filkoski and Scott Magnuson, CPA, respectively, the engagement partner and quality control partner on audits of Agria Corporation’s financial statements for 2012 and 2013 conducted by Horwath P.C. While the audit opinions for each year stated that the engagements had been conducted in accord with the standards of the PCAOB, in fact they were not. Specifically, the two audit partners ignored red flags indicating that there were material misstatements in the financial statements of the company for each year. The Order alleges unprofessional conduct in violation of Rule 2-02(b) of Regulation S-X. To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the rule cited in the Order. In addition, Mr. Filkoski is denied the privilege of appearing and practicing before the Commission as an account with the right to apply to resume practice after three years. He was also ordered to pay a penalty of $20,000. Respondent Magnuson was denied the right to appear and practice before the Commission as an account with the right to apply for re-entry after 1 year. He will pay a penalty of $10,000.

Fraudulent price quotes: In the Matter of Ronald Gonzalez, Adm. Proc. File No. 3-149364 (August 20, 2019) is an action which names as Respondent the former CEO of a registered broker-dealer. Mr. Gonzolez failed to supervise a trader at the firm who participated in a fraudulent scheme. Specifically, Trader furnished artificially inflated price quotes for certain mortgage backed securities to a significant customer of the firm. Although the CEO knew that Trader was providing this information to at least one customer, he failed to reasonably supervise the person. The Order alleges violations of Exchange Act Section 15(b)(4)(e). To resolve the proceedings Respondent agreed to the imposition of certain limitations on his duties and activities and to furnish an affidavit of compliance. He also agreed to pay a penalty of $40,000. In addition, the firm resolved related proceedings.

Touting: In the Matter of ICO Rating, Adm. Proc. File No. 3-19366 (August 20, 2019) is a proceeding which names as a respondent the St. Petersburg, Russia firm. Since 2016 the firm has provided review and rating services on its website for entities in various locations around the world that conducted initial coin offerings. The firm published research reports and was paid directly or indirectly by the issuer. Since the firm failed to disclose the amount of the compensation paid by the issuer, it violated Securities Act Section 17(b). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order. It also agreed to pay disgorgement of $100,572, prejudgment interest of $6,426 and a penalty of $162,000.

Offering fraud: SEC v. Kelly, Civil Action No. 3:19-cv-585 (S.D. Miss. Filed August 20, 2019) is an action which names Terry W. Kelly and his Mississippi based management company, Kelly Management LLC, as defendants. Beginning in 2009 Defendants solicited investors for, and sold, promissory notes issued by Timber Firm. Mr. Kelly also managed a team of salespersons for Timber. The funds were supposed to be used to develop the business. In fact, while Defendants earned $8 million in commissions, the investor funds were diverted from Timber to the personal use of the fund’s owner. Timber Firm was in actuality a Ponzi scheme. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). Defendants have agreed to settle the case by consenting to the entry of permanent injunctions. Monetary relief will be considered at a later date. See Lit. Rel. No. 24573 (August 22, 2019).

Manipulation: SEC v. Kandelapas, Civil Action No. 10-cv-02637 (N.D. Ill.) is a previously filed action which named as a defendant Andrew Kandelapas, the former CEO of a Chicago based penny stock firm. The Court previously entered a final judgment against Defendant, imposing permanent injunctions based on a complaint which alleged that Mr. Kandelapas made false statements and manipulated the firm’s stock. Addressing the previously reserved question of financial remedies, the Court ordered that Defendant pay disgorgement of $593,363, prejudgment interest of $113,554 and a penalty of $160,000. See Lit. Rel. No. 24572 (August 20, 2019).

Reg. FD:In the Matter of TherapeuticsMD, Inc., Civil Action No. 3-19362 (August 20, 2019). The Florida based firm conducts research and develops and commercializes pharmaceutical drugs for women’s health issues. In the last several years the company has been developing TX-004HR, a hormone drug therapy. A new drug application was submitted to the FDA in early July 2016. The agency notified TherapeuticsMD that it would complete a review by early May 2017. While the firm was developing two products in this area, only TX- 004HR had progressed to this stage. The company expected to begin communicating with the FDA on proposed labeling and post-marketing requirements shortly before the review was completed. The FDA, however, sent the firm a letter noting that unspecified deficiencies precluded conversations. In early May the FDA sent TherapeuticsMD a second letter that identified one deficiency: The lack of long-term safety data. After disclosing the contents of the letter in a press release and Form 8-K filing, the company requested and received a meeting date with the FDA. TherapeuticsMD also disclosed the meeting, noting possible outcomes. On June 14, 2017 the firm met with the FDA and reviewed the pertinent data. The meeting ended with a clear path forward identified by the agency. Subsequently, emails described the meeting as very positive, noting that the firm was waiting for the meeting minutes to assess the path forward. Three analysts followed-up on an e-mail offer to discuss the matter further. Following the discussions, the firm’s share price increased significantly. There were no public disclosures regarding the meeting. When the meeting notes were received in early July 2017, TherapeuticsMD filed a Form 8-K and press release updating the public. Later that day, firm executives held a pre-scheduled conference call with analysts during which the meeting with the FDA was reviewed. New information that had been submitted to the agency was identified. During the call three studies that had been submitted to the agency were emailed to the analysts on the phone along with other information from the company about TX-004HR. Following the publication of reports by certain analysts based on the call and/or the materials the stock price, which had declined, rebounded. During these events TherapeuticsMD did not have policies or procedures relating to compliance with Regulation FD. The Order alleges violations of Exchange Act Section 13(a) and Regulation FD. To resolve the proceedings, Respondent consented to the entry of a cease and desist order based on the section and regulation cited in the Order. The firm also agreed to pay a penalty of $200,000.

Offering fraud: SEC v. Crystal World Holdings, Civil Action No. 1:19-cv-02490 (D.D.C. August 19, 2019) Crystal, along with The New Sports Economy Institute and Christopher Paul Rabalais are named as defendants in the Commission’s complaint. Chrystal is a holding company that owns intellectual property related to the experimental sports marketplace website platform known as AllSportsMarket. Its stated goal is to become a world-wide 24-hour exchange for sports trading instruments. The Institute is a non-profit. It is seeking a royalty-free intellectual property licensing agreement with Crystal. Both firms were organized by Mr. Rabalais. Over a five-year period, beginning in mid-July 2014 and continuing through April 2019, members Crystal and the Institute offered common and preferred shares of Crystal to the public in the United States, Canada, Europe and Australia. About $1.5 million was received from investors. The Crystal shares were offered as “gifts.” In return investors made “donations.” Investors were told that there were plans to register the Crystal shares with the SEC in the future. Once the shares became registered the price would increase. Accordingly, now is the time acquire them, according to the representations. The documents reciting this claim carried the SEC’s seal without authorization. Defendants made a series of misrepresentations in connection with offering centered largely on the claimed pending registration of the shares with the SEC. These and other representations made by Defendants were false. No effort was ever made to register the shares with the SEC. Indeed, the “gift-donation model employed by Defendants presented a false appearance of fact regarding . . .” the Crystal shares, according to the complaint. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(2) and (3). The case is pending.

ADRs: In the Matter of Cantor Fitzgerald & Co., Adm. Proc. File No. 3-19357 (August 16, 2019) names the registered broker-dealer as a Respondent. During a four month period at the beginning in early 2012 and, for a second period beginning about mid-2012 and continuing for two years, the broker-dealer acted as, respectively: a) during the first period as a pre-release broker that obtained pre-release ADRs; and (b) later during the second period, received pre-release ADRs from other brokers. In each instance the firm failed to take reasonable steps to assure themselves of compliance with the pre-release ADRs when the participant or broker holds the shares for the benefit of the owner. When the specifications of the pre-release agreement are not met, it can artificially inflate the number of shares of the issuer’s stock. Thus, failure to comply with the terms of the agreements violates Exchange Act Section 17(a)(3). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the order. The firm also agreed to pay disgorgement of $359,448.05, prejudgment interest of $88,463.14 and a penalty of $200,000.

Offering fraud: SEC v. Strochak, Civil Action No. 9:19-cv-81164 (S.D. Fla. Filed August 16, 2019) is an action which names as a defendant Scott Strochak, formerly a senior V.P. and Director of Alternative Investments for Castleberry Financial Services Group, LLC. The firm claimed to provide alternative investments by managing surety-bond protected funds on behalf of clients that were covered by nationally known insurance carriers. Since February 2018 about $3.8 million was raised from investors. Each of the representations was false, according to the complaint. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). Defendant resolved the action, consenting to the entry of permanent injunctions based on the sections cited in the complaint. He also agreed to pay disgorgement and prejudgment interest totaling $250,056 which will be offset by any restitution ordered in the parallel criminal action. See Lit. Rel. No. 24570 (August 19, 2019).

Manipulation: SEC v. Brown, Civil Action No. 15-cv-13348 (D. Mass.) is a previously filed action which named as a defendant Samuel Brown. Mr. Brown participated in the manipulation of the shares of a publicly traded stock. He pleaded guilty to criminal charges based on the manipulation. Mr. Brown also settled with the Commission. The Court entered final judgment last week by consent. It enjoins Mr. Brown from future violations of the sections cited in the complaint and precludes participation in any penny stock offerings. See Lit. Rel. No. 24569 (August 16, 2019).

False statements: SEC v. Zeini, Civil Action No. 18-cv-08103 (C.D. Cal.) is a previously filed action which names as a defendant Hani Zeini, then the CEO of Sientra, Inc. The firm sells breast implants. At the time the company was conducting an offering, all of its implants were made in Brazil. Just prior to the commencement of the offering Mr. Zeini learned that the manufacturer’s CE Certificate – a sign of regulatory compliance required to sell products in the EU – had been suspended. Mr. Zeini did not disclose this fact. When that fact became public after the offering, the firm’s share price fell over 50%. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Court entered a final judgment against Mr. Zeini by consent, enjoining future violations of the sections cited in the complaint. Defendant was also ordered to pay a penalty of $160,000. See Lit. Rel. No. 24567 (August 16, 2019).

Manipulation: SEC v. Hand, Civil Action No. 1:15-cv-14109 (D. Mass.) is a previously filed action against California securities attorney Jehu Hand. The complaint alleged that Mr. Hand participated in a pump-and-dump manipulation scheme involving the shares of Greenway Technology in 2015. The attorney was convicted of securities fraud, wire fraud, and conspiracy to commit those offenses in a parallel criminal action. He was ordered to serve 66 months in prison, three years of supervised release and pay a fine of $1 million along with $486,953 in restitution. The Court in the Commission’s case entered a final judgment based on consent, precluding future violations of the sections cited in the complaint. The SEC also suspended Mr. Hand from appearing and practicing before the agency as an attorney based on the criminal conviction. See Lit. Rel. No. 24566 (August 16, 2019).

Australia

Remarks: Daniel Crennan QC, Deputy Chair, Australian Securities and Investment Commission, delivered the opening remarks at the ASIC Regtech Financial Advice Files Symposium (August 22, 2019). The conference focused on showcasing regtech advances that can facilitate the protection of consumers (here).

Hong Kong

Remarks: The Securities and Futures Commission and the Independent Commission Against Corruption entered into an MOU to formalize and strengthen their cooperation in combating financial crime. The Understanding covers the referral of cases, joint investigations, the exchange and use of information and the mutual provision of investigative assistance and capacity building. Overall the MOU is designed to strengthen the efforts of each organization.

Monetary Authority of Singapore

Report: The Monetary Authority of Singapore published its July Report on Consumer Prices (here).

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