A look forward; a look back:
As the end of the Government fiscal year loams, the Commission seems to have kicked the case filing machine into gear. Last week the agency filed 15 new cases. While at times the Commission has matched that total, the question here is if that pace continues. If so the stats for new actions might eclipse last year’s total.
Cases filed last week included those centered on: Internal controls, pre-release ADRs, offering fraud cases, share selection conflicts, crypto-currency, misappropriation by an advisor, mis-priced bonds and cherry picking.
SEC
Fees: The Commission announced that in fiscal year 2020 the rate for fees under Section 6(b) that public companies and other issuers pay to register their securities will be set at $129.80 per million shares.
Whistleblowers: The Commission awarded more than $1.8 million to a whistleblower whose information and assistance was critical to the success of an enforcement action.
SEC Enforcement – Filed and Settled Actions
The Commission filed 9 civil injunctive actions and 6 administrative proceedings this week, exclusive of 12j and tag-along actions.
Internal controls: In the Matter of Juniper Networks, Inc., Adm. Proc. File No. 3-1937 (August 29, 2019). Over a five-year period, beginning in 2008, the seller of network equipment failed to adequately maintain internal controls with respect to its operating subsidiaries in Russia and China. Specifically, in Russia JNN Development Corp. secretly agreed with network partners to increase the incremental discount on sales made to customers through those channel partners. The money was maintained in a fund that was used by channel partners for customer trips and, at times, for travel by foreign government officials. In China the sales employees submitted false invoices for travel to the Legal Department which understated the true amount of entertainment. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). 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 disgorgement of $4 million, prejudgment interest of $1,245,018 and a penalty of $6.5 million.
Pre-release ADRs: In the Matter of Wendy Katz, Adm. Proc. File No. 3-19395 (August 29, 2019) is a proceeding which names as a Respondent, Ms. Katz, an employee on the securities lending desk of ITG, Inc. from November 2011 through February 2015. Over a three-year period, beginning in 2011, Ms. Kats and the securities lending desk had an ongoing practice of obtaining and then lending pre-release ADRs from depository banks. In entering into these transactions reasonable steps were not taken to determine if the required number of foreign shares were owned and custodied by the person on whose behalf the pre-release ADRs were being obtained. The Order alleges violations of Securities Act Sections 17(a)(3). To resolve the proceedings Ms. Katz consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. She is also barred from the securities business with a right to apply for re-entry after 18 months. In addition, Respondent will pay a penalty of $20,000.
Unregistered broker: In the Matter of Howard C. Burns, Adm. Proc. File No. 3-19392 (August 29, 2019) names as a Respondent an individual who was previously a registered representative. During the period here Mr. Burns was not a registered representative. Nevertheless, he solicited investors to purchase the securities of Financial Visions, Inc. and its affiliates. The Commission previously filed an emergency actions with respect to that firm. The Order alleges violations of Exchange Act Section 15(a)(1). To resolve the proceedings Mr. Burns consented to the entry of a cease and desist order based on the section cited in the Order and agreed to be barred from the securities business and to the entry of a penny stock bar. In addition, he also agreed to pay disgorgement of $293,965.15 and prejudgment interest of $44,502.24. Payment is waived based on an affidavit of financial condition.
False filings: In the Matter of Omega Protein Corporation, Adm. Proc. File No. 3-19398 (August 29, 2019) is a proceeding which names as a Respondent the manufacturer and distributor of omega-3 fish oils and fish meal products. In late 2017 the firm was acquired. Previously its shares were listed on the NYSE. Historically a significant source of financing for the firm was the federal government. To secure those loans the firm had to represent that it was in compliance with the applicable federal laws and regulations regarding environmental matters. In 2013 and again in 2017 the firm pleaded guilty to criminal violations of those laws. Yet n its annual report for 2014 and the quarterly reports for the first three quarters of 2015 the firm represented that it was in compliance with its loan covenants. That representation was false. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceedings the firm consented to the entry of a cease and desist order based on the section cited in the Order. It also agreed to pay a penalty of $400,000.
Mismarking bonds: SEC v. Live Well Financial, Inc., Civil Action No. 1:19-cv-8086 (S.D.N.Y. August 29, 2019) is an action which names as defendants: The firm which sold reverse mortgages and now is in bankruptcy; Michael Hild, the Chairman and CEO of the firm; Eric Rohr, the CFO of the firm; and Darren Stumberger, the manager of its mortgage portfolio. Over a four year period beginning in 2015 Defendants defrauded those who purchased mortgage bonds from the firm by causing the securities to be mismarked. As early as 2015 the CEO of the firm convinced a supposedly independent pricing service to accept the firm’s prices. Over time the scheme accelerated as others used those prices. This permitted the firm to secure millions of dollars from lenders. It also significantly inflated the value of the firm from, for example just over $70 million to well over $350 million in nine months. The individual defendants used the new found funds to pay themselves large sums. Eventually the firm was forced into bankruptcy. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendants Stumberger and Rohr consented to the entry of a partial judgment that permanently enjoined them from future violations of the sections cited in the complaint. The case is pending. The Manhattan U.S. Attorney’s Office filed parallel charges. See Lit. Rel. No. 24579 (August 29, 2019).
Misappropriation: SEC v. Cambridge Capital Group Advisors, LLC, Civil Action No. 4:19-cv-00420 (N.D. Fla. Filed August 29, 2019) is an action which names as defendants the registered investment adviser, attorney Phillip Howard, and Don Reinhard, currently in prison after pleading guilty to criminal charged and being enjoined by the Commission. Attorney Howard previously represented NFL players in connection with the concussion lawsuit. In that case attorney Howard represented that his clients were injured, did not have brain function and that their bodies were beat-up from playing in the NFL. Nevertheless, Messrs. Howard and Reinhard solicited those clients to invest the limited funds they had in his firm, assuring them that the money would be put in a diverse portfolio of securities. Over a two-year period beginning in 2015 Defendants raised about $4.1 million from the NFL clients. Defendants’ representations to the former players were false. Much of the investment money was used to pay Defendants fees and for other items. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(4) and 203(f). The case is pending. See Lit. Rel. No. 24580 (August 29, 2019).
Offering fraud: SEC v. Hutchinson, Civil Action No. 8:19-cv-02166 (M.D. Fla. Filed August 29, 2019) names as a defendant William Hutchinson, a retiree. Over a period of several months Mr. Hutchinson, using Symulto Corporation which he controlled, to raise about $35,000 from investors. Specifically, investors were told that the company had world-wide sales of over $251 million and net income of $86 million from firm developed stored-value debit cards services and software for international electronic gaming and sports books. In fact, the firm had no business. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24578 (August 29, 2019).
Conflicts: SEC v. Cetera Advisors LLC, Civil Action No. 1:19-cv-02461 (D. Colo. Filed August 29, 2019) is an action which names as a defendant the registered investment adviser and broker-dealer. Beginning in 2012, and continuing for about four years, Defendant invested client funds in mutual fund shares that paid 12b-1 fees without disclosing that fact or that less expensive, identical shares were available. In addition, during the same period the firm received compensation from another broker-dealer for investing client funds in that firm’s program without making the proper disclosures. The complaint alleges violations of Advisers Act Section 206(2) and 206(4). The case is pending. See Lit. Rel. No. 24581 (August 29, 2019).
Crypto currency: SEC v. Bitqyck, Inc., Civil Action No. 3:19-cv-02059 (N.D. Tx. Filed August 29, 2019) is an action which names as defendants the firm, Bruce Bis and Samuel Mendez. Over a three-year period beginning in 2016 Bitqyck, owned by the individual Defendants, mass marketed Bitqy and BitqyM – digital coins – across the U.S. and in 20 countries. About 13,000 investors purchased coins. In marketing the coins Defendants made a series of misrepresentations which included: 1) That every coin purchaser would receive a fractional share of Bitqyck common stock through a “smart contract,” 2) that the QyckDeals daily deals platform, supposedly a global marketplace, would drive the value of the tokens; 3) that they owned a cryptocurrency mining facility; 3) and that the trading platform was available twenty-four hours a day, seven days a week. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 5 and 10(b). Each Defendant resolved the proceedings, consenting to the entry of permanent injunctions based on the sections cited in the complaint. In addition, each will pay disgorgement, prejudgment interest and a penalty in the amount of: Defendant Bitqyck, $8,375,617; and Defendants Bis and Mendez will each pay $890,254.22. See Lit. Rel. No. 24582 (August 29, 2019).
Offering fraud: SEC v. Champion-Cain, Civil Action No. 3:19-cv-01628 (S.D. Cal. Filed August 28, 2019) is an action which names as defendants Gina Champion-Cain and Ani Development, LLC. Ms. Champion-Cain is the CEO of American National Investments, Inc., an affiliate of Ani Development. Defendants raised over $300 million from about 50 investors through a sham lending scheme that began in 2012. Specifically, investors were told that they had the opportunity to furnish funds for short term loans to those seeking California liquor licenses. The investment funds were deposited with Ani. In fact, the claims were false. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). Defendants consented to the entry of preliminary injunctions.
Independence: In the Matter of RSM US LLP (f/k/ McGladrey LLP), Adm. Proc. File No. 3-19379 (August 27, 2019). For certain periods beginning in 2012 the audit firm violated the Commission’s auditor independence rules. Those rules generally preclude audit firms from preforming services such as management functions that include payroll processing, financial information system design or implementation and broker-dealer, investment adviser or investment banking services. Here RSM’s US quality controls around auditor independence resulted in the firm’s failure to identify and avoid prohibited non-audit services and a prohibited employment relationship as to at least 15 audit clients over a period of time. Certain of the violations remained undetected until at least 2016. The violations involved work on more than 100 audit clients for matters such as private funds whose advisers were seeking to comply with the custody rule. This resulted in violations of Regulation S-X, Rule 2-02(b)(1), Exchange Act Sections 13(a), 15(d) and 17(a)(1) and Advisers Act Section 206(4). To resolve the proceedings Respondent agreed to implement certain undertakings, including retaining an independent consultant and consented to the entry of a cease and desist order based on the sections and rules cited in the Order and to a censure. The firm will also pay a penalty of $950,000.
Misappropriation: SEC v. Boggs, Civil Action No. 19-cv-5672 (N.D. Ill. Filed August 23, 2019) names Marcus Boggs, an investment adviser representative, as a Defendant. Over a two year period beginning in 2016 Mr. Boggs misappropriated over $1.7 million from at least 3 advisory clients. He misappropriated the funds by selling securities from their advisory accounts and then transferring the cash to his account. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). See Lit. Rel. No. 24576 (August 27, 2019). The U.S. Attorney’s Office for the Northern District of Illinois filed parallel criminal charges.
Offering fraud: SEC v. Smith, Civil Action No. 2:19-cv-17213 (D. N.J. Filed August 27, 2019) is an action which names as defendants Brenda Smith, Broad Reach Capital, L.P. and two of its affiliates. Ms. Smith controls the entity defendants. She recently agreed with FINRA to be barred from the securities business. The firm operated as a purported investment adviser. Beginning at least in 2016 Defendants offered limited partnership interests to investors and raised about $105 million. Those investors were told that Defendants represented a fund that was profitable, employed sophisticated trading strategies involving highly liquid securities and was uniquely positioned because of its access to the Philadelphia Stock Exchange trading floor. Investors were furnished monthly account statements reflecting high returns. In fact, much of the money flowed through accounts to Ms. Smith. The complaint alleges violations of Securities Act Section17(a), Exchange Act Section 10(b) and Advisors Act Sections 206(1), 206(2) and 206(4). The Commission obtained an emergency freeze order on filing. The case is pending.
Offering fraud: SEC v. Hartman Wright Group, LLC, Civil Action No. 19-cv-02418 (D. Col. Filed August 26, 2019) names as defendants the firm, a private wealth management fund and Tytus Harkins, its founder and co-owner. Over a two-year period beginning in 2015 Defendants raised over $8 million from investors. Those investors were told that they were investing in a firm that turned-around mobile home parks. Supposedly the investments had rates of return of about 6% to 8%. Investors received statements and at times were paid returns. In fact, the representations were false. Defendants diverted the funds to other purposes, misrepresented the prices on properties and at times made Ponzi type payments. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24575 (August 27, 2019).
Cherry picking: In the Matter of Joseph C. Buchanan, Adm. Proc. File No. 3-19377 (August 26,2019). Respondent Buchanan was an investment adviser representative at Laurel Wealth Advisors, Inc., a registered investment adviser, in La Jolla, California for about four years beginning in November 2011. FINRA suspended Respondent for a two-year period, beginning in late 2013, for failure to satisfactorily respond to a request for information. In 2012 Mr. Buchanan began using an omnibus account at LWA’s broker to acquire a large block of shares that would later be allocated to his clients and personal account. The trader would at times delay the allocation of shares until after the market close or even the next day. Trades that became profitable later the same day were disproportionately allocated to Mr. Buchanan’s personal account. When trades became unprofitable during the same day they were disproportionately allocated to client accounts. By February 2012, LWA’s broker told the trader that the allocations should be made on the trade date. Nevertheless, Mr. Buchanan continued to delay allocations beyond one hour past the close of the trading day. Accordingly, the broker contacted the advisory. Despite repeated warnings, the practice of making late allocations continued. Eventually the broker suspended use of the omnibus account for one month in February 2015. When the privilege of using the omnibus account was restored, the late allocation practice resumed. The Advisory then suspended Mr. Buchanan’s account indefinitely. Two months later, in August 2015, the trader resigned. During a two-year period, beginning in March 2013, the allocations from Mr. Buchanan’s omnibus account to his personal account had same-day realized and unrealized gains of 0.89% or $56,075 in same-day profits. During the same period the allocations to client accounts had same-day realized and unrealized losses of -0.13%, or a combined same-day loss of -$60,821. As a result of his allocations the trader had ill-gotten gains of at least $56,227 — the difference between the same-day realized and unrealized profits and his pro rata share of cumulative losses on all trades in the omnibus account during the period. The “realized and unrealized gains for allocations to Buchannan’s personal accounts are statistically significant in that the likelihood of these same-day profitable trades being randomly allocated to his personal accounts are less than one in one billion,” according to the Order. The Order alleges violations of Advisers Act Section 206(1) and 206(2). Respondent resolved the proceedings, consenting to the entry of a cease and desist order based on the sections cited in the Order. He was also barred from the securities business. Mr. Buchanan will pay disgorgement of $56,227.00 and prejudgment interest of $15,284.03. Payment of these amounts, except for $40,000, is waived based on an affidavit of financial condition.
Circuit Courts
Investment contract/ unregistered broker: 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 which provides a path to citizenship for those who invest specified amounts of money in the U.S. that create jobs. 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. The Circuit Court relied primarily on the test set forth in the Supreme Court’s seminal decision in SEC v. W. J. Howey Co., 328 U.S. 293 (1946) which defines an investment contract to be one where there is an investment in a common enterprise with the expectation of profits from the efforts of others. Here, the limited partnership shares sold to investors using a PPM that stated the interests were securities subject to the federal securities laws, were in fact securities, according the Court. In reaching this conclusion the Court rejected Mr. Feng’s claim that there was no profit motive here when the amount of the investment plus the administrative fee paid were added together. That argument, the Court found, was contrary to the PPM definition of the administrative fee as separate from the investment. The Court also affirmed a finding that Mr. Feng acted as an unregistered broker considering all the facts and circumstances. The Court rejected Mr. Feng’s claim that he only acted as a lawyer in view of the type of advice given by the attorney to clients which focused on the investment rather than legal points.
