The Commission continued to focus largely on offering fraud cases and those centered on microcap fraud. One variation involved a “charitable” offering fraud. The Defendants essentially diverted money to themselves from those who were receiving government disability benefits through a series of fraudulent actions. In another, the complaint alleged that defendants, who essentially misappropriated inside information from The Motley Fool and traded in advance of its public release, engaged in deceptive conduct.

Be careful, be safe this week

SEC

Whistleblowers: The Commission issued near $3.5 million to four whistleblowers last week, according to a release issued on May 6, 2022.

SEC Enforcement – Filed and settled actions

Last week the Commission filed 5 civil injunctive actions and 1 administrative actions, exclusive of 12j, tag-a-long and other similar proceeding.

Offering fraud: SEC v. Marchi, Civil Action No. 3:22-cv-02661 (D.N.J. Filed May 5, 2022) is an action which names as defendant Mark Marchi, a securities law recidivist. In this case, the complaint alleges that over a four-year period, beginning in February 2016, he solicited investments for his firm, Precipio Capital, LLC. Defendant Marchi raised about $2.8 million from 22 investors on the promise that the trading would generate profits. In reality, much of the money was misappropriated or paid to earlier investors. There was little trading. Defendant’s use of investor funds was shrouded through the use of false documents. 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 case is pending. See Lit. Release No. 25384 (May 5, 2022).

Offering fraud: SEC v. Slattery, Civil Action No. 2:22-cv-00715 (D. Nev. Filed May 4, 2022) is an action which names as defendants: Derek Slattery and TradesMart Software Ric Corporation. Over a two-year period, beginning in October 2018, Defendants sold interests in TradesMart, based on claims that the proceeds would be used to trade only in Apple options and that investors could redeem their interest from what they called a “fixed portfolio” and have profits of 30%. In fact, there were no options and no investments. Defendants raised about $1.8 million form approximately 300 investors in the U.S. and several other countries. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25382 (May 5, 2022).

Microcap manipulation: SEC v. Forster, Civil Action No. 22CV0627 (S.D. Cal. Filed May 4, 2022) is an action which names as defendant Michael J. Forster, a stock promoter. Over a period of several months, beginning in February 2012, Defendant obtained control of microcap issuer Cuba Beverage Company, supposedly a maker of an energy drink. Defendant then engaged in a pump-and-dump manipulation of the firm’s shares, netting him illicit profits of $100,000. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. See Lit. Rel. No. 25383 (May 5, 2022).

Reg SHO: SEC v. BTIG, LLC, Civil Action No. 1:21-cv-04521 (S.D.N.Y.) is a previously filed action which named as a defendant the broker-dealer who is alleged o have violated Reg SHO. The complaint claimed that Defendant failed to properly mark, and in fact mismarked, over 90 sale orders from a hedge fund customer. The transactions appeared to represent more than $250 million as long and short exempt when in fact the orders from December 20167 through July 2017 should have been market short. Defendant simply accepted the representations of the client. In fact the transactions were mismarked and violated Rules 203(b)(1) and 203(b)(1) of Regulation SHO. The Court entered a final judgment by consent prohibiting future violations of the provisions cited above. The Court also directed Defendant to pay disgorgement in the amount of $315,048, prejudgment interest of $64,258 and a penalty of $315,048. See Lit. Rel. No. 25380 (May 3, 2022).

Deceptive trading: SEC v. Stone, Civil Action No. 1:22-cv-03553 (S.D.N.Y. Filed May 3, 2022) names as defendants two friends, David Stone and John Robson. The two men are alleged to has engaged in deceptive trading based on obtaining advanced copies of stock recommendations made by The Motley Fool, LLC. Specifically, since November 2020 Mr. Stone have used deceptive means to obtain unauthorized, pre-release access to stock picks by two Motley Fool services. After obtaining the information the two men immediately placed stock trades based on the information. Once Motley Fool made its picks available to clients the stock prices increased. Defendants then sold their shares. Overall, they have made about $12 million dollars. The complaint alleges violations of Exchange Act Sections 10(b), 20(e) and 20(b). The case is pending. See Lit. Rel. No. 25381 (May 4, 2022).

Charitable offering fraud: SEC v. Synergy Settlement Services, Inc., Civil Action No. 6:22-cv-0820 (M.D. Fla. Filed May 2, 2022) is an action which names as defendants: Synergy, the Foundation For Those With Special Needs, Inc, Special Needs Law Firm, PLLC, Jason Lazarus and Anthony Prieto, Jr. This action focuses on two supposed charitable pooled investment trusts of $46 million and 380 trust member, most of whom are injured or disabled. Under the Social Security Act disabled recipients of Medicaid or Social Security Supplemental Security Income benefits can obtain awards or settlements from certain law suits without impacting their benefits if the amounts received are placed in an irrevocable trust established and managed by a non-profit association. Beginning in May 2015 Defendants marketed and sold investments in two pooled investment trusts purportedly established and managed by a non-profit entity as required by the Social Security Act. In reality, the entity named as trustee of the two trusts is a shell company with no operations or employees. Defendants Lazarus and Prieto have installed the Foundation as a nominee trustee to conceal the fact that Defendants Synergy, a for-profit firm, Lazarus and Prieto perform all the trustee functions and profit from the trusts’ operations by collecting fees and the funds stemming from the operations. The operations are based on a series of misrepresentation including those about the operation and management of the trust. Defendants also improperly diverted all trustee fees to Synergy. In addition, they improperly used fees from deceased beneficiaries’ accounts to reimburse themselves for employee salaries and expenses and to make donations to trial lawyers’ and other organization in violation of the tax code. Since the trusts are not operated and managed by a non-profit they do not qualify for the exemptions from the registration provisions of the securities laws. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. See also In the Matter of True Link Financial Advisors, LLC, Adm. Proc. File No. 3-20838 (Filed May 2, 2022)(action naming as respondents the investment adviser and its registered adviser representative, Kai Stinchcombe; the Order is based on the facts outlined above; resolved with an order that each respondent shall cease-and-desist from future violations of Securities Act Section 17(a)(3) and Advisers Act Section 206(4); True Link will pay a penalty of $200,000; Respondent Srtinchcombe will pay a penalty of $20,000). See Lit. Rel. No. 25379 (May 2, 2022).

Microcap fraud: SEC v. Cattlin, Civil Action No. 1:21-cv- 05294 (E.D.N.Y.) and SEC v. Page, Civil Action No. 1:21-cv-05294 (E.D.N.Y.) are previously filed actions in which William R. Shupe and his firm, FJ Investments International, Inc., settled with the Commission. During the period 2016 through late 2019 Mr. Shupe worked with several microcap companies to sell stock to retail investors. Mr. Shupe had several roles in the frauds including officer, director and majority shareholder. Defendant Shupe helped conceal the controlling shareholders. He also created and used FJ Investments to help the controlling shareholders –Timothy and Trevor Page – disguise and distribute the proceeds of their illegal stock sales. To resolve the case each Defendant consented to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Shupe also agreed to the entry of a five year penny stock bar, a five year officer and director bar and to surrender the shares of stock in his possession. In addition, Mr. Shupe agreed to pay a penalty of $100,000. See Lit. Rel. No. 253788 (April 29, 2022).

Australia

Update: The Australian Securities and Investment Commission published its quarterly update for the period January to March 2022 (here).

Singapore

Report: The Monetary Authority of Singapore published its Macroeconomic Review, April 2022, which details the underlying policy decisions impacting key actions (here).

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I. Introduction

This is the first of two articles discussing the cases initiated by the Commission’s Enforcement Division during the first quarter of 2022. While it is always prudent to be careful when analyzing the results from one quarter, properly viewed they can provide important information regarding the direction of the program.

The work of the Enforcement Division during the period should also be considered in the context of the still on-going pandemic. For nearly two years the Division’s work has been largely hampered by its inability to sit across a table from a witness, pose questions, listen to the answer and do follow-up as appropriate. To be sure Zoom and Webex have been used effectively. But looking at a computer screen is not the same as sitting across the table from the witness. Nevertheless, the Division has worked hard and at times achieved very good results despite the difficulties.

This report, like those previously published regarding other time periods, will be divided into three segments. Part I will present the statistics for the first quarter of 2022. Part II will present selected cases from the period. Finally, Part III will analyze the statistics and the select cases presented in the context of earlier periods.

II. The statistics

During the first quarter of 2022 the Commission filed 53 new enforcement actions, excluding tag-a-long, 12j actions and similar matters. The cases were spread about evenly over the three months of the quarter, although slightly fewer cases were brought as the period drew to a close.

While the cases initiated during the quarter were primarily civil injunctive cases, during the first two months of the period that was not always the case. In January, for example, 10 civil injunctive actions were filed while 8 administrative proceedings were initiated. The next month, however, the pattern reversed. Only 9 civil injunctive actions were initiated while 13 administrative proceedings were commenced. In March the pattern again reversed with almost all of the cases being fled were brought in federal district court.

The number of actions brought in the first quarter appears to be consent with those from earlier periods. For example, in the first quarter of 2020 the Commission filed 48 enforcement actions. Similarly, in the final quarter of 2020 the agency again filed 48 enforcement actions.

The numbers clearly show that more enforcement actions filed in the first quarter of this year than in other comparable periods. Yet some would argue that a footnote is in order. During the first quarter of this year 12 of the enforcement actions involved only the failure of either an investment adviser or broker-dealer (there were 6 cases against investment advisers and 6 against broker-dealers) to file form CRS, a customer relationship summary. Each action was brought as an administrative proceeding. Some might suggest those actions differ from other more typical enforcement cases. Others may disagree. Hence the footnote. ‘

Finally, the categories into which the largest groups of actions for 1Q22 they were:

1) Investment advisers 18.8%

2) Insider trading 13.2%

3) Offering frauds 13.2%

4) Corporate/financial 7.5%

In contrast, the categories in the first quarter of 2021 were:

1) Misrepresentations 27%

2) Investment advisers 14%

3) Unregistered brokers 8%

Clearly the categories differ with the exception of actions focused on investment advisers, which has been something of a constant in recent periods. As will be seen in Part II of this article, the variety of cases filed in the first quarter of 2021 was also much broader than in the first quarter of 2022.

In contrast, the fourth quarter of 2021was largely consistent with the results from the current period:

1) Investment advisers 16%

2) Insider trading 12.5%

3) Corporate/financial 10%

The sole difference in the categories for the two periods is the large group of cases that fall into the category of offering fraud actions in the first quarter of 2022. The reason for this will become more apparent in Part II when the select cases are examined. That said, traditionally offering fraud actions center on microcap fraud. In the first quarter of 2022 there was a shift – many of the cases involve crypto assets. That may well reflect the changing focus within the Division. On May 3, 2022 the Commission announced that it is nearly doubling the size of what Enforcement now calls the Crypto Assets and Cyber Unit. The unit will expand to 50 dedicated positions.

Next: Part

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