by T. GormanPosted on Posted in SECActions

Insider trading has long been a staple of the Commission’s enforcement program. Over the years the agency has filed numerous insider trading cases. While at times the cases may have appeared different or had elements that may have been labeled differently, at the core of each case is the same basic principles – trading built on a breach of duty and trust. And, it is just that principle which is at the core one of the Commission’s most recent cases in the area, In the Matter of Robert J. Schettino, Adm. Proc. File No. 3-21977 (June 25, 2024).

This action centers on trading in the securities of NAPCO Security Technologies, Inc. by Robert Schettino. The company is a Delaware corporation based in Amityville, New York. It designs and manufactures electronic security devices, and cellar communications services for intrusion and fire alarm systems and school security systems.

Respondent Schettino has been employed at NAPCO since 1991. Initially, he was the controller. He has also served vice president of finance. Throughout his time at the firm, Respondent has been responsible for overseeing the process of finalizing the accounting records for each quarter and the preparation of the financial reports for the company.

Prior to the second fiscal quarter of 2020 NAPCO had not reported a quarter-over-quarter decline in equipment revenue in recent years. Yet in the second fiscal quarter of 2020 Respondent and other company officers received data showing that NAPCO revenue on a quarter-over-quarter basis for equipment revenues declined. The numbers also showed that consolidated revenues for the quarter would be below analyst consensus figures.

On January 17, 2020, while he was overseeing the finalization of the accounting records for the period, Respondent sold all of the 20,975 shares of NAPCO stock in his brokerage account. He had not purchased or sold a share of company stock for five years. The sale constituted a breach of fiduciary duty.

When the company results were issued on February 3, 2020, the share price for NAPCO declined about 22%. As a result of his trades, Respondent avoid losses of about $198,566. The Order alleges violations of Exchange Act Section 10(b) and Rule 10b-5.

To resolve the proceedings, Mr. Schettino consented to the entry of a cease-and-desist order based on the Section and Rule cited in the Order. He is also prohibited from acting as an officer or director of any issuer registered under Exchange Act Section 12 or required to report under Exchange Act Section 15(d). He is, in addition, denied the privilege of appearing or practicing before the Commission as an accountant. Finally, Respondent is ordered to pay disgorgement of $198,566, prejudgment interest of $38,815 and a penalty equal to the amount of the loss avoided.

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by T. GormanPosted on Posted in SECActions

Ponzi schemes have been a key focus for the Commission’s enforcement program, at least since the days of Bernie Madoff. While there are variations as with all schemes, typically the fraudsters solicit investments for an entity with which they are affiliated. The sales pitch frequently promises quick profits and little else. As the investor money flows in, it often goes out just as quickly – payments are made to earlier investors who may become disgruntled over time unless they receive the promised “profits.” The Ponzi payments typically help conceal the scheme by quelling what may become dissatisfaction by disgruntled investors who have yet to see the promised profits.

The Commission cases often have parallel criminal actions. While the filing of parallel criminal charges can aid the Commission’s investigation, it can also result in a type of frozen chaos in which the agency case remain frozen pending the resolution of the criminal charges but actually evolving as the criminal cases move forward as evidence is developed that can and will be used in all of the cases. This seems to the situation with in the Commission’s latest case in this area, SEC v. Weinstein, Civil Action No. 3:23-cv-03848 (D.N.J. Amended Complaint filed July 12, 2024).

The creators of the scheme: Defendant Eliyahu Weinstein is the creator of a scheme that seems to have spawned not just the Commission’s case but a series of related criminal actions. He is currently a resident of the Monmouth County Correctional Institution in Freehold Township, New Jersey and a named defendant in U.S. v. Eliyahu Weinstein, No. 23 MJ-03038 (D.N.J.). Prior to being arrested he used the name Mike Konig in the scheme which spawned the cases here.

Initially Defendant Weinstein concealed two prior felony fraud convictions from investors and some of his confederates. As the Commission’s case moved forward, the parallel criminal cases emerged, charging members of the scheme and making deals based on cooperation. Those actions resulted at least in part in the new amendment to the Commission’s complaint. That complaint now includes eight defendants, some of whom have been named in parallel criminal cases. In addition to Mr. Weinstein, the amended agency complaint now names:

Joel L. Wittels, initially involved with the books and records. He has pleaded guilty in the criminal case listed above.

Aryeh Bromberg, a member of the board of directors of Optimus Investments, Inc. He has been primarily involved in raising capital for that firm and has been named as a defendant in one of the parallel criminal cases.

Joel L. Wittels has been involved with the bookkeeping for Optimus. He pleaded guilty in March 2024 to a three count information in one of the parallel criminal cases, U.S. v. Wittels, No. 24-cr-210 (D.N.J.).

Richard M. Curry has been primarily involved with raising capital for Tryon Management Group, Inc. It was formed to interact with the other entities in the scheme. He pleaded guilty in U.S. v. Curry, 23-cr-689 (D.N.J.).

Christopher J. Anderson, co-founder of Tryon He pleaded guilty in U.S. v. Anderson, 23-cr-684 (D.N.J).

Ala Mohamed Hattab controls certain entities that acted as brokers in the cases.

Shlomo Erez, a citizen and resident of Israel who currently resides in New Jersey. He controlled the investor funds in connection one of the entities involved. He is also a licensed attorney, but not in the United States, who became involved in money laundering charges.

Origins of the scheme: In late November 2021 Defendants Weinstein, Bromberg and Wittels, through Optimus, sought to rise money from investors. Supposedly, the funds were to finance lucrative transactions for Optimus involving the supposed purchase, distribute and re-sell of health care products. Two months later Defendants Anderson and Curry formed Tryon Management Group LLC. The purpose was to raise capital to invest in Optimus through the sale of short-term promissory notes issued by Tryon.

Over the next several months Defendants Weinstein, Bromberg, Wittels, Anderson and Curry sought to raise capital in connection with the sale of the Tryon notes. Investors were solicited using a series of false statements. As the investor funds were raised, they were used in part to make Ponzi type payments.

By August 2022 the actual identity of Mr. Weinstein began to emerge. Details regarding fraudulent actions in connection with deals being made by Optimus also began to emerge. Nevertheless, the deals moved forward. Defendants collectively raised funds from at least 150 Tryon investors. At least $38 million was raised from the investors.

Current status of cases: The Commission’s complaint, which has been updated with an amendment, reflects key developments in the cases. It currently alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26049 (July 15, 2024). The criminal charges are evolving as the investigations move forward. Once those charges are finalized and resolved the Commission may also again amend its complaint. The agency will then move toward resolving the charges.