by T. GormanPosted on Posted in SECActions

Part I of this series presented the results for calendar year 2022, briefly discussing the number of cases filed for the year by the Commission and detailing the results for the fourth quarter of 2022.

C. Examples of cases included in the four largest categories of cases 4Q22

This Part of the series presents examples of the cases in the four largest categories of actions filed during the fourth quarter. Those were offering fraud actions, crypto assets, manipulation and insider trading. The cases are listed in chronological order.

Offering Fraud

Offering fraud: SEC v. Iakovou, Civil Action No. 4:22-v-00194 (M.D. Ga. Filed December 7, 2022) is an action which names as defendants: George Iakovou, Vika Ventures LLC and Penelope Zbravos. The firm was founded by the two individual defendants. Over a two-year period, beginning in late 2019, about 46 investors to put about $3.9 million dollars in what they were lead to believe would be pre-IPO shares of various firms. In fact, there were no such shares – the representations were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendant Zbravos, the girlfriend of Defendant Iakavou, resolved the matter, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. The Court will determine the amount, if any, of a civil penalty. The U.S. Attorney’s Office for the Middle District of Georgia announced the filing of related criminal charges.

Offering fraud: FTX: SEC v. Ellison, Civil Action No. 22-cv-10794 (S.D.N.Y. Filed December 21, 2022). This is the companion case to original action filed involving FTC. That action named as defendants, among others, Samuel Bankman-Fried and centered on the collapse of FTX discussed below. It names as Defendants Caroline Ellison and Zixiao “Gary” Wang. Defendant Ellison was employed at Alameda, Mr. Bankman-Fried’s hedge fund, and Mr. Wang, a co-founder of FTX. The complaint recounts the collapse of FTX primarily as a result of the looting of investor assets for the benefit of Defendants and Mr. Bankman Fried as recounted in the complaint against him. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b). The case is pending.

Crypto

Crypto trading fraud: SEC v. Rounsville, Civil Action No. 3:22-cv-02458 (N.D. Tx. Filed November 3, 2022) is an action which names as defendant Jeremy K. Rounsville. Over a period of about one year, beginning in May 2018, Defendant Rounsville served as the public face and primary promoter of the crypto asset trading program, “The Trading program.” It used proprietary trading software to generate large returns, according to Defendants. A trading bot was marketed under the name Arbitraging.co. The bot could identify arbitrage trading situations that would generate profits of up to 1% per day, according to the sales pitch. Defendant supposedly was not paid and did not share in profits. In reality, Trading Operation never operated as advertised. In fact, the operation did not engage in any trading. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the matter Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. The order also prevents him from participating in future offerings and imposes an officer/director bar. In addition, Defendant has been directed to pay penalties of $207,183. See Lit. Rel. No. 25569 (November. 3, 2022).

Crypto Ponzi scheme: SEC v. Braga, Civil Action No. 2:22-cv-01563 (W.D. Wash. Filed November 3, 2022) named as defendants: Douver Torres Braga, currently a resident of Florida, who created Trade Coin Club and its operations; Joff Paradise, currently a resident of Panama, who previously described himself as the Director of the United States for Trade Coin Club; and Keleionalant Taylor, the highest paid official of Trade Coin Club. Defendants operated a Bit Coin Ponzi scheme called Trade Coin Club for a period of about two years, beginning in 2016. During that period the firm raised about $295 million from more than 100,000 investors. Defendant Braga not only created the Club, he was one of the main operators. Potential clients were told that the Club had a trading bot generating significant profits by conducting millions of microtransactions per second. The bot also had a stop loss to protect them. Blockchain analysis permitted the Commission to analyze the operations – or lack of operations – of Trade Coin Club. As operations continued, Defendants recruited new members using a pyramid scheme-like referral system. In early 2018 the Club announced it would discontinue operations in the U.S. It also limited withdrawals to ICoin, a new crypto asset that ultimately proved worthless. By the summer of 2018 operations terminated. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending.

Crypto-fraud: SEC v. Bankman-Fried, Civil Action No. 1:22-cv-10501 (S.D.N.Y. Filed December 13, 2022). In 2018 Defendant Samuel Bankman-Fried began work on a crypto asset trading platform and ultimately co-founded FTX. The firm began operations in May 2019. The new trading platform was closely associated with Alameda Research LLC, a firm that had operations in the U.S., Hong Kong and The Bahamas. Known as a “crypto hedge fund,” its CEO was Defendant Bankman-Fried. He became the ultimate decision maker. Defendant Bankman-Fried raised over $1.8 billion from U.S. and other investors who acquired an equity stake in FTX. Investors were repeatedly told that the firm had the necessary and appropriate controls. Mr. Bankman-Fried fostered this belief throughout the period of operations. Yet from the beginning Mr. Bankman-Fried diverted investor assets from FTX to Alameda. As the cash diversions continued Defendant touted FTX as having “top-notch, sophisticated, automated risk measures in place to protect customer assets, that those assets were safe and secure . . .” Alameda was portrayed as just another investor, not a funnel for investor cash to Defendant. The statements were false. Much of the investor money was diverted to Defendant. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See also CFTC v. Samuel Bankman-Fried, Civil Action No. 1:22-cv-10503 (S.D.N.Y. Filed December 13, 2022. The Department of Justice also filed criminal charges.

Manipulation

Manipulation: SEC v. Patten, Civil Action No. 1:22-cv-0503 (D.N.J. Filed September 26, 2022) is an action which names as defendants: James Patten, an employee of Tryon Capital LLC controlled by defendant Coker Sr.; Peter Coker Sr. ; and Peter Coker Jr. , a resident of Hong Kong who is the CEO of Hometown International. Defendants took control of the outstanding shares of Hometown International, Inc. and E-Waste Corporation. The former operates one deli in New Jersey while the latter is a shell company. Using their control, defendants manipulated the share price of each company. For example, the share price of E-Waste increased to $10.00 from $0.10. Accordingly, Defendants substantially profited from their actions. The complaint alleges violations of Securities Act Sections 17(a)(1) and 17)(a)(3) and Exchange Act Sections 9(a), 10(b) and 15(a). The action is pending. The U.S. Attorney’s Office for the District of New Jersey announced criminal charges against the Defendants. See Lit. Rel. No. 25526 (September 27, 2022).

Manipulation – social media: SEC v. Constantin, Civil Action No. l4:22-cv-04306 (S.D. Tx. Filed December 13, 2022) is an action which names as defendants: Edward Constantin, Perry Matlock, Thomas Cooperman, Gary Deel, Mitchell Hennessey, Stefan Hrvatin, Daniel Knight and John Rybarcyzk. Each named Defendant is a well established social media influencer. Their followers believe each provides correct information regarding various stocks. In reality, since at least 2020, the influencers have provided information to the public as part of their efforts to repeatedly manipulate various securities. Those efforts have netted them about $100 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

Insider trading

Insider trading: SEC v. Weiss, Civil Action No. 1:22-cv-08064 (S.D.N.Y. Filed September 21, 2022) is an action which names as defendant, Michael Weiss, a partner at E&Y who was the firm’s Business Development Director. Through his position with the firm Defendant was able to access confidential client information regarding pending acquisitions, prospective business strategies and financial projections. He purchased securities in those firms for personal gain. The illicit trading yielded $10,286. The complaint alleges violations of Exchange Act Section 10(b). Defendant has agreed to the entry of a permanent injunction based on the Section cited in the complaint and the payment of disgorgement, prejudgment interest and a penalty of $23,900. See Lit. Rel. No. 25516 (September 22, 2022).

Insider trading: SEC v. Holzer, Civil Action No. 1:22-cv-08342 (S.D.N.Y. Filed September 30, 2022) is an action which names as defendant Charles Holzer, the Managing Member of Worth Capital, a real estate-focused family office owned by the Holzer family. This action centers on the acquisition of Dun & Bradstreet Corp. by an investor group, announced on August 8, 2018. Defendant Holzer learned about the deal approximately one week prior to the announcement from an investment adviser that was part of the Investor Group after executing a non-disclosure agreement. Despite the agreement, Defendant misappropriated the inside information and traded, realizing profits of $96,091. He also tipped his cousin who traded and had profits of $672,000. The complaint alleges violations of Exchange Act Section 10(b). To resolve the matter Defendant consented to the entry of a permanent injunction based on the Section cited in the complaint and an order directing him to pay disgorgement, prejudgment interest and a civil penalty in amounts to be determined by the Court. He is also barred from serving as an officer/director. See also SEC v. Moraes, Civil Action No. 1:22-cv-08343 (S.D.N.Y. Filed September 30, 2022)(based on similar facts defendant Fernando Moraes traded, realizing profits of $8,842; he also resolved the matter by consenting to the entry of a similar injunction and bar order and agreed to pay disgorgement of $8,842, prejudgment interest of $1,647 and a penalty of $48,646). See Lit. Rel. No. 25545 (September 30, 2022).

 Next: Examples of other significant cases filed during 4Q22  

Tagged with: ,

by T. GormanPosted on Posted in SECActions

Introduction – an overview of 2022

This article provides a brief overview of 2022 and is the last in a series of analyzing on a quarter basis the enforcement results of the SEC. While 2021 may have been marked, and perhaps hindered by the pandemic, that clearly was not the case in 2022 for SEC Enforcement. To be sure, few people are at the offices of the agency. Even Chair Gensler frequently appears on television from his Baltimore home rather than the Commission’s headquarters office in Washington DC. Testimony continues to be largely taken by remote, although that seems to be drawing to an end.

Nevertheless, the agency filed nearly 500 new enforcement cases in 2022, far more than in recent calendar years, according to our count What is perhaps more interesting is the variety of cases that were filed. While staples such as offering fraud actions and insider trading cases continue to be key, the percentage of those traditional actions of the overall number of enforcement actions filed dwindled last year.

In 2022 the universe of cases can be characterized as a “Cop on Every Corner” as reflected in the wide variety of cases filed. No matter the vantage point one assumes to assess market activity, it it is clear that SEC Enforcement was monitoring the activity. The range of cases filed, aside from traditional staples like offering fraud, insider trading and manipulation, has a broad reach from AML, FCPA, free riding, privacy and touting to SPACs and Reg FD. In many instances that reach may be the result, at least in part, of data analytics – a factor cited by the agency in announcing two new insider trading cases last year. Many observers believe the Commission may have the best data analytics team in Government.

Whatever the predicate for the increased number of enforcement actions and the broad reach of the enforcement program, there is no doubt it is good enforcement. The image of a “Cop on Every Corner” or perhaps more appropriately an SEC Enforcement Official monitoring each nook and cranny of the market place, should give comfort to all investors – the Commission is making the market safer and more efficient for all participants.

Statistics for 4Q22

In the fourth quarter of 2022 a total of 143 new enforcement actions were filed. The majority – 84 –were civil injunctive actions. While the pace of new filings slowed during the beginning of the quarter – a fact undoubtedly attributed to the huge “push” the agency makes every year as the Government fiscal year comes to an end on September 30, over the course of the quarter it increased. The statistics for the period are as follows:

4Q22 – cases filed (expressed as percentage of total)

Offering fraud 13%

Crypto assets 9%

Manipulation    9% 

Insider trading   7%

Two points stand out regarding these statistics. First, the four categories listed above reflect the largest groups of case initiated during the quarter. Yet only one of the categories is in double digits – offering frauds which is frequently one of the largest groups of cases for any period. The fact that the percentage of the total for the other three largest groups of cases filed in the fourth quarter is a reflection of the fact that the agency filed a variety of cases during the period which often probed little know corners of the market place. This is consistent with the approach taken by the agency since shortly after Mr. Gensler became Chair of the Commission.

A brief review of the cases cited in subsequent installments of this series confirms this point. During the fourth quarter of 2022 cases brought in areas outside those cited above included touting, financial fraud, free riding, unregistered securities, unregistered brokers and others. This broad reach approach can be very effective in monitoring the market as discussed above.

Second, the fact that crypto assets are the second largest category of cases is significant. While there has been an on-going debate regarding the regulation of those assets, it seems clear that the Commission is not waiting for Congress to act. Rather, the agency added a number of new enforcement positions which focus on crypto assets and is filing significant numbers of cases, a fact consistent with Chair Gensler’s statements that many crypto assets are in fact securities.

These results also undercut claims that the “rules” for determining what crypto assets may be securities are some how unclear. Indeed, most of the crypto asst cases filed are based on Securities Act Section 5 – a statute passed in 1933 – and the Supreme Court’s decision in SEC v. Howey, 328 U.S. 293, a case decided decades ago in 1946. Clearly the statute and the case have each been on the books for years and reviewed, interpreted and construed by untold numbers of courts over the decades. Stated differently, there is plenty of precedent to review and analyze the standards being applied to crypto assets.

Finally, this is the first of four Parts of the article. Section II provides examples of the cases brought in each of the four largest categories cited above; Section III provides examples of other significant cases filed during the quarter (and will be published in two parts because of its length); and Section IV is the Conclusion to the series. Earlier articles in this series analyzing each of th quarters of 2022 can be found at: 1Q22, here; 2Q22, here, and 3Q 22 here.

 Next: Examples of cases in each of the largest categories for the quarter  

Tagged with: ,