by T. GormanPosted on Posted in SECActions

One of the most common, if not the most common, forms of fraud handled by the Commission is offering fraud. These schemes exhibit endless patterns and variations. Typically, a fraudster constructs a convincing story that promises investors significant profits and returns from a soon-to-be-launched venture. In some cases, the promised returns are substantial, while in others, they are modest but enticing enough to lure potential investors into risking their savings without raising suspicion. The subject matter of these schemes can vary widely, from straightforward investments like acquiring tickets to sold-out Broadway shows to more sophisticated ventures involving cutting-edge AI technologies that captivate prospective investors. Whatever the focus, the pitch is carefully designed to appeal just enough to attract interest without appearing too good to be true.

The Commission’s latest case of offering fraud demonstrates how such schemes can strike this delicate balance. Over a four-year period, the defendants raised over $22 million through a privately held company used as a front. The case, SEC v. Feller, Civil Action No. 1:24-cv-0896 (S.D.N.Y., filed April 17, 2024), highlights the mechanics of such fraudulent activities.

The defendants named in this case are Paul Feller and Icaro Media Group, Inc., a private company that initially operated under the name Sport 195, Inc. before rebranding. Paul Feller serves as the Chairman and CEO of Icaro. Before this venture, he co-owned Americas of Cronus Equity, LLC.

From 2017 onward, Mr. Feller solicited investments in Icaro, raising more than $22 million from at least 38 investors over four years. His sales pitch was simple yet compelling: he claimed that Icaro was working with two multinational telecom companies to launch or had already launched digital platforms and mobile applications delivering sports content tailored to regional client interests.

While one of these telecom firms did initiate trial projects with Icaro, the collaborations were terminated in 2016. The other firm never launched any projects with Icaro, as the company failed to secure the necessary licenses for the content. Despite these setbacks, Mr. Feller continued his sales pitch, often embellishing it with claims of new developments, such as partnerships with a high-profile business executive and a prominent sportswear brand. None of these alleged transactions materialized.

The complaint alleges violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. The case is currently in litigation. See Lit. Rel. No. 25979 (April 17, 2024).

Tagged with: ,

by T. GormanPosted on Posted in SECActions

The Division of Examinations or EXAMS published a risk alert on April 17, 2024, regarding the amended Marketing Rule for investment advisers, Rule 206(4)-1. The Observations are divided into two sections. The first focuses on books, records and Form ADV. The second centers on the general prohibitions of the Rule. Throughout the Alert, the staff has included examples of each of the points presented which aid in clarifying the observation.

Book, Records and Form ADV

The staff observed situations in which the policies and procedures were not reasonably designed or implemented to address the amended Marketing Rule. For example, in certain instances the policies and procedures consisted only of general descriptions, did not address applicable marketing channels utilized by the adviser or were informal and not in writing.

In other instances, the policies and procedures were not complete or updated. In others, they had not been tailored to the adviser’s specific advertisement while in certain instances failed to address adequately the preservation and maintenance of the advertisement and the related documents. In some instances, the updated policies and procedures had not been implemented.

The staff also observed situations in which the policies and procedures had been updated but the related books and records had deficiencies. This occurred in situations where, for example, materials referenced had not been maintained such as questionnaires or copies of social media or the documents that supported performance claims.

In some instances, there were deficiencies on Form ADV where the adviser reported, for example, that their advertisements did not include third party ratings, performance results and hypothetical results when in fact they did.

General Prohibitions

Here the staff observed deficiencies such as including untrue statements of a material fact or unsubstantiated statements of a material fact in an advertisement. Similarly, the staff observed instances where the advertisement appeared to omit material facts necessary to make the statement not misleading or to avoid a misleading inference.

The staff also observed situations where a fair and balanced treatment of material risks or limitations about the potential benefits were not adequately set forth. For example, there were instances observed where performance information was highlighted without discussing the material risks and limitations. In some instances involving specific investment advise, the presentation did not appear fair and balanced. Similarly, in some instances there were performance results which were not fairly balanced or where the presentation was materially misleading.

In the end, while many advisers had implanted the amended Marketing Rule, the staff did observe points that should be addressed further and detailed above. Throughout the Alert, the staff has included examples of each of the points presented which aid in clarifying the observation.

Tagged with: ,