SEC Enforcement 3Q22 – A “Cop on Every Corner” Presence in the Market, Part II
Part I of this series, which was divided into two areas, presented the overall case statistics for the third quarter of 2022. During that the Division of Enforcement filed a total of 202 new cases. The majority of those cases filed were civil injunctive actions. While the Commission filed cases focused on a wide variety of areas, the leading categories of cases were those involving an offering fraud, insider trading, an investment adviser or financial fraud.
The cases below are examples of the case in each of the four largest categories. The cases in each category are presented chronologically in the order of filing.
III. Examples of cases filed in the four largest categories
This is one of the long standing, traditional areas of focus for SEC enforcement. The examples below focus first on a fraudulent real estate scheme that used Ponzi like payments to facilitate it and second on a fraud centered on saving a famous Hollywood film studio.
SEC v. Boron Capital, LLC, Civil Action No. 5-22CV0114 (N.D. Tx. Filed June 14, 2022) is an action which names as defendants: Boron; BC Holdings 2017, LLC; United BNB Fund 2018, LLC; and Blake Robert Templeton. Over an 11 year period, beginning in 2011, each of the named defendant entities was used by Mr. Templeton to defraud investors interested in real estate investments. To market the interests Mr. Templeton and the entities employed a variety of misrepresentations. Overall, the scheme raised over $18.7 million by using investor funds and at times making Ponzi type payments. The complaint alleges violations of Securities Act Section 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. The Court granted the Commission’s request for a temporary restraining and freeze order. See Lit. Rel. No. 25423 (June 15, 2022).
Offering fraud: SEC v. Desilu Studios, Inc., Civil Action No. 2:220-cv-005652 (C.D. Cal. Filed August 10, 2022) is an action which names the film studio and its founder, Charles Hensley, as defendants. The Studio is best known for its relationship with actress Lucille Ball and her husband Desi Arnez. Defendant Hensley raised almost $600,000 from 21 investors over a period of about one year beginning in June 2017. Investors were told that he had acquired the rights to the studio and that the funds would be for a rejuvenation. Both statements were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25466 (August 11, 2022).
While insider trading is also a long-standing focus of the Commission, the cases below have unusual wrinkles. Wahi is the first insider trading case involving crypto assets. Holzer centers on the managing member of a family office who misappropriated inside information.
SEC v. Wahi, Civil Action No. 2:22-cv-01009 (W.D. Was. Filed July 21, 2022) is an action which names as defendants: Ishan Wahi, a citizen of India who was employed as a Manager in Coinbase’s Asset and Investing Products group; Nikhil Wahi, a citizen of India and the brother of Defendant Ishan Wahi, who was employed as a senior manager at Salesforce; and Sameer Ramani, a U.S. citizen who is believed to be in India. Ishan Wahi invoked his 5th Amendment rights in testimony while Nikhil Wahi did not appear. Mr. Ramani is a close friend of Defendant Wahi. Beginning in June 2021 and continuing through April 2022, Defendant Ishan Washi repeatedly tipped his brother and Defendant Ramani to pending announcements that Coinbase, a large crypto platform, was about to announce on its blog or through Twitter, the listing of another crypto asset. The communication of that information violated the internal policies and procedures of Coinbase. The communications sparked repeated trading prior to the announcements. The suspicious trading of Nikhil and Ramani drew the attention of the Director of Security Operations at Coinbase who launched an investigation. On May 11, 2022, the Director scheduled an interview with Ishan who then sent a screen shot of it to Ishan using a phone with a foreign number. By trading in advance of Coinbase announcements while in possession of material non-public information about the pending announcements brother and Defendant Ramani amassed insider trading profits of over $1.1 million. The night before he was scheduled to testify Defendant Nikhil Wahi flew to India. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. This is the Commission’s first insider trading case tied to crypto assets.
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).
Actions centered on investment advisers have been a key focus of SEC enforcement for years. Indeed, actions centered on an advisor generally represent one of the leading categories of cases filed each year. Below are two example of these cases from 3Q22. The first centers on a recent trend in the area – robo advisers. The second focuses on a number of complex transactions used to defraud investors and clients.
In the Matter of Charles Schwab & Co. Inc., Adm. Proc. File No. 3-20897 (June 13, 2020). Respondents in the proceeding include the dual registered investment adviser and broker-dealer; Charles Schwab Investment Advisory, Inc, a registered advisory which is a subsidiary of Schwab Holdings, Inc., a subsidiary of The Charles Schwab Corporation; and Schwab Wealth Investment Advisory, Inc, an investment adviser formed for the firm’s Schwab Intelligent Portfolios or SIP product – a robo advisor. Over a three-year period, beginning in early 2015, certain adviser subsidiaries of The Charles Schwab corporation made false and misleading statements regarding its SIP product. The robo advisers were based on model portfolios that held between 6% and 29.4% of client assets in each case. The amount was preset so the affiliated bank would make at least a minimum amount of revenue from the spread on the cash by loaning the money. Investors were not charged a fee for the SIP service. The firm did not disclose the fact that under certain market conditions other assets such as equities outperform cash. Respondents were also alleged to have made false statements in their Form ADV filings regarding the conflict of interest in setting the cash allocations at levels that would generate a certain amount of revenue. For example, firm clients were told that the allocations were created through a “disciplined portfolio construction methodology.” In fact, they were set for business reasons. The difficulty was compounded by the fact that the firm launched an advertising campaign informing investors that the SIP program permitted them to keep more of their money than other advisers who charged a fee. Respondent cooperated with the Commission’s investigation. The firm also agreed to implement certain undertakings which included the retention of an independent consultant. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure. The firm will pay disgorgement of $45,907,541 and prejudgment interest of $5,629,320. The firm will pay a penalty of $135 million. A Fair Fund will be created.
SEC v. Greneco, LLC., Civil Action No. CIV 22-673 (W.D. Okla. Filed August 8, 2022). Named as defendants in the action are: GreneCo, LLC a firm owned by defendants Gene Larson and Gregory Womack; Gene Larson, a co-owner of GreneCo with defendant Gregory Womack; and Womack Investment Advisers, Inc., a state registered investment adviser controlled by Mr. Womack. Over about a one-year period, beginning in late December 2018, GreneCo and Messrs. Larson and Womack raised approximately $23.3 million from 250 investors in four unregistering offerings involving what were called real estate investment opportunities. Potential investors were solicited to purchase membership units in limited liability companies managed by GreneCo. The units were unregistered securities. Defendant Womack also recommended interests in one or more of the four offerings to clients of Womack Investment Advisers. Those investors were not told that Mr. Womack would receive substantial management fees from investor funds through the GreneCo offerings. Likewise, he and the Advisory did not inform Womack Investment Advisers clients that the firm would receive at least $160,000 in fees directly from GreneCo. To the contrary, Part 2 of the Advisor’s Form ADV stated that the firm “receives no compensation from a client’s participation and does not charge the client a fee for the investment.” Mr. Womack and the firm had a duty to disclose the management fees paid to him and the compensation paid to the investment advisor from GreneCo. The disclosures were not made. The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Advisers Act Section 206(2). Defendants resolved the action. Each Defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. Each will also pay a penalty in the amount of: $414.364, $41,440 and $186,471, respectively. Defendant Womack agreed, in addition, to pay disgorgement of $236,349 plus prejudgment interest. And, the Adviser agreed to pay disgorgement of $160,000 plus prejudgment interest and a penalty of $517, 995. See Lit. Rel. No. 25464 (August 10, 2022).
Although financial fraud is a traditional area of focus for the Commission, in recent years the agency has not brought large numbers of actions tied to this area despite repeated efforts. Recently, however, the Commission has been filing increasing numbers of cases in this area. The two cases below are good examples of these cases in this area. The first is built on sham transactions. The second centers on a scheme to boost revenue by deferring expenses, an approach used in the Worldcom fraud years ago which helped spur the passage of SOX.
SEC v. United Health Products, Inc., Civil Action No. 1:11-cv-03612 (D.N.Y. Filed June 8, 2022) is an action which names the firm, a manufacturer of certain medical products and two of its officers – Douglas Beplate, Chief Executive Officer — and Louis Schiliro, COO – as defendants. Defendants orchestrated two sham transactions to artificially inflate revenue. The first involved the purported sale of product to a customer using a back-dated purchase which the customer canceled. No product was shipped; no payment received. The transaction was booked. The second involved recognizing revenue from a sale to the firm’s largest customer when in fact there was no legitimate sale. To conceal the transactions the two officers of the company repeatedly gave the outside auditors false explanations. As a result, the Forms 10Q and 10-K doe 12017 and 2018 were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(A), 13(b)(5) and 16(a) along with Section 304(a) of SOX. The case is pending. See Lit. Rel. No. 25413 (June 8, 2022).
SEC v. Granite Construction, Inc., Civil Action No. 5:22-cv-0457 (N.D. Ca. Filed August 25, 2022) is an action which names as defendant the company, an infrastructure-construction firm based in Watsonville, California. Over a period of about 2 years, beginning in 2017, Dale Swanberg, group leader and senior vice president for the firm’s largest civil engineering projects, orchestrated a scheme to improperly defer the recording of additional costs that arose with significant projects to conceal the deteriorating revenue of the group. Specifically, the firm’s policies and procedures and internal accounting controls required the construction teams within the Heavy Civil Group to create a forecast for each project that accurately forecasted the total cost. The forecast was put into the general ledger that calculates revenues and the profit margin for the group. Mr. Swanberg’s scheme manipulated profit margins and deferred the recognition of expected cost increases. Thus, the firm overstated revenue by $62 million over several quarters of 2018 and 2019. Following disclosure of the scheme the stock price crashed. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm settled the matter, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, the firm agreed to pay a civil penalty of $12 million. See also SEC v. Swanberg, Civil Action No. 5:22-cv-00459 (N.D.Ca. Filed August 25, 2022 (same as above except does not include Exchange Act Section 13(b)(2)(B); case is pending); In the Matter of Jigisha Desa, Adm. Proc. File No. 3-21005 (August 25, 2022)(CFO of firm; based on facts above; alleged to have caused violations of SOX 304(a); resolved with a cease-and-desist order based on Section cited; Respondent reimbursed the firm over $176,000 in bonuses and cash equivalent for them); In the Matter of Laurel Krzeminski, Adm. Proc. File No. 3-21004 (August 25, 2022)(CFO of firm; based on facts above; resolved same as prior action above); In the Matter of James H. Roberts, Adm. Proc. File No, 3-21003 (August 25, 2022)(CEO of firm; based on facts detailed above; resolved with the entry of a cease-and-desist order as above; in addition, Respondent was ordered to reimburse the firm $629,000 per SOX 304(a); Respondent will also return 27,527 shares of stock).
Next: Examples of other significant cases filed during the 3Q22.