SEC Enforcement 3Q22 – A “Cop on Every Corner” Presence in the Market, Part III
Part I of this series presented basic statistics for the third quarter of this year – the number of cases as well as the largest areas of concentration (here). Part II presented examples of the cases in each of the largest areas of concentration (here). This installment of the series presents examples cases initiated during the third quarter of 2022 and were significant but not included in one of the four largest categories of actions initiated. The cases below are presented chronologically by the date they were filed.
Examples of other significant cases filed in 3Q22 .
Mini bonds — fraud: SEC v. Breland, Civil Action No. 3:22-cv-01470 (D.La. Filed June 2, 2022) is an action which named as defendant Vern Breland, former Mayor of the Town of Sterlington, Louisiana. The action centers largely around an April 26, 2017, offering and sale by the Town of $4 million of water and sewer utility bonds and the sale on September 28, 2018, of $1.8 million of “refunding bond” water and sewer utility revenue bonds. Essentially, the offerings replaced then existing bonds. The offerings were approved by the state bond commission. In fact, the offerings were based on false financial projections as Defendant Breland knew. Defendant Breland also deceived the state bond commission. In addition, he did not disclose that over $3 million of the proceeds from the earlier offerings had been misused. The complaint alleges violations of each subsection of Securities Act Sections 17(a) and Exchange Act Section 10(b). The case is pending. See also SEC v. Fletcher, Civil Action No. 3:22-cv-01467 (D.La. Filed June 2, 2022 (Acton against Aaron Fletcher and Twin Spires Financial LLC, the municipal advisory firm and its owner on the offerings, alleging violations of the same statutes as above; settled with entry of cease-and-desist orders based on Securities Act Section 17(a) and Exchange Act Section 10(b) and agreement to pay disgorgement, prejudgment interest and penalties in amounts to be determined later); In the Matter of Town of Sterlington Louisiana, Adm. Proc. File No. 3-20873 (June 2, 2022)(action against the town alleging same facts; resolved based on remedial acts of town plus its consent to the entry of a cease-and-desist order based on Securities Act Section 17(a) and Exchange Act Section 10(b)).
False statements re COVID test kits: SEC v. Schessel, Civil Action No,. 22-cv-03287 May 31, 2022) is an action which names as defendants: Marc Schessdel, the CEO of defendant SCWorx Corp., a firm that is a “software-as-a-service provider to the healthcare industry. On April 13, 2020 Defendants issues a false and misleading press release claiming to have a “committed purchase order” to obtain two million COVID-19 test kits with a provision to obtain more totaling $840 million. In fact, the firm had only had discussions with Telehealth Company. Yet following the press release the company’s stock went up 425% on volume of 96.2 million shares, over 900 times its three-month average daily volume. While the statement did not name the kit supplier, a link was provided to Supplier Company. In fact, there was no “committed purchase order and Supplier Company was not a legitimate supplier of those kits. The day after the release Telehealth Company notified Mr. Schessel and SCWorx in writing that there was no committed press release but only a preliminary summary draft – no agreement. Nevertheless, Defendant Schessel repeated the claims on April 16, 2020, during an investor call. Because of the price inflation of the stock Defendant Schessel used stock to pay off the company debt. Later, on April 30, 2020, before having a single kit, the company reported the deal was terminated – no kits. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The U.S. Attorney’s Office for the District of New Jersey and the Fraud Section of DOJ announced parallel criminal actions. The cases are pending.
Reg. BI, suitability: SEC v. Western International Securities, Inc., Civil Action No. 22:22-cv-04119 (C.D. Ca. Filed June 15, 2022) is an action which names as defendants: the firm, a registered broker dealer and Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham and Tomas Swan. Each individual defendant is a registered representative working at the firm which is a registered investment adviser and broker-dealer. Over a period of less than one year, beginning in July 2020, Defendants sold $13.3 million in L Bonds to retail investors. The bonds are a complex product that pays a significant rate of interest. In making those sales Defendants violated the care obligation of Regulation BI. The investors who purchased the bonds were not sophisticated and lacked an understanding of them. Nevertheless, the bonds were sold to those investors in violation of Reg. BI and its duty of care. The firm also had inadequate compliance procedures on the point. The complaint alleges violations of Reg. BI and Exchange Act Sections 20(a). The complaint is pending. This is the first case brought under Reg. BI.
Unregistered offering: SEC v. A.G. Morgan Financial Advisors LLC, Civil Action No. 34:22-cv-3421 (E.D.N.Y. Filed June 9, 2022) is an action which names as defendants: the registered investment adviser; Vincent Camarada, the sole owner of AG Morgan; and James McArethur, the firm’s chief compliance officer. In two instances – one from August to November 2017 and a second from December 2018 to July 2020 –Defendants solicited investors to purchase over $500 million of promissory notes issued by Complete Business Solutions Group, d/b/a Par Funding, a securities law recidivist. The solicitations were in violation of their fiduciary obligations to advisory clients since the advisor began borrowing money from Par in July 2017, creating an undisclosed conflict of interest. The complaint alleges violations of Securities Act Section 5 and Exchange Act Section 15(a)(1). The case is pending. See Lit. Rel. No. 25418 (June 10, 2022).
Rating agencies: In the Matter of Egan-Jones Ratings Company, Adm. Proc. File No,. 3-20902 (June 21, 2022). Named as Respondents are Egan-Jones Ratings and Sean Egan. The firm is a well-known ratings agency. It registered with the Commission and became an NRSRO for financial institutions, insurance companies, corporate issuers, government and municipal securities and those of foreign governments. Sean Egan, the founder and CEO of the privately held company, is also a Respondent. In 2013 Egan-Jones was found to have violated Exchange Act Sections 15E(a)(1) and related provisions by making a material misstatement in its form NRSRO and causing violations of Sections 15E and 17(a). The action was resolved with the entry of a cease-and-desist order as to Egan-Jones and the revocation of its registration regarding ratings for asset-backed securities and government securities with a right to apply for reentry after eighteen months. A cease-and-desist order based on Rule 17g-5 was also entered as to Mr. Egan. The action here centered on alleged violations of Rule 17g-5(c)(8)(i) regarding the issuance of a rating when there is a conflict of interest and Rule 17(g)-5(c)(1) which is concerned with maintaining a rating for a client that is responsible for 10% or more of the firm’s revenue under certain circumstances. First, Egan-Jones issued a rating in 2019 at a time when Respondent Egan had participated in determining the credit rating for the client. The firm founder engaged in sales and marketing activities with respect to the client. This breached the divide between sales and marketing and the issuance of a rating mandated by the Dodd-Frank Act. Second, Egan-Jones violated the 10% rule. Specifically, in 2017 the firm solicited business from a client that it was aware might contribute over 10% of its revenue for the year. This is contrary to Rule 17g-5(c)(1) of the Exchange Act. While $538,000 was recorded in the year-end financial statements in a footnote and labeled as “excess revenue refundable” – the exact amount by which the 10% level was exceeded — the loss contingency was not accrued in accord with GAAP. There was thus no reason for not tabulating the sum for purposes of the 10% rule. Respondent firm also failed to establish, maintain and enforce policies and procedures reasonably designed to manage conflicts of interest as required by Rule 15E(h)(1). The firm agreed to implement certain undertakings, including conducting a training program regarding the matters at issue here, and retaining an Independent Consultant in connection with resolving the matter. The firm will also develop and implement policies and procedures prohibiting Mr. Egan from participating in the development or approval of any ratings. The Order alleges violations of Sections 15E(h)(1) and 15E(f)(2) and Rules 17g-(5)(c)(8)(i), 17(g)(5(c)(8)(ii) and 17(g)-5(c)(1). In resolving this action, the firm consented to the entry of a cease-and-desist order based on each of the three Rules cited above and to a censure. It will also pay disgorgement of $129,000 along with prejudgment interest of $17,592. In addition, the firm will pay a penalty of $1.7 million. Respondent Egan also consented to the entry of a cease-and-desist order based on Rules 17g-(5)(c)(8)(i) and 17(g)(5(c)(8)(ii). He will pay a penalty of $300,000.
Transfer agents: The Commission instituted proceedings against seven transfers agents on June 30, 2022. The Orders allege that the agents failed to permit examination by the Commission staff of their books and records, that five failed to furnish statutorily required records, that four had deficient registration forms and that all failed to amend their registration forms when the information became inaccurate. The group members each also failed to file at least one annual report. Each of the seven are alleged to have violated the prohibition against transfer agents engaging in any activity as a transfer agent in violation of certain rules and regulations. The Orders alleged violations of Exchange Act Sections 17(b)(1), 17A(c)(2), 17A(d)(1) and the related rules. A public hearing will be held.
Identity theft/offering fraud: SEC v. Nir, Civil Action No. 2:22-cv-04438 (C.D. Cal. Filed June 29, 2022) is an action which names as defendants two Israeli citizens, Shlomo Nir and Tzachi Rahamim. Over a two-year period, beginning in 2019, Defendants assumed the identity of Individual A, a prominent financial educator among the Latinx and Spanish-speaking communities. Unbeknownst to Individual A, during the period Defendants encouraged investors in that community, using the identity of Individual A after altering his website, to liquidate their retirement accounts and purchase fixed income annuities. By March 2021 when Individual A obtained a preliminary injunction against Defendants in a private suit their company had received about $1.9 million in insurance broker commissions of which 52.5% was from investors who had sold securities to buy fixed indexed annuities. The complaint alleges violations of Securities Act Section 17(a)(1) and Exchange Act Section 10(b). Each Defendant settled, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. They also agreed to pay over $450,000 in disgorgement and penalties. See Lit. Rel. No. 2:22-cv-04438 (June 29, 2022).
Complex products: In the Matter of UBS Financial Services, Inc., Adm. Proc. File No. 3-20912 (June 29, 2022).The proceeding names as respondent the dual registered investment adviser and broker-dealer. The action centers on a product known as Yield Enhancement Strategy or YES. The product, developed by the firm, consisted of an existing portfolio of debt or equity securities that served as collateral for the purchase and sale of a combination of options on the S&P 500. During periods of low volatility YES made modest returns; during volatile periods it could and did generate losses. YES was marketed for about a year, beginning in February 2016. About $2 billion in client funds were invested. At first there were small gains; later in late 2018 as volatility increased there was a 13% loss. The Order alleges that the firm gave its financial advisers inadequate training and insufficient supervision. The firm took remedial steps. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). UBS resolved the matter, consenting to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. It also agreed to pay disgorgement of $5.8 million plus prejudgment interest of $1.4 million. The firm will, in addition, pay a penalty of $17.4 million. A Fair Fund will be established.
Unethical conduct: In the Matter of Ernst & Young, LLP, Adm. Proc. File No. 3-20911 (June 28, 2022). Ernst & Young is one of the largest accounting, auditing and consulting firms in the world. As auditors of public companies, accountants and consultants, part of their obligation is to safeguard and help further the ethical underpinnings of their profession in the marketplace. Despite repeated tutorials on multiple occasions between 2017 and 2021, and for many years before, the professionals at the firm cheated on ethics exams by using and circulating answer keys. And, many audit professionals who knew of the lies and the unethical conduct failed to report it. The Order in this matter states: The “gatekeeping role depends on the integrity not only of the independent audit firm’s audit personnel, but of its management and its attorneys.” Yet despite widespread information at the firm about cheating, and confirmation of the unethical conduct by an internal investigation, the firm failed to correct a submission to the Commission stating that it “did not have any current issues with cheating.” The Order concludes that the firm willfully violated PCAOB Rule 3500T regarding ethical standards in the AICPA Code and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. In resolving the matter, the firm agreed to implement certain undertakings. Those include the retention of an Independent Consultant and a requirement to conduct a review of the firm’s policies and procedures. The firm consented to the entry of a cease-and-desist order based on PCAOB Rule 3500T and a censure. The firm will also pay a penalty of $100 million.
Compliance: In the Matter of Health Insurance Innovations, Inc., Adm. Proc. File No. 3-20932 (July 20, 2022). Health Insurance Innovations is a technology platform, billing administrator and distributor of short-term and limited health insurance plans and related products. Over a three-year period, beginning in early 2017, the company and its CEO, Respondent Gavin Southwell, touted the high compliance standards of the firm. Consumers were told, for example, that the company had a 99.99% consumer satisfaction rating. Respondents also claimed that in 2016 the company had terminated a distributor because of repeated compliance issues. When Mr. Southwell joined the firm in 2016, he learned that Simple Health, a key operating unit, and others, were misrepresenting the facts regarding the compliance failure. He increased spending on compliance and took various steps in the area but failed to properly assess the situation. Thus, throughout the period, the company continued to have tens of thousands of dissatisfied consumers. Numerous consumers complaints were made to company agents. And, while the company did terminate a distributor in 2016, in fact the firm was rehired. In 2018 the FTC filed an emergency action to shut down Simple Health for defrauding consumers. The filing was disclosed and the stock price dropped but the situation was never fully disclosed. In March 2019 Congress announced an investigation into the situation. The stock price dropped again. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a). To resolve the proceedings Respondents consented to the entry of cease-and-desist orders based on the Sections cited in the Order. In addition, the firm will pay an $11 million penalty while Mr. Southwell will pay a penalty of $750,000. A Fair Fund will be created.
False statements: In the Matter of Equitable Financial Life Insurance Company, Adm. Proc. File No. 3-20931 (July 18, 2022). Equitable is an insurance company. One of its products is a variable annuity called Equivest. It is marketed to investors as a retirement savings product. Each version has distinct terms and fees that are described in a prospectus. Typically, an investment is made followed by periodic payments. The company agrees that in return for the investments retirement payments will be made to the investor that correspond, at least in part, to the performance of subaccounts that invest in various underlying mutual funds. The version here was marketed to grade school and high school teachers. Since 2016 Equitable has presented its fees to investors in the form of a quarterly spreadsheets. Those spreadsheets show the various types of fees paid by the investors. Those include separate account expenses, portfolio operating expenses, administrative and transaction fees and planning expenses. The teacher-investors understood that the spreadsheets were complete – all the fees were listed. They were not; there were omissions. The fees omitted from the spreadsheets were typically some of the largest incurred in connection with the operation of the plan. Those listed, in contrast, tended to be small and often insubstantial. Investors did not discern from the spreadsheets that in fact the large fees were omitted while the small ones were included. The investors relied on the spreadsheets to be correct and complete. Stated differently, they relied on the insurance company to tell the truth. It did not. The Order alleges violations of Securities Act Sections 17(a)(2) and 17(a)(3). To resolve the matter the Company agreed to implement a series of undertakings and consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, Equitable will pay a penalty of $50,000. The funds will be placed in a Fair Fund.
Identity theft: In the Matter of J.P. Morgan Securities LLC, Adm. Proc. File No. 3-20936 July 27, 2022). Respondent is based in New York City. The firm is a registered broker-dealer and investment adviser. It is a wholly owned subsidiary of JPMorgan Chase & Company, a global financial services firm. From January 2017 through the end of 2019 the firm failed to comply with Rule 201 of Regulation S-ID because its written identity theft prevention programs for the applicable lines of business failed to include reasonable policies and procedures to: 1) identify relevant red flags for the covered accounts; 2) respond appropriately to detected red flags; and 3) ensure that each program was updated periodically to reflect changes in identity theft risks to customers. Regulation S-ID requires that an identity theft program include reasonable policies and procedures to: identify relevant red flags; detect those red flags; respond appropriately to them; and ensure that the program is updated and includes evolving risks in the area. The identification of red flags is key to the regulation. In this regard the firm must consider factors that are specific to it in order to identify red flags that are relevant to the business and the nature and scope of the pertinent activities. Factors to consider: the type of accounts offered by the firm, the methods it provides to open covered accounts and access to them, and the firm’s experience with identity theft. The Appendix to the Regulation contains guidelines to assist firms in formulating and maintaining an identity theft prevention program that complies with the regulation. The Appendix contains lists of red flags that a firm should consider when creating a program. The firm is required to incorporate those which are appropriate to its business and the risks. The Regulation also requires that the firm periodically consider the evolution of identity theft over time to update the red flags adopted as part of its program. The adopting firm must have a written program and implement it by methods such as training and appropriate oversight. In this proceeding Respondent had accounts under two lines of business covered with identity theft programs. Each program was deficient. For example, while each had red flags, they were not based on firm specific factors. Here the programs were essentially restatements of the general legal requirements. Likewise, neither program had policies or procedures to ensure that the programs were updated periodically with new red flags based on customer experience. And, appropriate oversight was not conducted. In resolving this matter, the firm undertook remedial efforts by, in part, adopting improved polices and policies and procedures. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on Rule 201 of Regulation S-ID and a censure. The firm also agreed to pay a penalty of $1.2 million. See also In the Matter of UBS Financial Services, Inc., Adm. Proc. File No. 3-20937 (July 27, 2022)(based on violation of same regulation; resolved with a cease-and-desist-order based on Regulation S-ID, a censure, and payment of a penalty in the amount of $925.000); In the Matter of TradeSatation Securities, Inc., Adm. Proc. File No. 3-20938 (July 27, 2022)(similar to above; resolved with the entry of a cease-and-desist order based on Regulation S-ID, a censure and payment of a fine in the amount of $425,000).
Pay-to-play: In the Matter of Starvest Management Inc., Adm. Proc. File No. 301002 (September 15, 2022) is a proceeding involving the exempt reporting adviser and the pay-to-play provisions of the Advisers Act, Section 206(4) and Rule 206(4)-5. Generally, those provisions are designed to address advisers and their covered associates who make contributions to government officials in a position to influence the selection of investment advisers i for public pension funds. In this matter two covered associates of the adviser made contribution to a candidate for elected office in New York City in December 2020 and April 2021 which had influence over the selection investment advisers for New York pension funds. Within two years Respondent provided advisory services for compensation to the pubic pension system. That violates the Section and Rule. To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Section and the Rule cited above and to a censure. In addition, Respondent will pay a penalty of $70,000. See also In the Matter of Highland Capital Partners, Adm. Proc. File No. 3-21081 (September 15, 2022)(covered associate of exempt reporting adviser in May 2021 and within two years adviser renders advisory services for a fee; resolved with cease-and-desist order based same Section and Rule, a censure and payment of $95,000 penalty); In the Matter of Asset Management Group of Bank of Hawaii, Adm. Proc. File No. 3-21080 (September 15, 2022(same; resolved with cease-and-desist order based on same Section and Rule, censure and payment of penalty of $45,000); In the Matter of Canaan Management, LLC, Adm. Proc. File No. 3-21079 (September 15, 20229(same; resolved with cease-and-desist order based on same Section and Rule, censure and penalty of $95,000).
Earnings management: In the Matter of VMware, Inc., Adm. Proc. File No. 3-21065 (September 12, 2022) is a proceeding which names the firm as respondent. It is engaged in cloud based services. Beginning in FY 2019, when a new accounting standard was adopted, the company began to manage its “backlog,” by timing when orders were recorded. This was done in FY 2019 and 2020. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Securities Act Section 13(a). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, Respondent will pay a penalty of $8 million.
FCPA: In the Matter of Gol Linhas Aereas Inteligentes S.A., Adm. Proc. File No. 3-21094 (September 15, 2022) is a proceeding which names as Respondent the second largest domestic airline in Brazil. Its shares are listed on the NYSE and it files periodic reports with the Commission. The airline is based in Sao Paulo. The action centers on the period 2011 through 2013. Respondent during the period engaged in a bribery scheme. Specifically, officials were bribed in exchange for certain payroll tax and fuel tax reductions. The benefits went to Gol and other airlines. The Order alleges violations of Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B) and 30A. Respondents took remedial efforts. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The company also agreed to pay disgorgement of $51,940, prejudgment interest of $18,060,000 and payment of all but $24.5 million is waived based on financial condition.
Touting – offering fraud: SEC v. Mikula, Civil Action No. 2:22-cv-07096 (C.D. Cal. Filed September 30, 2022) is an action which names as defendants: Jonathan Mikula, the chief analyst and author of Palm Beach Venture who has been twice enjoined from violating the securities laws; Christian Fernandez, a Mexican citizen who controls entities used to funnel payments to Defendant Mikula for the promotion; Amit Rajberi, an Australian citizen who was CEO of Elegance Brands, Inc.; Sway Energy Corporation, a beverage firm; Avitar Singh Dhillon, a Canadian citizen who co-founded Emerald Heath; Emerald Health Pharmaceuticals, Inc., a biopharmaceutical company; and James De Mesa, president and CEO of Emerald Health. The action centers on a touting scheme directed by Defendant Mikula and others regarding four companies in 2019 and 2021. Despite claims that the promotions were not paid for, millions of dollars were paid for Defendants Mikula, Fernandez and Beri to promote the securities of the four firms using sham consulting agreements and false invoices. Investors put up $80 million to obtain shares of the companies. The complaint alleges violations of Securities Act Sections 5(a), 5(c), each subsection of 17(a) and 17(b) and Exchange Act Section 10(b). Defendants Elegance, Beri, Emerald Health, De Mesa and Dhillon agreed to settle the action, consenting to the entry of permanent injunctions based on the anti-fraud and other provisions of the securities laws cited in the complaint. Collectively, these Defendants will pay a total of $2.5 million to settle. In addition, Defendant Dhillon agreed to a permanent bar from acting as an officer/director, Defendant De Mesa agreed to a similar bar but for five years and Defendant Beri agreed to a ten year bar and a conduct based injunction prohibiting him from engaging in certain promotional activities. The Commission also instituted settled administrative proceedings against Defendant Sanford who will pay a penalty of $25,000 and be suspended from practice before the Commission with a right to apply for reentry after three years. See Lit. Rel. No. 25541 (September 30, 2022).
Crypto – manipulation: SEC v. The Hydrogen Technology Corporation, Civil Action No. 1:22-cv-08284 (S.D.N.Y. Filed September 28, 2022). Named as defendants in this matter are: Hydrogen, a firm which now focuses on programing interfaces; Michael Kane, the CEO of Hydrogen; and Tyler Ostern, president of Moonwalkeres, a South African firm which claims to be engaged in marketing. Over a period of about one year, beginning in January 2018, Hydrogen and Defendant Kane offered and sold crypto asset securities. They also hired Defendant Ostern to manipulate the price and volume of the coins on a crypto asset trading platform. The plan was to create a blockchain-based software ecosystem and develop and release so-called “Hydro protocols” on the platform which users would employ to pay for Hydro Tokens. Defendants used a trading bot to sell the Hydro tokens and tactics such as placing purchase orders that were then cancelled to manipulate the price. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) and Exchange Act Sections 9(a), 10(b), 15(a) and 20(a). The case is pending.
Required B-D records: In the Matter of Barclays Capital, Inc., Adm. Proc. File No. 3-21164 (September 27, 2022) is one of 16 actions brought against Wall Street broker-dealers for failing to maintain proper records. Specifically, the Order in this action, and the others, charge violations of the record-keeping obligations of registered broker-dealer. Over a three-year period, beginning in January 2018, those employed by the firm regularly used approved means of communication to conduct business. In those instances, the communications were monitored properly. In other instances, non-approved methods were used by firm employees at all levels. In those instances, the communications were not properly recorded. The Order concludes that the firm violated Exchange Act Section 17(a) and Rule 17a-4(b)(4). The Section and Rule which require broker-dealers to preserve for at least three years all communications received and copies of all communications sent relating to its business. The failures in this and the other cases also resulted in a failure to reasonably supervise the firm’s employees, contrary to Exchange Act Section 15(b)(4)(e). The firm took remedial steps and agreed to implement certain undertakings in connection with resolving the matter. A compliance consultant will also be retained. The firm consented to the entry of a cease-and-desist order based on Exchange Act Section 17(a) and Rule 17a-4 and a censure. Barclays also agreed to pay a penalty of $125 million. Each of the other actions is similar. A complete list of those cited is available on the Commission’s website here.
Free riding: SEC v. Phan, Civil Action No. 4:22-cv-001 (M.D. Ga. Filed September 26, 2022). Defendants Sang Phan and Rich Phan are brothers residing in Columbus, Georgia. Brothers Sang and Rich are former restaurant and nail salon employees. During the first and second quarter of 2021 the brothers decided to implement a free riding scheme. That scheme sought to take advantage of the practice of certain brokerage firms that make “instant deposits” for investors — essentially credit extended clients to facilitate trading. In this matter the brothers sought out brokers that made instant deposits, hoping to use the credit extensions to make trades and profit from the use of the broker’s funds. During the first and second quarter of 2012 the brothers used four brokerage accounts at two firms to purchase nearly $60,000 of shares in a biotech company. The idea was to profit from the pandemic by using the broker’s funds to invest in biotech shares before the brokers discovered the scheme – that all the transactions would be funded only by the brokers and not the brothers. The brothers also sought to use over $30,000 in securities purchased in Rich Phan’s online account in the same manner. None of the trades were profitable. In each instance after the bogus fund transfers, the brokers froze the accounts and liquidated the securities holding. Those steps left the brothers with over $12,800 in losses, not the hoped for riskless profits. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25522 (September 26, 2022).