SEC Enforcement: 4Q21 (Part II)
This series reviews and analyzes Enforcement Actions brought by the Commission during the forth quarter of 2021. Part I essentially categorized the actions brought by the Division of Enforcement during 4Q21. This segment of the series – Part II – provides examples of the actions which are part of the four largest groups of cases filed during the quarter – offering fraud actions, those involving investment advisers, actions centered on insider trading and cases based on corporate, disclosure and financial issues. Part III, the conclusion to the series, will appear next Tuesday. It presents examples of significant cases brought during the quarter that are not covered by one of the four leading categories discussed above. It also contains a concluding note to the series.
Select Cases from Leading Categories
The two cases presented here — Gamdy and Bernardi are examples of offering fraud cases – frauds in which typically investors are solicited to acquire securities which turn out to be fraudulent. In Gumdy, a sophisticated fraud centered on Securities Act Section 3(a)(11) which provides a limited exemption from registration, is used and abused to conduct the fraud. Bermardi demonstrates that it is not always the small, uneducated investor who is the victim of these actions. Here sophisticated investors were defrauded using fabricated documents.
SEC v. Gamdy, Civil Action No. 4:21-cv-03672 (S.D.Tx. Filed November 9, 2021). The action names as defendants: Robert Gandy, a securities law recidivist and the founder of Defendant Silverback Promotions, LLC; Clarence Fitchett, the founder of Defendant CF3 Enterprises, LLC; Kathy Givens-Gandy, the wife of Defendant Gandy; and Billy Chang, a Texas licensed Pharmacist. The action centers on two schemes involving penny stocks issuers Quantum Medical Transport, Inc. and Macau Capital Investments, Inc. The schemes were implemented in 2017 and 2018. The first centered on the use and abuse of Securities Act Section 3(a)(10). That section permits a firm to issue unrestricted shares to pay for a bona fide debt if the payment is approved at a fairness hearing by a court. This Section was used to defraud investors. The scheme began with the creation of fictitious debt for Quantum and Macau Capital. Debt of those firms was then sold to third parties. CF3 subsequently filed lawsuits in a Florida court on the debts. The court eventually approved the proposed settlements based on the issuance of shares issued by Quantum and Macau Capital. The transfer agent issued the shares based on the fraudulent judgments. The shares had a value of $7 million. The second scheme centered on creating fraudulent, convertible promissory notes. Here Defendants Gandy and Fitchett fabricated the notes for Quantum and Macau Capital that were at the center of the scheme. Defendants Chang and Givens-Gandy then sold the notes to third parties who exercised the option in each note to obtain the shares. Those shares were sold into the market. The sale of the notes generated about $100,000. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25260 (November 9, 2021).
SEC v. Bernardi, Civil Action No. 1:21-cv-08598 (S.D.N.Y. Filed October 20, 2021) is an action which names as defendants: Robert Bernardi, the founder of GigaMedia Access Corporation, a private encryption software firm and its CEO for a time; Nihat Cardak, Gia’s CFO for a period; and Sunil Chandra, an employee of the firm. Over a period of several months, beginning in early 2018, Defendants raised over $37 million from sophisticated investors in Giga. The plan was implemented through the use of fabricated bank statements, falsified audited financial statements and with the aid of an employee who impersonated a customer on an investor due diligence call. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal action was brought by the U.S. Attorney’s Office for the Southern District of New York. See Lit. Rel. No. 25244 (October 20, 2021).
Cases involving investment advisers have long been one of the leading categories of enforcement actions, perhaps because they are governed by the highest duty under the law and often subject to conflicts. Roberts is a good example of the kind of disclosure required in by advisers – it is not sufficient to claim the adviser may be subject to a conflict when in fact the adviser is subject to the conflict. Rege is a good example of an adviser abusing its obligation by using the advisory to conduct and profit from what is an offering fraud.
SEC v Roberts, Civil Action No. 21-cv-1615 (C.D. Ca. Filed September 30, 2021) is an action which names as defendant: Richard Roberts, the CEO of Defent TCFG Investment Advisors, LLC, a registered investment adviser and controls the holding company that owns registered broker-dealer TCFG Wealth Management, LLC. Over a six-year period, beginning in 2014, Defendant Roberts and his advisory firm falsely stated to advisory clients that the affiliated broker dealer, TCFG, “may” be receiving portions of the fees charged to advisory accounts by its third party clearing and custody firm. In fact, the fees were being charged and passed on to advisory clients about 60% of the time. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), and 206(4). The case is pending.
SEC v. Rege, Civil Action No. 3:21-cv-19313 (D.N.J. Filed October 26, 2021) is an action which names as defendants Swapnil Rege, barred as an investment adviser in 2019, and his firm, Swapstar Capital, LLC. Beginning in 2017, and continuing through the Commission’s investigation and entry of sanctions, Defendants raised over $10 million from advisory clients. Those investors were promised returns that ranged from 40 to 60% annually. Rather than invest the funds, however, Defendants used much of the money to repay other clients. The complaint alleges violations of Advisers Act Sections 203(f), 206(1), 206(2), and 3209(d). The action is pending. See Lit. Rel. No. 25249 (October 27, 2021).
Insider trading, fraud built entirely on court crafted elements since the phrase “insider trading” does not appear in Exchange Act Section 10(b) or Rule 10b-5, is a traditional focus of SEC Enforcement. Dobkin is a classic case of a corporate insider abusing his position at the company which gave him access to the inside information used to improperly trade. Debih is a similar example of these cases but set in an international context.
SEC v. Dobkin, Civil Action No. 5:21-cv-09285 (N.D. Cal. Filed December 1, 2021) is an action which names as defendants: Robert Dobkin, the founder of Linear Technologies, Corporation; Cynthia Braun, a stenographer at a hospital; Michael Fiorillo, the operator of a restaurant; and Jeffrey Gregersen. Mr. Dobkin learned that the firm he co-founded, Linear, was about to enter into a merger. He told his close friends Ms. Braun and Mr. Fiorillo. The latter tipped his friend, Jeffrey Gregersen. Each traded. Following the July 26, 2016 deal announcement the stock closed, up over 29%. Collectively, the traders had profits of over $325,000. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25275 (December 1, 2021).
SEC v. Debih, Civil Action No. 1:21-cv-10138 (S.D.N.Y. Filed November 30, 2021). Mr. Debih, a resident of Switzerland, is the only named defendant. There are other key players in this action, however. Benjamin Taylor and Darina Windsor, a couple in a romantic relation, were each employed in London as investment bankers at different banks. They are named defendants in another Commission enforcement action, SEC v. Taylor, Civil Action No. 19-cv-09744 (S.D.N.Y. Filed March 27, 2020). Mr. Debih is reference in the complaint. A second facet of this case centered around Bryan Cohen, employed at an international investment bank in the U.K. The complaint naming Mr. Debih as a defendant centers on two schemes. One involved Mr. Taylor and Ms. Windsor. The second involve Mr. Cohen. Both schemes generated substantial, illegal trading profits. The first scheme began in December 2012. Mr. Taylor obtained inside information from the investment bank at which he was employed. On more than one occasion the information was furnished to Mr. Debih. He traded and then tipped a friend, George Nikas, who also traded. Subsequently, in February Mr. Taylor, through an intermediary, again furnished inside information to Defendant Debih. The information traced to his girlfriend who obtained it from the investment bank at which she was employed. The information was again used by Mr. Debih to trade profitably. Again, the inside information was passed on to George Nikas who also traded. Mr. Nikas shared his trading profits. The tips involved multiple corporate transactions. As a result, Mr. Debih netted millions of dollars in trading profits. A second part of the scheme centered on Mr. Cohen who misappropriated inside information about two corporate deals from the investment bank where he was employed. That information was furnished to Mr. Debih and Nikas. Each traded profitably on the inside information. That information focused on separate transactions involving Syngenta AG and Buffalo Wiled Wings, Inc. Significant trading profits were again realized. The complaint alleges violations of Exchange Act Section 10(b) and 14(e). The complaint is pending. See Lit. Rel. No. 25274 (November 30, 2021).
Corporate, disclosure, financial fraud
Corporate, disclosure and financial fraud actions are, like insider trading, a traditional focus of the Enforcement Division. Amyris is an example of a firm that published incorrect financial statements because it internal controls were inadequate. ProPertro is an example of a firm failing to disclose corporate perks, a traditional disclosure area for firms.
In the Matter of Amyris, Inc., Adm. Proc. File No. 3-20624 (October 15, 2021) is a proceeding which names the developer of chemical products as a respondent. During the first two quarters of 2018 the firm improperly recognized certain royalty revenues. As a result, the firm’s financial statements were materially inaccurate. This resulted because the company did not devise internal accounting controls to provide reasonable assurance that relevant information was communicated to the accounting staff. The company took remedial actions. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings the company consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The company will also pay a penalty of $300,000
In the Matter of ProPertro Holdings Corp., Adm. Proc. File No. 3-20661 (November 22, 2021) is a proceeding which names as respondents the NYSE listed firm and Dale Redman, its co-founder and CEO. Over a two-year period, beginning in January 2017, Respondent Redman failed to provide sufficient information to the firm, and ProPertro failed to fully disclose certain perks received by the founder and former CEO. Specifically, the firm did not in its definitive proxy statement and annual reports properly disclose: 1) about $252,896 in travel charges tied to the use of the firm aircraft; 2) the personal use of company credit cards totaling $127,698 and 3) a pledge of firm stock made in violation of company policy. The firm took remedial efforts which were considered by the Commission. The Order alleges violations of Securities Act Section 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(a), 13(b)(2)(B), and 14(a), along with the related rules. To resolve the proceedings the firm consented to the entry of a cease-and-desist order based on each Exchange Act Section cited in the order while Mr. Redman consented to the entry of a similar order but one based on each Securities Act and Exchange Act Section cited. In addition, Mr. Redman will pay a penalty in the ammo und of $195,046
Next: The concluding segment of this series will present examples of significant actions brought during the fourth quarter of 2021 that were not included in the four largest categories. It will also contain the conclusion to the series.