SEC Enforcement: A Review of 1Q21 — Part I


The theme for the first quarter of 2021 might be “Acting.” With the change in administration looming, Chairman Clayton resigned at the end of 2020. Prior to the end of the first quarter much of the senior staff at the agency also resigned; many positions were assumed by someone who was named to temporarily takeover and was thus “acting.” From the Chair of the Commission through the senior staff at the head of each division, the people held positions as “Acting.” i

The end of the first quarter did see light at the end of the tunnel for the agency and the virus pandemic. As the quarter drew to a close Gary Gensler was sworn in as the new Chairman of the Commission. Unfortunately his choice for Enforcement Director had to quickly resign, a step that appears to have been taken to save the agency from being embroiled in potential difficulties with a case the new Director had led prior to joining the Commission staff.

There was also light at the end of tunnel regarding the virus. The Administration was claiming that by July 4 people would be able to assemble in small groups. New York City later claimed it would begin reopening shortly. All of this is good news for the Enforcement program which had been forced to operate with the federal courts largely closed, investigative testimony on Webex and meetings available only on zoom.

Despite these limitations the Commission brought a series of enforcement actions – a most difficult task. This report will analyze the results of the program for the first quarter of 2001.

Part 1, being published today, will analyze the overall number and types of cases brought during the quarter and provide examples of the cases in the largest groups of actions. Part II, to be published Thursday, provides examples of the broad array of cases filed in addition to those in the leading categories. Part III, to be published Friday, concludes the series with a discussion of the quarter and other key events, suggesting the future direction of the program.

The statistics

Approximately 48 new enforcement actions were filed during the first quarter o 2021. The vast majority of those cases were initiated in March, suggesting that perhaps the “Acting” staff found its footing and began driving the program forward.

The number of actions filed in the first quarter is less than the total filed during any quarter of 2020. About 83% of those cases were filed in federal court, a focus which is not inconsistent with that of 2020. The mix of cases brought during the quarter is also more diverse than was seen last year. The following table depicts the leading categories of actions grouped by percentage of the total number of cases for the period:

Misrepresentations 27%

Offering Frauds 22%

Investment Advisers 14%

Unregistered Brokers 8%

These results are not dissimilar for those for calendar year 2020. There the top categories of cases were:

Investment Advisers 19.5%

Offering Frauds 18.5%

Corporate/Financial 10.7%

Brokers 9.4%

The key difference between the results for the first quarter and those for last year are that actions centered on misrepresentations become the leading category of cases filed during the first quarter. At the same time, two categories for last year – Offering Frauds and Investment Advisers – dropped to the second and third spot in the line-up in the first quarter of 2021.

Perhaps most notable is the fact that actions centered on corporate and financial issues, the third largest group of cases in 2020, were virtually absent during the first quarter of 2021. Since cases in that category have traditionally been one of the larger groups of actions initiation by the Commission, and appeared to be re-emerging in the third quarter of last year, this may be significant.

The diversity of cases filed during the first quarter is perhaps the most interesting aspect of the period. The cases filed ranged from those based on the FCPA to Reg FD. Below is a sampling of the cases filed during the period that are included in the four leading categories.

Select Cases in the Largest Categories

False statements

SEC v. GPB Capital Holdings, LLC, Civil Action No. 1:21-cv-00583 (E.D.N.Y. Filed Feb. 4, 2021) is an action which names as defendants: The firm, a registered investment adviser; Ascendant Capital, LLC, a placement agent for GPB Capital; Ascendant Alternative Strategies, LLC, a registered broker-dealer; David Gentile, the founder, owner and CEO of GPB Capital; Jeffry Schneider, a minority owner of AAS and the sole owner and CEO of Ascendant Capital; and Jeffrey Lash, the managing partner of GPB Capital. The firm is an asset manager that serves as general partner and fund manager for several funds. It invests primarily in automotive retail, waste management and healthcare interests. Since 2013 it has raised over $1.7 billion for at least five limited partnership funds from about 17,000 investors, 4,000 of whom are seniors. While the firm projected success, claiming to consistently have an annualized 8% return and stressing its special distributions, the assertions were an “illusion,” according to the complaint. The fraud continued for 4 years with investors in the dark. The complaint claims that investor did not receive audited financial statements, made false statements and failed to disclose conflicts of interests. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 12(g) and 21F and Advisers Act Sections 206(1), (2) and (4). The case is pending. A parallel criminal action was filed by the U.S. Attorney for the Eastern District of New York. U.S. v. Gentile, No. 21-cr-54 (E.D.N.Y. Unsealed Feb. 4, 2021).

SEC v. Arrayit Corp., Civil Action No. 5:21-cv-01053 (N.D. CA. Filed Feb. 11, 2021) is an action which names the biotechnology firm and its CEO, Rene Schena, as defendants. In March and April as the pandemic was unfolding, Defendants made a series of false and misleading statements regarding the development of testing by the company. The statements were followed by surges in the share price and trading volume of the stock. Previously, the company had released false statements regarding its compliance with the obligation to file periodic reports. The complaint alleges violations of Exchange Act Sections 10(b) and 13(a). The case is pending. See Lit. Rel. No. 25029 (Feb. 11, 2021).

Offering fraud

SEC v. Contxt, Inc., Civil Action No 2:21-cv-00013 (D.Ut. Filed Jan. 7, 2021). Named as defendants are: ConTXT, Inc., a firm formed in 2016; Thomas Robbins, an undisclosed owner of ConTXT; Daniel Merriman, also an undisclosed owner of ConTXT; Mark Wiseman, chief marketing officer of ConTXT; and Clark Madsen, President and CEO of ConTXT. The case centers on two interrelated offering frauds created by Messrs. Robbins and Merriman who met while in prison for unrelated securities fraud schemes. The first centered on a trading program tied to ARC Holdings, a firm controlled by the two recidivists. Investors solicited to put their funds into the firm were told that Mr. Robbins had a “spiritual revelation” in 2008 about an exclusive algorithm for trading currencies, commodities, indices, stocks, bonds, ETFs and other instruments. The vision would become a reality in 2011 when the necessary technology could be developed according to the story. It did not – the program was a fraud. The second scheme centered on the sale of shares in ConTXT. In 2017 Defendants Madsen and Wiseman, along with their firm, entered into an agreement with Messrs. Robbins and Merriman to raise funds for ConTXT. The firm and its executives were aware that Defendants Robbins and Merriman had criminal records which would have to be concealed. Under the terms of the agreement between ConTXT and its two executives and Defendants Robbins and Merriman, the two recidivists would receive 37.5 million shares of the company in exchange for a payment of at least $1,018,769.41. The funds would come from selling shares of ConTXT and the trading program. The ConTXT shares were marketed through the use of a PPM and related documents. Those documents falsely attributed the corporate duties of Messrs. Robbins and Merriman to a nominee. The PPM also contained false financial information for the company. Much of the money raised was never invested in the company. The complaint alleges violations of Securities Act Section 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). To resolve the action each Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, Defendant Robbins and Merriman agreed to the entry of conduct-based injunctions. Each Defendant also agreed to pay disgorgement and prejudgment interest as follows: Robbins, $828,567 and $142,714; Merriman $744,191 and $121,869 along with a penalty of $192,384; Madsen $29,00 and $3,531 and a penalty of $96,384; Wiseman $68,500 and $8,341 and a penalty of $96,187; and ConTXT $269,187 and $32,779. In the parallel criminal case based on the trading program, Mr. Robbins pleaded guilty to securities fraud and money launderings. He was sentenced to serve five years in prison and ordered to pay $10,170,700.69 in restitution. See Lit. Rel. No. 25005 (January 8, 2021).

SEC v. Vuuzle Media Corp., Civil Action No. 2:21-cv-01226 (D. N.J. Filed January 27, 2021). The company Defendant is in the video streaming business. Defendant Ronald Flynn is a resident of the Philippines and the UAE and the founder of the firm. He is also its majority shareholder and is subject to at least two state cease-and-desist orders, one issued by the Ohio Department of Securities and the other by the California Department of Business Oversight. Defendant Ricard Marchitto, a retired dentist, claimed to be a vice president of marketing. The history of Vuuzle is one of shifting sale pitches to raise cash from investors – sales programs orchestrated by Mr. Flynn. Beginning in September 2016 Mr. Flynn told investors that Vuuzle was in the process of building a mobile phone application called initially and later The application was supposed to stream live performances. While it was supposed to make millions from huge numbers of subscribes, it did not. From late May through mid-November 2018 the average number of devices using was 371. By year end the company and its major shareholder were refocusing on TV streaming. Subsequently, the firm became a “front,” in the words of the complaint, for Mr. Flynn and a boiler room operation. The focus was to sell shares of the company, primarily from the Philippines. Investors were told that 99% of the funds raised would be plowed into developing the business. It was a lie. Large portions of the funds raised were used to pay commissions. About $10 million was misused by Mr. Flynn. Marketing was conducted using a series of misrepresentations. Those include false promises of an IPO; false claims of future dividends; and concealing the role of Mr. Flynn in the company. Overall, only $2 million of the $14 million raised from investors was put back into the company. Defendant Marchitto substantially assisted with these efforts. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a)(1). The complaint is pending. See Lit. Rel. No. 25017 (January 27, 2021).

Investment advisers

SEC v. Goodman, Civil Action No. 21-cv-00365 (D. Minn. Filed Feb. 8, 2021) is an action which named as a defendant Isaiah Goodman. Becoming Financial, LLC, his firm, was a Minnesota registered investment adviser. Over a two-year period, beginning in the fall of 2018, the advisor informed clients that their funds would be invested in securities and mutual funds. The investments would be conservative. They would be made for the long term. Over the period Mr. Goodman and his firm raised about $2.25 million from at least 20 advisory clients. Rather than invest the funds as promised, Defendant misappropriate significant portions of the capital raised. Portions were also used to make Ponzi like payments to certain investors. To conceal their wrongful conduct, Defendants furnished investors with false account statements. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25026 (February 9, 2021).

SEC v. Heckler, Civil Action No. 2:21-cv-04587 (D.N.J. Filed March 9, 2021) is an action which names as a defendant, George Heckler, an unregistered investment adviser. Over a ten-year period, beginning in 2009, Defendant used two funds he created as vehicles to cover up an earlier failed venture, repay some investors and line his pocket. Over the period Mr. Heckler raised at least $90 million from investors. The funds were not invested as promised. Rather, they were used to cover-up past failures and for personal use. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4). The case is pending. See Lit. Rel. No. 25047 (March 11, 2021).

Unregistered brokers

SEC v. Wooten, Civil Action No. 2:21-cv-00482 (D. Az. Filed March 22, 2021) is an action which centers on investment funds managed by EquiAlt, a defendant in another Commission fraud action (here). In this case defendants James P. Wooten, Ronald Frank Stevenson and their firms – Family Tree Estate Planning, LLC and American Financial Security LLC — acted as brokers for the EquiAlt funds over a four-year period beginning in 2016. Specifically, Mr. Wooten and his firm, Family Tree, raised at least $32 million from over 300 investors and was paid approximately $3.7 million in transaction-based compensation. Mr. Stevenson and his firm, American Financial, raised about $19 million from about 250 investors and was paid about $1.7 million in sales commissions. Defendants were not registered brokers. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a)(1). The case is pending. See Lit. Rel. No. 25059 (March 23, 2021).

SEC v. Fisher, Civil Action No. 0:21-civ-60624 (S.D. Fla. Filed March 22, 2021) is an action centered on the sale of the securities of 1 Global Capital, LLC, a South Florida merchant cash advance company that is a defendant in a separate Commission fraud action. Defendant in this action, John W. Fisher, is alleged to have been one of the salesmen for the firm. Specifically, from March 2017 through June 2018 Defendant sold over $8.5 million of the firm’s securities to a number of investors. He was paid $329,000 in commissions despite the fact that he is not a registered broker. The complaint alleges violations of Exchange Act Section 15(a)(1) and Securities Act Sections 5(a) and 5(c). The case is pending. See Lit. Rel. No. 25057 (March 22, 2021).

Tomorrow: Part II, A Diverse Array of Other Cases

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