SEC Enforcement: A Review of 2Q21 (Part I)
This is the first part of a two part series reviewing the results of the Commission’s enforcement program for the first two quarters of 2021. The second part of this article will be published tomorrow.
If the theme for the first quarter of 2021 was “Acting,” the theme for the second quarter might be “revolving.” As the first quarter began the Chair of the Commission had resigned. By early in the quarter virtually every senior staff position was filled by someone who was “Acting” but had not been officially appointed to the position.
That began to change in the second quarter as Mr. Gensler became Chair of the agency. But then the “revolving” began at the helm of the Enforcement Division. First the Director was “Acting;” then there was an appointment of a candidate from outside the agency followed by a quick resignation; then there was the appointment of an Associate Director to the position; and now there is an appointment of the Attorney General of New Jersey to the position; revolving.
Perhaps now there will be stability at this crucial position, although the long lingering question is still what ever happened to promoting from within, a practice largely followed in the early days of the Division when the Commission’s enforcement program was considered to be the best in Government.
The enforcement program continued to improve in terms of the number of cases brought during the second quarter. During that period the program initiated 75 new enforcement cases. While eight of these cases were based on a failure to file a Form 12b-25 or Form NT of late filing, the total still significantly eclipses the first quarter 2021 when 48 new civil injunctive actions and administrative proceedings were brought.
During the first half of 2021 the Commission initiated a total of about 123 enforcement cases. At this pace the total for the year would fall far below other years except for the fact that during the third quarter of the calendar year — fourth quarter of the Government fiscal year – typically large numbers of cases are filed.
The mix of cases initiated in the second quarter is substantially similar to that of the first quarter. For the second quarter the leading categories of cases were as following:
Offering frauds 31%
Investment Advisers 18%
With the exception of the cases centered on failing to file Form NT, the mix of actions is substantially similar to that of the first quarter as reflected by comparing the table below with the one above:
Offering frauds 22%
Investment advisers 14%
Unregistered broker 8%
The key focus of the program clearly appears to be offering fraud cases and those involving investment advisers, many of which are based on undisclosed conflicts of interest.
What is perhaps most surprising is the lack of corporate and financial fraud actions. This category of cases traditionally is a focus of Enforcement. While in recent years the agency has experienced difficulty identifying new cases in this area, by the end of 2020 that appeared to have changed. At year end 2020 almost 11% of the actions filed represented corporate and financial fraud actions. Interestingly, many of those actions were not based on a restatement of the financial statements as in years past but data analysis, an approach the Commission has used in many areas with signification success.
Selected Cases from the leading categories
The cases detailed below are typical of those in each category.
SEC v. The Premier Healthcare Solution, LLC, Civil Action No. 2:21-cv-11460 (D.N.J. Filed May 19, 2021) names as defendants the firm and Josiah David, a man with an extensive criminal and regulatory history who changed his name. Beginning in 2017 Defendants sold membership interests in Premier. The sales pitch excluded the long and sordid history of Mr. David, a consultant to the board. The pitch also misrepresented the nature of the interests being marketed, the financing the firm claimed it had with the bank and the key points of the business model. About $3.9 million was raised from approximately 131 investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25094 (May 21, 2021).
SEC v. Elstun, Civil Action No. 4:21-cv-00206 (W.D. MO. Filed March 29, 2021) is an action which names as a defendant Douglas Elstun, an investment adviser and the former owner of advisory Crossroads Financial Management, Inc. The complaint alleges Defendant defraud certain high income athlete clients by charging a higher percentage fee than agreed. For other clients he applied the management fee to accounts which he did not manage. In addition, a number of clients were put into very high risk investments such as reverse ETFs for significant periods despite the fact that the instruments were designed only for short term investments. Finally, a number of clients were put into unsuitable investments. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 204. The case is pending. See Lit. Rel. no. 206 (March 30, 2021).
SEC v. Shkreli, Civil Action No. 15-cv-7175 (E.D.N.Y. Settled April 5, 2021). The settlement in this action involved defendant Evan Greebel, former counsel to Retrophin, Inc., a publicly traded pharmaceutical company founded by Martin Shkreli. The founder was sentenced to serve seven years in prison after being convicted on fraud charges tied largely to his conduct concerning two hedge funds. See U.S. v. Shkreli, No. 15-cv-07175 (S.D.N.Y.). The Commission’s action centered on the period 2013 and early 2014 when Mr. Shkreil orchestrated a fraud involving the pharmaceutical firm and his hedge funds. Specifically, Mr. Shkreli induced investors from his hedge funds to enter into agreements with the company of which he was CEO stating that certain payments they received from the company were for consulting services. In fact, the payments were for the release of potential claims against Mr. Shkreli. Mr. Greebel is alleged to have aided the scheme. To resolve the matter with the Commission Mr. Greebel consented to, and the Court entered, permanent injunctions based on Exchange Act Section 10(b). Mr. Greebel was also barred from serving as an officer or director of a public company. No monetary relief was ordered in view of the penalties imposed in the related criminal action. See Lit. Rel. No. 25065 (April 6, 2021).
Tomorrow: Part II of this series reviewing the results of the Commission’s enforcement program for the first two quarters of 2021 will be published tomorrow.