This Week In Securities Litigation (August 15, 2022)
New rule proposals continue to emerge from the Commission. Last week there were proposals regarding clearing agencies and revisions to Form PF which is used by the FSOC and the Commission to collect certain information on a confidential basis for supervision and future rules.
New cases filed last week focused largely on traditional areas. They included actions based on an offering fraud, conflict, and financial fraud.
Be careful, be safe this week
Proposed Rules: The Commission is proposing to amend Form PF, a reporting vehicle for certain SEC-registered investment advisers to private funds. The amendments are designed to enhance the reporting of information on a confidential basis to the FSOC regarding systemic risk and to bolster SEC oversight, according to the August 10, 2022 release (here).
Whistleblowers: Over $16 million was awarded to two whistleblowers, according to a press release dated August 9, 2022.
Proposed rules: The latest proposed rules regarding clearing agencies focus on conflicts of interest, according to the August 8, 2022 release. They would also require firms: 1)To establish policies and procedures regarding conflicts of interest which include board members; 2) adopt provisions to promote the views of owners, participants and other relevant stakeholders; 3) require that any new provisions cover the functioning, composition and membership of the nominating and management committees; 4) be structured so that the majority of the board members are independent; and 5) require the development of policies and procedures to oversee the firm’s relationship with certain critical service providers . (here)
SEC Enforcement – Filed and settled actions
Last week the Commission filed 3 civil injunctive actions and 1 administrative actions, exclusive of 12j, default, tag-a-long and other similar proceedings.
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. 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).
Unauthorized securities transactions: SEC v. Alpine Securities Corporation, Civil Action No. 22-cv-1279 (D. Nev. Filed August 10, 2022) is an action which names as defendants: the registered broker; Christopher Doubek, its CEO; and Joseph Walsh, the firm’s COO. Over a two month period, beginning in May 2019, the firm, through Defendants Doubek and Walsh, sold about $286,000 in customer securities without notice or authority. Defendants claimed that portions of the securities were worthless, other portions had been abandoned and others were moved to Alpine state escheatment accounts. Following customer and FINRA complaints the securities were returned. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(c)(1)(A). The case is pending. See Lit. Rel. No. 25465 (August 10, 2022).
Financial fraud: In the Matter of Angel Oak Capital Advisors, LLC, Adm. Proc. File No. 6084 (Aug. 10, 2022) is a proceeding which names as respondents the registered investment adviser and Ashih Negandhi, a portfolio manager at the firm. These proceedings center on reporting inaccurate disclosure rates for securitized residential mortgage loans. The firm raised $90 million from investors through the first-ever securitization of a pool of “fix and flip loans – those made for property owners to do repairs and then sell the property. After the offering there was an unexpected increase in loan delinquencies. The firm was concerned that if an increase in late payments was reported it might cause an early amortization trigger in the securitization that was designed to protect noteholders against loss. It might also damage the advisory. To prevent an early amortization, Angel Oak permitted funds to be taken from the loan in progress accounts or LIP to make the payments. This reduced the delinquency rate. While the firm disseminated performance data to noteholders and other reports the fact that the rates were artificial because of the fact that payments were being made from the LIP accounts was not disclosed. Ashish Negandhi was aware of the result of rising mortgage delinquency rates and the payments being made from the LIP accounts. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Advisers Acts Section 206(2). Each Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and to a censure. The advisory paid a penalty of $1.75 million. Respondent Negandhi will pay a penalty of $75,000. A Fair Fund will be created.
Conflicts: 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 in part 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).
Investors: The Australian Securities & Investment Commission published a release about investor behavior. Specifically, the Commission released the results of a survey of over one thousand investors which gives insight into investor behavior. The paper was published on August 11, 2022 (here).
Hedging: The European Securities and Markets Authority published a call for evidence on “pre-hedging” on July 29, 2022. The focus is to gather evidence and generate a discussion on the practice to assist ESMA to develop appropriate guidance (here).