This Week In Securities Litigation (Week ending April 6, 2018)

The Commission issued an investor warning this week, cautioning against impersonators of Government employees who may seek sensitive information. The agency also filed actions which included one centered on an ICO, another focused on a fin-tech firm and another based on an offering fraud.

FINRA settled an investigation focused on inadequate AML procedures with a brokerage firm. FinCEN offered additional guidance in the area, publishing a series of questions and answers, many of which are keyed to issues relating to beneficial ownership.

Finally, the New York Attorney General announced the conclusion of his inquiry into certain disclosure issues regarding the mutual fund industry. In connection with the conclusion of the investigation he announced a resolution of issues stemming from it with thirteen major funds. The resolution calls for additional disclosures.


Whistleblowers: The Commission announced an award of over $2.2 million paid to a whistleblower that first reported to another federal agency.

Warning: The Commission issued a warning to investors on Government Impersonators who are trying to either trick people into sending them money or revealing sensitive information (April 4, 2018)(here).


Guidance: The regulator published a series frequently asked questions with corresponding answers, many of which focused on beneficial ownership (April 3, 2018)(here).

SEC Enforcement – Litigated Actions

Valuation: SEC v. Yorkville Advisors, LLC, Civil Action No. 12 CIV 7728 (S.D.N.Y. Opinion March 29, 2018). The Court granted Defendants’ motion for summary judgment, finding that the Commission either did not have evidence to support its claims or, in some instances, that the agency had misinterpreted it. In two instances the Court found that conflicts of fact precluded summary judgment.

Named as Defendants in the action were prominent hedge fund manager Yorkville Advisor, LLC and two of its principals Mark Angelo and Edward Schinik. Yorkville is a registered investment adviser founded by Mr. Angelo. Mr. Schinik served as COO. The Advisor managed the YA Global Investments (U.S.) LP fund, the YA Offshore Global Investments, Ltd. fund and the YA Global Investments, LP fund.

The investment strategy employed generally called for funds to be put into privately negotiated structured equity and debt in public and private companies, according to the complaint. Key assets were incorrectly valued as the market crisis unfolded. Yorkville overvalued a series of investments by at least $50 million as of December 2008 and $47 million as of the end of December 2009. The supporting documentation of the Defendants reflected these over valuations, according to the complaint. Misrepresentations were also made to prospective investors to lure them into putting their money in the funds. Those concerned the collateral underlying certain securities obtained as investments, the liquidity of the Funds and their internal procedures. The complaint alleged violations of each subsection of Securities Act section 17(a), Exchange Act section 10(b) and Advisors Act sections 206(1) and (2) and 204(4). It also alleged control person liability under Exchange Act section 20(a).

Defendants moved for summary judgment. The motion focused primarily on the period 2008 and 2009 during which the SEC claimed there were fraudulent misrepresentations regarding the value of 15 Yorkville investments out of the 265 positions held along with certain other misrepresentations regarding the internal procedures and related issues. The Court granted the motion for summary judgment with limited exceptions – a claim against Mr. Mr. Schinik and a negligence allegation regarding Mr. Angelo where there were conflicts of fact precluding summary judgment. Any liability of the firm would be determined by the outcome of those claims.

The SEC’s allegations fall into two groups, according to the Court. The first group alleged misrepresentations regarding the value of the 15 positions. The second focused on what the Court called “one-off misrepresentations concerning the Fund’s internal procedures and financial health.” In a lengthy opinion reviewing each of the Commission’s claims, the Court concluded that either the evidence supporting the allegation was lacking or the asserted factual support was misstated, with the limited exceptions noted above.

After rejecting SEC claims that there was a motive or opportunity to commit fraud that would support a finding of scienter, the Court turned to the question of whether the evidence supported a strong inference of wrong doing. It did not the Court found. For example, the Commission claimed that Mr. Schinik’s intent was demonstrated by his failure to disclose what it called key documents to the outside auditors during the period as well as his affirmative misrepresentations regarding the 15 positions to the investors and auditors. The Court rejected these claims, noting “First and foremost, internal and external reviews of YA’s valuations of the 15 Positions never showed any evidence of fraud or deceit . . . [the valuation committee] met regularly and attempted to value assets that were inherently difficult to value and required subjective judgments, due to their illiquid and customized nature. There is no evidence that Defendants Schinik or Angelo instructed anyone to withhold material information from the VC [valuation committee], or delay the write down of any investment.”

The Court also rejected claims by the SEC that misrepresentations were made regarding the valuation policies. For example, the Commission argued that a letter to the outside auditors falsely claimed that “’In some cases, the General Partner employed financial models to determine a ‘best estimate’ valuation . . .’” false because models were not used. The Court found, however, that “the record is replete with instances in which YA used financial models in connection with their investments.” The Court rejected most of the Commission’s other claims for similar reasons.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 4 civil injunctive cases and 1 administrative proceeding, excluding 12j and tag-along proceedings.

Offering fraud: SEC v. Pocklington, Civil Action No. 5:18-cv-00701 (C.D. Cal. Filed April 5, 2018) is an action which names as Defendants: Peter H. Pocklington, a Canadian citizen who at one time owned an NHL franchise and is the undisclosed founder and control person of The Eye Machine; he is also a convicted felon and has been sanctioned by Arizona securities regulators; Lantson Eldridge is an attorney who acted as the front man for operating The Eye Machine; Terrance Walton is a CPA who claimed to be the CFO of The Eye Machine; Yolanda Valazquez, along with Vanessa Puleo and Robert Vanetten, solicited investors; Nova Oculus Partners, LLC, — The Eye Machine — was founded to develop and manufacture a biomedical device to deliver electrical current to the eye for certain treatments; and AMC Holdings, LLC, a holding company for most of the shares of The Eye Machine; the shares are owned by a private trust. The action centers on a three year period beginning in 2014 during which Defendants raised over $14 million from 260 investors for The Eye Machine. During the solicitation the background of Mr. Pocklington, as well as the fact that he controlled the firm, was concealed. Investors were also mislead regarding the use of the offering proceeds, much of which went to those retained to solicit investors and a portion of which was misappropriated by Mr. Pocklington. The shares sold were not registered. The complaint alleges violations of Securities Act sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act sections 10(b), 15(a) and 15(b)(6)(B)(i). The case is pending.

Adviser registration: In the Matter of Clayborne Group, LLC, Adm. Proc. File No. 3-18423 (April 5, 2018) names as Respondents the firm and Dean Heinemann, the owner, manager and COO of the firm. From 2005 through 2016 the firm was registered with the Commission as an investment adviser. Yet from 2012 through 2016 it did not have the requisite amount of assets under management. During the period the firm also violated the custody rule by having possession of client assets without providing the required quarterly statements and audited financials. The firm’s Form ADV was also incorrect and it failed to keep the required records. The Order alleges violations of Advisers Act sections 203A, 204, 206(4) and 207. To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. Respondent Heinemann was also suspended from the securities business. At the end of the 12 month period he will provide the staff with a certificate stating he complied. In addition, he will pay a penalty of $20,000.

Offering fraud: SEC v. Robertson, Civil Action No. 16-cv-667 (E.D.Va.) is a previously filed action against Merrill Robertson Jr. and Sherman C. Vaughn, Jr. The Court entered a final judgment against Defendant Robertson enjoining him from future violations of Securities Act sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b) and directing that he pay $8 million in disgorgement. The disgorgement will be satisfied by the payment of restitution in the parallel criminal case. The litigation as to Mr. Vaughn continues. The underlying action alleged that the two defendants raised over $10 million from investors, about $6 million of which was misappropriated. See Lit. Rel. No. 24101 (April 5, 2018).

Offering fraud – ICO: SEC v. Sharma, Civil Action No. 1:18-cv-02909 (S.D.N.Y. Filed April 2, 2018). Defendant Sohrab Sharma is the founder of Centra Tech, Inc. He held various positions with the firm. Robert Farkas is the COO of Centra. From July 30, 2017 through early October 2017 Defendants raised about $32 million from thousands of investors through the sale of securities issued by Centra. The securities were issued as an ICO – an initial coin offering. A presale was also held in early July, marketed through press releases and posts to social media. The ICO was marketed through a number of White Papers and other materials. The White Papers described the Centra ICO as a token offering in which 400 Contra Tokens would be sold for 1 Ether. The purpose of the Centra ICO was to raise capital for the completion and operation of the “world’s first Multi-Blockchain Debit Card and Smart and Insured Wallet.” Essentially the network would permit investors to convert various types of tokens through the Centra Card that was tied to Visa, MasterCard and other financial institutions. The relationships with the credit card and financial firms, as well as executives claimed to work at the firm, were false. Similarly the claim that investors would be paid a dividend was false. The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a) and Exchange Act section 10(b). The complaint is pending. See Lit. Rel. No. 24090 (April 2, 2018). The Manhattan U.S. Attorney’s Office filed a parallel criminal action.

Offering fraud –Fintec: SEC v. Liberty, Civil Action No. 2:18-cv-00139 (D. ME Filed April 2, 2018) centers on what is essentially a “bait and switch” scheme in which the Defendants told potential investors they were acquiring interests in a fintech start-up known as Mozido when in fact they obtained interests in shell companies. The Defendants in this action are: Michael Liberty, a former Chairman of Global Strategic Initiatives for Mozido who pleaded guilty to illegal political contributions in late 2016; Brittany Liberty, Michael’s wife who manages the the Defendant entities; Paul Hess, who promoted various Liberty affiliated entities; Richard Liberty, a cousin of Michael who also promoted Liberty related interests; George Marcus, Esq., an attorney for Michael Liberty and his affiliates; Mozido Invesco, LLC, a firm Michael Liberty took control of shortly after it was formed; Family Mobile, LLC; BRTMDO Investments, LLC; Brentwood Financial, LLC, the original BRTMDO Investments version of this company; and TL Holdings Group, LLC. Over a seven year period beginning in 2010 Michael Liberty and his associates used shell companies such as Mozido Invesco to raise about $48 million in an unregistered offering from investors who understood they were acquiring interests in Mozido through a series of controlled shell companies. Defendant Michael Liberty was aided in this scheme by his attorney, George Marcus, and then girlfriend and later wife, Brittany. Four shell companies were employed in the scheme. In connection with this scheme investors were falsely told that their funds would go to Mozido whose financial position was claimed to be strong, that Michael Liberty had invested substantial amounts of his personal funds in the firm and that he was financially able to guarantee their investment. In addition, beginning in 2015 Michael Liberty and his associates conducted a second unregistered offering of securities in DaVincian Healthcare, raising $6 million from investors. The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a) and Exchange Act sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 24092 (April 4, 2018).

Manipulation: SEC v. Bercowy, Civil Action No. 8:18 cv 792 (M.D. Fla. Filed April 3, 2018) is an action which names Gregory Bercowy as a Defendant. He is an associate of a state registered investment adviser. Between August 4 and 15, 2016 Mr. Bercowy sold shares of blue chip stocks in his relative’s brokerage account to purchase 3 million shares of penny stock Aureus, Inc. Mr. Bercowy then entered a number of orders which were quickly cancelled. Those transactions were designed to boost the price of the shares. The share price increased from $0.52 to $1.62. The Defendant admitted in recorded phone conversations that he was trying to boost the share price. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. See Lit. Rel. No. 24091 (April 4, 2018).


AML: The regulator fined Aegis Capital Corporation $550,000 for failing to have adequate supervisory and anti-money laundering programs. The programs were not adequately designed to detect red flags or suspicious activity regarding the sale of low-priced securities for trading in delivery versus payment accounts. For those accounts the customers buy and sell securities that are not held at the brokerage firm executing the trades. FINRA found that Aegis failed to adequately monitor or investigate trading in seven DVP customer accounts that liquidated billions of shares of low priced securities on behalf of their underlying customers. None of those customers were known to Aegis. The firm failed to identify these transactions despite an alert from the clearing firm. Several of the customers were foreign financial institutions that effected the transactions on behalf of their clients.

Criminal Cases

Offering fraud: U.S. v. Williams, No. 1:16-cr-00436 (S.D.N.Y.) is an action in which Steven Brown pleaded guilty to one count of conspiracy to commit wire fraud. The charges in the case are based on a scheme that took place over an eight year period beginning in 2009. Mr. Brown and others solicited investors with claims that they were investing in feature length motion pictures. Investors were furnished false documents about the claimed business and fraudulent guarantees of their investments. Over $9.5 million was raised from investors. Mr. Brown continued to solicit investors even after being arrested and charged in this case.

Offering fraud: U.S. v. Simmons, No. 1:17-cr-00127 (S.D.N.Y.) is an action in which Joseph Meli was sentenced in connection with a multi-year offering fraud following his guilty plea to securities fraud. Specifically, from 2015 through early 2017 Mr. Meli raised about $100 million from 130 investors based on representations that his fund had agreements under which it could obtain hard to acquire tickets to Broadway shows and concerts that could be resold. The claims were false. This week Mr. Meli was sentenced to serve 78 months in prison followed by three years of supervised release. See also SEC v. Meli, Civil Action No. 1:17-cv-00632 (S.D.N.Y.); SEC v. Carton, Civil Action No. 17 cv 6764 (S.D.N.Y.).

Offering fraud: U.S. v. Simmons (S.D.N.Y.) is an action in which Steven Simmons was sentenced to 37 months in prison following his guilty plea to conspiracy to commit securities fraud and wire fraud. The charges in the case were based on allegations that between 2013 and 2017 Mr. Simmons and his co-defendant raised over $6 million from investors supposedly for investment in a Hedge Fund. In fact the Fund was essentially a Ponzi scheme. The Court also directed that Mr. Simmons serve a period of three years of supervised release following his prison term and to forfeit $6.9 million, representing the amount of proceeds obtained as a result of the conspiracy.

New York AG

Mutual funds: The New York Attorney General announced the conclusion of an investigation regarding mutual fund fees, the disclosure of a report of findings and an agreement with thirteen major firms regarding disclosures. The agreement reached with the funds provides for additional disclosures regarding Active Share, a measure of the percentage of stock holdings in a fund portfolio that differs from its benchmark index. This information can be used to assess if a higher-fee, actively managed fund has the potential to “beat the benchmark returns of a lower-cost, passively managed fund,” according to the release. The findings of the investigation are summarized here.

Tagged with: , , , ,