This Week In Securities Litigation (Week ending August 25, 2017)
The Commission filed actions against investment advisers or their associates this week involving: compliance issues tied to political intelligence regarding government agencies like CMS; another centered on the payment of excessive fees; and a third involving unauthorized transactions.
Municipal securities were also a focus this week. A series of actions were filed centered on the failure to comply with continuous disclosure obligations. Those obligations typically require the issuer to periodically update the financial information on bonds sold to the public.
Advisory: The regulator issued revised Geographic Targeting Order. It requires U.S. title insurance companies to identify the natural persons behind shell companies used to pay for high-end residential real estate in seven metropolitan areas. An advisory was also published.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 5 civil injunctive cases and 6 administrative proceedings, excluding 12j and tag-along proceedings.
Breach of duty: In the Matter of Municipal Finance Services, Inc., Adm. Proc. File No. 3-18139 (August 24, 2017) is a proceeding which names as Respondents the firm, a registered municipal advisor, Rick Smith, the founder of the firm, and Jon Wolff, a vice president at the firm. The firm was an adviser to the City under a written agreement. Essentially, it advised the City on offerings. In May 2013 the City issued certain bonds that included a continuing disclosure agreement. At the time the City had three outstanding bond issues, each of which also had continuous disclosure agreements. The 2013 agreement amended the disclosure obligations for the prior offerings by extending the time in which to furnish the financial information by one year and in other ways that were inconsistent with the previously issued bonds. Respondents failed to advise the City about these points and did not submit the agreements to EMMA for three years. The Order alleges violations of Exchange Act Section 15B(c)(1). To resolve the proceeding the firm will implement an undertaking which includes an obligation to adopt appropriate polices and procedures. In addition, each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. The firm was censured and will pay a penalty of $50,000. Each of the individual defendants agreed to pay a penalty of $8,000.
Dismissal: SEC v. Martin-Artajo, Civil Action No. 13-cv-5677 (S.D.N.Y.) is a previously filed action against Javier Martin-Artajo and Julien Grout, two traders formerly affiliated with the so-called London Whale. The Commission voluntarily dismissed the action. See Lit. Rel. No. 23918 (August 23, 2017). Previously, the Manhattan U.S. Attorney’s Office dismissed a parallel criminal action against the two traders.
Due diligence: In the Matter of Sylvester King, Jr., Adm. Proc. File No. 3-17839 (August 23, 2017). Mr. King was a registered representative and adviser representative. Outside of his positions, beginning in 2009 and continuing until 2012, he participated in selling $5 million of unregistered, illiquid securities to certain professional athlete brokerage customers and advisory clients in an internet branding company known as Global Village. He took these actions without undertaking any due diligence regarding the investments. Rather, he sold them based on information from Global, some of which was incorrect. The Order alleged that Mr. King willfully aided and abetted and caused Morgan Stanley and Wells Fargo Advisers where he had been employed to violate Section 17(a)(1) of the Exchange Act. To resolve the proceeding Mr. King consented to the entry of an order barring him from the securities business and from participating in a penny stock offering with a right to apply for reinstatement after three years. Following the lifting of the stay in his bankruptcy proceeding Mr. King will pay a penalty of $80,000. See also In the Matter of Aaron R. Parthemer, Adm. Proc. File No. 3-17878 (August 23, 2017)(similar action against a registered representative and advisor representative; settled with agreement to pay a penalty of $160,000 after the stay in his bankruptcy proceeding is lifted).
Municipal securities/disclosure: SEC v. Kapanicas, Civil Action No. 5:17-cv-01704 (C.D. Cal. Filed August 23, 2017) is an action against Alan Kapanicas, the former executive director of the Beaumont Financing Authority which issued about $260 million in municipal bonds in 24 separate offerings from 2003 through 2013. For each offering the City of Beaumont, California agreed to provide investors with annual continuing disclosures. From at least 2004 through April 2013 the City failed to comply with this obligation. In offerings in 2012 and 2013 the City failed to disclose its poor financial condition. This made the bonds appear more attractive, misleading investors. The complaint alleged violations of Securities Act Sections 17(a)(2) and (3). Mr. Kapanicas resolved the action, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to pay a penalty of $37,000. See Lit. Rel. No. 23920 (Aug. 24, 2017); see also In the Matter of Beaumont Financing Authority, Adm. Proc. File No. 3-18132 (August 23, 2017)(related action against the Financing Authority based on essentially the same facts; resolved with a series of undertakings and a cease and desist order based on Securities Act Sections 17(a)(2) and (3)); In the Matter of O’Connor & Company Securities, Inc., Adm. Proc. File No. 3-1131 (August 23 2017)(action based on same facts as above naming underwriter and a registered representative at the firm, Michael Wetherbee as Respondents; resolved with a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 15B(c)(1) and a censure of the firm which will pay a penalty of $150,000; Mr. Wetherbee is suspended from the securities industry, from serving in an supervisory capacity and from participating in a penny stock offering for six months; he will pay a penalty of $15,000).
Misappropriation: SEC v. Camarco, Civil Action No. 1:17-cv-02027 (D. Colo. Filed August 23, 2017) names as a defendant Sonya D. Camarco, a registered and advisory representative of LPL Financial LLC from 2004 through August 2017. During that period she misappropriated about $2.8 million in client funds by writing checks on their accounts to C Investments, although she had no authority do take such action. When confronted she denied the claims. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is in litigation. See Lit. Rel. No. 23919 (Aug 24, 2017).
Compliance: In the Matter of Deerfield Management Company, L.P, Adm. Proc. File No. 3-18120 (August 21, 2017). Deerfield is a registered investment adviser that provides advisory services in the healthcare sector exclusively to its associated funds. In 2012 the firm adopted a Compliance Manual, revised in 2013. The Manual contained certain sections regarding insider trading. It specified concerns about the misuse of material nonpublic information by the firm or its employees. The advisor engaged research firms and their political intelligence analysts to furnish information regarding government decision-making. This created a potential risk of obtaining inside information. Accordingly, the Manual established certain procedures for the use of “experts” and “expert networks.” The Manual did not apply those procedures to “research firms.” Rather, it essentially relied on an examination of the firm’s procedures, an approach that was not effectively enforced. When issues and conflicts arose, such as dealing with a firm whose COO was a political intelligence analyst, there was no follow-up. Eventually this resulted in the firm receiving inside information about CMS on which trades were executed. The Order alleges violations of Advisers Act Sections 204A. To resolve the proceeding the adviser consented to the entry of a cease and desist order based on the Section cited in the Order as well as to a censure. In addition, the adviser will pay disgorgement of $714,110, prejudgment interest and a penalty of $3,946,267. In accepting the offer of settlement the Commission considered the remedial acts of the adviser.
Excessive fees: SEC v. Drake, Civil Action No. 17-cv-06204 (C.D. Cal. Filed August 22, 2017) is an action which names as a defendant, Jeremy Drake, formerly a registered investment adviser representative at HCR Wealth Advisors. Over a four year period beginning in November 2012 Mr. Drake deceived two clients about the fees charged, a high profile professional athlete and his wife. Specifically, Mr. Drake told the clients that they were receiving a special VIP rate fee which was lower than that charged other clients. In fact it was significantly higher. In addition to the misrepresentations regarding the amount of the fees, Mr. Drake falsified account statements and related documents to continue the deception. Overall the clients were charged about $1.2 million in excess fees. The complaint alleges violations of Advisers Act Section 206(1) and 206(2). The case is in litigation. See Lit. Rel. No 23916 (Aug. 22, 2017).
Manipulation/deception: SEC v. Pappas, Civil Action No. 3:17-cv-00954 (M.D. Fla. Filed Aug. 21, 2017) is an action centered on defendant Creative Learning Corp., a franchisor of children’s educational programs, and its former CEO, Brian Pappas, former board member, Daniel O’Donnell, and former COO and v. p. of operations, Michelle Cote. In an effort to promote the firm Mr. Pappas and the firm engaged in a fraudulent scheme through a series of actions which included a failure to disclose his business history which included a bankruptcy at another franchising firm, a misrepresentation regarding his evaluation of internal controls and financial transactions with related parties, manipulative trading and the disclosure of inside information. Mr. Pappas also failed to timely file certain disclosure forms. Defendants O’Donnell and Cote executed disclosure documents which they knew, or should have known, were false and misleading. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 9(a), 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(d), 13(k), 14(d) and 16(a). The company and defendants O’Donnell and Cote resolved the case. Each consented to the entry of permanent injunctions prohibiting future violations of certain Sections of the securities laws. In addition, defendants O’Donnell and Cote agreed to the entry officer director bars and penny stock bars for a period of ten years. The two individuals will also pay about $71,000 in disgorgement, interest and penalties. Mr. Pappas is litigating the action. See Lit. Rel. No. 23914 (Aug. 22, 2017).
Unauthorized loans: In the Matter of Vertical Capital Asset Management, LLC, Adm. Proc. File No. 3-18125 (August 22, 2017) names as Respondents: Vertical Capital Asset Management or VICAM, a registered investment adviser that provides advisory services only to Vertical Capital Income Fund; Vertical Fund Group, Inc. or VFG; Vertical Recovery Management, LLC or VRM, which managed two privately offered mortgage funds; Gustavo Altuzarra, the co-founder of VCAM, VFG, VRM and VCS; and Christopher Chase, also a co-founder and managing member of VCAM, VFG, VRM and VCS. The Order alleges that Messrs. Altuzarra and Chase made misrepresentations to a client fund and its investors and prospective investors and another fund they controlled beginning in 2009. They also made unauthorized loans from funds they advised or managed to other entities they controlled. Subsequently, they made efforts to conceal those transactions. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4) and Investment Company Act Sections 17(a)(1) and (3) and 34(b). To resolve the matter Messrs. Altuzarra and Chase each consented to the entry of a cease and desist order based on each of the Sections cited in the Order except Investment Company Act Sections 17(a)(1) and (3); they are barred from the securities business and participating in any penny stock offering and ordered to pay, on a joint and several basis with VCAM, VRM and VFG, $6,272,549 along with prejudgment interest and a civil penalty of $2.4 million. VCAM consented to the entry of a cease and desist order based on each Section cited in the Order except Investment Company Act Sections 17(a)(1) and (3). VRM and VFG each consented to the entry of a cease and desist order based on Securities Act Section 17(a) and Exchange Act Section 10(b) as to VRM and Investment Company Act Section 17(a)(3) as to VFG. VCAM’s investment adviser registration was revoked.
False statements: SEC v. BioChemics, Inc., Civil Action No. 12-cv-12324 (D. Mass.) is a previously filed action centered on false statements regarding the company collaborating with major pharmaceutical firms and the results of drug trials. A final judgment was entered against defendant John Masiz precluding violations future violations of Securities Act Sections 17(a)(2) and (3). The order imposes a conduct related injunction and an officer and director bar. It also requires the payment of a $120,000 penalty. In connection with the settlement Mr. Masiz admitted violations of the statutes cited in the injunction; the Commission dismissed its claims based on Securities Act Section 17(a)(1) and Exchange Act Sections 10(b) and 20(a). See Lit. Rel. No. 23917 (Aug. 22, 2017).
False press releases: SEC v. Tyagi, Civil Action No. 17-cv-03128 (August 21, 2017) is a previously filed action against Adesh Kumar Tyagi, the former CEO of a penny stock company alleging the issuance of false press releases and manipulative trading. The Court entered a final judgment by consent as to Mr. Tyagi, enjoining him from future violations of Exchange Act Sections 10(b), 13(d) and 16(a). In addition, he will pay about $294,000 in disgorgement and prejudgment interest. See Lit. Rel. No. 23913 (August 21, 2017).
Failure to disclose finances: SEC v. Aristqa Power, Inc., Civil Action No. 17-cv-4598 (S.D.N.Y.) is a previously filed action against the firm and its CEO. The firm is a developer of wind turbines. The judgment entered is against former CEO William Schmits who was enjoined from future violations of Securities Act Section 17(a). The order also imposed a three year officer and director bar, a penny stock bar and requires him to pay an $80,000 penalty. See Lit. Rel. No. 23912 (Aug. 18, 2017).