This Week In Securities Litigation (Week ending July 22, 2016)
Investment advisers were at the center of a number of actions brought by the Commission this week . Two proceedings involved a registered adviser and its COO that were involved in an unregistered and fraudulent offering; two other actions centered on undisclosed conflicts related to loans extended to the adviser through a new broker arrangement that were forgiven in whole or part; another was based on preferences given in redemption rights. The Commission also filed a settled action centered on extensive accounting errors.
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 2 civil injunctive actions and 6 administrative proceedings, excluding 12j and tag-along proceedings.
Offering fraud: In the Matter of Concert Global Group Limited, Adm. Proc. File No. 3-17354 (July 21, 2016) names as Respondents Concert Global, the parent company of Respondent and registered investment adviser Concert Wealth Management, Inc. and Felipe Luna, the CEO and Chairman of Concert Global. The proceeding centers on the sale of about $2.2 million of unregistered Concert Global shares. The shares were sold from 2010 through 2013 to advisory clients of Concert Wealth and others to support a growth plan. Investors were solicited using materials that were materially inaccurate since they overstated the AUM of Concert Global as well as its financial results and either misrepresented or failed to disclose conflicts arising from the potential use of the offering proceeds to pay several affiliated entities. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Advisers Act Sections 206(2) and 206(4). Respondents took a series of remedial steps including sending corrective updates to investors and engaging a compliance consultant to address concerns identified by the inspection staff. The firm also agreed to a number of undertakings. To resolve the matter Concert Global consented to the entry of a cease and desist order based on the Securities Act Sections cited in the Order. Concert Wealth consented to the entry of a cease and desist order based on the Advisers Act Sections cited in the Order and to a censure. Mr. Luna consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. Concert Global and Concert Wealth will, jointly and severally, pay a civil penalty of $120,000. Mr. Luna will pay a penalty of $60,000. See also In the Matter of Dennis Navarra, Adm. Proc. File No. 3-17355 (July 21, 2016)(proceeding against Mr. Navarra who was the CFO, COO and Chief Strategy Officer of Concert Wealth; resolved with a cease and desist order based on Securities Act Sections 5(a), 5(c) and 17(a) and Advisers Act Section 206(2), the entry of a censure but no penalty based on financial condition).
Offering fraud: SEC v. Williams, Civil Action No. 2:14cv00519 (D. Utah) is a previously filed action against Stanley Parrish and Tyson Williams. The complaint alleged that the two men raised about $1.5 million from investors by selling them interest in ST Ventures, LLC. The funds were supposed to be invested in collateralized mortgage obligations that would be leveraged to achieve large returns in a short period. In fact investor funds were used to pay other investors. This week the court entered permanent injunctions against each defendant based on Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The two defendants will pay, on a joint and several basis, disgorgement in the amount of $3,111,484.89 along with prejudgment interest and a civil penalty of $130,000. See Lit. Rel. No. 23598 (July 20, 2016).
Improper registration: In the Matter of Saving2Retire, LLC, Adm. Proc. File No. 3-17352 (July 19, 2016) is an action which names as Respondents the adviser and its sole owner. In 2011 Saving2Retire registered with the Commission. It claimed to be eligible under Advisers Act Rule 203A-2(e) which exempts certain advisers from the prohibition on registration in Section 203A if the adviser provides advice to all clients through an interactive website. The rule also provides that an adviser claiming the exemption may give advice through other means if certain limitations are met. Save2Retire did not qualify under 203A-2(e) because it did not have internet clients. In addition, for at least one period the firm gave advice to more clients than permitted. And, it failed to produce documents during an inspection. The Order alleges violations of Advisers Act Sections 203A and 204. The proceeding will be set for hearing.
Undisclosed conflicts: In the Matter of Washington Wealth Management, LLC, Adm. Proc. File No. 3-17349 (July 18, 2016). Respondent is a registered investment adviser. The firm engaged a broker-dealer and registered investment adviser to provide client services. The adviser received over $1.8 million in loans from the broker, most of which were intended to be forgiven. The adviser failed to inform clients of this arrangement. The Order alleges violations of Advisers Act Sections 206(2) and 207. To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. In addition, the firm will pay a penalty of $50,000.
Undisclosed conflicts: In the Matter of Advantage Investment Management, LLC, Adm. Proc. File No. 3-17348 (July 18, 2016) is a proceeding which names as a Respondent the registered investment adviser. The adviser entered into an arrangement with a broker-dealer and registered investment adviser for client services. It received a $3 million, five year, forgivable loan. The adviser failed to disclose this arrangement to clients in violation of Advisers Act Section 207 and 206(2). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. In addition, the firm agreed to pay a penalty of $60,000.
Conflicts: SEC v. Conrad, Civil Action No. 1:16-cv-02572 (N.D. Ga. Filed July 15, 2016). Thomas Conrad and his son Stuart were named as defendants in the action along with Financial Management Corporation and Financial Management Corporation, S.R.L. Thomas had been barred from association with any broker or dealer and the registration of his then broker-dealer firm revoked in a 1971 administrative proceeding. Financial Management acted as the general partner and unregistered investment adviser for the hedge funds operated by Mr. Conrad under the World Opportunity Fund name, including its successor, World Fund II. Financial Management Corp. assumed Financial Management’s role as the general partner and adviser to the World Opportunity feeder funds. Mr. Conrad created at least four hedge funds, WOF, WOF Master, World Fund II and BVI. A master – feeder structure was used. Investors in the feeder funds received limited partnership interests in those funds. In January 2013 Mr. Conrad appointed himself a sub-adviser to WOF Master. His fees were not disclosed. Mr. Conrad also did not fully disclose his background to investors, failing to tell investors he had been barred by the Commission. In addition, investors were not told about the transactions involving his family and their use of investor funds for personal items. Finally, in 2008 when investors were precluded from redeeming their interests, Mr. Conrad and his son effected redemptions for their accounts and obtained other cash from the funds. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section (b) and Advisers Act Sections 206(1), 206(2) and 206(4). The action is pending. See Lit. Rel. No. 23597 (July 18, 2016).
Accounting errors: In the Matter of The Phoenix Companies, Inc., Adm. Proc. File No. 3-17345 (July 15, 2016). Phoenix was a holding company for three insurance subsidiaries. On November 8, 2012 the firm announced that its previously issued audited financial statements, including those in its Forms 10K for the years ended December 31, 2011, 2010 and 2009 could no longer be relied on and would have to be restated. That included the unaudited financial statements for quarterly periods in Forms 10-Q going back to March 31, 2011. On April 1, 2014 the firm filed a Form 10-K for the year ended December 31, 2012. In the filing Phoenix restated and amended its consolidated financial statements for the years ended December 31, 2011 and 2010. The filing identified several errors as well as material weaknesses in internal controls. Overall income before taxes decreased by 92% for fiscal 2011 and 20% for fiscal 2010. Certain errors discovered involved the firm’s universal life insurance products. Others involved the fixed indexed annuity product of Phoenix. Phoenix also found errors in its accounting for reinsurance contracts. Finally, Phoenix made errors regarding the accounting for certain derivatives. The Order alleges violations of Exchange Act Section 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding Phoenix consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm will also pay a civil penalty of $600,000.
Offering fraud: SEC v. Roberts, Civil Action No. 2:16-cv-1664 (D. Nev. Filed July 14 2016). Defendant Zachary Roberts is an inactive member of the bar of California. He controlled Encore Acceptance I, LLC, a Nevada limited liability company. In 2010 Mr. Roberts was introduced to the Chippewa Cree Tribe of the Rocky Boy’s Reservation, Montana. Eventually an agreement was stuck between Encore Service Corporation LLC, another Encore entity ostensibly operated by a Roberts associate, and an entity controlled by the Tribe. Under the terms of that agreement Encore would advise and mange the Tribe’s then nascent entry into the online payday lending business through a wholly owned subsidiary. The management agreement contained a number of provisions precluding interference with the business of the Tribe. Those included making payments to members of the Tribe and restricting Tribe members’ ability to have financial interests in certain controlled entities related to the on-line business. Subsequently, Encore, through another affiliate, sought to, and did, expand its management agreement to increase its business with the Tribe and the fees paid to it. The new agreement was initially rejected by the Tribe but later approved after arrangements were made to pay certain members of, and officials of, the Tribe (collectively “Tribe Affiliate”). Between December 2011 and July 2012 Encore offered and sold about $1.72 million of notes with an interest rate of 24% to 18 persons using a private placement memorandum. That memorandum did not disclose that from September 2011 to July 2013 over $1.1 million was paid by the Encore affiliate to Tribe Affiliate; the agreements under which the payments were made; and the fact that under the terms of the management agreement those arrangements and payments could be deemed an act which might result in the termination of the agreement and thus jeopardize the value of the investors’ interests.
The Tribe eventually discovered the undisclosed agreements. The relationship with Defendant was terminated. Mr. Roberts tried to convince investors that the interruption resulted from a change in Tribe leadership. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 23595 (July 15, 2016).
Manipulation: U.S. v. Galanis, No. 1:15-cr-00643 (S.D.N.Y.). The case centers on a microcap fraud and the manipulation of shares of publicly traded Gerova Financial Group. To execute his scheme John Galanis, with the assistance of another, caused the firm to issue 5 million shares. That represented nearly half of the public float for the company. It was then placed in an account under the name of Shahina. This disguised his ownership of the stock. A series of accounts under the Shahina name were then opened. Mr. Galanis induced investment advisers and others to purchase shares of Gerova stock for their clients by paying bribes. These arrangements permitted him to control the timing of the market transactions. That activity was coordinated with wash sales and matched trades that manipulated the share price. As this market activity unfolded Mr. Galanis and his conspirators sold their stock. The manipulation yielded about $20 million in profits. Mr. Galanis pleaded guilty to one count of conspiracy to commit securities fraud and one count of securities fraud. The date for sentencing has not been set.
Misappropriation: The regulator fined Prudential Annuities Distributors, Inc. $950,000 for failing to detect and prevent a scheme that resulted in the theft of about $1.3 million from an elderly customer. Beginning in July 2010 account executive Travis Wetzel made withdrawals from a customer annuity and diverted the payments to his own use. Despite repeated red flags Prudential honored each request for a withdrawal.