The Commission filed a series of cases as the half way point in the year approaches along with the Fourth of July holiday weekend. Those cases included: An action against a municipal adviser for failing to properly advise an issuer, a fraudulent offering action in which three attorneys and a real estate agent swindled investors who purchased shares issued under a fraudulent S-1 registration and another in which investors were defrauded through the sale of instruments that were contracts for a difference.
Joint statement: SEC Chairman Jay Clayton, CFTC Chairman J. Christopher Giancario and U.K. Financial Conduct Authority Chief Executive Andrew Bailey issued a joint statement on opportunistic strategies in the credit derivatives markets, June 24, 30219 (here).
Rules: The Commission adopted capital, margin and segregation requirements for security-based swap dealers and major security-based swap participants along with amendments to capital and segregation requirements for broker-dealers. The package of rules represents a significant step toward establishing the regulatory regime for these instruments (June 21, 2019)(here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 6 civil injunctive actions and 1 administrative proceedings this week, exclusive of 12j and tag-along actions.
Breach of duty – failure to advise: SEC v. Comer Capital Group, LLC, Civil Action No. 19-cv-4324 (N.D. Ill. Filed June 27, 2019) is an action which names the firm, a registered municipal adviser, as a Respondent. Comer Capital was retained by the Harvey Public Library District in connection with a $6 million bond offering in January 2015. The District, which was unsophisticated, relied on Comer for expertise with respect to the offering. Comer in turn delegated its obligations to IFS Securities with respect to marketing and pricing. That firm, however, did not have the expertise to effectively carry out those tasks. As a result, the bonds were not fairly priced. The District paid at least $500,000 in additional interest over the life of the bonds. Comer breached its fiduciary duty to the District regarding the retention of IFS and its lack of qualifications for the role of underwriter. The complaint alleges violations of Exchange Act Section 15B(c)(1). The case is pending. See Lit. Rel. 24520 (June 27, 2019). See also In the Matter of IFS Securities, Adm. Proc. File No. 3-19220 (June 27, 2019)(settled action alleging violation of MSRB Rule G-17 regarding conduct of municipal securities activities; resolved with consent to the entry of a censure, an agreement to implement certain undertakings and the payment of a civil penalty of $50,000).
Mark-ups: In the Matter of State Street Bank and Trust Co., Adm. Proc. File No. 3-19221 (June 27, 2019) is a previously filed action names as a Respondent the bank. The Order alleged that State Street over charged registered investment company clients by misrepresenting and overcharging for expenses tied to Society of Worldwide Interbank Financial Communications or SWIFT messages, a secure messaging network used by financial institutions over a period of 17 years tracing back to 1998. The Order alleged violations of Sections 31(a) and 34(b) of the Investment Company Act. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on those Sections. The Bank will also pay disgorgement of $48,473,242 and prejudgment interest of $307,619 along with a penalty of $40 million.
Offering fraud: SEC v. Plummer, Civil Action No. 3:19-cv-1538 (N.D. Tx. Filed June 26, 2019) is an action which names as a defendant Mark Plummer, the founder, owner and president of Texas E&P, an oil and gas firm. Mr. Plummer was expelled from FINRA for providing misleading testimony and destroying documents. Beginning in February 2015, and continuing for about two years, Mr. Plummer and his firm raised about $6.1 million by selling joint venture interests. The funds were to be used for the operation of the firm. Mr. Plumber, however, misappropriated a substantial portion of the funds. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). To resolve the case Mr. Plumber consented to the entry of a permanent injunction based on the sections cited in the complaint. He also agreed to pay disgorgement of $399,011, prejudgment interest of $33,008 and a penalty of $75,000. See Lit. Rel. No 24514 (June 26, 2019).
Misappropriation: SEC v Sugarman (S.D.N.Y. Filed June 26, 2019) is an action which names as a defendant Jason Sugarman, an officer and director of Valor Group Ltd., A Bermuda-based insurance conglomerate and a director and indirect owner of then Commission registered broker-dealer and investment adviser Burnham Securities. Over a three year period, beginning in late 2013, Mr. Sugarman and his partner, Jason Galanis, a securities law recidivist who is currently in prison after pleading guilty to charges tied to this scheme, stole $43 million from pension funds to finance the acquisition of a global financial conglomerate of European and Bermuda insurers and an investment adviser based in Virginia and Connecticut. In connection with the scheme Messrs. Sugarman, Galanis and others victimized a Native American tribal corporation, siphoning millions of dollars from the entities they acquired. Overall the scheme involved eight individuals. In the wake of the scheme the investment advisers were defunct, the European insurer sank into administrative receivership, the Bermuda insurance holding company delisted from the Bermuda Stock Exchange, the Native American tribal corporation was indebted for $60 million and the pension funds had $43 million in worthless securities. Mr. Sugarman was the largest winner. In the end he had voting control over corporate assets that were acquired with the bond proceeds from which he siphoned off $9 million in cash. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24518 (June 27, 2019).
Offering fraud: SEC v. Chahal, Civil Action No. 1:18-cv-00426 (E.D. Va.) is a previously filed action against Amrit Chahal in which the Court entered the final judgment by consent. The final judgment permanently enjoins future violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1) and 206(2). The judgment also directs that Mr. Chahal pay disgorgement of $1,232,510. That obligation is satisfied by the forfeiture order in the parallel criminal case in which Defendant pleaded guilty and was sentenced to prison. The Commission also entered an order barring Mr. Chahal from the securities business. The complaint alleged an offering fraud in which Mr. Chahal and his firm raised about $1.4 million from 50 individuals and suffered significant trading losses but continued to solicit investments. He also misappropriated portions of the offering proceeds. See Lit. Rel. N. 24517 (June 27, 2019).
Fraudulent offering: SEC v. Sargent, Civil Action No. 1:19-cv-11416 (D. Conn. Filed June 27, 2019) is an action which names as defendants attorneys Henry Sargent, Frederick Mintz, Alan Fraade, and Joseph Tomasek, along with real estate agent Patrick Giordano. In 2014 Defendant Sargent recruited a number of friends and family to serve as nominal shareholders of BMP, Holdings LLC. He subsequently filed a Form S-1 with the Commission which falsely claimed the shareholders were not affiliates of the firm and acquired their shares for investment purposes. Two years later Francis Reynolds, president of PixarBio Corp, retained Mr. Giordano to locate a shell company for PixarBio to acquire and use as a vehicle to distribute unregistered shares. He identified BMP. A few months later Defendant Sargent sold his controlling interest in BMP to PixarBio for $325,000. The two firms were then merged. The attorney opinion letters prepared by Messrs. Mintz and Fraade falsely stated that the shares were free trading. Subsequently, over a period of several months, beginning at the endo of October 2016, shares of the merged firm were sold to the public. Mr. Sargent had proceeds from the illegal distribution of about $631,000, Mr. Giordano of $117,000 and Mr. Herod $910,000. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Sections 5(a), 5(c) and 17(a). See Lit. Rel. No. 24516 (June 27, 2019).
Insider trading: SEC v. Gannamaneni, Civil Action No. 18-cv-11390 (S.D.N.Y.) is a previously filed action which names as a defendant, among others, Rajeshwar Gannamaneni, an employee at the Singapore branch of an investment bank. In 40 instances he traded in advance of corporate events based on information he obtained from his employer. The complaint alleged violations Exchange Act Sections 10(b) and 14(e). To resolve the action Defendant consented to the entry of permanent injunctions based on the sections cited in the complaint. He also agreed to pay disgorgement of $376,414, prejudgment interest of $39,379 and a penalty of $376,414. See Lit. Rel. No. 24515 (June 27, 2019).
Security-based swaps: SEC v. Worldwide Markets, Ltd., Civil Action No. 2:19-14205 (D.N.J. Filed June 25 2019) is an action which names as defendants: Worldwide, a broker-dealer registered in the British Virgin Islands; Tab Networks, Inc., a financial services firm based in Delaware; and Thomas F. Plaut who controlled each entity defendant. Beginning in 2014 investors were solicited through a website to own and trade U.S. stocks off-shore by Worldwide. In fact, the advertisements were deceptive. The securities sold to investors were actually contracts-for-a-difference which are a form of derivative and security-based swaps. While customers were permitted to view their portfolios on-line, in reality none had separate accounts – all the investor funds were comingled. Despite assurances that their funds could be withdrawn, by the fall of 2017 as Worldwide’s business was failing, customer requests for their funds were not honored. The complaint alleges violations of Securities Act Sections 5(e) and 17(a) and Exchange Act Sections 6(1), 10(b), 15(a)(1) and 20(a). The case is pending. See Lit. Rel. No. 24513 (June 25, 2019).
Misappropriation: SEC v. Laguardia, Civil Action No. 19 Civ. 5895 (S.D.N.Y. Filed June 24, 2019) is an action which names as a defendant Donald Laguardia, the founder of L-M Manager, a unregistered investment adviser to a master fund and its two feeder funds. Over a four year period, beginning in 2013, he engaged in a series of fraudulent acts which included: 1) misappropriating about $2.6 million from the master fund and its two feeder funds; 2) directing that over $800,000 in fund expenses be reversed and accounted for as a receivable; and 3) made material misrepresentations about certain expenses for the funds to investors. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. See Lit. Rel. No. 24511 (June 24, 2019).
Misappropriation: SEC v. Chiat, Civil Action No. 1:17-cv-10928 (D. Mass.) is a previously filed action which named as defendants Avi Chiat, Yasuna Murakami and their two advisory entities. The complaint alleged that Mr. Murakami misappropriated investor funds and made about $1.3 million in Ponzi-like payments. Each of the individual defendants raised capital from investors, according to the complaint, while giving them fabricated statements that falsely inflated their investment results. This week a final judgment was entered by consent as to Mr. Chiat which enjoins him from future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4) and from participating in securities transactions involving others. In addition, he will pay disgorgement and prejudgment interest of $345,158 and a penalty of $184,767. See Lit. Rel. No. 24510 (June 24, 2019).
Offering fraud: SEC v. Nguyen, Civil Action No. CV19-1174 (C.D. Ca. Filed June 13, 2019) names as defendants: Richard Vu Nguyen, a TV personality who hosts a Vietnamese language show; and NTV Financial Group, Inc., a firm which Mr. Nguyen formed. Beginning in February 2018, and continuing for the next year, Defendants raised about $2.4 million from at least 80 investors. Investors were solicited through the TV show and were largely Vietnamese. Mr. Nguyen was represented to be a former Goldman Sachs executive who never lost. Investors were assured of high returns. One investor solicited was an undercover FBI agent. In fact, Mr. Nguyen had two prior criminal convictions and lost much of the investor money in the fund while diverting portions to personal expenses. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2) and 206(4). A freeze order was entered when the complaint was unsealed on June 25, 2019). The action is pending. See Lit. Rel. No. 24512 (June 25, 2019).
Manipulation: In the Matter of Merrill Lynch Commodities, Inc., CFTC Docket 19-07 (June 25, 2019) is an action against the indirect subsidiary of Bank of America Corporation which is a CFTC registered Swap Dealer. In a number of instances, beginning as early as 2008, Merrill Lynch placed orders to buy and sell gold, silver, platinum and palladium futures contracts on the COMEX with the intent to cancel the orders before execution. This conduct was intended to and did manipulate prices. The conduct violations Section 9(a)(2) of the CEA and, for conduct after August 15, 2011 Sections. 6(c)(1) and 6(c)(3). To resolve the proceedings the firm consented to the entry of a cease and desist order based on the sections cited in the Order. The firm also agreed to pay restitution in the amount of $2,364,585, disgorgement of $11,100,000 and a civil penalty of $11,500,000. A corporate monitor will also be appointed.
Insider trading; U.S. v. Ying, No. 1:18-cr-00074 (N.D.Ga.) is an action in which Defendant Jun Ying, formerly the Chief Information Officer of Equifax, was sentenced to serve four months in prison followed by one year of supervised release. He was also ordered to pay restitution of $117,117.61 and fined $55,000. Mr. Ying was found guilty of insider trading based on then material non-public information about the data breach at his employer. Previously, another Equifax employee pleaded guilty to insider trading related to the data breach. See also SEC v. Ying, Civil Action No. 1:18-cv-01069 (N.D. Ga.)
Crypto offering fraud: U.S. v. McDonnel, No. 19-cr-148 (E.D.N.Y. Guilty plea June 21, 2019) named as a defendant Patrick McDonnel who operated a firm called CabbageTech which was also known as Coin Drop Markets. Beginning as early as November 2014 Mr. McDonnel marketed the firm and himself as an experience virtual currency trader. He offered to provide investors with trading advise on virtual currencies. Mr. McDonnel was also available to trade for investors. Those who signed up for his services received account statements showing their investments and balances. The advice, statements and account balances were all fraudulent. Mr. McDonald was not a virtual currency expert, just an old-fashioned huckster. Mr. McDonald’s expertise was an illusion. What was not an illusion was the investor funds he took – at least $194,000 in U.S. currency, 4.41 Bitcoin, 206 Litecoin, 620 Ethereum Classic and 1,342,624 Verg from at least 10 investors. Mr. McDonald pleaded guilty to one count of wire fraud. The date for sentencing has not been announced.
U.S. v. Motta (S.D.N.Y.) is an action which names as defendant Luis Motta and Eustiquio Lugo of Venezuela. Each was charged in an eight count indictment alleging conspiracy to engage in money laundering and seven counts of money laundering. Mr. Motta was the minister of electrical energy in Venezuela while Mr. Lugo was the procurement director at Corpoelec. The charges are based on allegations that Defendants laundered the proceeds of illegal bribes through accounts in the Southern District of Florida. The bribes were for the award of over $60 million in contracts awarded to local firms by Corpoelec in violation of the FCPA. The case is pending.
U.S. v. TechnipFMC, plc (E.D.N.Y. Filed June 25, 2019). TechnipFMC plc, or TFMC, is the product of a 2017 merger of Technip S.A. and FMC Technologies, Inc. The charges involving TFMC and its wholly owned U.S. subsidiary, Technip USA, Inc., stem from two separate schemes. One focused on Technip. The second involved FMC.
The Technip scheme traces to as early as 2003. At that time the company conspired with Singapore-based Keppel Offshore & Marine Ltd or KOM, an attorney for that firm and Zwi Shornicki, a consultant to each company, to pay $69 million in bribes to firms associated with the agent. Portions of the payments were funneled by Mr. Shornicki to officials at Brazilian state-owned oil company Petrobras to obtain lucrative contracts. Technip also payed $5 million directly to the Workers’ Party in Brazil and Workers’ Party officials to aid the scheme.
FCM engaged in a separate scheme in Iraq. Over a five-year period, beginning in 2008, according to admissions in the court papers, the firm paid bribes to at least seven government officials. Those officials were at the Ministry of Oil, the South Oil Company and the Missan Oil Company. Payments were channeled through a Monaco based intermediary company. The focus was to secure lucrative projects in Iraq.
To resolve the charges with the DOJ, TFMC entered into a deferred prosecution agreement tied to a criminal information. In connection with that agreement Technip USA pleaded guilty to a one-count information. U.S. v. Technip USA (E.D.N.Y. Filed June 25, 2019). TFMC will pay a criminal fine of $296 million. The firm was credited for its extensive cooperation and remediation. The amount paid to DOJ will be offset by the $214 million paid to resolve charges with Brazilian authorities.
Mr. Shornicki pleaded guilty to a one-count criminal information charging him with conspiracy to violate the FCPA. He is awaiting sentencing. U.S. v. Sharnocki (E.D.N.Y. Guilty plea June 25, 2019).