This Week In Securities Litigation (Week ending March 23, 2018)
The SEC prevailed on a summary judgment motion against Steven Metro, the key figure in the Grand Central insider trading case. The Court entered an injunction and imposed a $25,000 penalty, far less than the $2 million requested by the Commission in its brief.
The Commission also continued its retail investor focus this week. Cases were brought centered on an offering fraud involving largely retail investors, the customer protection and hypothecation rules and the manipulation of microcap securities.
Whistleblowers: The Commission announced its largest ever whistleblower awards this week. Two whistleblowers will share an award of nearly $50 million. A third whistleblower will receive over $33 million. The previous high was a $30 million award in 2014.
SEC Enforcement – Litigated Actions
Insider trading: SEC v. Metro, Civil Action No. 3:14-cv-01742 (D.N.J.). The SEC obtained summary judgment against Steven Metro, the key to the Grand Central insider trading ring that reputedly had $5.6 million in illicit trading profits. The Court also directed that Mr. Metro pay a penalty of $25,000, although the Commission had requested a $2 million penalty in its motion papers. Mr. Metro, a former law school graduate who worked as a clerk at Simpson Thatcher, previously pleaded guilty to one count of conspiracy and a second count of securities fraud. He was sentenced to serve 46 months in prison and pay forfeiture consisting of his available cash and certain other property. U.S. v. Metro, No. 3:15-cr-00028 (D. N.J.). The guilty pleas were based on a scheme that traced to February 2009. At that time Mr. Metro first accessed inside information at the law firm. After obtaining the information he would meet with his law school class made, Frank Tamayo, and furnished him the information. Later Mr. Tamayo would meet near the information booth in Grand Central Station with Vladimir Eydelman, a broker and furnish him the information. This process was repeated thirteen times before the scheme unraveled.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 3 civil injunctive cases and 2 administrative proceeding, excluding 12j and tag-along proceedings.
Offering fraud: SEC v. McKinley Mortgage Co. LLC, Civil Action No. 2:18-cv-00616 (E.D. CA Filed March 22, 2018) names as Defendants two mortgage firms named McKinley Mortgage Co. LLC, one of which is owned by Defendant Tobias Preston while the other is owned by Defendant Caleb Preston. The other Defendants are Charles Preston and Laura Sanford. From 2012 through 2016 Tobias Preston, his brother Charles and son Caleb raised over $66 million from about 300 largely retail investors. Investors were told that their investments in Alaska Financial Company III, LLC were secure because the firm had high returns from its portfolio. The claims were false. In fact the firm was largely insolvent. In addition, Tobias Preston improperly used $17 million of investor funds while Charles Preston misused about $700,000 in investor funds. The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a) and Exchange Act sections 10(b) and 15(a) and Advisers Act sections 206(1) and 206(2). To resolve the action Defendants McKinley Mortgage Co. LLC, Tobias Preston, Charles Preston and Caleb Preston each consented to the entry of a permanent injunction prohibiting future violations of each of the provisions cited in the complaint except Exchange Act Section 15(a). Caleb Preston agreed to the entry of an injunction based on Exchange Act Section 15(a). Affiliated entity McKinley Mortgage Co. LLC agreed to the entry of a permanent injunction based on each of the Securities Act and Exchange Act antifraud provisions. Laura Sanford consented to the entry of a permanent injunction based on Securities Act Section 17(a). The Preston and McKinley Defendants agreed to repay almost $30 million and to the appointment of new management for McKinley, Alaska Financial and their affiliates. Tobias will also be ordered to return assets he improperly acquired and pay a penalty of $2.5 million. Finally, Charles and Cabel Preston will pay, respectively, penalties of $425,000 and $150,000. See Lit. Rel. No. 24076 (March 22, 2018).
Unregistered broker/securities: In the Matter of Robert L. Baker, Adm. Proc. File No. 3-17716 (March 22, 2018) names as Respondents Mr. Baker, Jacob Herrera, Michael Bowen and Terrance Ballard. Each Respondent has agreed to settle except Mr. Ballard who has defaulted. Over a period of four years, beginning in 2011, the settling Respondents sold factional undivided working interest in oil and gas properties for three entities and fractional undivided royalty interest in oil and gas properties for three other entities. The settling Respondents were the primary sales persons, participating in cold calls to potential investors across the country. Each was paid a fixed salary of $800 every two weeks. In addition, each received transaction based compensation from the six entities for selling oil and gas interests to investors. None of the working interests sold were registered. The Order alleges violations of Securities Act sections 5(a) and 5(c) and Exchange Act section 15(a). In resolving the case each settling Respondent agreed to cooperate in the future with the Commission. Each settling Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. Each also agreed to the entry of an industry bar and to pay a penalty of $50,000. The penalties will be paid to a court appointed receiver — a fair fund was created. A hearing will be set.
False advertising: SEC v. Present, Civil Action No. 14-cv-14692 (D. Mass. March 22, 2018) is a previously filed action against the former CEO of F-Squared Investments who was found liable by a jury for misleading investors about the firm’s AlphaSector Strategy. The Court entered a final judgment against Mr. Present based on Advisers Act Sections 206 and 207and ordered him to pay disgorgement of $10,849,604 plus interest of $1,377,033 and a $4,575,000 penalty. See Lit. rel. No. 24077 (March 22, 2018).
Customer protection rule: In the Matter of Electronic Transaction Clearing, Inc., Adm. Proc. File No. 3-18406 (March 19, 2018) is a proceeding which names the registered broker-dealer as a Respondent. The Order centers on three transactions: 1) In November and December 2015 the firm moved about $7.8 million in customers’ cash and fully paid securities to its omnibus margin account at another clearing firm to meet in-house margin requirements of that clearing firm; 2) In three instances in September and November 2015 the firm delivered fully paid securities of two cash customers valued at over $17.7 million from its Depository Trust Company account to the same clearing firms account in exchange for immediate funds; and 3) in December 2015 the firm failed to properly segregate a customer’s excess margin securities causing about $17.7 million of the customer’s excess margin securities to be loaned out by the clearing firm. The customers’ consent before moving or pledging the securities was not obtained. These actions violated the customer protection rule which requires that the firm safeguard the cash and securities of their customers and maintain physical possess or control of its customers’ fully paid and excess margin securities free and clear. The firm also violated the hypothecation rules which generally preclude the broker dealer from pledging as collateral a customer’s securities in a way that would permit them to be commingled with other customers’ securities without consent. The Order alleges violations of Exchange Act sections 15(c)(2) and (3) and 17(a)(1) and the related rules. To resolve the matter the firm consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. The firm also agreed to pay a penalty of $80,000.
Manipulation: SEC v. Beaufort Securities Ltd., Civil Action No. 2:18-cv-01317 (E.D.N.Y. Filed March 2, 2018). The action names as Defendants Beaufort Securities, a U.K. registered brokerage firm, and Panayiotis Kyriacou, an investment manager at the firm. In 2016 an undercover FBI agent introduced himself to Mr. Kyriacou. The Agent indicated he was a stock promoter, according to the complaint. In December 2017 the Agent told Mr. Kyriacou that he was working on a deal involving U.S. OTC traded HD View 360 Inc. The goal was to create the appearance that the stock was actively traded. The investment manager suggested matched trades, something he claimed to do frequently. In early 2018 Mr. Kyriacou arranged for the Agent to enter four purchase orders for HD View. The Agent agreed, noting that he had arranged for others to take the opposite side of the trades. In early January the Agent had the investment manager submit two purchase orders to the market for HD View shares. One order was executed. It almost doubled the price of the stock. Orders sent to market and executed the next day did not have any impact. Two additional orders were placed the next month as part of the scheme but had no price impact. The intent of each order, however, was to engage in matched trades to create the appearance of activity. The Agent did not arranged for the matched trades. The complaint alleges violations of Exchange Act Section 10(b). The case is pending (see also related case below).
Manipulation: SEC v. Mancino, Civil Action No 3:18-cv-01316 (E.D.N.Y. Filed March 2, 2018). The action names as Defendants: Dennis Macino, the President, CEO and a Director of HD Views 360, Inc.; William Hirschy, the CEO of WT Consulting Group, LLC; TJM Investments, Inc. whose CEO is Mr. Macino; DJK Investments 10 Inc., a firm affiliated with Mr. Macino; and WT Consulting, a firm through which Mr. Hirschy conducted his trading activity. From January 2017 through the end of the year Defendants Macino and Hirschy utilized their controlled entities to engage in matched trades and manipulate the shares of West Coast Ventures Group Corp., a firm whose shares were traded on OTC Link. From at least February 2017 through September of that year the two men engaged in a manipulative scheme involving the shares of HD View 360, Inc. In the fall of 2017 an under cover FBI Agent introduced himself to Messrs. Mancino and Hirschy as a stock promoter. He claimed to be connected to a group of off-shore brokers with trading discretion. The Agent told the two men that his group could buy stock in exchange for a kickback. The three men eventually entered into an arrangement under which the Agent would arrange for the discretionary accounts to purchase stock in exchange for a 40 to 50% kickback. The point of the trading was to effect an artificial price. Two companies were identified in connection with the scheme – HD View and West Coast. In late 2017 and early 2018 the Agent and Defendants Mancino and Hirschy had a series of telephone calls regarding their arrangement. The Agent recorded the conversations. On January 31, 2018 a test trade was made to make sure that the Agent’s brokers were able to purchase the shares of HD View. The trade was arranged in a telephone call. An order was placed and the Agent directed the broker at Beauford Securities in the U.K. (see above) to enter a matching order. The order was entered. The price of HD View almost doubled. The complaint alleges violations of Securities Act Section 17(a)(1) and Exchange Act Sections 9(a) and 10(b). The case is pending.
Virtual currency: The Securities and Futures Commission halted an offering of digital tokens called KROPS to the public through the website of Black Cell Technology Limited. The SFC concluded that the offering involved a collective investment scheme which requires registration with the Commission before it begins. To resolve the matter the firm agreed to reimburse purchasers and to an undertaking not to devise, set up or market any scheme that is a collective investment scheme unless it complies with the relevant portions of the Securities and Futures Ordinance.
Program: Insights Into SEC Enforcement, is roundtable discussion of the Former Directors of the SEC’s Division of Enforcement that will be held on April 3, 2018 beginning a 4:30 p.m. at Georgetown University Law School. The program will be followed by a reception. Registration is available here without charge. The program is sponsored by the SEC Historical Society, the Federal Bar Association, and the Association of SEC Alumni.