On Monday, June 3, 2019, the Commission will celebrate its 85th anniversary. At the same time the SEC Historical Society, a virtual museum dedicated to the history of financial regulation, will celebrate the 20th anniversary of its founding.
Last week the agency made its first whistleblower award to a person who initially reported a matter internally and later to the agency. The internal report resulted in the company self-reporting.
The Commission brought a variety of actions last week, ranging from insider trading to one involving an investment adviser who overcharged his clients and a prime bank fraud. The insider trading case centered on a firm employee tipping his long-time friend who traded. The investment adviser inflated the fees charged most of his clients while the prime bank fraud was a textbook example of this type of action, complete with an attorney to window dress it by making available his trust account as a repository for investor funds, boosting confidence in the scam. Finally, one offering fraud centered on the development of a new drug, another involved a tech firm that supposedly had a process or device to track drug users to avoid double billing – a matter of interest to insurance carriers — while another focused on the claimed resale of Chicago real estate. Each of the deals was fraudulent.
Whistleblowers: The Commission awarded $4.5 million to a whistleblower whose internal reporting resulted in the company self-reporting and reported to the SEC within 120 days, all resulting in a report to another agency. This is the first whistleblower award under the rules which were designed to incentivize internal reporting and a report to the agency within a specified time period.
SEC Enforcement – Filed and Settled Actions
The Commission filed 5 civil injunctive actions and 1 administrative proceeding this week, exclusive of 12j and tag-along actions.
Offering fraud: SEC v. Milne, Civil Action No. 19-cv-1304 (D.N.J. Filed May 29, 2019) is an action which names as defendants Donald A. Milne III, a securities law recidivist who previously pleaded guilty to criminal securities fraud, and his firm, Instaprin Pharmaceuticals, Inc. Over a five year period, beginning in 2013, Defendants raised over $4 million from more than 70 investors in a fraudulent offering. Specifically, Defendants solicited investors who were in many instances unsophisticated and elderly to purchase interests in Instaprin to aid the development of a new form of aspirin to instantly stop heart attacks and strokes. To bolster the pitch Defendants claimed that Mr. Milne had assembled a blue chip board of directors and advisory committees. Progress reports were also distributed. In fact, Defendants misappropriated the investor funds. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Defendants resolved the matter by each consenting to the entry of permanent injunctions based on the sections cited in the complaint. Defendants also agreed to pay disgorgement and prejudgment interest totaling $3,628,325. Mr. Milne agreed to pay, in addition, a penalty of $554,301 while Instaprin will pay $2,771,493. A relief Defendant controlled by Defendant Milne will pay disgorgement and prejudgment interest of $941,100. See Lit. Rel. No. 24484 (May 30, 2019).
Insider trading: In the Matter of David A. Altom, Adm. Proc. File No. 3-19186 (May 29, 2019). Named as Respondents are: Mr. Altom, formerly a Senior Director of Health, Safety and the Environment at Seventy Seven Energy, Inc., and Gabriel Graven, a friend of Mr. Altom. Prior to the acquisition of Seventy Seven by Patterson-UTI Energy, Inc., announced on December 12, 2016, Mr. Altom told his friend Gabriel Graven about the deal. Mr. Graven traded, reaping profits of $126,835.35. The Order alleges violations of Exchange Act Section 10(b). The Commission considered the cooperation of Respondents. To resolve the proceedings, each Respondent consented to the entry of a cease and desist order based on the section cited in the Order. In addition, Mr. Graven will pay disgorgement of $126,835.35, prejudgment interest of $10,955.89 and a penalty of $136,460.35. Mr. Altom will pay a penalty of $85,000.
Offering fraud: SEC v. Ford, Civil Action No. 19-cv-2214 (E.D. Pa. Filed May 22, 2019) is an action which names as a defendant Henry Ford f/k/a Cleothus Lefty Jackson, a convicted felon, and his firm, Fallcatcher, Inc. In mid-2018 he raised about $5 million from 50 investors keyed to a presentation. Specifically, Mr. Ford made a presentation in which he was identified as the founder and chief information officer of the firm which supposedly was a tech company that developed systems to track those who used drugs such as opioids to prevent double billing. During the presentation he falsely claimed that a major insurance company was interested in the firm. He also claimed that another insurer was interested. The presentation was taped and circulated to others. In fact, the claims were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24482 (May 29, 2019).
Offering fraud: SEC v. Slowinski, Civil Action No. 1:19-cv-03552 (N.D. Ill. Filed May 29, 2019) is an action which names as a defendant George Slowinski who owned a firm called Rebuilding America. He claimed to be a real estate entrepreneur. Beginning in September 2013, and continuing for the next several months, he raised about $20 million from over 600 investors who were told that within 2 years they would reap returns of 38% from Rebuilding America. The returns would come, according to the claims, from investing the money to rehab houses on the South side of Chicago. What Defendant did not tell investors was that between 30% and 42% of each investment dollar was diverted to him, making the scheme untenable. In addition, Mr. Slowinski diverted another $2.8 million to his personal use. By 2017 Rebuilding America collapsed. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24483 (May 29, 2019).
Overcharges: In the Matter of Stephen Brandon Anderson, File No. 3-19183 (May 28, 2019). Mr. Anderson is the owner and CCO of River Source Wealth Management LLC, a registered investment adviser until March 2017. River Source’s revenue came largely from fees charged advisory clients that were tied to AMU for each client. Two fee increases were implemented during the 2012 – 2015 time period. The first was in September 2012. Mr. Anderson sent a letter to River Source firm clients stating that the maximum annual fee would be increased from 1.0% to 1.25% for clients with less than $1 million in assets under management – most of the firm clients. The increase was disclosed in Form ADV Part 2A, dated March 17, 2015. The second fee increase was in December 2015. Mr. Anderson sent a letter notifying clients that the maximum fee would be increased from 1.25% to 1.5%, effective January 1, 2016. This time the fee change was not reported in the Adviser’s filings. Each representation regarding a fee increase was incorrect. In 2015 River Source charged most clients an advisory fee that exceeded the 1.25% stated in Respondent’s letter. In total the adviser received about $650,000 in advisory fees for 2015, of which $185,816 were overcharges. In 2016 the majority of the firm clients paid fees that exceeded the 1.5% specified in the Anderson client letter. In that year River Source received about $640,000 in advisory fees of which $181,360 were overcharges. The advisor also failed to properly calculate AMU correctly, disclose material events, keep the required books and records and implement a reasonable compliance system. Respondent resolved the proceedings by consenting to the entry of a cease and desist order based on Advisers Act Sections 204, 206(2) and 207 and to a censure. In addition, Respondent is precluded from acting in a supervisory or compliance capacity in the securities business but may apply to do so again after three years. Respondent will pay disgorgement of $367,176, prejudgment interest of $38,205 and a penalty of $100,000.
Manipulation: SEC v. Craig, Civil Action No. 3:15-cv-05076 (N.D. Cal.) is a previously filed action which named James Craig as a defendant. This week the Court entered a final judgment against Mr. Craig by consent, enjoining him from future violations of Exchange Act Section 10(b). The final order also directed that he pay disgorgement and prejudgment interest of $217. The complaint alleged that Mr. Craig created two Twitter accounts which mimicked those of well-known investment houses and put out news which caused the share price of two stocks to fall. Mr. Craig then traded but only made profits of $97 because he waited to long. See Lit. Rel. No. 24481 (May 28, 2019).
Prime bank fraud: SEC v. Sims, Civil Action No. 19-cv-00995 (C.D. Cal. Filed May 23, 2019) is an action which names as defendants: David Sims, a securities law recidivist, Mario Procopio, Ralph Greaves, an attorney, and three controlled entities – AlC Holdings, LLC, El Cether-Elyown and SIMS Equities, Inc. Over a three year period, beginning in April 2014, Defendants raised over $1.4 million from 13 different investors. The investors were lured into what is commonly called a prime bank fraud with tales of access to bank instruments and trading platforms were millions of dollars were traded. Investors were told they could “piggy-back” onto these platforms and make fabulous amounts of money with no real risk. Attorney Greaves aided the fraud by making it appear legitimate — his trust account was used as a repository for investor funds. Unfortunately for the investors, the claims were fictitious. Their funds were misappropriated by Defendants. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24480 (May 24, 2019).
U.S. v. Gonzalez (S.D. Tx. Guilty plea May 29, 2019) is an action in which dual U.S. – Venezuelan citizen Jose Manuel Gonzalez Testino pleaded guilty to one count of conspiracy to violate the FCPA, one count of violating the FCPA and one count of failing to report foreign bank accounts. Essentially Mr. Gonzalez, who controlled a number of U.S. and internal companies that provide goods and services to Petroleos de Venezuela S.A. or PDVSA admitted to paying over $629,000 in bribes to a subsidiary of PDVSA in return for inside information on the procurement process of the firm. He also admitted to paying bribes to PDVSA officials based in Huston and employed by Citgo. In exchange Citgo officials helped his firms obtain business. Mr. Gonzalez is one of 21 individuals who have been charged in this conspiracy and 16 who have pleaded guilty. He is scheduled to be sentenced on August 28, 2019.
World bank: The Bank debarred two subsidiaries of Veolia Water Technologies, a Paris based firm. The penalty was imposed for one year based on fraudulent and collusive practice tied to a project in Columbia.
Frances’ OTV was debarred for two years in connection with the transactions. That firm failed to disclose fees paid to commercial agents during the tender prequalification and bidding process. OTV and VWT Brazil also engaged with one of the agents and attempted to improperly influence the tendering requirements and engaged in collusive practices. The contract was ultimately awarded to another firm.
The actions centered on the Rio Bogota Environmental Recuperation and Flood Control Project in Columbia. It was designed to improve water quality, reduce flood risks and create a multi-functional area along the river.
OTV and VWT Brazil committed to developing integrity compliance programs consistent with World Bank Integrity Compliance Guidelines as part of the settlement.
Crypto currency: The Australian Securities and Investment Commission released an update to its prior guidance regarding the manner in which the securities laws may apply to an offering of digital currency (here).
Client funds: The Securities and Futures Commission reprimanded and fined China Merchants Securities (HK) Co. Ltd. $5 million for mishandling client funds. Specifically, the agency found that between October 1, 2011 and September 2014 the firm transfered funds ranging from $68,000 to $308 million from client trust accounts for purposes other than those specifically permitted by the Securities and Futures Rules. The firm also failed to have fit and proper staff to conduct the business and proper internal controls and procedures.
FCPA Institute: On June 21 and 22, 2019, Professor Mike Koehler will conduct the FCPA Institute at the Offices of Dorsey & Whitney LLP in Minneapolis, Minnesota. The Institute provides a unique learning experience for those seeking to elevate their knowledge of the Foreign Corrupt Practices Act. Professor Koehler is one of the foremost scholars on the FCPA and conducts an interesting and most informative program. The program is live in Minneapolis and also webcast. You can obtain more information about the program and register here.