The Commission prevailed in four court actions. In the district court the agency won a summary judgment motion against an investment adviser. In the Eleventh Circuit Court the SEC secured a pair of victories. In one it obtained the reversal of a grant of summary judgment against it in an ARS case. In another, the Circuit Court affirmed a district court ruling in favor of the Commission. And, in the Tenth Circuit the Court affirmed a grant of summary judgment in favor of the Commission in an investment fund fraud action.

Enforcement focused on offering fund fraud actions. One was brought against a mother and a daughter. In two others three lawyers were named as defendants who are alleged to have enabled the illegal transactions.

Finally FINRA sanctioned four major Wall Street players based on inadequate supervision. Sanction were imposed on Wells Fargo, Morgan Stanley, Citi and UBS.

The Commission

Proposed rules: The Commission reopened the comment period for proposed amendments to its Net Capital, Customer Protection, Books and Records and Notification Rules for broker-dealers. The amendments were proposed on March 9, 2007 and the comment period closed on June 18, 2007 but no action was taken on them.

Report: The Commission issued a Report on Administrative Proceedings for the period October 1, 2011 through March 31, 2012. The Report contains tables showing the number of matters before the ALJs and the Commission.

Speech: Carlo v. di Florio, Director, Office of Compliance Inspections and Examinations addressed the Private Equity International Private Fund Compliance Forum (May 2, 2012). His remarks focused on National Examination Program and its application and goals as to newly registered hedge funds (here).

SEC Enforcement: Litigated Cases

Breach of fiduciary duty: SEC v. Putman, Civil Action No. 09-C-506 (E.D. Wis. Filed May 20, 2009) is an action against James Putman, the founder and CEO of Wealth Management LLC, a registered investment adviser. The complained claimed that Mr. Putman breached his fiduciary duty and made material misrepresentations regarding the safety and stability of client investments. It also alleged that he improperly accepted $1.24 million in 2006 and 2007 in undisclosed payments from life insurance premium financing investments made by clients of Wealth Management. The court granted the Commission’s motion for summary judgment and entered an injunction against Mr. Putman prohibiting future violations of Advisers Act Sections 206(1), 206(2) and 206(4), Securities Act Section 17(a) and Exchange Act Section 10(b). He was also ordered to pay disgorgement and prejudgment interest of $1,530,129 and a civil penalty of $130,000.

SEC Enforcement: Filings and settlements

Statistics: This week the Commission filed 8 new civil injunctive actions and 2 administrative proceedings (excluding follow-on actions and 12(j) proceedings).

Pump & dump: SEC v. Recycle Tech, Inc., Case No. 1:12-cv-21656 (S.D. Fla. Filed May 2, 2012) and SEC v. Seth Eber, Case No. 1:12-cv-21653 (S.D. Fla. Filed May 2, 2012) are two illegal stock distribution cases alleged to have been run by Kevin Sepe with the assistance of attorney Ronny Halperin. The first case names as defendants the company, Messrs, Sepe and Halperin, Royan Gonzalez, OTC Solutions, LLC, Anthony Thompson, Pudong LLC, Jay Fung and David Rees. Here Mr. Sepe, along with the others, is alleged to have organized a scheme to capitalize on the anticipated demand for temporary housing resulting from the Haitian earthquake. It focused on the reorganization and conversion of Recycle Tech into a public company and the issuance of a series of false press releases to inflate the share price. After attorney David Rees converted Recycle Tech’s debt into more than 25 million purportedly free trading shares, other defendants participated in promoting the shares. From February to early March 2010 several defendants sold more than 5 million shares of Recycle Tech into an inflated market, realizing profits of over $1.1 million. The complaint, which is in litigation, alleges violations of Securities Act Sections 5, 17(a) and 17(b) and Exchange Act Sections 10(b) and 13(a). The shares were also suspended from trading.

The second names as defendants Seth Eber, Howard Ettelman, Charles Hansen, Melissa Rie, Luz Rodriguez and Messrs. Sepe and Halperin. The scheme is similar. Here HydroGenetics, Inc., a public company is in the business of acquiring alternative energy companies. Attorney Melissa Rice prepared the legal opinions required for the conversion of the company debt into more than 240 million purportedly free trading shares. False opinion letters claimed the shares were exempt from registration. Eventually the shares were illegally sold to the public, yielding profits of more than $2.5 million. The complaint alleges violations of Securities Act Section 5. The case is in litigation. The shares of the company were also suspended from trading.

Misrepresentations: In the Matter of UBS Financial Services Inc. of Puerto Rico, Adm. Proc. File No. 3-14863 (Filed May 1, 2012) and In the Matter of Miguel A. Ferrer, Adm. Proc. File No. 3-14862 (Filed May 1, 2012) are proceedings alleging that misrepresentations were made in connection with the sale of shares in non-exchange traded closed end funds about the pricing and the market. The former is against the firm and settled. The latter is against Respondents Miguel A. Ferrer, former CEO of UBS PR, and Carlos J. Ortiz, former Managing Director of Capital Markets of the subsidiary. It is in litigation.

Since 1995 UBS PR has been the primary underwriter of fourteen separately organized closed-end companies’ shares. It assisted with nine others. The majority of the funds held Puerto Rico municipal bonds. The firm is the only secondary dealer for the funds it underwrote and the dominate dealer for the others. Customers were falsely told the prices for the securities were set by the market. In fact they were set by the UBS PR head trader. During 2008 and early 2009 those prices were set to maintain a high price to NAV spread. By the spring of 2009 the parent of UBS PR concluded that the inventory of fund shares held by its subsidiary was too large. Subsequently, UBS PR regularly sold fund shares at prices which were below those reflected in pending customer sell order, effectively preventing them from selling their shares.

From March to September 2009 UBS PR sold about 75% of its inventory to investors. Throughout the period the firm continued to misrepresent the manner in which it set secondary market prices and the liquidity of the market. The firm also did not disclose that it was withdrawing support from the market. Market prices of certain funds declined by 10 – 15%. The Order as to the firm alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(c). The firm settled, consenting to the entry of a cease and desist order based on the Sections cited in the Order as well as to a censure. In addition to complying with its undertakings, the firm agreed to pay disgorgement of $11.5 million along with prejudgment interest and a civil penalty of $14 million. The other proceeding will be set for hearing.

Unregistered securities: SEC v. Scucci, No. 6:12-CV-00646 (M.D. Fla. Filed April 30, 2012) is an action against a mother and daughter, respectively, Karen Beach and Christel Scucci, and their controlled entities Protégé Enterprises, LLC and Capital Edge Enterprises, and attorney Cameron Linton. The complaint alleges that about 3.3 billion shares of unregistered penny stock were sold yielding about $1.6 million in illegal profits. The shares were obtained through so-called “wrap around agreements” under which debts of certain microcap companies owed to their officer and affiliates were assigned to Protégé and Capital Edge. The notes were altered to permit their payoff in shares, a right exercised by the two companies. The mother and daughter then had Mr. Linton issue false legal opinions which permitted the shares to be sold. The Commission’s complaint alleges violations of Securities Act Section 5. The case is in litigation.

Unregistered securities: SEC v. e-Smart Technologies, Inc., Civil Action No. 1:11-cv-00896 (D.D.C. Filed May 13, 2011) is an action against the company and others centered on an unregistered stock offering from April 2005 through June 2006. The defendants are alleged to have raised over $2.6 million by selling 26 million e-Smart shares. The complaint also claims that defendant George Sobol conducted a similar offering from March 2005 through June 2006 which raised about $890,000. This week defendants Kenneth Wolkoff and George Sobol settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Securities Act Section 5. Both men also consented to be barred for five years from participating in any penny stock offering and to disgorge all e-Smart stock. In addition, Mr. Wolkoff agreed to pay a penalty of $40,000 while Mr. Sobol will pay $30,000.

Fraudulent offering: SEC v. McNerney, Civil Action No. 1:12-cv-21627 (S.D. Fla. Filed April 30, 2012) is an action against attorney Michael McNerney alleging violations of Exchange Act Section 10(b). The complaint centers on his role with Mutual Benefits Corporation and a $1 billion offering conducted from 1995 through May 2004. The Commission first halted the fraud at the company when it filed a contested emergency civil enforcement action against Mutual Benefits and its officers. A restraining order was obtained and later a receiver was appointed. Subsequently, in a related criminal case Mr. McNerney was convicted and sentenced to serve five years in prison. Mr. McNerney consented to the entry of a permanent injunction. The Commission also suspended him from practice under Rule 102(e).

Investment fraud: SEC v. Usee, Inc., Case No. 3;12-cv-01325 (N.D.Tex. Filed April 30, 2012) is an action against the company and its promoters, Terry Wiese and Scott Wiese. Investors were told that Usee was a voice over internet protocol company that was on the verge of large profits. The individual defendants offered investors two opportunities to invest. Under one, stock could be purchased which was claimed to have returns of up to 1,000% in the first year. Under the other, promissory notes could be purchased which supposedly had returns of up to 100% in 60 days. In reality investors funds were simply squandered and the representations about the company were false. The defendants settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The defendants also agreed to disgorge nearly $5.8 million along with prejudgment interest. The individual defendants agreed, in addition, to pay penalties of $300,000. Each defendant was also enjoined from offering or selling securities issued by any company they own or control and the Wieses are barred from serving as an officer or director.

Fraudulent seminars: SEC v. Powell, Civil Action No. 1;12-cv-483 (E.D.Va. Filed April 30, 2012) is an action against Darlene Powell and Robert Elbridge. The two defendants were independent contractors for Long Term-Short term Inc., d/b/a BetterTrades. They sold products and services to investors who wanted to learn to trade securities and options. Mr. Elbridge is alleged to have made misleading statements claiming that he was an experienced trader and about the success of securities trading in the Daily Cash Flow Trading Lab. Ms. Powell falsely claimed that she was an experienced and successful trader who made her living from trading. Investors purchased subscriptions to the trading lab and traded securities that Mr. Elbridge recommended based on his misrepresentations. Each defendant settled, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). Ms. Powell also agreed to pay disgorgement of $81,036 along with prejudgment interest and a civil penalty of $130,000. Mr. Eldridge was not required to pay a civil penalty based on his financial condition.

False pricing: SEC v. RKC Capital Management, LLC, Case No. 2:12-cv-00408 (D. Utah Filed April 30, 2012) is an action against the firm along with RKC Capital LLC, the investment advises to RKC Matador Fund LLC, and Russell Cannon. From November 2007 through July 2011 the complaint claims that the defendants defrauded investors by causing the price of Matador to be fraudulently inflated by overstating its assets under management. That was accomplished by marking the close for the share price of the fund’s largest holding. The defendants also instructed Matador’s fund administrator to record its holdings in Global above the actual market price for 15 months. The falsifications assisted in soliciting investors and increasing fees. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1),(2) and (4). The case is in litigation.


The regulator fined four firms in connection with their failure to properly supervise and have an adequate basis for recommending the sale of over $9.1 million worth of leveraged and inverse exchange traded funds or ETFs. Those securities are typically open-ended investment companies whose shares represent interests in a portfolio of securities that track an underlying index. Leveraged ETFs seek to deliver multiples of the index. Inverse ETFs seek to deliver the opposite of the performance index. Here from January 2008 through June 2009 the firms did not have adequate supervisory systems to monitor the sales and failed to conduct adequate due diligence regarding the risks of the securities. In some instances registered representatives made unsuitable sales. The penalties imposed were as follows: Wells Fargo, a $2.1 million fine and $641,489 in restitution; Citigroup, a $2 million fine and $146,431 in restitution; Morgan Stanley, a $1.5 million fine and $604,584 in restitution; and UBS, a $1.5 million fine and $431,488 in restitution.

Court of Appeals

ARS: SEC v. Morgan Keegan & Co., No. 11-13992 (11th Cir. May 2, 2012) is an action in which the Circuit Court reversed a grant of summary judgment in favor of Morgan Keegan.

The Commission’s complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(c) based on claimed misrepresentations made by brokers at the firm as they continued to sell auction rate securities in early 2008 as the market collapsed. Four of its customers stated that they were told things such as ARS are as good as cash and that the securities were completely liquid. Those allegations were bolstered by internal records suggesting that the firm knew the ARS market was unraveling as the sales continued. The firm claimed that it had fully disclosed the risks of the securities in a series of disclosure documents, prompting the district court to rule in its favor on summary judgment.

The Circuit Court reversed. In its cases on materiality the Supreme Court has repeatedly rejected the use of a bright line test for materiality as potentially over or under inclusive the Court noted. Rather, the High Court opted for a standard utilizing the “total mix” of information important to an objective, reasonable investor. Under this standard the representations made to the four clients of the firm cannot be disregarded in favor of the written materials since it deprives them of context, according to the Court. Indeed, the SEC has the authority under its statutes to bring an action charging a violation no matter how small. Disregarding the statements of the four customers is inconsistent with the total mix standard of materiality. The Court concluded by holding that while in some instances disclosure documents may be sufficient to make oral representation immaterial that is not true here where there is no proof the purchasing customers actually received them.

Withdrawing the Fifth Amendment: SEC v. Smart, No. 11-4134 (10th Cir. Decided April 27, 2012) is an action in which the Commission claimed that defendant Brian Smart along with his company, Smart Assets LLC, operated a Ponzi scheme. During the pre-complaint investigation Mr. Smart declined to testify on the advice of his counsel, citing his Fifth Amendment privilege. After the filing of the complaint, and during discovery, he failed to appear for his deposition. He did appear on the date the company was to be deposed and, after consulting with company counsel, again declined to testify. When faced with a Commission motion for summary judgment however Mr. Smart sought to withdraw his invocation of the privilege and offered an affidavit in opposition. The district court refused to permit Mr. Smart to withdraw his assertion, drew an adverse inference against him based on the invocation of the privilege and granted summary judgment in favor of the SEC.

The Circuit Court affirmed, concluding that the withdrawal of the privilege is based on the facts and circumstances of the case. It is impermissible to withdraw the assertion when the party invokes the privilege throughout discovery and then seeks to change position to support or defend a motion for summary judgment. Permitting withdrawal under those circumstances can prejudice the other party. Where, however, the party is pro se, unaware of the consequences of taking the Fifth and the opposing party has sufficient substitute evidence, withdrawal may be appropriate. Here the Court concluded that Mr. Smart was “using the privilege to manipulate the litigation process” by repeatedly invoking the privilege and then when faced with a summary judgment motion seeking to withdraw it.

Investment fund fraud: SEC v. Lauer, No. 09-15138 (11th Cir. April 19, 2012) is an action against Michael Lauer in which the Commission alleged that he engaged in a $500 million fraud in connection with the operation of an investment fund. The district court granted partial summary judgment in favor of the SEC. The court entered an injunction prohibiting future violations Sections 17(a) and Exchange Act Section 10(b) both individually and as a Section 20(a) control person, and Advisers Act Sections 206(1) and 206(2). He was also ordered to disgorge $43,688,249 along with prejudgment interest and pay a $500,000 civil penalty. The Eleventh Circuit affirmed the ruling of the district court, concluding that it was supported by overwhelming evidence.

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