This Week In Securities Litigation (Week of Feb. 24, 2020)
The Commission released a series of statements by various officials regarding the continued dialogue with representatives of audit firms regarding the audit quality in China and other emerging markets in the wake of the Coronavirus virus (here). The Monetary Authority of China also issued a release concerning efforts in that jurisdiction to ease the financial impact of the virus as discussed below.
SEC Enforcement prevailed on a partial motion for summary judgment in yet another action tied to F-Squared. That series of cases focused largely on the failure of those dealing with the firm to conduct due diligence regarding the investments.
Enforcement also filed two new actions last week. One centered on conflicts arising from secret compensations arrangements crafted by an investment adviser with funds recommended to clients. The other was an on-going offering fraud in which the agency secured an order for temporary emergency relief. Each case is in litigation.
SEC Enforcement –Litigated Actions
False advertising: SEC v. Navellier & Associates, Inc., Civil Action No. 1:17-cv-11633 (D. Mass. ) is a previously filed action against the firm, a registered investment adviser, and Louis Navellier, its founder, principal, CIO and CEO. This is another action arising out of an investment strategy tied to F-Squared Investments, Inc. From 2010 to 2013 defendants marketed an investment called Viro AlphaSector based on information obtained from F-Squared. Defendants did not conduct due diligence regarding the investment. In addition, when red flags arose and it turned out that in fact that AlphaSector did not have a successful track record but had only been back-tested, defendants changed the name and sold it without informing clients. The complaint alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). The court entered partial summary judgment on the Commission’s claims, concluding that Defendants violated Advisers Act Sections 206(1) and 206(2). The Court concluded that although Defendants knew there were misleading claims in the materials and that there was inadequate due diligence, they failed to inform clients. See Lit. Rel. No. 24744 (Feb. 20, 2020).
SEC Enforcement – Filed and Settled Actions
The Commission filed 1 civil injunctive action and 1 administrative proceeding last week, exclusive of 12j and tag-along actions.
Insider trading: SEC v. Lee, Civil Action No. 13-cv-05185 (S.D.N.Y.) is a previously filed action in which the complaint alleged that Sandeep Aggarwai, a former research analyst at a registered broker dealer and investment research firm, tipped Richard Lee, a portfolio manager at a hedge fund, furnishing him with inside information on a then pending announcement of a merger involving two technology companies. Mr. Lee’s trading earned his firm over $350,000 in illegal profits. The Court entered a final judgement against Mr. Aggarwal, prohibiting future violations of Exchange Act Section 10(b). The order also requires the payment of a civil penalty in the amount of $32,429. See Lit. Rel. No, 24743 (Feb. 20, 2020).
Unregistered broker: SEC v. Kouyoumdjian, Civil Action No. 019-cv-61773 (S.D. Fla.) is a previously filed action which named Emmanuel Kouyoumdjian as a defendant. The complaint alleged that Mr. Kouyoumdjian, a former registered representative and a disbarred stockbroker, acted as an unregistered broker in selling shares in an alternative energy company through the use of a nationwide call campaign. Defendant resolved the action, consenting to the entry of a permanent judgment prohibiting future violations of Securities Act Section 5 and Exchange Act Section 15(a). He was also ordered to pay disgorgement, prejudgment interest and a penalty totaling $62,007. The Court entered the final judgment on February 18, 2020. See Lit. Rel. No. 24745 (Feb. 20, 2020).
Conflicts: SEC v. Criterion Wealth Management Insurance Services, Inc., Civil Action No. 2:20-cv-01402 (C.D.Ca. Filed Feb. 12, 2020). Named as defendants are one-time registered investment adviser, Criterion Wealth (now a state registered firm), and Robert Allen Gravette and Mark A. MacArthur. During the period here the two executives co-owned the advisory. The complaint centers on the arrangements made with Fund Manager A and Fund Manager B that took place over a five-year period beginning in 2012. The two executives were long time acquaintances of Fund Managers A and B. Over the five year period Criterion recommended four real estate investment funds offered by Fund Manager A to advisory clients. A special and undisclosed compensation arrangement involving Fund Manager A required that payments be made to Broker-Dealer as a result of the investments. Virtually all of those payments were then transferred to the two advisory executives. That arrangement resulted in a reduction of the profit participation that Criterion investors received from their investments. Advisory clients were placed in a separate share class or feeder fund that paid Criterion investors lower returns than those received by all other investors in the same Fund Manager A funds. There were similar arrangements with Fund Manager B. The fee arrangements with Fund Manager A and Fund Manager B were not properly disclosed. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207. The case is pending. See Lit. Rel. No. 24738 (Feb. 13, 2020).
Offering fraud: SEC v. Pyatt, Civil Action No. 1:20-cv-38 (W.D.N.C. Filed Feb. 10, 2020) is an action which names as defendants, Mark N. Pyatt and his firm, Winston Reed Investments, LLC. Defendants are alleged to have defrauded over 12 investors in a scheme that traces back to 2017. Investors were told that their funds would be invested in a variety of instruments that would pay large returns. Instead, much of the money was misappropriated. At the conclusion of a lock-up period investors were told that there was a catastrophic loss which prevented the return of any funds. Investors had received false financial reports up to that point showing their profits. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The Commission filed the action under seal and then sought emergency relief and a freeze order at the time of unsealing which was granted. The case is pending. See Lit. Rel. No. 24741 (Feb. 20, 2020).
National Intelligence Units from Financial Transaction Task Force Countries – an organization founded by the G-7 — and the Egmont Group Secretariat met in Paris this past week to discuss the international ramifications of virtual assets. Those participating included FinCEN’s Director Kenneth Blanco. A key focus was the sharing of information and the coordination of efforts regarding crpto assets and international criminals (Feb. 16, 2020)(here).
Offering fraud: U.S. v. Genovese, No. 1:18-cr-00183(S.D.N.Y. Sentencing Feb. 14, 2020). Nicholas Genovese claimed he operated an established hedge fund that he founded. Beginning in 2015 Mr. Genovese solicited individuals to invest in the fund. He claimed to be part of the family that owned the Genovese Drug Store chain which had operated in the New York area. Investors were given to believe that he was the heir to the family’s fortune from the sale of the business for hundreds of millions of dollars in the late 1990s. Investors were also informed that he had graduated from Dartmouth College’s Tuck School of Business and had extensive Wall Street experience with blue chip firms. Ten investors entrusted Mr. Genovese with about $11.2 million. The representations were false. Indeed, Defendant had a string of prior felony convictions for fraud related crime. Defendant pleaded guilty to one count of securities fraud. Last week he was sentenced to serve 140 months in prison. In addition, he was ordered to serve three years of supervised release following the prison term and pay restitution to his victims in the amount of $11,211,704 in addition to forfeiture of the proceeds of the crime. See also SEC v. Genovese, Civil Action No. 1:18-cv-00942 (S.D.N.Y.).
The Monetary Authority of Singapore announced support for measures recently implemented by financial institutions and issuers in the wake of the coronavirus outbreak. Those include moratoriums on repayments, extension of payment terms for trade financial facilities and additional financing for working capital (Feb. 14, 2020)(here).