This Week In Securities Litigation (Week of February 21, 2022)
Last week the Commission prevailed on a summary judgement motion against an investment adviser charged with the misappropriation of client assets. It also filed actions centered a fraudulent valuation, the failure to file Form CRS and unregistered securities.
Cornerstone Research published a report on actions based on accounting and auditing issues. The Report concluded that overall the number of actions filed in 2021 was down significantly, compared to the prior year.
Be careful, be safe this week.
SEC Enforcement – Litigated Actions
Misappropriation: SEC v. Boucher, Civil Action No. 20CV1650 (S.D.Ca. 2020). Mark J. Boucher and his firm, Strategic Wealth Advisor Group Services Inc., are named as defendants in this case. Mr. Boucher has worked for an investment adviser for the last 19 years. He worked for Investment Adviser A from 2010 through 2016 and Investment Adviser B from 2016 through 2019. The firm was a state registered investment adviser in 2019.
The complaint is based on three multi-year frauds in which Mr. Boucher misappropriated over $2 million in client funds. While working for Advisers A and B Defendant Boucher defrauded Client A by misappropriating almost $700,000 from her advisory accounts. A variety of deceptive conduct was used, including forging checks and even withdrawing funds on margin when he wanted more cash than was available. In addition, about $60,000 was misappropriated from Client B’s advisory accounts by wiring sale proceeds from the account using a phone call in which Mr. Boucher impersonated the client. After Client C passed away, Mr. Boucher misappropriated about $1.5 million from the trust accounts by moving the funds to his personal accounts. He also took steps to conceal his actions from the firms and later the staff during the investigation. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2).
Following discovery, the Court granted the Commission’s motion for summary judgment in an order dated On February 8, 2022. The Court concluded that the agency was entitled to judgment on each of its charges. In reach this conclusion the Court found that the undisputed facts established scienter and stole the client funds. That ruling was based in part the Court’s conclusion that Defendants, in their Opposition, failed to establish there were material facts in dispute because the documents offered and relied on were not authenticated. The Court also denied Defendant’s renewed motion to stay the action in view of an ongoing, parallel criminal proceeding. Remedies will be considered at a later date. See Lit. Rel. No. 25329 (February 11, 2022).
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 1 civil injunctive actions and 14 administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.
Fraudulent valuation: SEC v. Valissaris, Civil Action No. !:22-cv-01345 (S.D.N.Y. Filed February 17, 2022) is an action which names as defendant James Valissaris, the founder and CIO of Infinity Q Capital Management LLC, a SEC registered investment adviser. Ove a four year period, beginning in early 2017 and continuing through February 2021, Defendant represented to investors and others that certain holdings of the Infinity Q Funds were valued by an independent third party pricing service. In fact the claims were false. To the contrary Defendant inflated the stated valuations of the funds by: 1) Manipulating the computer code of the models used by the service; 2) entering incorrect inputs; 3) selecting models that he knew were inappropriate; and 4) Cherry picking one of the key inputs. In addition, he materially inflated the mutual fund’s NAV and the private fund’s total assets. Finally, in certain instances Defendant altered documents. At one point the Funds were over valued by about $1 billion. Even as the pandemic started and continued the values of the funds were significantly over stated. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), Advisers Act Sections 206(1), 206(2), 206(4) and 206(7) and Investment Company Act Sections 34(b) and 37. The case is pending. The SEC’s investigation is continuing. The U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal action. See Lit. Rel. No. 25331 (February 17, 2022). See also CFTC v. Valissaris, Civil Action No. 1:22-cv-01347 (S.D.N.Y. Filed February 17, 2022).
Failure to file Form CRS: In the Matter of Arthur Zaske & Associates, Adm. Proc. No. 3-20674 (February 15, 2022), is one of twelve proceedings brought against 6 registered investment advisers and 6 broker dealers for failing to prepare customer relationship summaries known as
Form CRS and deliver it their retail investors. The proceedings were resolved with a cease-and-desist order and the payment of a penalty ranging from $10,000 to $97,525.
Crypto – unregistered securities: In the Matter of Blockfi Lending LLC, Adm. Proc. File No. 34503 (February 14, 2022). Named a respondent in the action is BlockFi, a firm formed in 2018 that is a wholly owned subsidiary of BlockFi Inc., a financial services company. Beginning in early 2019 Respondent started selling BlockFi Interest Accounts or BIAs to investors. Thorough those accounts investors could lend crypto assets to BlockFi in exchange for a promise to receive a variable monthly interest payment. The funds to pay the interest were generated by deploying the firm’s assets in various ways including loans of crypto assets to institutional corporate borrows, lending U.S. dollars to retail investors, and investing in equities and futures. The case turned on the manner in which BlockFi generated the funds to pay the variable rate of interest in exchange for investors lending their crypto assets. The assets were borrowed in exchange for a promise to repay with interest. Investors loaned the crypto assets based on BlockFi’s statements about how it would generate the yield to pay the BIA investors interest. Through those transactions investors had a reasonable expectation that BlockFi would use the invested crypto assets in BlockFi’s lending and investing activity and that investors would share in the profits from those transactions BlockFi also made a material false statement on its website concerning its collateral practices. In resolving the proceedings, the firm agreed to implement a series of undertakings. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(2) and (3). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. Respondent also agreed to pay a penalty of $50 million.
Insider trading: SEC v. Brown, Civil Action No. 5:21-cv-04594 (N.D. Cal.) is a previously filed action which named as defendant: Nathaniel Brown; Benjamin Wylam; Naveen Sood; Marcus Bannon; Matthew Rauch; and Naeresh Ramaiya. Messrs. Brown and Wylam settled with the Commission, the final two defendants in the case. The complaint claimed that Defendant Brown sereved as revenue recognition manager for Infinera Corporation. He is alleged to have repeatedly tipped nis best friend, Benjamin Whlam, regarding the firm’s quarterly financial performance over a period of about one and a half years beginning in April 2016. Mr. Whylam, a high school teacher and bookmaker, traded and tipped Defendant Sood who owed him a six figure gambling debt. Mr. Sood traded and tipped her friend who also traded. Overall the group had trading profits of almost $1.7 million. Messrs. Brown and Wylam consented to the entry of final judgments precluding future violations of Exchange Act Section 10(b). Mr. Brown was suspended from appearing and practicing before the Commission as an attorney based on his felony conviction in the parallel criminal action. In that action Defendants Brown and Wylam each pleaded guilty. Mr. Brown was sentenced to serve 22 months in prison and forfeit $30,000; Defendant Wylam was sentenced to serve one year and a day in prison and ordered to forfeit $999,000. See Lit. Rel. No. 25330 (February 11, 2022).
EB-5 fraud: SEC v. Kameli, Civil Action No. 17-cv-04686 (N.D. Ill.) is a previously filed action which named as a defendant immigration attorney Seyed Taher Kameli and his companies. Defendant represented at least 226 foreign investors that their $500,000 investment would be invested in senior living projects in Illinois or Florida and create at least 10 permanent full time jobs so they would qualify under the EB-5 program for a green card. Rather invest all of the $88.7 million raised, he co-mingled the fund and misused a portion of the funds. To resolve the action Defendants consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). The judgment also orders that Defendants and three of Mr. Kameli’s companies named as Relief Defendants to pay, on a joint and several basis, in varying amounts, of $1,172,000 plus prejudgment interest of $108,161. The order also orders Defendants to pay, jointly and severally, a $320,000 civil penalty. See Lit. Rel. No. 25328 (February 11, 2022).
SEC Accounting & Auditing Enforcement
Cornerstone Research announced that the SEC initiated 34 enforcement actions involving accounting ore auditing allegations against 26 individuals and 20 firms in 2021. The number of actions filed represented a 32% drop from the 50 filed the prior year. Last year was the third in a row that the number of actions filed by the SEC declined. The results are compiled in Accounting and Auditing Enforcement Activity – 2021 Review and Analysis, Cornerstone Research (here).