This Week In Securities Litigation (Week of January 25, 2021)
It appears that the exit may have halted, or at least slowed from the Commission. While the depleted agency has not filled the vacancies that have emerged in recent weeks, with the swearing in of President Biden, Commissioner Allison Herren Lee was named as Acting Chair. In addition, Paul Munter, currently deputy Chief Accountant, was named as Acting Chief Accountant. Melissa Hodgman, an associate director in the home office, was named Acting Director of the Division of Enforcement.
The agency filed a number of enforcement actions last week. Those actions involved an offering fraud, a father-son team that deceived advisory clients, and an offering of digital coins.
Be careful, be safe this week
SEC Enforcement – Filed and Settled Actions
The Commission filed 4 new civil injunctive actions and 1 administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters.
Unregistered securities: SEC v. Thompson, Civil Action No. 1:20-cv-5=05205 (N.D. Ill.) is a previously filed action which named as a defendant Geoffrey Thompson. The complaint alleged that Defendant and his firm, Covalent Collective, Inc., raised over $1.9 million from about 500 investors who purchased unregistered securities. To resolve the matter, Defendant consented to the entry of a permanent injunction based on Securities Act Sections 5(a) and 5(c) and a conduct- based injunction. He also agreed to pay disgorgement of $481,328, prejudgment interest of $51,615 and a penalty of $9,639. See Lit. Rel. No. 25014 Jan. 21, 2021).
Offering fraud: SEC v. Stack, Civil Action No. 1:21-cv-00051 (W.D. Tex. Filed Jan. 15, 2021) is an action which names as a defendant Attorney William Andrew Stack. Mr. Stack agreed to act as a figure-head CEO for microcap firm Preston Corp. During his tenure the firm issued false press releases regarding its supposed business as a financial services provider. Portions of the funds raised in 2016 were misappropriated. The complaint alleged violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25013 (Jan. 21, 2021).
Free- riding: SEC v. Batra, Civil Action No. 2:21-cv-00434 (C.D. Cal. Filed Jan. 15, 2021). Defendant Abhi Batra apparently traded frequently but not successfully. Over a four-year period beginning in 2016, for example, he generally suffered losses from trading, but ultimately had profits. At first Mr. Batra traded through seven brokerage accounts in his name. After the accounts were set-up, he arranged to fund them by transferring cash from his bank account by Automated Clearing House or ACH transfer. Typically, Defendant would trade options. If the trade lost money he would cause his bank to retract the transfer of funds to the broker by falsely claiming it was unauthorized. This left the brokerage firm with the loss from the trade. Mr. Batra used the same technique in some instance even when the trade was profitable. For example, at Broker B Mr. Batra purchased options on a stock. The account had been funded with an ACH transfer of cash. The trade was profitable. Defendant then withdrew the profits. Later he also retracted the ACH transfer, again claiming it was fraudulent and unauthorized. Ultimately Defendant purchased over $8 million is securities through 44 accounts at 14 different brokers. As brokers came to understand the scheme Mr. Batra employed – known as “free-riding” — Defendant altered his approach. By March 2018 he had switched to nominee accounts not in his name for his scheme. In less than two years he opened 32 more accounts. About $900,000 was deposited into the accounts using ACH transfers. Subsequently, the transfers were retracted based on Defendant’s misrepresentations. Over the four-year period brokers suffered $665,000 in losses from Defendant’s free riding-scheme. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25012 (Jan. 19, 2021).
Defrauding clients: SEC v. Glick, Civil Action No. 25011 (D. Ariz. Filed Jan 15, 2021) is an action which names as a defendant former investment adviser representative Jacob Glick. He defrauded advisory clients through three schemes over a two-year period beginning in 2016. First he put clients into unsuitable investments. Second, he solicited two clients to invest in a private placement using misrepresentations regarding the nature of the investments. Finally, he misappropriated funds from an advisory client. The complaint alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25011 (Jan. 19, 2021).
Misrepresentations: SEC v. Sztrom, Civil Action No. 21-cv-cv-00086 (S.D. Cal. Filed Jan. 15, 2021) is an action which names as defendants Michael Sztrom, David Sztrom, his son, and the son’s firm, Sztrom Wealth Management, Inc. In August 2015, Michael, who had been an investment adviser for years, resigned from the firm he was at. Michael then learned he was under investigation; the clearing brokers he had used would not work with him. Son David, who had just passed his regulatory exams, associated with advisor Advanced Practice Advisors, LLC. The firm refused to permit Michael to associate with it. Nevertheless, David and his firm, Szreom Wealth Management, Inc., along with his father advised a number of clients without disclosing the true facts — Michael was not associated with any advisory. The complaint alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. See Lit. Rel. No. 25010 (Jan. 19, 2021).
Unregistered digital offering: In the Matter of Wireline, Inc., Adm. Proc. File No. 3-20206 (Jan. 15, 2021) is a proceeding which named the firm as a Respondent. In September 2018 the firm conducted an offering of digital assets through a simple agreement for future tokens or SAFT. At the conclusion of the offering, the agreements provided the coins would be released. Investors were told that the funds raised would be used to develop the Wireline microservices platform. The tokens would be a medium of exchange. The offering was not registered. The Order alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(2) and (3). To resolve the proceedings Respondent agreed to implement certain undertakings and consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, Respondent will pay disgorgement of $650,000. A fair fund will be created.
Cyber risk: The Monetary Authority of Singapore issued revised Technology Risk Guidelines to keep pace with technologies and shifts in the cyber threat landscape on January 14, 2021 (here).