This Week In Securities Litigation (Week of July 20, 2020)

The Commission scheduled another virtual outreach meeting this week. The meeting will focus on the municipal markets. In addition, another whistleblower award was announced.

Enforcement continued to file new cases, consistent with its approach over the last several weeks. The cases filed included an offering fraud action and another centered on the sale of unregistered securities.


Program: The Commission announced that it would hold a virtual Compliance Outreach Program for Municipal Advisors on August 13, 2020 in conjunction with the MSRB and FINRA.

Whistleblower: An award of about $3.8 million was made to a whistleblower who provided significant information that aided the Commission in disrupting an ongoing fraudulent scheme.

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 civil injunctive action and 3 administrative proceedings last week, excluding 12j and tag-along-proceedings.

Policies and procedures: In the Matter of First Western Capital Management Co. Adm. Proc. File No. 3-19882 (July 16, 2020) is a proceeding which names as a Respondent the registered investment adviser. Over a six-year period, beginning in October 2010, Respondent purchased for advisory clients securities that were sold in reliance on Rule 144A. At the time of those transactions the firm did not have adequate compliance policies and procedures and had not provided its investment adviser representatives adequate training or provide sufficient supervision of the Rule 144A transactions. This violated Advisers Act Section 206(4) and the related rule. To resolve the proceedings Respondent consented to the entry of a cease and desist order, the entry of a censure and agreed to pay a penalty of $200,000.

Unregistered securities/broker: In the Matter of LLC, Adm. Proc. File No. 89318 (July 14, 2020) is a proceeding which names the firm as a Respondent, along with its owner Dean Vagnozzi. Over a four year period, beginning in April 2013, the firm sold securities in five funds that were not registered. In addition, over a period of several months in mid-2018 Mr. Vagnozzi acted as an unregistered broker for Fallcatcher, Inc., earning transaction based compensation in connection with raising funds for that entity. The Order alleges violations of Securities Act Section 5(a) and 5(c) and Exchange Act Section 15(a). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. The firm was also censured. In addition, Mr. Vagnozzi is suspended from the securities business for a period of 12 months. In connection with the Section 5 violations the firm will pay a penalty of $86,718 that will be transferred to the Treasury subject to Exchange Act Section 21F(g)(3). Mr. Vagnozzi will pay a penalty in connection with these violations of $8,671 that will go to the Treasury subject to the same section. Finally, in connection with the Section 15(a) violations Respondents will pay, jointly and severally, disgorgement of $489,491 plus prejudgment interest of $5,753.33. Mr. Vagnozzi will pay a penalty in connection with this violation of $9,472. The disposition of the funds tied to the Section 15(a) violation was not specified.

Offering fraud: SEC v. Thunderbird Power Corp., Civil Action No. 1:20-cv-22901 (N.D. Fla. Filed July 14, 2020). Named as defendants are Richard Hinds, Anthony Goldstein and John Alexander Van Arem. Each is an officer of the company that sold shares to investors. The sales were tied to a vision of a new wind turbine, popular with environmentalists. Thunderbird supposedly had an industrial grade turbine called PowerStack under development. The tech had been validated by a nationally-known – but unidentified – scientific firm, according to the sales pitch. Proceeds from the offering were supposed to go to development. The stock was compared to an early version of Amazon and other, similar start-ups that later were successful. Defendants raised almost $2 million from investors in less than three years. The claims were false. Portions of the investor money was misappropriated. The Commission’s complaint alleges violations of Securities Act Section 5(a), 5(c), each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending.

Security-based swap: In the Matter of Plutus Financial, Inc., Adm. Proc. File No. 3-19873 (July 13, 2020). Two firms are named as Respondents — Plutus Financial or Abra, a U.S. based entity, and Plutus Technologies Philippines, a Manila based firm. Abra developed an app that permits investors to enter into financial transactions with either of the Respondents serving as the counter-party. People could download the app and fund an account with dollars or Bitcoin. By 2018 the contracts offered permitted investors to obtain synthetic exposure to the price movement of dozens of currencies. The transactions were memorialized on a blockchain. When engaging in a transaction, the investor executed a smart contract provided by Abra. The gains and losses were marked to the blockchain and recorded in the investor’s digital wallet. The wallet could only be unlocked at the end of the contract with the consent of Abra. In February 2019 Respondents broadened the business. Investors could obtain synthetic exposure to numerous U.S. securities and ETFs. The structure was essentially the same as that of the initial currency transactions. It was advertised on the web in 155 countries. The advertisement contained an interview, made available on February 6, 2019, which stated that if “you sign up today . . . you’ll get an email the next few weeks when it’s your turn to start buying stocks and you’re off to the races” (internal citations omitted). A link was provided so that retail investors could download the app and begin investing for as little as $5.00. Abra did not set any requirements that investors put up a specific amount of capital. There was no effort by the promoters to identify those investing or their financial resources. Indeed, Abra made no effort to determine who down-loaded the app. More than 20,000 people added their name to the waiting list. Later in February the staff of the SEC and CFTC contacted Abra. No swaps were sold between February and May 2019. In May 2019 Abra restarted the stock/ETF business but decided not to sell to U.S. investors, only those abroad. Nevertheless, some contracts were entered into by U.S. citizens. Overall about 10,000 swaps were sold to about 2,000 persons, most of whom were outside the U.S. The contracts Respondents offered and sold were security-based swaps. The contracts provided on an executory basis for the exchange of one or more payments based on the value of one or more securities. The contracts were based on the value of individual securities. No registration statement was in effect. The transactions did not comply with Securities Act Section 5(e). There was no effort to determine if the investors were eligible — the required information about the transaction was not made available to the investors. The transactions did not take place on an exchange as required by Exchange Act Section 6(1). To resolve the matter each Respondent engaged in certain remedial acts. Each also consented to the entry of a cease and desist order based on the sections cited in the Order. Respondents agreed to pay, on a joint and several basis, a penalty of $150,000 which will be transferred to the general fund of the Treasury subject to Exchange Act Section 21F(g)(3).

Conflicts: SEC v. Alderson, Civil Action No. 18-Civ. 4930 (S.D.Y.Y.) is a previously filed action which named as defendants registered investment adviser deVere USA, Inc., Benjamin Alderson, the firm’s former CEO and Bradley Hamilton, its former manager. The complaint alleged that when recommending and making pension transfers, Defendants had significant conflicts with their clients stemming from undisclosed side deals they had made with others. Those deals provided financial incentives to act in a manner not in the best interests of their clients. Indeed, those arrangements gave Defendants an incentive to put their financial interests ahead of those of the clients. The Court entered final judgments by consent as to Messrs. Alderson and Hamilton. Defendant Alderson consented to the entry of a permanent injunction based on Advisers Act Sections 206(1), 206(2), 206(4) and 207. Mr. Alderson was also ordered to pay disgorgement of $265,000, prejudgment interest of $10,060 and a penalty of $125,000. Mr. Hamilton was enjoined from future violations of Advisers Act Section 206(2) and was directed to pay disgorgement of $265,000, prejudgment interest of $10,600 and a penalty of $75,000. All amounts will be paid to a fair fund. Mr. Alderson was also barred from the securities business in a separate order. See Lit. Rel. No. 24852 (July 10, 2020).


The Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert titled CyberSecurity: Ransomware Alert (July 10, 2020). The OCIE Alert follows one issued on the same topic by Homeland Security (AA19-339A), dated June 30, 2020 (here), which is a joint product of Treasury and FinCEN. That alert provides an overview of malware, related activity and a list of previously unreported indicators of compromise reported to FinCEN. The OCIE Alert draws on its experience and the Homeland Security Alert. There has been an apparent increase in sophisticated ransomware attacks on SEC registrants, including broker-dealers, investment advisers and investment companies, according to OCIE. The perpetrators of those attacks typically demand compensation to maintain the integrity and/or confidentiality of customer data or for the return of control over the systems. OCIE distilled its observations and comments into five points: 1) Incident response and resiliency policies; 2) Operational resiliency;3) Awareness and training; 4) Vulnerability scanning and patch management; 5) Access management; and 5) Perimeter security.


Alert: The regulator issued an alert regarding a high-profile scam exploiting Twitter accounts to solicit fraudulent payments denominated in convertible virtual currency (here).

Criminal cases

Offering fraud: U.S. v. Kim (N.D.CA. Charged July 15, 2020) is an action in which Jae Woo Kim was charged with one count of wire fraud at his initial appearance. The charge is based on an affidavit that alleges Mr. Kim raised over $4.5 million from investors, claiming that it would be used in connection with a crypto currency investment and trades that would make a profit. In fact, the funds were sent to an off-shore gambling site. The solicitations took place beginning in late 2017. The case is pending.


Remarks: James Shipton, Australian Securities & Investment Commission Chair, delivered remarks at the Joint Committee on Corporations and Financial Services, July 15, 2020. His remarks focused on the challenge facing the financial industry in view of the current pandemic (here).


Report: The European Securities and Markets Authority published its first Review Reports on the MIFIR transparency regime. The report reviews the MIFIR transparency regime for equity instruments. It contains proposals for targeted amendments regarding the transparency obligations of trading venues (here).


Remarks: Ravi Menon, Managing Director of Monetary Authority of Singapore, delivered remarks at the MAS Annual Report 2019/2020 Virtual Media Conference on July 16, 2020. His remarks focused on the global and domestic economic outlook (here).

Tagged with: , ,