This Week In Securities Litigation (Week of June 1, 2020)
The country continues to slowly open in an effort to reinstate a semblance of normal life and business. As that process continues the Commission has held a series of conferences and updated various rules. This week there will be a conference focused on market structure issues.
Enforcement continued its recent focus, brining actions based on the sale of tokens, compliance, misappropriated and a Ponzi scheme. The agency is also continuing its inquiries tied to COVID-19 and firms and individuals operating in that space.
Stay safe, stay healthy.
SEC Enforcement – Filed and Settled Actions
The Commission filed 2 civil injunctive actions and 3 administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.
Unregistered securities: In the Matter of Bitclave PTE Ltd., Adm. Proc. File No. 3-19816 (May 28, 2020) is a proceeding that names as a Respondent, a San Jose based firm that operates through a Singapore entity. The firm is an early-stage blockchain services company. Beginning in June 2017, and continuing through November of that year, the firm sold digital tokes it called Consumer Activity Tokens or CAT to about 9,500 investors, including individuals in the United States. The purpose was to fund development of its blockchain based search platform. The interests sold were securities that were not registered. Specifically, they were investment contracts. The Order alleges violations of Securities Act Sections 5(a) and 5(c). To resolve the matter the firm agreed to implement a series of undertakings that unwind parts of its operations. Respondent also consented to the entry of a cease and desist order based on the sections cited in the Order, agreed to pay disgorgement of $25.5 million, prejudgment interest of $3,444,197 and a penalty of $400,000.
Compliance: In the Matter of Ares Management LLC, Adm. Proc. File No. 3-19812 (May 26, 2020). Ares is a global alternative asset manager whose clients are pooled investment vehicles. In some instances, the clients are public firms; in others they are not. Ares had over $149 million in total assets under management at the end of 2019. In 2016 Ares had in place a comprehensive set of procedures governing the handling of material non-public information. In that year the firm invested several hundred million dollars in Portfolio Company. The investment gave the adviser the right to appoint two directors to the board of Portfolio Company creating the risk that Ares would obtain material non-public information. During the period the firm received inside information with respect to a Portfolio Company loan. Over time, Areas also received a variety of information that was potentially material inside information such as changes to senior management, mid-quarter hedging adjustments, efforts to sell a passive interest in a specific assets and similar matters. All of the information was later disclosed. All of the purchases were approved by the investment committee. As a result of the purchases Ares acquired over 1 million shares of Portfolio Company representing about 17% of the float. Although Ares placed the Portfolio Company stock on its restricted list, the compliance team failed to properly follow the firm procedures which governed the situation –that is, when the firm held shares in an entity where its employees had board seats. In those instances, the procedures required that the staff make written notes for entry into the management system sufficiently documenting if prior to approving the trade inquiry was made to determine if the deal team had inside information. Here in numerous instances, the compliance staff failed to make entries in the order management system sufficiently documenting if prior to the approval of the trade it had inquired if the deal team had obtained inside information. And, to the extent such entries were made, they lacked consistency and detail. Accordingly, despite the increased risk resulting from the relationships between Ares and Portfolio Company, the compliance staff failed to properly adhere to and apply the firm’s systems. After the Commission’s investigation began in 2019 however, the firm retained a consultant and reviewed and evaluated its policies and procedures. The Order alleges violations of Advisers Act Sections 204A and 206(4). To resolve the matter the firm consented to the entry of a cease and desist order based on the sections cited and to a censure. Ares also agreed to pay a penalty of $1 million.
Misappropriation: SEC v. Sadleir, Civil Action No. 1:20-cv-03997 (S.D.N.Y. Filed May 22, 2020) is an action which names film promoter William Sadleir as a defendant. In 2015 Mr. Sadleir, the owner and Founder of Aviron Group, LLC, the parent of several film distribution and related entities, convinced BlackRock Multi-Sector Income Trust to invest $75 million in Aviron’s film business. The investment was made in two tranches, one in 2015 and a second two years later. Each was in the form of a promissory note. In 2017 Mr. Sadleir diverted about $25 million to a sham entity, falsely telling the Income Trust that the funds went to a legitimate media firm. In addition, he misappropriated about $13.8 million to his personal use. In 2019 Mr. Sadleir forged the Income Trust’s signature to documents permitting the release of their collateral – a transaction valued at about $3 million. The complaint alleges violations of Securities Act 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24824 (May 26, 2020).
Offering fraud – Ponzi scheme: SEC v. Smith, Civil Action No. CV-20-105 (C.D CA. Filed Ma 9, 202) is an action which names as defendants Paul H. Smith and his entities, Northstar Communications LLC, Planning Services Inc. and eGate, LLC. Since January 2018 Defendants have been hosting investor events at which they marketed securities claimed to pay a guaranteed return ranging from 3% to 10.5%. In fact, there were no investments. Defendants misappropriated the funds, but channeled portions of the investor money back to others, Ponzi style. Defendants raised about $5.6 million from 35 investors. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The Court granted the Commission’s request for a TRO, a freeze order, an accounting and the appointment of a receiver. A hearing is scheduled for June 3, 2020. See Lit. Rel. No. 24822 (May 22, 2020).
Filings: In the Matter of TSP Capital Management Group, LLC, Adm. Proc. File No. 3-19807 (May 22, 2020) is an action which names as Respondent the registered investment adviser. Respondent advises two funds. The firm has failed to timely distribute its audited financial statements to the investors in its largest fund since 2014 and has not even retained an auditor since 2015. The firm also failed to implement policies and procedures with respect to this matter. The Order alleges violations of Advisers Sections 206(4), and Rules 206(4)-2 and 206(4)-7. To resolve the matter Respondent consented to the entry of a cease and desist order based on the section and rules cited in the Order. The firm was also censured. The adviser will also pay a penalty of $60,000.
COVID-19: Australian Investment Commission Chair James Shipton addressed the Senate Select Committee on COVID-19, May 28, 2020 (here). His remarks reviewed the efforts of the agency regarding the virus, including efforts to maintain orderly trading in the markets and enforcement work which centers on a significant risk of consumer harm.
Internal controls: The Securities and Futures Commission banned KwokChau Mo, a former fund manager at Guosen Securities (HK) Asset Management Company Ltd. for nine months. The action is based on his failure to report while a firm employ that he had a beneficial interest in, and control over, two accounts in the name of a friend. These actions circumvented the internal controls of the firm.