This Week In Securities Litigation (Week of March 7, 2022)

With the focus of everyone on the Ukraine and the unbelievable actions there regulators such as the SEC were largely quiet. The Commission did file four civil injunctive actions, focused largely on conflicts, misappropriation and sham transactions.

Be careful out there; be safe

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 4 civil injunctive actions and no administrative proceedings, exclusive of Section 12(j), tag-along and other similar proceedings.

Conflicts: SEC v. Cambridge Investment Research, Inc., Civil Action No. 22-cr-71 (D. IA. Filed March 1, 2022). Cambridge Investment Research is a Commission registered investment adviser. It has an affiliate which is a registered broker-dealer. Over a period of two years, beginning in January 2014, the adviser repeatedly invested client funds in products that frequently resulted in fees being paid to its affiliated broker-dealer without making full disclosure to the clients involved. For example, during the period of this case which began in 2014 and in some instances and continues until today: 1) The firm invested in mutual fund shares and money market funds that generated or had the potential to generate revenue for the broker-dealer; 2) the adviser invested in mutual funds that could generate fees for the wrap accounts; 3) in some instances the adviser converted regular accounts to wrap accounts; 4) for a period the adviser followed a practice of giving forgivable loans to certain adviser representatives; and 5) the adviser failed to adopt written procedures requiring the disclosure of the fees resulting from these practices. The complaint alleges violations of Advisers Act Sections 206(2) and 206(4). The case is pending. See Lit. Rel. No. 25340 (March 2, 2022).

Misappropriation/sham transaction: SEC v. Degregorio, Civil Action No. 1:22-cv-01102 (E.D.N.Y. Filed March 1, 2022) is an action which names as defendant Joseph Orazio Degregoroio, an affiliate of a number of brokers. Over a period of about 6 years, beginning in the fall of 2015, Defendant raised about $1.2 million from investors by telling them that the funds would be put into various types of profitable investments. In fact, the investments did not exist and most of the money was misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25339 (March 2, 2022).

Sham transaction: SEC v. Coldcutt, Civil Action No. 22-cv-0274 (D.D.C. Filed March 1, 2022). Andrew Coldcutt is a Canadian Citizen who practices law in California where he has offices. He claims to be a securities lawyer. The Commission brought a subpoena enforcement action against him in 2017. Two orders compelling compliance were issued against the attorney. In 2017 two hedge fund managers approached the attorney. They were interested in acquiring a public company whose shares they could freely trade. Mr. Coldcutt complied, knowing that the point was to conduct a pump-and-dump scheme. Mr. Coldcutt told the two managers he know of such an entity. It was supposedly in the fruit and distribution business. To facilitate the manipulation scheme, Mr. Coldcutt filed an S-1 registration statement with the Commission. In view of the subpoena enforcement action he did not, however, let his name appear in the filings. In 2019 the registration statement went effective after several amendments were filed. In fact, the entity was a sham – it did not exist. The managers were undercover FBI agents. The complaint alleges violations of each subsection of Securities Act Section 17(a). The case is pending. See Lit. Rel. No. 25338 (March 1, 2022).

Misappropriation: SEC v. Shkeli, Civil Action No. 25337 (February 28, 2022) is an action against Martin Shkreli, the former CEO of Retrophin, Inc., a publicly traded pharmaceutical company. Last week the Court entered a partial judgment in the action imposing a permanent officer and director bar and $1.392 million in penalties. See Lit. Rel. No. 25337 (February 28, 2022).

Misappropriation: SEC v. Abarbanel, Civil Action No. 21-cv-05429 (S.D.N.Y.) is a previously filed action in which the Commission amended the complaint, expanding the initial scheme detailed in the original complaint and settled with two defendants. The initial complaint alleged a scheme in which investors were promised their funds would be put into certain securities when in fact the funds were routed through a series of off-shore funds and misappropriated. The agency settled with defendants Victor Chileli and one of the funds. The two settlements will return over $77 million to the defrauded investors. See Lit. Rel. No. 25336 (February 28, 2022).

Cherry picking: SEC v. Toroian, Civil Action No. 2:22-cv-00715 (E.D. Pa. Filed February 25, 2022) is an action which names as defendants: Marguerite Toroian and Bell Rock Capital, LLC a registered investment adviser founded by defendant Toroian. Over a period of about four years, beginning in 2011, Ms. Toroian engaged in a cherry-picking scheme in which she used the firm’s master account to hold trades and then allocate them later with those that had good returns going to the firm. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. See Lit. Rel. No. 25335 (February 25, 2022).

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