This Week In Securities Litigation (Week of October 17, 2022)
The Commission is undoubtedly still recovering from its incredible push to file enforcement actions at fiscal year-end – only one new enforcement case was filed last week. During the week Senate democrats apparently told Chair Gensler that reform in the crypto asset area should begin now, a point which appears to be inconsistent with Mr. Gensler’s view that legislative change in the area is not close. And, the Acting Chief Accountant published a statement on auditor performance when dealing with fraud.
Be careful, be safe this week
Rules: The Commission adopted rule amendments to modernize how broker-dealers preserve electronic records on October 13, 2022 (here). The proposals also enhance electronic recordkeeping requirements for security-based swaps.
Comment period: The Commission reopened and extended several rulemaking release due dates because of a technology error, according to a release dated October 7, 2022 (here).
Statement: Paul Munter, Acting Chief Accountant, issued a statement on October 11, 2022 titled The Auditor’s Responsibility for Fraud Detection. In his statement Mr. Munter discussed the role of the auditor, the importance of having a strong system of quality controls, risk assessment and good practices (here).
SEC Enforcement – Filed and settled actions
Last week the Commission filed 1 civil injunctive action and no administrative proceedings, exclusive of 12j, default, conflicts (which are included in the tabulations of cases). tag-a-long and other similar proceedings.
Ponzi scheme: SEC v. National Realty Investment Advisors LLC, Civil Action No. 22:22:-cv-06066 (D. N.J. Filed October 13, 2022) is an action which names as defendants: The firm, supposedly a real estate developer; Ray E. Grabato, the majority owner of the firm; Daniel C. O’Brien, a minority owner of NRIA; Thomas Salzano, a vice president of the firm who has also been named as a defendant in a Commission enforcement action, pleaded guilty in a consumer fraud action and settled a matter with the FTC; and Arthur Scutaro, previously an executive at NRIA involved in a fraud case with Defendant Salzano. Since 2018 NRIA has claimed to be managing real estate assets. Currently it is in bankruptcy. From inception through earlier this year the firm was involved in a fraudulent scheme that disseminated false statements to raise over $600 million from about 2,000 investors. Approximately 382 of those investors were retirees who contribute over $94.8 million to the scheme from retirement accounts. Contrary to repeated claims, the company never made sufficient money to fund its distributions. Rather, defendants manipulated the financial statements of NRIA to make it appear that the firm made money. Defendants also used investor funds to pay for the family expenses of Mr. Salzano. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25558 (October 14, 2022).
Misrepresentations – IA: SEC v. Springer, Civil Action No. 19-cv-02559 (E.D. Cal.) is a previously filed action in which defendants Keith Springer and his firm, investment advisory Springer Management, Inc., an investment adviser, are alleged to have defrauded a number of clients by falsely claiming that they were not paid fees to recommend select investments, a false statement. Defendants settled the action, consenting to the entry of permanent injunctions based on Advisers Act Sections 206(1) and 206(2. They were also directed to pay a $400,000 civil penalty on a joint and several basis. Last week the Court entered the settlements. In a separate administrative proceeding Mr. Singer also agreed to the entry of an associations bar. See Lit. Rel. No. 25557 (October 14, 2022).
Offering fraud: SEC v. Parnas, Civil Action No. 1:21-cv-995 (S.D.N.Y.) is a previously filed action which named as defendants Lev Parnas and David Correla. The complaint alleged that Defendants made material misrepresentations when they solicited investors for their firm, Fraud Guarantee. Investors were told that the firm was designed to make money to pay those who had been defrauded by others. In fact, Defendants and their firm misappropriated most of the money raised. The Court earlier entered a partial judgment against Defendant Parnas by consent, enjoining him from violating Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(b). Subsequently, the Commission imposed an association and penny stock bar on Mr. Parnas. Mr. Correla previously settled. The final judgment entered last week directed the payment of disgorgement in the amount of $1,400,746 and prejudgment interest of $378,844.76. Mr. Parnas previously pleaded guilty in a parallel criminal proceeding. In that case the court directed the payment of restitution and forfeit. See Lit. Rel. No. 25556 (October 11, 2022).
The Financial Stability Oversight Council released its Report on Digital Assets Financial Stability Risks and Regulation on October 3, 2022 (here). The Report was prepared in view of Section 6 of President Biden’s Executive Order 14067 on “Ensuring Responsible Development of Digital Assets.” It discusses financial risks posed by the assets, enforcement of regulations, regulatory gaps and future steps.
Remarks: Himamauli Das, Acting Director, FinCEN, delivered remarks at the ACAMS AML Conference on October 12, 2022 (here). Those remarks focused on the regulator’s beneficial ownership rule.
Report: Annual Report on Enforcement Outcomes, 2021-2022 (here).
Announcement: The European regulator announced its strategic goals for the next five years, in a release dated October 10, 2022 (here).
Announcement: The Monetary Authority of Singapore expanded its Sustainability Group, appointing a new Chief Sustainability Officer, according to a release issued on October 13, 2022)(here).
Remarks: Ravi Menon, Managing Director, MAS, delivered the keynote speech at Sibos 2022 conference, on October 10, 2022. In his remarks Mr. Menon stated that FinTech can potentially play a positive transformative role by addressing cross-boarder payment and settlement and having a high quality, trusted ESG data ecosystem (here).