This Week In Securities Litigation (Week of October 30, 2023)
The Commission filed two new enforcement action last week. One was based on incorrect statements. The second focused on the misappropriation of client assets by an investment adviser. The Director of the Division of Enforcement also addressed the New York Bar Association Compliance Institute.
Be careful, be safe this week
SEC
Remarks: Gurbir Grewal, Director, Division of Enforcement, delivered remarks at the New York Bar Association Compliance Institute, October 24, 2023 (here). His remarks began with a discussion of trust and then moved to compliance.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 1 civil injunctive action and 1 administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Incorrect statements: In the Matter of Blackrock Advisors, LLC, Adm. File No. 3-21786 (October 24, 2023).The action centers on BlackRock and its client, BlackRock Investment Advisors, LLC or BTI. Blackrock is perhaps one of the best know registered investment advisers. Its client, BlackRock Multi-Sector Income Trust, is a closed-end management investment company. BTI is required to file periodic reports regarding its investments. The reports contain information supplied by BlackRock. In eight reports filed with the Commission, from October 2015 to October 2019, BlackRock inaccurately described the investments of BTI regarding Aviron Group LLC. At one point this was BTI’s largest investment. The reports described the firm as being engaged in Diversified Financial Services. Aviron, however, was not diversified; it was not a financial services firm. To the contrary, the firm was in the business of developing print and advertising plans for one or two films each year. It also underwrote the distribution expenses in exchange for an agreed upon rate of return from the proceeds of the films. Six of the Reports made during the period inaccurately reflected the coupon rate to be paid by Aviron to BIT. In those instances it appeared that the nominal yield derived from the investments would be larger than in fact is was while in four of the reports, smaller while one report provided conflicting information. In 2019, in connection with a review of the Aviron investment, BlackRock identified the errors and accurately reported the Aviron Investment going forward. The Order alleges violations of Advisers Act Section 206(4) and Investment Company Act Section 34(b). To resolve the action BlackRock consented to the entry of a cease-and-desist order, based on the Sections cited. In addition, the firm was censured and agreed to pay a penalty of $2.5 million. The firm cooperated with the staff and undertook remedial actions.
Misappropriation: SEC v. Darrah, Civil Action No. 2:23-cv- 08843 (C.D. Cal. Filed October 20, 2023) is an action which names as defendants: Julie Anne Darrah, a part owner of once registered investment adviser Vivid Financial Management, Inc. or VFM, also a defendant. Beginning in 2016 Defendant Darrah, then employed at VFM, began targeting elderly female advisory clients. Many of these advisory clients appointed her has a trustee. Rather than fulfill her obligations to the clients, she began misappropriating their assets. Beginning in 2016 Defendant misappropriated about $2.25 million from nine clients of the firm. There were also violations of the custody rule and false statements made in Form ADV. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4). Defendant consented to the entry of a preliminary injunction plus a freeze order which includes the requirement to conduct an accounting. See Lit. Rel. No. 25885 (October 25, 2023).
Australia
Article: Calissa Aldridge, Executive Director of the Australian Securities and Investment Commission, titled “Why Fear of Missing Out Can Make you Lose Out,” (here) published by the agency on October 26, 2023
Remarks: Acting ASIC Chair Sarah Court delivered the Opening Statement at a program discussing the Supplementary Budget Estimates 2023/2024 for the agency on October 26, 2023 (here).
BaFin
Article: The Federal Financial Supervisory Authority or BaFin, published an article titled Crypto Markets: What Can We Learn From the Turbulence? The article is written by Rupert Schaefer, BaFin’s Chief Executive Director of Strategy Policy and Control. It suggests that only when there is consistent implementation of market forces will there be sustainable innovations. The article was published October 19, 2023 (here).
UK
Crypto: The Financial Conduct Authority published a warning about common issues with crypto marketing. Those include claims regarding the safety or security of the investment, risk warnings that are presented in fine print and firms failing to provide customers with adequate information. The comments were published on October 25, 2023 (here).