This Week In Securities Litigation (Week of Sept. 7, 2020)
The Commission closed out the pre-labor day/end of summer period with an array of its staples. Cases were filed based on undisclosed 12b-1 fees (with a notation in the Order that the adviser failed to take advantage of the Share Class Selection offer), offering frauds and unregistered broker sales of securities. Also filed was an action centered on failing to deliver the prospectus after an offering ad a case tied to a pyramid scheme. Finally, a settled insider trading case was filed that imposed a penalty but did not require the payment of disgorgement – perhaps in view of Liu.
Be safe and healthy this week
Whistleblowers: The Commission awarded over $2.5 million to Joint Whistleblowers who provided a detailed analysis that spawned multiple, successful actions, according to a September 1, 2020 announcement.
SEC Enforcement – Filed and Settled Actions
The Commission filed 8 civil injunctive actions and 4 administrative proceedings last week, excluding 12j and tag-along-proceedings.
Undisclosed conflicts: In the Matter of Signature Financial Services, Ltd., Adm. Proc. File No. 3-19963 (Sept. 3, 2020) is an action which names as a Respondent the registered investment adviser. From 2014 through 2019 Respondent recommended or charged clients for shares that carried 12b-1 fees without disclosing that fact. Respondent also failed to have policies and procedures properly implemented to prevent violations. The firm did not self-report during the Share Class Selection Disclosure Initiative, according to the Order. The Order alleges violations of Advisers Act Sections 206(2) and (4). Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. They also agreed to pay disgorgement of $252,460, prejudgment interest of $24,120.34 and to implement certain undertakings. The disgorgement and prejudgment interest were deposited into a distribution fund for investors.
Ponzi scheme: SEC v. Brown, Civil Action No. 2:20-cv-08058 (C.D. Cal. Filed Sept. 3, 2020) is an action which names as a defendant Steven F. Brown, the manager of Alpha Fund Trade Analytics, Inc. Beginning in February 2015, and continuing for about three years, Defendant marketed interests in the fund, a pooled investment vehicle. About $7.5 million was raised from 75 investors who were promised guaranteed monthly returns ranging from 8 to 12% per month of total assets. The fund supposedly took the risk. In fact, only a small portion of the investor funds were invested with the balance being misappropriated. In fact, the fund acted as a Ponzi scheme. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). Defendant partially resolved the case, consenting to the entry of a permanent injunction based on the sections cited in the complaint. Questions regarding monetary relief will be considered by the Court on motion at a later date. The U.S. Attorney’s Office for the Central District of California filed a parallel criminal action. See Lit. Rel. No. 24888 (Sept. 3, 2020).
Offering fraud: SEC v. Thompson, Civil Action No. 20-cv-05205 (N.D. Ill. Filed Sept. 3, 2020) is an action which names as a defendant Geoffrey Thompson who previously settled an enforcement action with the Commission based on registration violations. He is the founder of Canadian firm Covalent Collective, Inc. Beginning in July 2014 Defendant and his firm raised over $19 million from about 500 investors. The securities were not registered. The firm never began any revenue generating activities. Defendant diverted about $2.7 million of the offering proceeds to his own purposes. The complaint alleges violations of Securities Act Sections 5(a) and 5(c). The case is pending. Settled administrative proceedings were filed as to the firm. See Lit. Rel. No. 24887 (Sept. 3, 2020). See also In the Matter of Covalent Collective, Inc., Adm. Proc. File No. 3-19961 (Sept. 3, 2020)(resolved with a cease and desist order based on Securities Act Sections 5(a) and 5(c) and certain undertakings based on future cooperation).
Unregistered broker: SEC v. Fife, Civil Action No. 1:20-cv-05227 l(N.D. Ill. Filed Sept. 3, 2020) is an action which names as defendants John Fife and five entities he controls. Previously Mr. Fife settled a market timing action with the Commission and was barred by FINRA. In this case Mr. Fife and his firms purchased and sold securities of microcap entities, reaping millions of dollars. Specifically, over a four-year period, beginning in 2019, over 250 notes were purchased from about 135 different firms. The purchases were made at deep discounts, the notes converted and then the shares were sold for millions of dollars. While Mr. Fife acted as a dealer, he was not registered. The complaint alleges violations of Exchange Act Section 15(a)(1). The case is pending. See Lit. Rel. No. 24886 (Sept. 3, 2020).
Aiding and abetting: SEC v. DiChiara, Civil Action No. 1:20-cv-11645 (D. Mass. Filed Sept. 3, 2020) is an action which names as a defendant attorney Peter DiChiara. Essentially Defendant assisted client Morrie Tobin and others who secretly controlled Environmental Packaging Technologies Holdings, Inc. to profit from controlling the firm by selling shares to the public without disclosing accurate information or complying with limitations on the sale of the stock. To facilitate the scheme, attorney DiChiara wrote legal opinions falsely stating that certain nominee entities were not affiliates. This permitted restrictions on the shares to be removed. He also aided the transfer of $1 million to an offshore entity which was then used by Mr. Tobin for a stock promotional campaign. Eventually the Commission suspended trading in the stock. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(2) and (3) and 15(b) and Exchange Act Section 20(e). Defendant resolved the action, consenting to the entry of a permanent injunction based on the sections cited in the complaint and to the entry of a five-year penny stock bar and conduct based injunctions. Mr. DiChiara agreed, in addition, to pay a penalty of $40,000, $15,000 in disgorgement and $2,167 in prejudgment interest. See Lit. Rel. No. 24884 (Sept. 3, 2020).
Prospective delivery: In the Matter of National Financial Services LLC, Adm. Proc. File No. 3-19958 (Sept. 3, 2020) is an action which names as a respondent the registered broker-dealer. The Order alleges that the firm failed to comply with its prospectus delivery obligations to investors in connection with the public offering of FuelCell Energy, Inc. Over a two-year period from 2005 to 2017 about 70 million shares of stock were sold for the firm in five public offerings. By failing to deliver the final prospectus the firm violated Securities Act Section 5(b)(2). The firm also failed to properly supervise the traders. The firm resolved the matter by consenting to the entry of a cease and desist order based on the section cited in the order and to a censure. The firm will also pay disgorgement of $797,905, prejudgment interest of $163,288 and a penalty of $1.5 million. All the money went to the U.S. Treasury. See also In the Matter of FuelCell Energy, Inc., Adm. Proc. File No. 3-19957 Sept. 3, 2020)(same as above; resolved with a cease and desist order based on the same section as above; no penalty was imposed based on cooperation).
Insider trading: In the Matter of Yue Li, Adm. Proc. File No. 3-1959 (Sept. 3, 2020) is an action which names as a respondent Yue Li, a Chinese citizen and former Vice General Manager of Overseas Acquisitions at Tahoe Investment Group Co., Ltd., a private equity firm. In 2017, while in possession of inside information regarding Tahoe’s impending acquisition of a firm, Respondent made a purchase of 8,200 shares of stock in the firm being acquired which later yielded profits of over $21,000. The Order alleges violations of Exchange Act Section 10(b). To resolve the matter, Respondent consented to the entry of a cease and desist order based on the section cited in the Order. In addition, Respondent agreed to pay a penalty of $43,218 which will be transferred to the U.S. Treasury.
Unregistered broker: SEC v. Sexton Advisory Group, Inc., Civil Action No. 5:20-cv-01806 (C.D. Cal. Filed Sept. 2, 2020) names as defendants Steven Sexton and his firm, Sexton Advisory Group. Defendants were part of a nationwide roll out of offerings for the sale of securities by the Woodbridge Companies. Those firms were one of the largest Ponzi schemes. Currently they are in bankruptcy. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). Defendants resolved the action by each consenting to the entry of a permanent injunction based on the sections cited in the complaint. In addition, the firm agreed to pay disgorgement and prejudgment interest of $271,792. Previously, $251,827 had been paid to the trustee which was credited against the amount due. The balance plus a penalty of $30,000 will be put into a fair fund. See Lit. Rel. No. 24883 (Sept. 2, 2020).
Offering fraud: SEC v. Wykle, Civil Action No. 1:20-cv-23616 (S.D. Fla. Filed Sept. 2, 2020) is an action which names as defendants Gary Wykle and Alejandro Cortes. The Republic Group, Inc., controlled by Mr. Wykie, sold promissory notes to 150 investors, raising about $9.4 million. Investors were told that the notes would pay interest ranging from 2.5% to 3% per month. The funds were supposed to be used to make short term loans in the travel industry. In fact, much of the money was misappropriated or paid in fees to Defendant Cortes. The complaint alleges violations of Securities Act Sections 5(a) and (c) and Exchange Act Section 15(a). It also alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the case each defendant consented to the entry of a permanent injunction. In addition, Mr. Wykle will pay disgorgement of $948,295, prejudgment interest of $136,979 and a civil penalty of $192,768. Mr. Cortes will pay disgorgement of $749,280, prejudgment interest of $111,805 and a penalty of $75,000. The U.S. Attorney’s Office for the District of Puerto Rico, where much of the marketing was done, filed a parallel criminal action. See Lit. Rel. No. 24882 (Sept. 2, 2020).
Misappropriation: SEC v. Clason, Civil Action No. 3:20-cv-01279 (D. Conn. Filed Sept. 1, 2020) is an action which names as a defendant Matthew O. Clason, an investment adviser representative. Over the last two years Defendant Clason used his relationship with a client to misappropriate that person’s funds. The complaint alleges violations of Advisers Act Section 206(1) and 206(2). See Lit. Rel. No. 24881 (Sept. 1, 2020).
Pyramid scheme: SEC v. McLane, Civil Action No. 2:20-cv-00122 (N.D. KY. Filed August 31, 2020). The action centers on Mindset 24 Global, LLC, a personal development company themed to the current interest in mindfulness. The firm was created by co-founders, John McLane and Paul Nash. Mr. McLane was the CEO of the firm; Mr. Nash served as the chief technical officer. Each is named as a defendant in the complaint. The firm traces to 2017 when it began offering through a website personal development services through different levels of online self-help instructional packages. The packages came in four levels, each offered at a different price. The information in the packages was composed of various videos and workbooks. The higher priced packages offered more personal material. A compensation plan offered participants an opportunity to earn commissions at different levels. The top end the program offered the participant 70% of the sale proceeds. In that case 30% of the proceeds went to the Defendants. In addition, there was an opportunity to earn what was called a “coded bonus” tied to sales. The greater the sales, the greater the compensation. Beginning in July 2017, and continuing through at least May 2018, Defendants offered the packages and actively promoted Mindset 24 through a website and social media. Defendants raised over $1 million, mostly in bitcoin from participants. Virtually all the sales were made to those in the program. The vast majority of the participants lost money. Of the 735 participants who paid for a series package, for example, 92% suffered losses that averaged over $1,000. In addition, Defendants misappropriated about $51,000 of investor funds. About $20,000 was misallocated to a small minority of participants. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) – the interests purchased are investment contracts or securities. The complaint also alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24880 (August 31, 2020).
Binary options: SEC v. Senderov, Civil Action No. 19-cv-5242 (E.D. WA. Settled August 31, 2020). The action named as defendants Anto Senderov and Lior Babazar, both citizens residents of Israel. Defendants own or control two unregistered internet sites and a call center that solicit investors to purchase binary options. The solicitations took place over a three-year period, beginning in January 2014. Those soliciting the purchases described the options as profitable investments for all investors, including those with little or no experience. Investors were told by the call center that they could make large profits working with its experienced professionals. In fact, those at the call center were instructed to lie. Defendants also failed to disclose that the option firms had an interest in investors failing to make money. Through these solicitations Defendants obtained millions of dollars from investors. The complaint alleges violations of Securities Act Section 5 and Exchange Act Section 20(a) tied to violations of Exchange Act Sections 15(a) and 10(b). To resolve the case each Defendant consented to the entry of a permanent injunction based on Exchange Act Section 10(b) and Securities Act Section 5. The judgment directs that the two Defendants, jointly and severally, pay disgorgement and prejudgment interest in the amount of $560,000. Each Defendant was also directed to pay a penalty of $350,000. And, each Defendant agreed to be enjoined from selling binary options in the U.S. The Court entered judgments as to each Defendant. See Lit. Rel. No. 24879 (August 31, 2020).
Consultation: The Securities and Futures Commission announced on September 2, 2020 the results of certain consultations. Specifically, the regulator concluded consultations on enhancements to the open-ended fund companies regime, including the removal of all investment restrictions for private OFCs. The Commission will also allow licensed or registered securities brokers to serve as custodians for private OFCs (here).
Consultation: The Monetary Authority of Singapore published a Consultation Paper on September 4, 2020 regarding Draft Notices on the Competence Requirements for Representatives Conducting Regulated Activities under the Financial Advisers Acts and Securities and Futures Act (here).
Consultation: MAS published a Consultation Paper on the Execution of Customer Orders on September 3, 2020 (here).