This Week In Securities Litigation (Week of September 26, 2022)
As the government fiscal year draws to a close, the Commission filed a diverse series of actions, consistent with the results from the second quarter of this year. Those focused on false statements regarding the difficulties with a new aircraft to insider trading, offering frauds and misappropriation of client funds at advisory firms.
Be careful this week, be safe
Testimony: Chair Gary Gensler testified before the Senate Committee on Banking, Housing, and Urban Affairs on September 15, 2022. His remarks focused on maintaining the integrity of the markets, crypto and the resilience of the markets (here).
Marketing Rule: Exams issued an Alert on September 19, 2022 regarding the implementation of the new Marketing Rule (here).
SEC Enforcement – Filed and settled actions
Last week the Commission filed 7 civil injunctive actions and 8 administrative action, exclusive of 12j, default, conflicts, tag-a-long and other similar proceedings.
Policies & procedures: In the Matter of Raymond James & Associates, Inc., Adm. Proc. File No. 3-21133 (September 22, 2022) is a proceeding which names the dual registered broker-dealer and investment adviser as a Respondent. Beginning in October 2015, and continuing for the next four years, a Registered Representative at the firm misappropriated about $148,000 from an elderly customer of the firm. After the customer passed away the same Registered Representative misappropriated additional funds from another customer account. Prior to the time the Registered Representative confessed to the fraud, Raymond James interviewed the Registered Representative and learned little. He was put on an improvement plan. In dealing with this matter Raymond James lacked policies and procedures reasonably designed to clearly communicate to supervisory and compliance staff the process to be used and support required to deal with this matter properly. The firm undertook remedial actions considered by the Commission in this matter. In essence, Raymond James failed to properly supervise the Registered Representative involved in accord with Exchange Act Section 15(b)(4)(e) and prevent violations of Exchange Act Section 10(b). The matter was resolved with a censure of the firm and the payment of a penalty of $500,000.
False statements: In the Matter of The Boeing Company, Adm. Proc. File No. 3-21140 (September 22, 2022) is a proceeding which names as respondent the aircraft manufacturer. The proceeding centers on the difficulties the company experienced with its then new 737 MAX aircraft. In October 2018 and March 2019 two 737 MAX aircraft crashed because a senser misinterpreted certain data that was read as part of a new Maneuvering Characteristics Augmentation System designed to avoid stalls. At the time of the crash each plane was climbing and not in danger of stalling. On each flight when the new system made adjustments the crews were unable to regain control. Subsequently, the FAA grounded the new plane. In late November 2018, when discussing the crashes, Boeing highlighted certain aspects of the preliminary accident report while downplaying others. The company also offered the public its assurances that the plane was safe. Yet the company had already begun redesigning the aircraft. The press release with the assurances made no reference to these facts. Later, in April 2019, then company president Dennis A. Mulenburg stated that there was “no surprise or gap of unknown . . that somehow slipped through [the] certification process” for the plane, a fact the company had reexamined. Yet prior to the statements, Boeing had produced a series of documents in response to a DOJ subpoena suggesting key facts that had not been disclosed to the FAA during the flight approval process. In addition, an internal compliance review identified certain documentation gaps and inconsistencies related to the plane and the certification process. Boeing offered and sold debt securities to investors after it issued the 2018 press release. The Order alleges violations of Securities Act Sections 17(a)(2) & (3). The company agreed to the entry of a cease-and-desist order based on the Sections. It also agreed to pay a penalty of $200,000,000. See also In the Matter of Dennis A. Muilenburg, Adm. Proc. Foile No. 3-21141 (September 22, 2022)(Proceeding naming then president of the firm as respondent; based on same facts and charging violations of same Sections; resolved with consent to entry of a cease-and-desist order and payment of a $1 million penalty).
Independence: In the Matter of Ira S. Viener, CPA, Adm. Proc. File No. 3-21139 (September 22, 2022) is a proceeding which names Mr. Viener as Respondent. He is a licensed CPA but not registered with the PCAOB. Respondent consented to an indefinite suspension by the IRS beginning August 1, 2006. This matter centers on his work regarding Punch TV and Company A. Specifically, he audited the financial statements for the years 2015 through 2019 in connection with Reg. A filings made with the Commission. He also audited the financial statements of Company A for the fiscal year 2018. That company and Punch TV are affiliates. The Order states he thus engaged in unprofessional conduct by failing to satisfy the independence standards, thereby making his audit opinion representing the work had been done per GASS false. In addition, he failed to properly plan the engagements, consider fraud, obtain sufficient appropriate audit evidence, prepare adequate documentation, obtain written representations from management, review the filings containing his audit reports and maintain professional skepticism. The Order alleges violations of Rule 102(e). The matter will be set for hearing.
Insider trading: SEC v. Weiss, Civil Action No. 1:22-cv-08064 (S.D.N.Y. Filed September 21, 2022) is an action which names as defendant, Michael Weiss, a partner at E&Y who was the firm’s Business Development Director. Through his position with the firm Defendant was able to access confidential client information regarding pending acquisitions, prospective business strategies and financial projections. He purchased securities in those firms for personal gain. The illicit trading yielded $10,286. The complaint alleges violations of Exchange Act Section 10(b). Defendant has agreed to the entry of a permanent injunction based on the Section cited in the complaint and the payment of disgorgement, prejudgment interest and a penalty of $23,900. See Lit. Rel. No. 25516 (September 22, 2022).
Offering fraud: SEC v. McDonald, Civil Action No. 2:22-cv-06799 (C.D. Ca. Filed September 21, 2022) is an action which names as defendants James McDonald, Jr. and his firm Hercules Investments, LLC. The complaint is based on two schemes. The first, conducted between May 2019 and October 2021, raised about $3.6 million from 20 investors for an Index Hedge Fund. Defendant McDonald comingled investor cash and furnished false account statements. He also diverted significant sums of investor cash to his personal use. In the second, conducted between February and October 2021, Defendant McDonald sold equity interests in Hercules, a state registered investment adviser, raising about $1.5 million from firm clients and others. Funds raised were to be used to develop the firm’s business. They were not. Again, the investor funds were comingled, used for personal expenses and for repayment of others. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206. The case is pending. See Lit. Rel. No. 25515 (September 22, 2022).
Insider trading: SEC v. Mendwa, Civil Action No. 4:22-cv-05340 (N.D. Ca. Filed September 20, 2022). Named as defendants are John P. Mendes and Andre Dabbaghian. Mr. Mendes was employed as a registered representative and investment adviser representative with a dually registered broker-dealer and investment adviser. Andre Dabbaghian was employed by Granite Construction Inc. during the period 2015 through mid 2018. He was the Senior Manager of Corporate Development. Mr. Dabbaghian had formerly been registered with FINRA and employed as an investment banking analyst. The case centers on the acquisition of Layne Christensen Company by Granite in a deal announced on February 14, 2018. Prior to the deal announcement Defendant Dabbaghian learned of the potential deal regarding Layne by Granite through his employment. At the time he acquired the material, non-public information, Mr. Dabbaghian owned a duty of confidentiality to his employer. Stated differently, he owed a duty not to disclose the information – the information belonged to Granite, not Defendant Dabbaghian. Nevertheless, Defendant Dabbaghian disclose information about the potential merger to his friend John Mendes on or before November 3, 2017. Following the disclosure Mr. Mendes purchased shares of Layne securities for his wife and at least 18 other customers, including his parents, beginning on November 3, 2017 and continuing through November 13, 2017. On November 14, 2017, the day after the deal announcement, the share price of Layne shares closed at $14.89. That represented a price increase of $2.27 per share – up 18% from the close the prior day. Collectively, the persons for whom Mr. Mendes purchased shares had profits of about $170,000. The complaint alleges violations of Exchange Act Section 10(b). Each Defendant resolved the charges with the Commission. Mr. Mendes consented to the entry of a permanent injunction based on the Section cited in the compliant. He also agreed to pay disgorgement of $41,985, prejudgment interest and a civil penalty of $51,579. Defendant Dabbaghian consented to the entry of a permanent injunction based on the Section cited in the complaint and agreed to the entry of an officer/director bar. The Court will consider the amount of the penalty, if any, at a later date. See, Lit Rel. No,. 25512 (September 20, 2022).
Privacy: In the Matter of Morgan Stanley Smith Barney LLC, Adm. Proc. File No. 3-21112 (September 20, 2022) is a proceeding which names a respondent, a dual registered broker-dealer and investment adviser. The Order centers on two failures. First, the firm failed to protect customer records and information when disposing of consumer information. The company retained Moving Company which had no expertise in the area or experience to wipe or destroy any data on decommissioned devices. At some point Moving Company retained another firm to complete the task and stopped working with the firm which had been handling the matter. Moving Company sold about 4,900 information technology assets which contained thousands of records and failed to oversee the wipe process. Second, the firm failed to properly safeguard customer personal identifying information or PII. This occurred in 2019 with regard to 500 decommissioned devices. When the firm tried to cross-check and reconcile all the records from this process it was unable to locate those relating to 42 devices. While they should have been encrypted in fact the encryption failed to activate until 2018. Some data on the devices remained unencrypted. The Order alleges violations of Rule 30(a) and (b) of Regulation S-P. To resolve the proceedings Respondent agreed to the entry of a cease-and-desist order and a censure based on the provisions cited. It also agreed to pay a penalty of $35 million.
Policies & procedures – voting: In the Matter of Toes Corporation, Adm. Proc. File No. 3-21113 (September 20, 2022) names as respondent the Commission registered investment adviser. Over a multi-year period, beginning in 2017, the firm cast proxy votes at over two hundred shareholder meetings on behalf of its investment company clients. In taking those actions the firm always voted in favor of the proposals offered by the issuer’s management. Yet Toes lacked the policies and procedures to ensure that the votes were made in accord with the client’s best interests. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order, and to a censure. A $150,000 penalty was also imposed.
Violation of order: SEC v. Manhattan Transfer Registrar Company, Civil Action No. 9:22-cv-81457 (S.D.Fla. Filed September 20, 2022) names as defendants the firm and John Ahearn, respectively, a transfer agent and its former president. The action centers on a bar order entered by the Commission as to Mr. Ahearn based on his prior guilty plea to the sale of unregistered securities. The bar order was issued on May 17, 2018. Shortly after it was entered, Defendant Ahearn violated it by working with the firm. The firm also failed to comply with the prior Commission order by failing to retain an independent consultant. The complaint alleges violations of Exchange Act Section 17(A)(c)(4)(C). The firm consented to the entry of a judgment enjoining it from violating the charged provision and ordering the payment of disgorgement of $1,075, prejudgment interest of $200.02 and a penalty of $75,000. See Lit. Rel. No. 25514 (September 21, 2022).
Misappropriation: SEC v. Wells, Civil Action No. 22-cv-5113 (N.D. Ill. Filed September 20, 2022) is an action which names David Wells, a representative at a registered broker-dealer and investment advisory firm. From October 2020 through July 2021 Defendant misappropriated over $683,000 from three of his advisory clients. He solicited them to furnish the funds which he then lost trading in his brokerage accounts. False statements were made to the clients to induce them to furnish him funds. In his resignation letter to the firm, Defendant admitted the wrongdoing. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 25513 (September 21, 2022).
Crypto: SEC v. Balina, Civil Action No. 1:22-cv-950 (W.D. Tx. Filed September 19, 2022) is an action which names as defendant Ian Balina, the CEO of a company that provides crypto investment research. This action focuses on Defendant’s unregistered offering and promotion in 2018 of crypto assets securities called SPRK Tokens. Defendant failed to disclose his compensation and register an offering of tokens that he re-sold. Sparkster, Ltd., a software development firm, conducted an unregistered offering of SPRK Tokens in April and July 2018, raising about $30 million. Defendant executed an agreement to invest about $5 million in the Offering. He also agreed to receive a 30% bonus which was not disclosed and promoted them. The complaint alleges violations of Securities Act Section 5(a), 5(c) and 17(b). The complaint is pending. See also In the Matter of Sparkster, Ltd., Adm. Proc. File No. 3-21103 (September 19, 2022)(proceeding naming as respondents the firm and Sajjad Daya; based on offering in action above; alleges violations of Securities Act Sections 5(a) & 5(c); resolved with consent decrees as to each Respondent; Mr. Daya will pay a penalty of $250,000; the firm will pay disgorgement of $30 million, prejudgment interest of $4,6524,754.25 and a penalty of $500,000. A Fair Fund will be created and may be combined with certain others).
Policies and procedures – custody: In the Matter of Arcadia Wealth Management, Inc., Adm. Proc. File No. 3-21110 (September 19, 2022) is a proceeding which names the Commission registered investment adviser as respondent. Beginning in 2013, and continuing for the next five years, the firm failed to comply with the Commission’s verification requirements regarding \custody. The adviser also failed to adopt and implement written policies and procedures designed to prevent violations of the Advisers Act and the rules thereunder. The Order alleges violations of Advisers Act Section 206(4) and the related Rules. To resolve the proceedings, Respondent will implement certain undertakings. It also consented to the entry of a cease-and-desist order based on the Section and related Rules cited in the Order and to a censure. The firm agreed to pay a penalty of $90,000. Arcadia Wealth also agreed that in any related action it is not entitled to an offset based on the penalty paid in this proceeding. See also In the Matter of Matthew W. Dreyer, CPA, Adm. Proc. File No 3-21111 (September 19, 2022)(accountant engaged by Arcadia in connection with surprise exams; failed to take the proper steps and, when contacted by Exams made misrepresentations regarding his work; alleges violations of Rule 102(e)(1)(ii); Respondent denied privilege of appearing and practicing before the Commission with right to re-apply after 5 years).
Wrap fees: In the Matter of Waddell & Reed, LLC, Adm. Proc. File No. 3-21107 (September 19, 2022) is a proceeding which names the formerly registered investment adviser as respondent. Beginning in January 2015, and continuing through 2021, the firm failed to take reasonable steps after its MAPLatitude program flagged 737 accounts that were part of the wrap fee program where only minimal services were being delivered – yet the full wrap fee was charged. The firm failed to take the proper follow-up steps so the firms were not charged the wrap fee resulting in payments from those accounts to the firm of $484,645. The firm also failed to have the proper policies and procedures in place. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and Rule 2106(4)-7. Respondent resolved the proceeding, consenting to the entry of a cease-and-desist order based on the Sections and Rule cited and to a censure. Respondent also agreed to pay disgorgement of $575,589 and prejudgment interest of $90,944. Those funds will be put into a Distribution Fund for accounts impacted here. Respondent will also pay a penalty of $200,000.
Muni bonds: SEC v. Fletcher, Civil Action No. 3:22-cv-01467 (W.D.La.) is a previously filed action in which the Court entered a final judgment against defendants Aarpon Fletcher and Twin Spires Financial LLC for their involvement in two muni bond offerings and failure to register as a municipal advisor. The judgement is based on two revenue bonds issued to finance the development of a water improvement system in 2017 and 2018. The offerings were based on false financial projections created by Defendants. See Lit. Rel. No. 2551 (September 19, 2022).
Remarks: Ravi Menon, Managing Director, Monetary Authority of Singapore, delivered the Keynote address at the SuperReturn Asia Conference, September 20, 2022 (here). His remarks focused on the economic downturn, inflation, tensions in the global economy and climate risks.