This Week In Securities Litigation (Week of September 7, 2021)
Welcome back! While you were away many assessed the series of settled proceedings filed by the Commission centered on the safeguard rule as a “wakeup” call. The rule is designed to safeguard the data of clients. While the cases were based on failures to implement appropriate policies and procedures rather than actual harm to investors, in an age of increasing hacks it may well be appropriate to head the message of that group of cases.
Be careful, be safe this week
Statement: Commissioner Caroline Crenshaw issued a statement on information bundling and corporate penalties on September 3, 2021. The statement expresses concern about companies that may make it difficult to assess the benefits of certain conduct. That can make determining corporate penalties more difficult. The Commissioner suggests this issue may be avoided by focusing more on other factors such as punishing misconduct and effectively deterring future violations (here).
Remarks: Chair Gary Gensler delivered remarks before the European Parliament Committee on Economic and Monetary Affairs on September 1, 2021 (here). His remarks addressed a range of topics including protective data analytics, digital engagement practices and financial stability as well as crypto assets and issuer disclosures.
Advisory committee: The Committee will hold its next meeting by remote on September 9, 2021. Topics will include investor protection in a digital world, regulatory reform at the PCAOB, Rule 10b5-1 plans and SPACs, according to the September 2, 2021 announcement.
Whistleblowers: The agency announced five whistleblower awards totaling $1.2 million on August 27, 2021.
SEC Enforcement – Filed and Settled Actions
Last week the Commission filed 6 civil injunctive actions and 7 administrative proceedings, exclusive of tag-along and other similar proceedings.
Accounting-disclosure fraud: In the Matter of Pareteum Corporation, Adm. Proc. File No. 3-20522 (September 2, 2021) is an action which names a respondent, the company, a telecommunication firm. In 2018 and early 2019 the firm engaged in improper accounting practices directed by former executives that recognized revenue on non-binding purchase agreements. The improper revenue numbers were published in press releases. Ultimately, a restatement was required which reduced full year revenue from $32.4 million to $20.3 million. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B. To resolve the proceedings, the firm agreed to implement certain undertakings and took remedial acts. The company consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, the firm agreed to pay a penalty of $500,000.
Offering fraud: SEC v. Bitconnect, Civil Action No. 1:21-cv-07349 (S.D.N.Y. Filed September 1, 2021) is an action which names as defendants: the company, formed by Defendant Kumbhani in 2016 with its UK subsidiaries; Satish Kumbhani, a citizen of India; Glenn Arcaro, the lead promoter for Bitconnect; and Future Money Ltd., a Hong Kong based firm formed by Defendant Arcaro. Over a one-year period, beginning in January 2017, the firm launched a successful “lending program” that raised over $2 million or about 325,000 bitcoin. Defendant Arcaaro formed his own network in the U.S. to solicit investments. It is the subject of a separate enforcement action. Investors were induced to invest by what was called a “Trading Bot” that supposedly generated trading returns as high as 40% per month. The claims were false. Frequently investors were paid with Ponzi like payments. Promoters were paid commissions that ranged from 0.2% to 7%. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and Exchange Act Sections 10(b) and 15(a). The action is pending.
Offering fraud: SEC v. Davenport, Civil Action No. 8:21-cv-01427 (C.D. Ca. Filed August 31, 2021) is an action which names as defendants: Dawson Davenport, a securities law recidivist and a principal of Davenport Consulting; Elite Aerospace Group, Inc., a manufacturer of rockets, spacecraft and aircraft; Robert Gunton, the sole offer of Big Gun Creative Inc, a PR firm; Amdrea Lindstrom, sole officer of Edge of the Desert, Inc., a consulting firm; Michael Owens, the owner of several consulting firms; Dustin Tillman, one of the founders of Elite; Julie Yale, owner of Yale Entity Services Corp., a bookkeeping firm; and Zeeshwan Zia, one of the founders of Elite and currently its CEO. The complaint alleges two schemes tied to the sale of shares in Elite. The so-called Boiler Room Scheme raised about $67 million over a four-year period, beginning in 2014. The scheme was directed by Defendant Owens. He was assisted by Defendants Dawson Davenport, Robert Gunton, Andrea Lindstrom and July Yale. As part of the scheme, the amount of commissions paid was concealed. The scheme continued into 2018 with Defendants Davenport, Lindstrom, Tillman and Zia falsifying Elite’s unaudited financial statements. The RMMH scheme sold about $2 million of unregistered Elite common stock in 2017. The Owens Group maintained the stock ledger and issued certificates which claimed old shares would be canceled – a false claim. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 25193 (September. 1, 2021).
Fraudulent fees/trading: SEC v. Eistun, Civil Action No. 4:21-cv-00206 (W.D. Mo.) is a previously filed action which names as defendant investment adviser Douglas Eistun. The complaint alleged that Defendant overcharged clients by charging fees on non-advisory assets. It also alleges that he engaged in high risk and undisclosed trading involving exchange-traded funds without disclosing the risks. Defendant resolved the charges by consenting to the entry of permanent injunctions based on Advisers Act Sections 204(a) and 206(4) and several related rules. He agreed to pay disgorgement of $386,647, prejudgment interest of $64,338 and a penalty of $390,094. See Lit. Rel. No. 25191 (September 1, 2021).
Safeguard rule: In the Matter of Cetera Advisors Networks, LLC, Adm. Proc. File No. 3-20490 (August 30, 2021) is a proceeding which names the registered investment advisor and broker-dealer, along with four of its affiliates that are wholly owned and controlled subsidiaries, as respondents. Those firms are Cetera Advisor Networks LLC, Cetera Investment Services LLC, Cetera Financial Specialists LLC, Cetera Advisors LLC and Cetera Investment Advisers LLC.
The case centers on a failure to properly implement the Safeguard Rule. That Rule has three purposes: 1) To protect the security and confidentiality of client information; 2) to protect customer information against hazards; and 3) to protect against hacks. Over a three-year period, beginning in 2017, about 60 Cetera Entities’ personnel were taken over by unauthorized third parties resulting in the exposure of over four thousand customers. At the time none of the accounts had multi-factor authentication turned on, although firm policy did require it whenever possible. None of the accounts appear to have engaged in unauthorized transactions. The firm failed to properly implement the Rule however. During the period Respondents had in place policies and procedures regarding certain aspects of the Rule, but they were not reasonably designed and properly implemented. The firm also had a number of tools available to implement controls that would mitigate higher risks. The Order alleges violations of Advisers Act Section 206(4). In resolving the matter, Respondents implemented certain remedial acts. They also consented to the entry of cease-and-desist orders based on the Section cited in the Order and the related Rule and to a censure. Respondents will pay a civil penalty of $300,000. See also In the Matter of Cambridge Investment Research, Adm. Proc. File No. 3-20496 (August 30, 2021)(names the firm, a registered broker-dealer, and affiliate Cambridge Investment Research Advisers, Inc., a registered investment adviser, as respondents; also based on the Safeguard Rule on similar facts to those above; resolved with a cease-and-desist order to same Section and Rule cited above, a censure, and the payment of a $250,000 penalty); In the Matter of KMS Financial Services, Inc., Adm. Proc. File No. 3-20495 (August 30, 2021)(action naming the firm, a registered investment adviser and broker-dealer, as a Respondent; based on similar facts as the cases cited above; resolved with a consent to the entry of a cease-and-desist order based on the same sections and a censure; also a penalty in the amount of $200,000).
Misappropriation: SEC v. Brown, Civil Action No. 2:20-cv-08058 (C.D. Cal.) is a previously filed action which names as defendant Steven F. Brown. Mr. Brown was the sole owner and operator of an investment pool known as Alpha Trade Analytics, Inc. He made Ponzi like payments to investors, according to the complaint, after having either misappropriated or misused investor funds. In a parallel action the U.S. Attorney’s Office for the Central District of California announced that Mr. Brown pleaded guilty to wire fraud and was sentenced on June 29, 2021 to serve 51 months in prison followed by three years of supervised released. He was also ordered to pay restitution of $3,313,346 to his victims. On August 24, 2021, the Court entered by consent a final judgment against Mr. Brown, enjoining him from future violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1) and 206(2). The judgment also directed him to pay disgorgement of $2,613,346 plus prejudgment interest of $654,833 all of which is deemed satisfied by the criminal restitution order. See Lit. Rel. No. 25190 (August 31, 2021).
Cherry picking: SEC v. Bressman, Civil Action No. 18-cv-11925 (D. Mass.) is a previously filed action which named as defendant Michael Bressman. The complaint alleged that Defendant misused his access to an omnibus account to cherry pick the accounts – misallocate trades with those that were profitable going to his account while those that were not profitable were allocated to other accounts – over a six year period that ended in early 2018. The Court entered a final judgment by consent, enjoining Defendant from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, the judgment directs him to pay disgorgement of $730,923. The disgorgement order is deemed satisfied by the order to pay restitution of $793,680 in a parallel criminal action. See Lit. Rel. No. 25188 (August 30, 2021).
Insider trading: SEC v. Blakstad, Civil Action No. 19-cv-6387 (S.D.N.Y. Filed August 30, 2021) is an action which names as defendants: Donald Blakstad; Martha Bustos; and Robert Maron. Over a period of about two years, beginning in April 2016, Defendant Bustos, an employee at Illumina Inc. with access to confidential information regarding firm finances, illegally provided her friend Donald Blakstad and others with material non-public information regarding the business. Mr. Blakstad traded, reaping profits of over $6.2 million. At times individuals were paid to trade ahead of Mr. Blakstad in an effort to conceal his trading. Mr. Blakstad also lavishly paid Ms. Bustos for the information. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25186 (August 30, 2021).
Offering fraud: SEC v. Bullard, Civil Action No. 0:21-cv-01932 (D. Minn. Filed August 27, 2021) is an action which names as defendants: Jason Bullard, the operator of the Bullard Enterprise who previously held select securities licenses; Angela Romero-Bullard, a co-owner of the Bullard Enterprise and the owner of a gym; Empire Racing Stables LLC, a principal owner of the Bullard Enterprise; and TI 13 LLC whose principal office is the Bullard Enterprise. Over a period of fourteen years tracing back to 2007, Defendants Jason and Angela Bullard, husband and wife, and their entity have raised about $17.6 million from investors who were promised that their investment capital would be put into foreign currencies. In fact, much of the money was diverted to personal use – no foreign currencies have been traded since at least 2015. Investors have been provided with false accounting records. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25194 (Sept. 2, 2021).
Insider trading: In the Matter of Scott and Lisa Chasin, Adm. Proc. File No. 3-20498 (August 30, 2021) is an action which names the couple as respondents. In July 2019 Lisa Chasin, received a tip from friend Beth Mueller, the senior director of corporate reporting for Peak Resorts, that the firm was about to announce a merger. The couple the traded in the shares of Peak Resorts, purchasing 2,500 shares. On July 18, 2019, the company announced the merger. Subsequently, the shares were sold at a profit of about $14,000. The Order alleges violations of Exchange Act Section 10(b). To resolve the matter Respondents cooperated and then consented to the entry of cease-and-desist orders based on the Section cited in the Order. In addition, the couple agreed to pay, on a joint-and-several basis, a penalty in the amount of $27,996. See also In the Matter of Beth Mueller, Adm. Proc. File No. 3-20491 (August 31, 2021)(action against the tipper based on facts above; resolved with a consent to the entry of a cease-and-desist order based on Exchange Act Section 10(b) and to an order directing the payment of a penalty in the amount of $27,996).
False stock tweets: SEC v. Fassari, Civil Action No. 8:21-cv-0403 (C.D. Cal.) is a previously filed action which named as defendant Andrew Fassari. Defendant is alleged to have posted false statements on Twitter and another social media site while buying and selling securities. Specifically, Mr. Fassari began purchasing over 41 million shares of Arcis Resources securities shortly before tweeting false information about the company. The share price skyrocketed, rising over 400%. To resolve the action, Mr. Fassari consented to the entry of permanent injunctions based on Exchange Act Section 10(b) and Securities Act Section 17(a). In addition, he will pay disgorgement of $457,110, prejudgment interest of $8,007 and a penalty of $195,047. Defendant also agreed to the entry of a penny stock bar. See Lit. Rel. No. 25185 (August 27, 2021).
Unregistered broker: SEC v. McHenry, Civil Action No. 3:21-cv-554 (S.D. Miss. Filed August 26, 2021) is an action which names as defendants William B. McHenry Jr. and First South Investment, LLC. The firm is owned by Mr. McHenry. Beginning in 2010 Defendants regularly engaged in the business of selling securities for others. Specifically, they sold promissory notes for Arthur Lamar Adams and Madison Timber Properties, LLC. The notes were not registered; Defendants were not registered. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). Previously, the Commission charged Madison Timer, Mr. Adams and others in connection with the Madison Timber scheme. A receiver has been appointed in the matter. The case is pending. See Lit. Rel. No. 25184 (August 27, 2021).
Misappropriation: SEC v. Boccara, Civil Action No. 3-21 CV 2022 (N.D. Tx. Filed August 26, 2021) is an action which named as defendant Gullaume David Boccara. The complaint alleges that over a three-year period, beginning in 2019, Defendant engaged in various schemes to effectively misappropriate client assets entrusted to him. For example, at times he caused the family fund to sell him assets at low prices which he then sold for a profit. At other times he purchased options in the open market and sold them to the family fund at inflated prices. In some instances, Defendant sold worthless options to the fund. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. See Lt. Rel. No. 25187 (August 30, 2021).
Offering fraud: U.S. v. Rhodes, No. 1:12-cr-00887 (S.D.N.Y. sentencing September 1, 2021) is an action in which Jason Rhodes, co-founder and CIO of Sentinel Growth Fund Management LLC, was sentenced to serve 48 months in prison. The sentence is based on his guilty plea to charges of securities fraud, wire fraud, investment adviser fraud and conspiracy. The charges were based on defrauding 25 investors out of about $25 million. The scheme originated in 2013 and continued through December 2016. While investors were promised that their funds were properly invested, in fact much of the investor money was misappropriated. Investors were furnished with false statements in an effort to conceal the fraud. At the request of the firm’s principals Mr. Atlas authored two opinion letters in 2016 that contained information he knew would be used to operate the business unlawfully. Attorney Ledbetter was personally involved in the solicitations, having raised over $100 million from investors.
Offering fraud: U.S. v. Ledbetter, No. 20-CR-60103 (S.D.Fla. sentencing on August 27, 2021) is an action in which attorneys Andrew Ledbetter and Steven Schwartz, along with Jan Atlas, the former COO of the firm, each pleaded guilty to one count of conspiracy to commit wire and securities fraud. The charges were based on the massive 1 Global Capital Investment Scheme. Company operations resembled a pay-day loan operation. In fact, it was a massive investment fraud scheme in which hundreds of millions of dollars were raised. Defendant Schwartz was the COO of the firm while Messrs. Ledbetter and Schwartz were outside lawyers at different firms. Ultimately the fraud impacted about 3,600 investors in 42 states. Mr. Ledbetter was sentenced to serve 60 months in prison and directed to pay $148,976, 248 in restitution; Mr. Schwartz was directed to serve 24 months in prison and pay $36 million in restitution; and Mr. Atlas will serve 8 months in prison. He was also ordered to pay $28 million in restitution.
Report: The European Securities and Markets Authority published its second Trends, Risks and Vulnerabilities Report for 2021 on September 1, 2021. The report emphasizes the risks and fragile fundamentals in an environment of high risk for investors in the current environment (here).