Trends in SEC Enforcement: 2022 – A Cop on Every Corner, Part II
Part I of this series presented the results for calendar year 2022, briefly discussing the number of cases filed for the year by the Commission and detailing the results for the fourth quarter of 2022.
C. Examples of cases included in the four largest categories of cases 4Q22
This Part of the series presents examples of the cases in the four largest categories of actions filed during the fourth quarter. Those were offering fraud actions, crypto assets, manipulation and insider trading. The cases are listed in chronological order.
Offering fraud: SEC v. Iakovou, Civil Action No. 4:22-v-00194 (M.D. Ga. Filed December 7, 2022) is an action which names as defendants: George Iakovou, Vika Ventures LLC and Penelope Zbravos. The firm was founded by the two individual defendants. Over a two-year period, beginning in late 2019, about 46 investors to put about $3.9 million dollars in what they were lead to believe would be pre-IPO shares of various firms. In fact, there were no such shares – the representations were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendant Zbravos, the girlfriend of Defendant Iakavou, resolved the matter, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. The Court will determine the amount, if any, of a civil penalty. The U.S. Attorney’s Office for the Middle District of Georgia announced the filing of related criminal charges.
Offering fraud: FTX: SEC v. Ellison, Civil Action No. 22-cv-10794 (S.D.N.Y. Filed December 21, 2022). This is the companion case to original action filed involving FTC. That action named as defendants, among others, Samuel Bankman-Fried and centered on the collapse of FTX discussed below. It names as Defendants Caroline Ellison and Zixiao “Gary” Wang. Defendant Ellison was employed at Alameda, Mr. Bankman-Fried’s hedge fund, and Mr. Wang, a co-founder of FTX. The complaint recounts the collapse of FTX primarily as a result of the looting of investor assets for the benefit of Defendants and Mr. Bankman Fried as recounted in the complaint against him. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b). The case is pending.
Crypto trading fraud: SEC v. Rounsville, Civil Action No. 3:22-cv-02458 (N.D. Tx. Filed November 3, 2022) is an action which names as defendant Jeremy K. Rounsville. Over a period of about one year, beginning in May 2018, Defendant Rounsville served as the public face and primary promoter of the crypto asset trading program, “The Trading program.” It used proprietary trading software to generate large returns, according to Defendants. A trading bot was marketed under the name Arbitraging.co. The bot could identify arbitrage trading situations that would generate profits of up to 1% per day, according to the sales pitch. Defendant supposedly was not paid and did not share in profits. In reality, Trading Operation never operated as advertised. In fact, the operation did not engage in any trading. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the matter Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. The order also prevents him from participating in future offerings and imposes an officer/director bar. In addition, Defendant has been directed to pay penalties of $207,183. See Lit. Rel. No. 25569 (November. 3, 2022).
Crypto Ponzi scheme: SEC v. Braga, Civil Action No. 2:22-cv-01563 (W.D. Wash. Filed November 3, 2022) named as defendants: Douver Torres Braga, currently a resident of Florida, who created Trade Coin Club and its operations; Joff Paradise, currently a resident of Panama, who previously described himself as the Director of the United States for Trade Coin Club; and Keleionalant Taylor, the highest paid official of Trade Coin Club. Defendants operated a Bit Coin Ponzi scheme called Trade Coin Club for a period of about two years, beginning in 2016. During that period the firm raised about $295 million from more than 100,000 investors. Defendant Braga not only created the Club, he was one of the main operators. Potential clients were told that the Club had a trading bot generating significant profits by conducting millions of microtransactions per second. The bot also had a stop loss to protect them. Blockchain analysis permitted the Commission to analyze the operations – or lack of operations – of Trade Coin Club. As operations continued, Defendants recruited new members using a pyramid scheme-like referral system. In early 2018 the Club announced it would discontinue operations in the U.S. It also limited withdrawals to ICoin, a new crypto asset that ultimately proved worthless. By the summer of 2018 operations terminated. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending.
Crypto-fraud: SEC v. Bankman-Fried, Civil Action No. 1:22-cv-10501 (S.D.N.Y. Filed December 13, 2022). In 2018 Defendant Samuel Bankman-Fried began work on a crypto asset trading platform and ultimately co-founded FTX. The firm began operations in May 2019. The new trading platform was closely associated with Alameda Research LLC, a firm that had operations in the U.S., Hong Kong and The Bahamas. Known as a “crypto hedge fund,” its CEO was Defendant Bankman-Fried. He became the ultimate decision maker. Defendant Bankman-Fried raised over $1.8 billion from U.S. and other investors who acquired an equity stake in FTX. Investors were repeatedly told that the firm had the necessary and appropriate controls. Mr. Bankman-Fried fostered this belief throughout the period of operations. Yet from the beginning Mr. Bankman-Fried diverted investor assets from FTX to Alameda. As the cash diversions continued Defendant touted FTX as having “top-notch, sophisticated, automated risk measures in place to protect customer assets, that those assets were safe and secure . . .” Alameda was portrayed as just another investor, not a funnel for investor cash to Defendant. The statements were false. Much of the investor money was diverted to Defendant. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See also CFTC v. Samuel Bankman-Fried, Civil Action No. 1:22-cv-10503 (S.D.N.Y. Filed December 13, 2022. The Department of Justice also filed criminal charges.
Manipulation: SEC v. Patten, Civil Action No. 1:22-cv-0503 (D.N.J. Filed September 26, 2022) is an action which names as defendants: James Patten, an employee of Tryon Capital LLC controlled by defendant Coker Sr.; Peter Coker Sr. ; and Peter Coker Jr. , a resident of Hong Kong who is the CEO of Hometown International. Defendants took control of the outstanding shares of Hometown International, Inc. and E-Waste Corporation. The former operates one deli in New Jersey while the latter is a shell company. Using their control, defendants manipulated the share price of each company. For example, the share price of E-Waste increased to $10.00 from $0.10. Accordingly, Defendants substantially profited from their actions. The complaint alleges violations of Securities Act Sections 17(a)(1) and 17)(a)(3) and Exchange Act Sections 9(a), 10(b) and 15(a). The action is pending. The U.S. Attorney’s Office for the District of New Jersey announced criminal charges against the Defendants. See Lit. Rel. No. 25526 (September 27, 2022).
Manipulation – social media: SEC v. Constantin, Civil Action No. l4:22-cv-04306 (S.D. Tx. Filed December 13, 2022) is an action which names as defendants: Edward Constantin, Perry Matlock, Thomas Cooperman, Gary Deel, Mitchell Hennessey, Stefan Hrvatin, Daniel Knight and John Rybarcyzk. Each named Defendant is a well established social media influencer. Their followers believe each provides correct information regarding various stocks. In reality, since at least 2020, the influencers have provided information to the public as part of their efforts to repeatedly manipulate various securities. Those efforts have netted them about $100 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
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).
Insider trading: SEC v. Holzer, Civil Action No. 1:22-cv-08342 (S.D.N.Y. Filed September 30, 2022) is an action which names as defendant Charles Holzer, the Managing Member of Worth Capital, a real estate-focused family office owned by the Holzer family. This action centers on the acquisition of Dun & Bradstreet Corp. by an investor group, announced on August 8, 2018. Defendant Holzer learned about the deal approximately one week prior to the announcement from an investment adviser that was part of the Investor Group after executing a non-disclosure agreement. Despite the agreement, Defendant misappropriated the inside information and traded, realizing profits of $96,091. He also tipped his cousin who traded and had profits of $672,000. The complaint alleges violations of Exchange Act Section 10(b). To resolve the matter Defendant consented to the entry of a permanent injunction based on the Section cited in the complaint and an order directing him to pay disgorgement, prejudgment interest and a civil penalty in amounts to be determined by the Court. He is also barred from serving as an officer/director. See also SEC v. Moraes, Civil Action No. 1:22-cv-08343 (S.D.N.Y. Filed September 30, 2022)(based on similar facts defendant Fernando Moraes traded, realizing profits of $8,842; he also resolved the matter by consenting to the entry of a similar injunction and bar order and agreed to pay disgorgement of $8,842, prejudgment interest of $1,647 and a penalty of $48,646). See Lit. Rel. No. 25545 (September 30, 2022).
Next: Examples of other significant cases filed during 4Q22