Trends in SEC Enforcement: 2022 – A Cop on Every Corner, Part III (concluding segment)
Trends in SEC Enforcement: 2022 – A Cop on Every Corner, Part III (concluding segment)
Part I of this series briefly discussed the overall enforcement results for 2022 and presented a discussion of the four largest groups of cases brought during 2022 – offering fraud cases, those involving crypto assets, and those concerned with manipulation and insider trading. Part II presented examples of the cases included in the four largest groups of cases filed in 4Q22.
This Part III of the series identifies examples of cases initiated during the period which are not included in one of the four largest categories of case. The actions are grouped by type and generally presented within the group in chronological order. Because of the number of cases this part was will be divided into two segments. The first segment was published yesterday. Below is the concluding segment of Part III.
D. Examples of other Significant Cases (final segment)
Policies and procedures
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).
Privacy: In the Matter of Morgan Stanley Smith Barney LLC, Adm. Proc. File No. 3-21112 (September 20, 2022) is a proceeding which names aa a respondent, the 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.
Stop order: In the Matter of The Registration Statement of American CryptoFed DAO LLC, Adm. Proc. File No. 3-21243 (November 18, 2022). Respondent was established on July 1, 2021 as the successor to American CryptoFed, Inc. The firm has filed two registration statements with the Commission. The first was a Form 10 registration statement that sought to register the Ducat and Locke tokens under Exchange Act Section 12(g). The second was filed on September 17, 2021, on Form S-1. It sought to register the offer and sale of the tokens. Subsequently, the Commission issued an order Directing Examination and Designating Officers Pursuant to Section 8(e) of the Securities Act. The next day it issued an Order and Notice of Proceeding under Section 12(j) of the Exchange Act against American CypoFed. Respondent claims to be a Decentralized Atomos Organization. The tokens, according to the firm, are not securities but utility tokens. Essentially the Registration Statements fail to comply with the applicable rules – little information is actually contained in the filings. There are, however, misstatements and material omissions. Respondent is also alleged to have failed to cooperate with the Section 8(e) examination. The matter will be set for hearing.
Touting: In the Matter of Kimberly Kardashian, Adm. Proc. File No. 3-21197 (October 3, 2022). Ms. Kardashian was retained to promote a crypto token called EMAX. She was paid $225,000 to promote the token. The tokens were promoted beginning in May 2021 in social media and marketing material. Ms. Kardashian also posted about the coins on her Instagram account which included an introductory video. In the advertising materials, the company that issued the coins assured purchasers that the coins would be traded in a secondary market. The marketing materials also discussed the management of the company. Prior to the EMAX promotion the Commission had issued the DAO Report of Investigation on July 25, 2017 stating its views on crypto and what constitutes a security. The report defined the test for determining if an investment contract is a security under the Supreme Court’s determination in SEC v. Howey, 328 U.S 293 (1946). It also discussed what has now become known as the “ecosystem” surrounding the crypto coins – the efforts of others part of the Howey test that creates the hoped for profits with the pooled investor money. While it is clear that Ms. Kardashian promoted the coin as promised, what she did not do is disclose that she was paid to promote the coins and the amount. There was thus a violation of Section 17(b) of the Securities Act. Ms. Kardashian resolved the proceedings by cooperating with the Commission and agreeing not to receive any form of compensation for three years for promoting a crypto asset security. She also agreed to continue cooperating with the agency and consented to the entry of a cease-and-desist order based on the Section cited in the Order. In addition, Ms. Kardashian will pay disgorgement of $250,000, prejudgment interest of $10,415.35 and a $1 million penalty.
SPAC: In the Mater of Perceptive Advisors LLC, Adm. Proc. File No. 3-21031 (September 6, 2022) is a proceeding charging a registered investment adviser tied to its activities with a SPAC. Specifically, the firm failed to disclose certain conflicts, made material misrepresentations, and did not adopt sufficient compliance policies and procedures. The firm also lost its status as a passive investor while negotiating a potential transaction involving a SPAC and a public company of which it was a greater that 5% shareholder. Respondent did not file a Schedule 13D. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and Exchange Act Section 13(d). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure. The firm also agreed to pay a penalty of $1.5 million.
Reg FD: SEC v. AT&T, Inc., Civil Action No. 1:21-cv-01951 (S.D.N.Y. Filed March 3, 2021) is an action against the firm and three of its executives, Christopher C. Womack, Kent D. Evans and Michael J. Black. In March 2016 the firm learned that there would be a steep drop-off in the sale of smart phones. That in turn would cause revenue for the first quarter of 2016 to fall below the consensus estimate. The Chief Financial Officer instructed the head of the IR Department to “work” the analysts who had revenue estimates tied to equipment “to high.” The individual Defendants were then instructed to make calls to select analysts. Those calls were made to about 20 firms. During the calls material nonpublic information was disclosed, although there were efforts to disguise that fact. The complaint alleges violations of Exchange Act Section 13(a) and Regulation FD. To resolve the matter the company, and each of its executives, consented to the entry of a permanent injunction based on the Section and Regulation cited in the complaint. In addition, the company agreed to pay a penalty of $6.25 million while each executive will pay $25,000.
Unauthorized transactions: In the Matter of Sparklabs Global Ventures Management, LLC, Adm. Proc. File No. 3-21063 (September 12, 2022) is a proceeding which names as respondents: the firm, an exempt reporting adviser to the State of California; Sparklelabs Management, LLC, also an exempt reporting adviser to the State of California; and Bernard Moon, an owner and managing member of each entity. The proceeding centered on the unauthorized and undisclosed loans among the funds over a three-year period, beginning in 2016. By entering into the loans which were not authorized, and in violation of their agreements, the funds breached their fiduciary duties. Contrary to their operating agreements, committees were not formed to advise on such activity. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). Respondents consented to the entry of cease-and-desist orders and censures. The two firms will pay, on a joint and several basis, a penalty of $200,000. Mr. Moon will pay a penalty of $25,000.
Next: The concluding segment of the series