Digital assets are not the only coins drawing regulatory scrutiny these days. Earlier this year, the U.S. Securities and Exchange Commission (SEC) announced that it filed a complaint against California-based Red Rock Secured LLC (Red Rock), its CEO and two former account executives for allegedly engaging in a fraudulent scheme to convince investors to roll over securities out of their retirement accounts (e.g., the federal government employee Thrift Savings Plan (TSP), 401(k) plans and individual retirement accounts (IRAs)) into self-directed IRAs (SDIRAs) for the purpose of investing in precious metals. As detailed in this post, there are several reasons why the SEC's enforcement action – along with the Commodity Futures Trading Commission's (CFTC) parallel enforcement action – provide a golden opportunity to revisit parallel enforcement, SDIRAs and account rollovers.

The Alleged Scheme

According to the SEC's complaint filed in the U.S. District Court for the Central District of California, since at least 2017, the defendants targeted primarily "right-wing, conservative[s]" over 59½ years old who had retirement savings in the TSP, 401(k)s or IRAs. Through aggressive email and advertising solicitations, according to the SEC, the defendants advised these investors that to "protect" their retirement savings from market risk and inflation, they needed to transfer their holdings into SDIRAs and invest in gold and silver bullion. But, in what the SEC described as a classic bait-and-switch, defendants persuaded many of the investors to instead buy niche "premium" coins that purportedly held standalone value.

According to the SEC, these so-called premium coins included an obscure silver Canadian coin for which Red Rock controlled the entire market, allowing it to claim falsely that the "market value" of the coin was more than twice the value of its silver content. According to the complaint, at least 700 investors rolled over more than $50 million from their retirement accounts to invest in the Red Rock coins, whereby the markups netted the company and its principals more than $30 million.

The SEC charged the defendants with violations of the antifraud provisions of the federal securities laws, specifically Exchange Act Section 10(b) and Rule 10b-5 and Sections 206(1) and (2) of the Investment Advisers Act of 1940 (Advisers Act). The SEC also charged the individual defendants with aiding and abetting Red Rock's violations and the CEO with control person liability for violations of Exchange Act antifraud provisions. The SEC is seeking a permanent injunction against the defendants, civil penalties and disgorgement plus prejudgment interest, as well as an officer and director bar for the CEO. The case is currently set for trial starting on May 14, 2024.

The CFTC Files Parallel Enforcement Action

On the same day the SEC filed its complaint, the CFTC, joined by the California Department of Financial Protection and Innovation and the Hawaii Department of Commerce and Consumer Affairs, filed a joint complaint – premised on substantively similar facts – against Red Rock, the CEO and one of the former executives. The complaint alleges violations of the antifraud provisions of the Commodities Exchange Act and CFTC regulations, as well as state law commodities fraud, investment advisor fraud, securities fraud and elderly abuse under California and Hawaii law.¹

In comparison to the SEC's case, which focused on alleged misrepresentations made by the defendants to induce investors to roll over assets from various retirement accounts, the CFTC action focused on purported misrepresentations in connection with the sale of the coins, which are commodities. The complaint further alleged the defendants knowingly or recklessly misled concerning the markup on these coins – the difference between what Red Rock paid to acquire the coins and the price Red Rock charged its customers for those coins. In comparison to representations about a small markup, Red Rock allegedly charged markups ranging from approximately 100 percent to 130 percent on the coins and did not tell customers the actual markups charged. The CFTC – which has its own precious metals fraud advisory page – also alleged various misrepresentations concerning the defendants' relationships with various mints, the pricing and mintage of the coins; purported discounts offered to investors; and the purported "retail/market value" of the customers' coin purchases.

The CFTC's case was transferred to the same judge as the SEC matter but not consolidated.² The case is set for trial starting on the same day as the SEC's case.

Key Takeaways

• SEC and CFTC Parallel Actions Are Becoming Increasingly More Common. Although it is not a regular occurrence, in recent years we have seen more and more parallel SEC and CFTC enforcement actions. In the past, we have seen this play out in both the swaps and futures arena, along with several off-channel communication enforcement matters over the last few years. Additionally, in recent years (including as recently as this month), we have observed the SEC and CFTC filing parallel enforcement actions involving sales of precious metals.³ Although the agencies may be battling for regulatory superiority in the crypto arena, coordination remains strong between the two.
• Fraud on the Seller as a Basis for the SEC's Jurisdiction. The SEC views the defendants' recommendation for investors to roll over retirement assets in their SDIRAs to then invest in Red Rock's "premium" coins – which are a commodity – as constituting a securities transaction subject to the SEC's jurisdiction. This is not a surprise. First, Section 202(a)(11) of the Advisers Act defines "investment adviser" as one who for compensation, among other things, advises as to the advisability of investing in, purchasing or selling securities.⁴ Additionally, the Financial Industry Regulatory Authority (FINRA) considers an SDIRA rollover recommendation equivalent to a securities recommendation.⁵ As a result, it is little surprise to see the SEC assert jurisdiction in a fact pattern like this one.
• SEC Scrutinizing SDIRA Transactions. Earlier in 2023, the SEC's Office of Investor Education and Advocacy (OIEA) issued a Risk Alert concerning SDIRAs and the risk of fraud. Parties involved in these types of transactions should anticipate heightened SEC scrutiny concerning the rollover into an SDIRA for the purposes of purchasing arguably illiquid and potentially volatile investments, including commodities and other non-securities. Among the types of areas the SEC will likely scrutinize in these situations: the investor's prior investments, the guidance to the account holder as to the relative risks of securities associated with the rollover into an SDIRA and the purported benefits of the new investment relative to the prior (perhaps more stable) investment.
• TSP-Related Enforcement Actions May Be on the Rise. In the SEC's press release announcing the action, the agency noted "[t]his action arises from an investigation generated by the Division of Enforcement's Thrift Savings Plan Initiative, which focuses on potentially improper practices targeting government employee retirement accounts." Although SEC Enforcement has investigated and ultimately filed enforcement actions for fraud related to the TSP in the past – and issued an Investor Alert regarding the same in 2017 – the new initiative signals a potential refocus on this area. Given the recent enforcement focus on high-risk investment areas (such as crypto), we would expect SEC Enforcement, with its new initiative, to continue pressure testing promoters and other actors encouraging investor rollovers from the TSP.

The SECond Opinions Blog will continue to monitor these proceedings and provide further updates. If you need additional information on this topic – or anything related to securities enforcement or investigations – please contact the authors or other members of Holland & Knight's Securities Enforcement Defense Team.

Notes

¹ For ease of reference, we refer to the joint action as the "CFTC" action. For the state statutes at issue, see Cal. Corp. Code §§ 29536, 25230, and 25235; Hawaii Rev. Stat. §§ 485A-501(a)(2) and 485A-603.5.

² See CFTC v. Red Rock Secured, LLC, et al., No. 23-cv-03680 (C.D. Cal.).

³ As the CFTC's enforcement action illustrates, state securities regulators have been active policing the precious metals space. Separate and apart from joint actions, state regulators have filed several standalone enforcement actions involving sales of precious metals, such as this example.

⁴ The fiduciary obligations of those who provide investment advice "as a component of other financial services" is explained at length in the SEC's Release No. 1A-1092, issued in 1987.

⁵ By way of example, in December 2013, FINRA issued Regulatory Notice 13-45, titled "FINRA Reminds Firms of Their Responsibilities Concerning IRA Rollovers." In RN 13-45, FINRA seeks to "remind firms of their responsibilities when (1) recommending a rollover or transfer of assets in an employer sponsored retirement plan to an [IRA] or (2) marketing IRAs and associated services." The impetus for RN 13-45 appears to be in part FINRA's belief that many Americans are "confused about their retirement savings options." See id.