Courts Give SEC Split Decisions on Same Day

by Dorsey & Whitney LLP
Contact

March 29, 2018 was a significant day for the Commission. The agency obtained decisions in two different cases. In one, the Commission prevailed against two defendants in a bench trial held seven years ago arising from the market crisis. The Court, however, found against the Commission as to five other defendants. Two other defendants settled before trial while one passed away. SEC v. Betta, Civil Action No. 80803 (S.D. Fla. Verdict March 29, 2018). In the second the Commission prevailed on a summary judgment motion in an action centered on an investment adviser alleged to have defrauded his firm and clients. SEC v. Ahmed, Civil Action No. 3:15-cv-675 (D. Comm. Ruling March 29, 2018).

The complaint in Betta named ten registered representatives as defendants who were employed by California based Brookstreet Securities Corporation: William Betta, Travis Branch, Barry Kornfield, James Caprio, Clifford Popper, Troy Gagliardi, Alfred Rubin, Steven Shrago, Russell Katz and Shane McCann. From 2004 to 2007 the Defendants lured investors to purchase Collateralized Mortgage Obligations or CMOs with false claims that they were safe liquid investments suitable for retirees and that the investments would not be margined, according to the complaint. In fact, the CMOs were margined and very risky investments, suitable only for sophisticated investors. Overall, the Defendants attracted more than 750 customers with CMO investments of more than $175 million from which they earned about $18 million in commissions and salaries.

In early 2007, the CMO market began to fail resulting in significant loses for the investors. By June 2007 the margin calls snowballed to the point where Brookstreet failed to meet its net capital requirements and went out of business. Many of the investors lost their savings, homes and ability to retire or stay retired. Many of the investors owe Brookstreet’s clearing firm hundreds of thousands of dollars. The complaint alleged violations of securities Act Section 17(a) and Exchange Act section 10(b).

The Court entered findings of fact and conclusions of law on March 29, 2018. In those findings the Court ruled in favor of the Commission and against Defendants William Betta and Travis Branch. In its lengthy findings the Court found sufficient evidence that these two representatives “acted with scienter because they made highly unreasonable omissions or misrepresentations that involved an extreme departure from the standard of ordinary care, and mislead investors which was either known to Betta and Branch or was so obvious that Betta and Branch must have been aware of it.” This was true for Mr. Betta, for example, whose “main role was to ensure that brokers and their clients properly understood the CMO program . . .” A permanent injunction was entered against each Defendant based on the sections cited in the complaint. The Court declined to impose a penalty but may consider the issue in the future.

The Court ruled against the Commission and in favor of Defendants Rubin, Shrago, Kautz, McCann and Garliradi. Here the Court fund that the “Commission has offered insufficient evidence to demonstrate the level of culpability for scienter or severe recklessness as to these five Defendants . . . There is an abundance of evidence showing that it was not unreasonable for [these five] Defendants to rely upon the expertise of Brookstreet, which at the time was a large, national firm. Brookstreet had a centralized, fully staffed and active legal and compliance department. And particularly significant, the CMO Program Manager was an experienced and knowledgeable trader who had a successful track history . . . Defendants reasonably relied upon Brookstreet’s renowned “expert” CMO Portfolio Manager Popper, along with his ‘portfolio management team’ . . .” (emphasis original). Defendants Kornfeld and Caprio settled with the Commission earlier while Defendant Popper passed away prior to trial. See Lit. Rel. No. 24112 (April 13, 2018).

The SEC fared better in Amed. Defendant Iftikar Ahmed, an investment professional, was a partner at Oak Investment Partners, a multistage venture capital firm, according to the complaint. The firm advised several funds, each of which invested investor funds in various entities. Those investors range from individuals to institutions and pension funds.

As a general partner at Oak Investment Mr. Ahmed identified and recommended investment opportunities for the funds advised by the firm. His duties included specifically recommending the purchase of securities and advising on the price. He also managed investments he recommended.

Beginning in October 2013, and continuing through the end of 2014, according to the complaint, Mr. Ahmed recommended that Oak Investment make significant investments in three companies:

Chinese e-commerce firm: In August 2014 Mr. Ahmed recommended an investment in a Chinese e-commerce company whose shares were held by an offshore firm. Although he knew, according to the complaint, that the shares were being offered at $1.5 million, he recommended that the fund pay a price which was $2 million more – that is, $3.5 million. To support the recommendation Mr. Ahmed made false representations regarding the finances of the firm. The fund purchased the shares for $3.5 million. Mr. Ahmed arranged for the purchase price to be wired to Iftikar Ali Ahmed Sole Prop, a claimed business with a BVI bank account where the seller was supposed to be located. In fact the firm’s bank account listed the address of Mr. Ahmed’s Connecticut residence. Later the $2 million was transferred to a personal bank account in the name of Mr. Ahmed and his wife.

Asia based joint venture: A second recommendation was made at the end of 2014. In this instance Mr. Ahmed arranged for an Oak Investment fund to purchase the shares of an Asia-based joint venture from its two partners. Although the offering price was $2 million, the fund was told by Mr. Ahmed that it was $20 million. Again he made false representations regarding the finances of the joint venture to support his claim. Mr. Ahmed then made arrangements for the payment to be wired in two installments, one of $2 million and a second of $18 million. The latter was to go to the BVI based partner and transferred to the partnership. Again the funds were wired to Iftikar Ali Ahmed Sole Prop. The funds were never transferred to the partnership. Mr. Ahmed had purported deal documents e-mailed to an Oak Investment employee showing the deal closed.

E-commerce firm: In late 2013 Mr. Ahmed made the first of two recommendations regarding the purchase by an Oak Investment fund of shares in an e-commerce company. At the time of the recommendations a substantial portion of those shares were owned by I-Cubed, a firm initially owned by Mr. Ahmed and later his wife. Initially, Mr. Ahmed recommended a $25 million purchase. He did not disclose his interest in the firm. Later he advised the fund to purchase additional shares of the e-commerce company directly from I-Cube. Although his firm purchased those shares in late 2012 for $2 million he advised the fund to pay $7.5 million. His interest in I-Cube was not disclosed.

The Commission filed an amended complaint, detailing additional instances of transactions such as those detailed above. That complaint alleged violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2), 206(3) and 206(4).

The Court ruled in favor of the Commission and against the Defendant on each of the deals in the amended complaint. In reaching its conclusion the Court rejected Defendant’s contentions based on Morrison v. National Australia Bank Ltd. 130 S.Ct. 2869 (2010) that the transactions were off shore. The Court found that Defendant Ahmed violated each of the sections cited in the complaint. In reaching its conclusion the Court ruled rejected a motion by the Defendant. The question of remedies will be considered at a later date.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.