The Nutter Securities Enforcement Update is a periodic summary of noteworthy recent securities enforcement activity, settlements, decisions, and charges.
Investment Advisers/Investment Companies
SEC v. Ryan R. Riley, Lit. Rel. 25653 (Mar. 1, 2023) – In a bifurcated settlement, an investment adviser was charged with defrauding investors and advisory clients when over a nine-year period, he allegedly solicited them to invest in his companies, misappropriated funds for personal use, and lost most of the funds through risky day trading. Charges under Securities Act Section 17(a), Exchange Act Section 10(b)(6) and Rule 10b-5 thereunder, and Advisers Act Sections 206(1) and 206(2). The adviser consented to the entry of a judgment which, if approved by the court, would permanently enjoin him from violating the charged provisions and bar him from acting as an officer or director of a public company. Disgorgement and civil penalties will be decided later by the court.
SEC v. Kevin J. Kane and Sean M. Kane, Lit. Rel. 25655 (Mar. 2, 2023) – In a litigated matter, a father and son financial advisory team allegedly misrepresented to clients that that they left their former firm voluntarily, when they were terminated for cause. They allegedly also misrepresented to certain clients that they were still associated with their former firm and could still access client accounts. They also allegedly impersonated clients in phone calls to their former firm to execute transactions in their clients’ accounts. Charges under Advisers Act Sections 206(1) and 206(2). Remedies sought include permanent injunctions and civil penalties.
SEC v. Adam S. Kaplan and Daniel Kaplan, Lit. Rel. 25656 (Mar. 3, 2023) – In a litigated matter, two brothers were charged with misappropriating more than $5m from at least 60 of their advisory clients. The brothers allegedly overcharged clients for advisory fees by fraudulently inflating the fee amounts in the clients’ advisory agreements, without the clients’ knowledge or consent, so that they could collect higher fees than their clients had agreed to pay. They also allegedly misappropriated clients’ funds by fraudulently applying charges to their clients’ credit card and bank accounts for, among other things, purported investments or additional advisory fees to which they were not entitled. Charges under Exchange Act Section 10(b) and Rule 10b-5 thereunder and Advisers Act Sections 206(1) and 206(2). Remedies sought include inunctions, disgorgement plus prejudgment interest, and civil penalties.
SEC v. BKCoin Management, LLC, et al., Lit. Rel. 25657 (Mar. 6, 2023) – In a litigated matter, Miami-based investment adviser BKCoin Management LLC and one of its principals, Kevin Kang, were charged with making Ponzi-like payments to fund investors and misappropriating investor money to pay for personal use. Kang allegedly attempted to conceal the misappropriation by providing altered documents with inflated account balances to the third-party administrator of certain funds. BKCoin allegedly materially misrepresented to some investors that it or one of its funds had received an audit opinion from a “top four auditor,” when in fact neither BKCoin nor any of the funds received an audit opinion. Charges under Securities Act Section 17(a), Exchange Act Section 10(b), Rule 10b-5 thereunder, Advisers Act Sections 206(1) and 206(2). Remedies sought include permanent injunctions against both defendants, disgorgement, prejudgment interest, a civil penalty from both of the defendants, and an officer and director bar and conduct-based injunction against Kang.
In the Matter of E. Magnus Oppenheim & Co. Inc., Rel. 34-97114, IA-6259 (March 13, 2023) – In a settled matter, a register investment adviser was charged for failing to adopt and implement reasonably designed compliance policies and procedures to prevent violations by the adviser and its supervised persons when it failed to remedy multiple exam deficiencies over several years. The firm was also charged with failing to conduct best execution reviews of third-party broker-dealer service providers. Charges under Advisers Act Sections 206(2) and 206(4) and Rule 206(4)-7(a) thereunder. Remedies include cease-and-desist, censure, and civil penalty of $50K. Respondent also agreed to undertakings of retaining an independent compliance consultant to review the compliance policies and procedures designed to promote Respondent’s compliance with the Advisers Act.
SEC v. Sapere Wealth Management, LLC and Scott Trease, Lit. Rel. 23-cv-00172 (March 30, 2023) – In a settled matter, the SEC announced charges against a North Carolina-based investment advisor and its principal for unsuitably recommending that three clients invest $7.3m in risky, alternative-investment deals. The defendants allegedly did not reasonable understand the investments and thus lacked a reasonable basis to recommend them to clients. Defendants allegedly incorrectly believed that the alternative investments were collateralized by gold. In one of the investments, a client ultimately lost $2.3m. Charges under Advisers Act Section 206(2). Remedies included five-year injunction requiring due-diligence consultants to review certain potential transactions; a $100,000 civil penalty against Trease; and an undertaking to distribute the SEC’s complaint and the final judgment to their clients.
In the Matter of Cambria Capital, LLC, Rel. 34-97020 (March 2, 2023) – In a settled matter, Cambria Capital, LLC, a dually registered investment adviser and broker-dealer specializing in microcap securities, was charged with failing to file Suspicious Activity Reports with the U.S. Treasure Department’s Financial Crimes Enforcement Network when it allegedly failed to investigate suspicious activities associated with the liquidation of microcap securities, including the deposit of physical certificates, the liquidation of large quantities of these securities, and the immediate wire out of funds from customer accounts. Cambria’s Written Supervisory Procedures identified numerous potential red flags that Cambria allegedly failed to investigate in practice. Charges under Exchange Act Section 17(a) and Rule 17a-8 thereunder. Undertaking to hire independent AML Complaint Consultant. Remedies included cease-and-desist, censure, and civil penalty of $100k.
In the Matters Silver Edge Financial, LLC et al., and Equity Acquisition Company Ltd., et al., Rel. 2023-44 (Mar. 3, 2023) – In a settled matter, Silver Edge Financial LLC, Equity Acquisition Company Ltd., the owners of both companies, and the sales staff of Silver Edge Financial were charged with unregistered broker-dealer activity relating to their sales of interest in shares of various pre-IPO companies. Since 2019, Silver Edge, its owner, and six salespeople sold interests in two funds that were set up as series LLCs, with each series representing an interest in shares of a single pre-IPO company. The underlying assets in these series were interests in shares of companies that allegedly were expected to undertake an IPO or other liquidity event within two-to-five years. Equity Acquisition Company and its founder allegedly acted as unregistered dealers in connection with their business of obtaining pre-IPO shares and offering them up for sale to various pre-IPO funds, including the Silver Edge Funds. Violations of Exchange Act 15(a). Remedies include cease-and-desist; for Silver Edge and Mackle, $2.5m disgorgement, $975k civil penalty, industry and penny stock bars; for Equity Acquisition Company and Klein, $3.6m disgorgement, and $269,360 civil penalty. All also agreed to undertakings to ensure the legal and orderly distribution of the pre-IPO interests.
In the Matter of Keybanc Capital Markets Inc., Rel. 34-97064 (March 7, 2023) – In a settled matter, a broker-dealer was charged with failing to comply with Exchange Act Rule 15c2-12 when participating as an underwriter of municipal securities. The rule requires underwriters to reasonably determine that the municipal issuers have agreed to provide ongoing disclosures to the Municipal Securities Rulemaking Board (MSRB) and has an exemption for offerings sold to no more than 35 sophisticated investors who are not reselling or purchasing for the accounts of others. The broker-dealer was charged with selling to other broker-dealers or investment advisors without a reasonable belief that the purchasers were not buying on behalf of clients. Charges under Exchange Act Section 15B-(c)(1) and Rule 15c2-12, and MSRB Rule G-27; remedies included censure, cease-and-desist, disgorgement of $263,607 plus prejudgment interest, and a civil penalty of $100,000.
SEC v. Hollender, et al., Lit. Rel. 25674 (March 23, 2023) – In a litigated matter, defendants were charged with selling interests in shares of pre-IPO companies without being registered broker-dealers, and with misleading investors about the fees associated with their investments. The defendants allegedly provided investors with marketing materials, advised investors on the supposed merits of the investments, and received transaction-based compensation, despite not being registered as brokers. In addition, they allegedly told investors that there were no upfront fees associated with their investments even though they received upfront commissions of approximately 10 percent. Charges under Securities Act Section 17(a) and Exchange Act Sections 15(a) and 10(b), and Rule 10b-5.
Issuer Reporting/Audit and Accounting/Directors and Officers/Compliance
In the Matters of The Greenbrier Companies, Inc. and William A. Furman, Press Rel. 2023-43 (Mar. 2, 2023) – In a settled matter, the Greenbrier Companies and its founder and former CEO were charged with failing to disclose perks provided to Furman and other Greenbrier executives and compensation Furman received from Greenbrier’s chargers of Forman’s private plane for travel by company executives, including Furman. According to the SEC, Furman owned a private aircraft, which he leased to an aircraft management company to charter to third parties on his behalf. During 2017 to 2021, Greenbrier paid the management company approximately $3m to charger Furman’s plane for business-related travel, but Greenbrier did not disclose that Furman received approximately $1.6m of that amount. Greenbrier also failed to disclose approximately $320k of perks provided to Furman and other executives, including travel for the executives’ spouses to attend customer and industry receptions. Charges under Securities Act Section 17(a)(2), 17(a)(3), Exchange Act Section 14(a) and Rules 14a-3 and 14a-9 thereunder, Exchange Act Section 13(a), 13(b)(2)(A) and (B) and Rules 14a-3 and 14a-9 thereunder. Remedies included cease-and desist; $1m civil penalty as to Greenbrier; $100k penalty to Furman.
In the Matter of Chembio Diagnostics, Rel. 33-11163 (Mar. 2, 2023) – In a settled matter, Chembio Diagnostics Inc. was charged with making a material representation concerning the performance of a COVID-19 antibody test the company developed and marketed during the spring of 2020. In a May 8, 2020 prospectus supplement filed with the Commission, Chembio allegedly falsely stated that the COVID-19 test was 100% accurate when used more than eleven days after the onset of symptoms. On June 16, 2020, the FDA announced that it was revoking the Emergency Use Authorization for the COVID-19 test in part because performance data demonstrated that the COVID-19 test did not perform as well as described in the EUA application. The stock price declined 60% from the prior day’s closing price. Charges under Securities Act Sections 17(a)(2) and 17(a)(3). Remedies include cease-and-desist and $500k civil monetary penalty.
In the Matter of Ralph Bartel, Rel. 34-97084 (March 9, 2023) - In a settled matter, an investor was charged with failing to file public disclosures of his direct and beneficial ownership of shares of publicly traded Wilhelmina International, Inc. (WHLM) when his aggregate holdings exceeded 5% and 10% of outstanding WHLM stock. For these purposes, the SEC claimed, Bartel’s personal holdings were aggregated with those of Azzuro Capital, which was wholly owned by a trust whose trustees could be removed by respondent. Charges under Exchange Act Sections 13(d), 13(g) and 16(a), and rules 13d-1(a) and (d) and 16a-3. Remedies included cease-and-desist and a $100,000 civil penalty.
SEC v. Evoqua Water Technologies Corp. and Imran Parekh, Lit. Rel. No. 25662, AAER-4390 (Mar. 13, 2023) – In a litigated matter, Evoqua Water Technologies Corp. and its former division-level finance director were charged for improper accounting practices that materially misstated the company’s revenue in SEC filings during 2017 and 2018. According to the complaint, the former finance director inflated quarterly and at year-end revenue by counting revenue from sales much earlier than accounting principles permitted. The SEC further alleged that Evoqua was negligent in managing the financial reporting and accounting controls thereby allowing the former finance director’s improper accounting practices. Charges under Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and Rules 10b-5(a) and (c), 12b-20, 13a-1, 13a-11, 13a-13, and 13b2-1 thereunder. Both parties have consented to entries of final judgment that include permanent injunction, disgorgement, civil penalty of $8.5m (company), and an officer/director bar (individual). Evoqua also agreed to undertakings to implement recommended improvements to its system of internal accounting controls.
In the Matter of DXC Technology Company, Rel. 33-11166, 34-97140, AAER-4391 (March 14, 2023) – In a settled matter, DXC Technology Company, a multi-national information technology company, was charged for making material misstatements in its reporting and disclosures of non-GAAP net income and non-GAAP diluted earnings per share. The SEC alleged that DXC excluded transaction, separation, and integration-related costs (“TSI”) from its non-GAAP net income, non-GAAP EPS, and other non-GAAP measures. However, on a quarterly basis, DXC materially increased its non-GAAP earnings by negligently misclassifying tens of millions of dollars of expenses as TSI costs thereby excluding them in its non-GAAP disclosure. Charges under Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a) and 13a-15(a) and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder and Regulation G Rule 100(b). Remedies included cease-and-desist and penalty of $8m. DXC also agreed to undertakings to develop and implement policies and disclosure controls and procedures. In determining to accept DXC’s settlement offer, the SEC considered DXC’s cooperation and remedial measures.
SEC v. Ozy Media, Inc., et al., Lit. Rel. 25670 (March 17, 2023) – In a partial settlement of ongoing litigation, the former Chief Operating Officer and Chief of Staff of Ozy Media consented to judgments on charges that they participated in misrepresentations to prospective investors concerning the company’s financial condition, business relationships and fundraising efforts, including claims that defendants inflated the company’s revenue by at least 100%. Charges under Securities Act section 17(a), and Exchange Act section 10(b) and Rule 10b-5. Remedies include injunctions, an officer and director bar for the former COO, and money penalties to be determined later by the court. Litigation against the remaining defendants is ongoing.
SEC v. Vale, SA, Press Release 2023-63 (March 28, 2023) – In a litigation settlement, a major international mining company settled charges that it had made false and misleading statements about the safety of its mine-related dams prior to the 2019 collapse of a Brazilian dam that killed 270 people. Charges had been brought under Securities Act Sections 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13b2-1. Remedies included injunctive relief, disgorgement of $25m (plus 5.9m in prejudgment interest) and a civil penalty of $25m.
In re Spicer Jeffries LLP, et al., Rel. 34-97216, AAER 4394, (March 29, 2023) – In a settled matter, the audit firm and engagement partner for two private funds were charged with failing to conduct the audits in accordance with generally accepted auditing standards. With respect to certain of the funds’ “Level 3” investments, for which fair values were not readily determinable, the order stated that the auditors failed to adequately respond to fraud risks, to obtain sufficient audit evidence, to prepare sufficient audit documentation and to perform certain supervision and quality control steps. Charges under Exchange Act Section 4C and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. Remedies included certain undertakings, a cease-and-desist order (firm) and a practice bar of at least one year (engagement partner).
SEC v. Craig D. Percaivalle, et al., Press Rel. 2023-69 (Mar. 31, 2023) – In a litigated matter, the SEC charged tree executives of Mobile, Alabama-based shipbuilder, Austal USA LLC, for orchestrating a fraudulent revenue recognition scheme that allowed its parent company to meet or exceed expectations. Defendants allegedly directed others to lower the cost estimates to meet Austral USA’s revenue budget and revenue projections. The complaint also alleges that Austral USA’s parent company prematurely recognized revenue and, as a result, met or exceeded analyst consensus estimates for earnings before interest and tax (EBIT), a key financial metric for the company. Charges under Exchange Act Section 10(b), Rule 10b-5. Remedies sought include permanent injunction, disgorgement, civil monetary penalty, director-and-officer bars.
SEC v. Ho Wan Kwok (a/k/a Miles Guo, Miles Kwok, Wengui Guo and Brother Seven), Kin Ming Je (a/k/a William Je), Mountains of Spices LLC (d/b/a New York Farm), and G Club Operations LLC, Defendants, and Mei Guo, Qiang Guo (a/k/a Mileson Guo), Hing Chi Ngok, and Sin Ting Rong, Relief Defendants, Lit. Rel. No. 25668 (Mar. 15, 2023) – In a litigated matter, the SEC charged an exiled Chinese businessman, Guo, and his financial advisor, Je, for their involvement in unregistered and fraudulent offerings that raised more than $850 million. According to the complaint, since April 2020, the defendants misappropriated investment funds to enrich and support themselves and their families’ lifestyles, including a misappropriation of $100 million that was diverted to a hedge fund owned by Guo’s son. The SEC also charged Guo, G Club Operations LLC, and Mountains of Spices LLC for violating the registration provisions of the securities laws and further charged Guo for another offering of a crypto asset security, referred to as “H-Coin,” “Himalaya Coin,” or “HCN,” that he falsely stated was backed by gold and that he would personally compensate investors for any potential losses. Charges under Securities Act Sections 17(a), 5(a) and (c) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. Remedies sought include permanent injunctions, disgorgement, civil penalties, officer and director bars, and a securities industry bar for Guo. The U.S. Attorney’s Office for the Southern District of New York also announced charges against Guo.
SEC v. Sun, et al., Lit. Rel. 25676 (March 24, 2023) and Related Promoter Matters – In an ongoing litigated matter, defendant Sun and three wholly-owned companies were charged with the unregistered offering and sale of crypto asset securities and with manipulating the market through more than 600,000 wash trades. Specifically, defendants allegedly offered and sold TRX and BTT as investments through multiple unregistered “bounty programs,” which directed interested parties to promote the tokens on social media, join and recruit others to Tron-affiliated Telegram and Discord channels, and create BitTorrent accounts in exchange for TRX and BTT distributions. Charges under Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 9(a)(1) and (2), 10(b) and Rule 10b-5. The SEC simultaneously brough charges under Securities Act section 17(b) against two celebrities for allegedly touting the investments without disclosing their compensation. Six other celebrities entered into administrative settlements the same day for allegedly touting the investments without disclosing their compensation, agreeing to disgorgement of the amount of their compensation plus civil penalties of approximately three times those amounts. Litigation is ongoing.
SEC v. John Barksdale et al., Lit. Rel. 25680 (March 30, 2023) – In a litigated matter, the court entered judgment against two individuals after the SEC alleged that they raised tens of millions of dollars through two unregistered fraudulent offerings of securities involving a crypto asset called “Ormeus Coin.” The individuals also allegedly sold subscription packages that included Ormeus Coin through a multi-level marking business called Ormeus Global and made false statements regarding mining revenues produced by Ormeus Coin. Charges under Securities Act Sections 5, 17(a), Exchange Act Section 10(b), Rule 10b-5. Remedies include permanent injunction, disgorgement of $46,297,463 plus prejudgment interest, and civil penalty of $23,148,731.
SEC v. William Andrew Stack, Esq., Lit. Rel. 25682 (Mar. 31, 2023) – In a litigated matter, the court entered a final adjustment against William Andrew Stack, an attorney and nominal CEO of Preston Corp., a now-defunct financial services provider for the mining industry. The Complaint alleged that Preston Corp. purported be a financial services provider specializing in royalty financing for mining operations, but in reality had no actual operations. The complaint alleged that Stack made materially misleading statements, including that Preston Corp had entered into a “gold mine agreement” with a third party. Stack allegedly conducted an unregistered distribution of the company’s common stock to retail investors and allegedly misappropriated the proceeds of the offering. Charges under Securities Act Sections 5(a), 5(c), 17(a), Exchange Act Section 10(b), Rule 10b-5(b). Remedies included a five year officer-and-director bar, penny stock bar, and bar from providing legal services relating to Regulation D or other exemptions, disgorgement plus prejudgment interest of $438,103.21 and $333,110 civil penalty.
SEC v. Terren S. Peizer et al., Rel. 2023-42 (Mar. 1, 2023) – In a litigated matter, Terren Peizer, Executive Chairman of the California-based healthcare treatment company Ontrac Inc., was charged with inside trading for selling more than $20m of Ontrak stock while in the possession of material nonpublic information related to the company’s largest customer. Peizer allegedly established a Rule 10b5-1 trading plan in the name of Acuitas Group Holdings, LLC, his investment vehicle, to sell Ontrak stock when he had learned that Ontrak’s relationship with its then-largest customer was tenuous. He allegedly adopted a second Rule 10b5-1 trading plan when he learned that the same customer relationship was being terminated. When Ontrak announced that the customer had terminated the contract, the stock price fell more than 44% and, as a result, Peizer allegedly avoided more than $12.7m in losses by executing the two trading plans. The DOJ announced parallel criminal charges. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5 thereunder, Exchange Act Section 20(a). Remedies sought include disgorgement with prejudgment interest, civil penalties, and officer and director bar.
SEC v. Abdelkader, Lit. Rel. 25660 (March 9, 2023) – In a settled matter, the SEC alleges that a trader obtained material nonpublic information from his wife, an employee of Audentes Therapeutics, that Audentes was likely to be acquired, and purchased short-term, out-of-the-money call options on the stock. Charges under Exchange Act section 10(b) and rule 10b-5. The trader consented to the entry of a final judgment that would include an injunction against future violations, disgorgement of his profits and a civil money penalty of approximately $90,000.
U.S. v. Buyer, No. 1:22-cr-00397 (SDNY) – In a federal criminal matter, the jury found former U.S. Representative Stephen Buyer guilty on four counts of securities fraud. Prosecutors alleged that defendant, while working as a lobbyist, profited on purchases of shares in Sprint and Navigant after receiving nonpublic information about their upcoming mergers. Sentencing and other remedies will be determined in later proceedings.
SEC v. Sean Wygovsky and Christopher Matthaei, Lit. Rel. 25683 (Mar. 30, 2023) – In a litigated matter, the SEC filed insider trading action against a former trader at a Canadian asset management firm and a former partner at a U.S. broker-dealer for using non-public information in advance of at least seven merger announcements involving Special Purpose Acquisition Companies (“SPACs”). The two defendants allegedly profited by more than $3.4 million as a result of the insider trading scheme. Criminal charges were filed against Matthaei in a parallel action. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5 thereunder. Remedies sought an injunction against future violations, officer and director bar, disgorgement plus prejudgment interest, and civil penalties.
SEC v. Carnovale, et al, Lit. Rel. No. 25685 (March 31, 2023) – In a litigated matter, the SEC ended a judgment against one of two defendants who allegedly participated in a fraudulent scheme involving unlawful microcap stock sales. The defendants allegedly gained control of thinly traded microcap companies, hired stock promoters to create demand for their stock, and generated substantial illicit profits by selling the stock to unsuspecting investors. The allegedly misled investors, brokers, and transfer agents to convince these parties that the stock was eligible for trading in the public markets, when in fact their stock was not registered for sale with the SEC. Charges under Securities Act Sections 5, 17(a), Exchange Act Section 10(b), Rule 10b-5. Remedies included penny stock bar, disgorgement of $231,020, PJI of $28,416, and civil penalty of $207,183.