The Nutter Securities Enforcement Update is a periodic summary of noteworthy recent securities enforcement activity, settlements, decisions, and charges.
Investment Advisers/Investment Companies
In the Matter of Classic Asset Management, LLC and Douglas G. Schmitz, Rel. 34-97427, IA-6300 (May 4, 2023) – In a settled matter, a North Dakota-based registered investment adviser and its part-owner were charged with breaching their fiduciary duty in connection with the use of leveraged ETFs in discretionary client accounts. From at least 2017 through December 2020, they invested advisory clients in leveraged ETFs for extended periods of time, often in significant concentrations, despite warnings in the funds’ prospectuses that they were designed to be held for no more than a single trading day and required frequent monitoring. The order finds that they lacked a reasonable belief that the leveraged ETFs were in their clients’ best interests, failed to appropriately monitor the performance of these products, and failed to adopt adequate policies and procedures. Charges under Advisers Act Section 206(4) and Rule 206(4)-7. Remedies included cease-and desist, censures, disgorgement of $195,228 (entity) and $783,113 (individual) and prejudgment interest.
SEC v. Matthew J. Werthe (dba HSR Wealth Management), Lit. Rel. 25710 (May 5, 2023) – In a litigated action, a California-based investment adviser was charged with defrauding clients by conducting a cherry-picking scheme and making related false and misleading statements. The complaint alleges that the adviser placed securities trades using a block trading account early in the day but did not allocate the trades until later in the day. The adviser allegedly disproportionately allocated profitable trades to himself and unprofitable trades to his clients’ accounts, resulting in at least $450,000 in ill-gotten gains. Charges under Exchange Act Section 10(b), Rule 10b-5, Securities Act Section 17(a), and Advisers Act Sections 206(1), 206(2). Remedies sought include permanent injunction, conduct-based injunction, disgorgement with prejudgment interest, and civil penalties.
SEC v. RRBB Asset Management, Lit. Rel. 25719 (May 11, 2023) – In a litigated matter, the president of a registered investment adviser consented to judgment on charges that he engaged in a cherry-picking scheme, allocating favorable daily trades to preferred clients and unfavorable trades to accounts associated with elderly investors. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, and Advisers Act Sections 206(1), 206(2), 206(4) and 207 and Rule 206(4)-7. Remedies included injunctive relief, disgorgement of $50k plus prejudgment interest, and a civil penalty of $100k.
In the Matter of Sciens Investment Management, et al., Rel. IA-6315, File 3-21445 (May 24, 2023) – In a settled matter, the respondent was charged with failing to adopt and implement reasonably designed policies and procedures for valuation of private fund investments, by providing only minimal guidance about how to value the funds “Level 3 Investments” for which no significant observable inputs are available. Charges under Advisers Act Section 206(4) and Rule 206(4)-7. Remedies included censure, cease-and-desist, and a civil penalty of $275k.
In the Matter of RTW Investments, LP., Rel. 34-97622, IA-6318 (May 30, 2023) – In a settled matter, a registered investment adviser was charged with failing to disclose conflicts of interest regarding its personnel’s ownership interests and its investment of client assets in affiliated certain special purpose acquisition companies (“SPACs”). The respondent was also charged with failing to timely file accurate reports on Schedule 13G concerning the beneficial ownership of the common stock of a public company formed as a result of a SPAC business combination. Charges under Advisers Act Sections 206(2) and 206(4) and Rules 206(4)-7 and 206(4)-8, and Exchange Act Section 13(d) and Rules 13d-1 and 13d-2. Remedies included censure, cease-and-desist, and a civil penalty of $1.4m.
SEC v. GPL Ventures LLC, et al., Lit. Rel. 25706 (May 3, 2023) – In a settlement of a litigated matter, the court entered a consent judgment against defendants who were charged with acting as unregistered securities dealers and engaging in a penny stock market manipulation scheme. The SEC alleged that the defendants acted as dealers by privately acquiring many microcap stocks at a discount though conversions of convertible debt and subsequently selling the stocks in public markets. The defendants were also charged with acquiring shares of one microcap issuer and secretly arranging for the issuer to use a portion of the proceeds to fund stock promotions. Without admitting or denying the charges, the defendants agreed to permanent injunctions against future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a)(1) and Rule 10b-5, and penny stock bars. Other remedies included disgorgement of approximately $30m plus prejudgment interest, civil penalties of $3.5m each against two individual defendants, and cancellation of all remaining convertible notes.
SEC v. HSBC Securities (USA) Inc., Rel. 34-97476 and SEC v. Scotia Capital (USA) Inc., Rel. 34-97477 (both May 11, 2023) – In settled matters, two broker-dealers were charged with failing to maintain and preserve business-related communications by their employees using personal devices via text messages (“off-channel communications”) and related failures to supervise employees and to implement policies and procedures prohibiting off-channel communications. The order credited the respondents with self-reporting the issue prior to being contacted by SEC staff and with prompt, proactive remediation. Charges under Exchange Act Section 17(a) and rules 17a-4(b)(4) and 15(b)(4)(E). Remedies included censure, cease-and-desist, and civil penalties of $15m and $7.5m, respectively.
SEC v. Lee Cohen, Lit. Rel. 25704 (May 3, 2023) – In a litigated matter, a UK citizen was charged with participating in a fraudulent scheme to manipulate trading in the stock of HD View 360 Inc., a now-defunct microcap company. The trade allegedly operated a call room in the Philippines to generate buy orders for the stock from unsuspecting U.S. investors, targeting in particular senior citizens. The complaint alleges he pitched that the stock had excellent growth prospects, when in reality the company was a failing start-up. The trader allegedly duped investors into placing buy orders at artificially high prices that closely matched target prices set by the CEO. Matching sell orders allegedly allowed the CEO to sell his shares in an artificially inflated market. The complaint alleges that the trader received commissions based on a percentage of the sales he generated. Charges under Securities Act Section 17(a), Exchange Act Sections 9(a)(1) and (2), 10(b), 15(a) and Rule 10b-5. Remedies sought include permanent injunctive relief, disgorgement with prejudgment interest, and penny stock bar.
SEC v. Thomas Carter Ronk, Lit Rel. 25732 (May 22, 2023) – In a settled litigation matter, a trader was charged with engaging in fraudulent promotional efforts and market manipulation of two microcap stocks by disseminating misstatements in newsletters, and with making false statements to prospective investors in connection with a private stock offering. Charges under Securities Act Sections 17(a) and (b) and Exchange Act Section 10(b) and Rule 10b-5. Without admitting or denying the SEC's allegations, the trader consented to a final judgment in which he agreed to be permanently enjoined from violations of the charged provisions, five-year officer-and-director and penny stock bars, and a civil penalty of $75k.
Issuer Reporting/Audit and Accounting/Directors and Officers/Compliance
SEC v. IRB Brasil Resseguros S.A., Lit. Rel. 25718 (May 10, 2023) – In a partial settlement of a litigation matter, a publicly-traded Brazilian reinsurer consented to judgment on charges that it spread a fabricated story that Berkshire Hathaway had recently invested in the company. The company’s stock price rose with the announcement and fell more sharply when Berkshire denied it. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included injunctive relief. Based on the company’s subsequent internal investigation, cooperation with SEC staff, and remedial measures, the SEC did not impose a penalty on the company. Litigation against a former executive vice president of finance and investor relations is ongoing.
In the Matter of Isaac H. Sutton, Rel. 33-11183, 34-97495 (May 11, 2023) – In a settled matter, the former CEO of a publicly-traded shell company was charged with issuing a misleading press release about the effectiveness of a COVID-19 prevention face mask manufactured by a subsidiary. Following the press release, the company’s stock price and trading volume materially increased. Charges under Securities Act Section 17(a)(3). Remedies included cease-and-desist, a 12-month penny stock bar, and a $25k civil penalty.
SEC v. Giguiere, et al., Lit. Rel. 25724 (May 12, 2023) – In a partial resolution of ongoing litigation, the SEC informed the court that it did not intend to seek further relief from defendant Kevin Gillespie, who had consented to injunctive relief and a penny stock bar. The charges were that Gillespie, the former CEO of a microcap issuer, participated in a scheme in which the company issued 200,000 shares of common stock and a convertible promissory note to other defendants who had not provided equivalent consideration, and in which the group had agreed to sell the shares at a target price and split the proceeds. Charges under Exchange Act Section 10(b) and Rule 10b-5. The litigation remains ongoing against other defendants.
SEC v. Quanta, Inc., et al., Lit. Rel 25726 (May 15, 2023) – In a settled matter, Quanta, Inc., a California-based biopharmaceutical company, its CEO, Arthur Mikaelian, and its executive vice president, Grant Mikaelian, were charged with misrepresenting the FDA staff’s response to the company’s proposed clinical trial of Escozine as a COVID-19 treatment. According to the complaint, a company press release misrepresented that the FDA staff validated a clinical study conducted by the Dominican Republic and that the FDA recognized the potential therapeutic benefits of Escozine. The complaint further alleges that Quanta included $198,000 of improperly recognized revenue in its 10-Q for the first quarter of 2021, overstating its total revenue by 61% and that Arthur Mikaelian falsely represented the quarterly financials to Quanta’s auditor. Charges under Securities Act Sections 17(a), 17(a)(1) and 17(a)(3) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, 13b2-2, and 13a-14. Remedies include permanent injunctions, five-year officer-and-director bars (individuals), five-year penny stock bars (individuals), and $150k and $75k civil penalties (Arthur Mikaelian and Grant Mikaelian, respectively).
In the Matter of Shrizali F. Jumani, Rel. 33-11195, 34-97543 (May 22, 2023) – In a settled matter, an unlicensed accountant was charged with facilitating the removal of restrictive legends from share certificates, and the sale of shares, owned by the former chair of publicly-traded OncoSec Medical, Inc., and with aiding and abetting the failure to make required Schedule 13D and other filings regarding those sales. Charges under Securities Act Sections 5(a), 5(c) and 17(a), and Exchange Act Sections 10(b) and 13(d) and 16(a) and Rules 10b-5, 13d-1 and 16a-3. Remedies included cease-and-desist, a penny stock bar, and a $25k civil penalty.
In the Matter of Gaia, Inc., et al., Rel. 33-11196, 34-97548 (May 23, 2023) – In a settled matter, a public company and its chief financial officer were charged with overstating the number of paying subscribers to their internet streaming service by including subscribers who had been gifted a free month of service and had not paid or reactivated their accounts. The respondents were charged with retaliating against a whistleblower and with including language in employee severance agreements requiring waiver of their rights to monetary incentives intended to encourage direct communication with the SEC about possible securities law violations. Charges under Securities Act Sections 17(a)(2) and 17(a)(3), and Exchange Act Sections 13(a) and 21F(h) and rules 13a-11, 12b-20 and 21F-17. Remedies included cease-and-desist and civil penalties of $2m (entity) and $50k (individual).
In the Matter of First Guaranty Bancshares, Inc., Rel. 33-97631 (May 31, 2023) – In a settled matter, a bank holding company was charged with failing to disclose, in its Form 10Q or 10K filings, repurchases of its common stock. The company allegedly used a third party to purchase shares on the open market and then bought the shares for its employee stock bonus program. Charges under Exchange Act Section 13(a) and Rules 13a-1, 13a-13, and 13a-15(a). Remedies included cease-and-desist and a civil penalty of $600k.
SEC v. Brett M. Bartlett et al., Lit. Rel. 25705 (May 3, 2023) – In a litigated matter, Brett Bartlett, his father-in-law, Scott Miller, and their companies were charged with conducting fraudulent securities offerings that raised at least $20.5 million. The complaint alleges that from at least June 2018 to May 2020, Bartlett and Miller raised funds from more than 1,000 investors nationwide by selling promissory notes, stock, and fraudulent gold contracts through various companies. Bartlett and Miller allegedly solicited investors from a large church in central Illinois and Bartlett allegedly frequently invoked his Christian faith and attributed his alleged success to divine intervention to win investor trust. Bartlett and Miller allegedly also made more than $11 million Ponzi-like payments and sent to investors $21 million in bad checks that bounced because of insufficient funds. They alleged misappropriated $1.2 million for personal use. In a parallel investigation, Bartlett and two of his companies were charged criminally. Charges under Securities Act Section 5(a), 5(c), Section 10(b), Rule 10b-5, Section 17(a). Remedies sought include permanent injunctions, including conduct-based injunctions, disgorgement with prejudgment interest, civil penalties, and officer-and-director bars.
SEC v. Cedric Dewayne Griffin, Lit. Rel. 25707 (May 4, 2023) – In a litigated action, Cedric Dewayne Griffin was charged with raising around $5.9 million from at least 103 investors through a fraudulent securities offering targeting members of the African-American community in Jacksonville, Florida and elsewhere. The complaint alleges that from at least January 2020 to December 2021, Griffin lured individuals into investing in promissory notes issued by his two companies, promising high monthly returns. Griffin allegedly represented to investors that he would use their money to purchase and resell real estate for a profit and provide investors with monthly returns on those profits. The complaint alleges that Griffin did not purchase any real estate and instead misappropriated investor funds to pay other investors their purported investment returns in a Ponzi-like fashion. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5. Remedies sought include permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and officer-and-director bar.
SEC v. Ronald D. Swanson, Lit. Rel. 25711 (May 5, 2023) – In a litigated action, the court entered a final judgment against Ronald Swanson, who allegedly made false and misleading statements about Texas-based liquid purification technology company Sonic Cavitation, Inc. The complaint alleged that Swanson made multiple false statements exaggerating the interest level of Sonic Cavitation’s potential business partners and the capabilities of its technology, minimizing the risk level of its investment offerings. Charges under Securities Act Section 17(a), Exchange Act Section 10(b), Rule 10b-5. Remedies included disgorgement of $677,753 plus prejudgment interest, civil penalty of $250k, and 10-year officer-and-director bar.
SEC v. Joshua Burrell and Activated Capital, LLC, Lit. Rel. No. 25709 (May 5, 2023) – In a litigated action, the court entered a final judgment by consent against Joshua Burrell, who allegedly, through Activated Capital, LLC, raised about $6.3 million from investors to invest in Opportunity Zones, a community development program established by the Tax Cuts and Jobs Acts of 2017. The offering materials represented that properties would be purchased in the name of the funds and that distributions to investors would come from income from the real estate. Burrell allegedly misappropriated investor money by using it to purchase properties in the name of other Activated entities for which the investors did not have an ownership interest. Burrell allegedly used investor money to pay purported distributions to investors. Charges under Securities Act Section 17(a), Exchange Act Section 10(b), Rule 10b-5. Remedies included permanent injunction and disgorgement $100,115.42 and prejudgment interest.
In the Matter of Hemp Naturals, Inc., Rel. 33-11193, Green Stream Holdings, Inc., Rel. 33-11192, The Marquie Group, Inc., and 7 others (May 16, 2023) – In a settled matter, 10 microcap companies were charged with offering and selling securities in unregistered offerings that failed to comply with Regulation A. The SEC alleged that each of the 10 companies obtained qualification from the Commission for their offerings under Regulation A, but each subsequently made one or more changes to their offerings without meeting the requirements of the exemption. Such changes included improperly increasing the number of shares offered, improperly increasing or decreasing the price of shares offered, failing to file updated financial statements at least annually for ongoing offerings, engaging in prohibited at the market offerings, or engaging in prohibited delayed offerings. Charges under Securities Act Section 5. Remedies included cease-and-desist and civil penalties ranging from $5k to $90k.
In the Matter of the Registration Statement of American CryptoFed DAO LLC, File 3-21243, Initial Decision Release No. 1415 (May 17, 2023) – In an administrative proceeding following a five-day hearing, the ALJ issued a “stop order” suspending the effectiveness of the respondent’s registration statement. The Commission alleged that the respondent, a decentralized autonomous organization, had failed to file financial statements and an opinion of counsel regarding the two crypto assets sought to be registered. The respondent had argued that no order should issue because the tokens were not securities and that the financial statements were not needed because the respondent had no assets or liabilities.
SEC v. Chicago Crypto Capital LLC, et al., Lit. Rel. 25729 (May 18, 2023) – In a litigated matter, the SEC obtained default judgments against Chicago Crypto Capital LLC, (CCC), its owner Brian Amoah, and former salesperson Elbert “Al” Elliott for acting as unregistered brokers and conducting an unregistered offering of BXY tokens, which raised at least $1.5 million in proceeds from about 100 individuals. According to the complaint, the defendants made materially false and misleading statements in the offer, purchase, and sale of BXY tokens including the custody and delivery of BXY, the markup charged by CCC, the delivery of account statements, CCC's liquidation of an investor's BXY, their personal investments in BXY, and the financial and management problems at BXY's issuer, Beaxy Digital Ltd., in late 2019. Charges under Securities Act Sections 5, 17(a) and Exchange Act Sections 15(a) and 10(b) and Rule 10b-5. The default judgment remedies include permanent injunction, officer-and-director bar (Amoah), disgorgement of $935,599.75 plus prejudgment interest (company and Amoah), disgorgement of $21,777.64 plus prejudgment interest (Elliott), and civil penalties of $1,339,368 (company), $245,552 (Amoah), and $133,938 (Elliott).
SEC v. The Hydrogen Technology Corporation, et al., Lit. Rel. 25737 (May 26, 2023) – In a consent judgment arising from a litigated matter, a crypto issuer and two individuals were charged with making unregistered sales of crypto asset securities and with manipulating the price and trading volume of the securities. Charges under Securities Act Sections 5 and 17(a) and Exchange Act Sections 9(a)(2), 10(b) and 20(b) and Rule 10b-5. Remedies included injunctive relief, disgorgement of $1.5m plus prejudgment interest, and a civil penalty of $1.035m (corporation) and disgorgement of about $45k plus prejudgment interest and a civil penalty of $207k (former CEO).
In the Matter of Todd Dobberfuhl, Rel. 34-97499(May 12, 2023) – In a settled matter, a corporate controller was charged with trading in the securities of Vaxart, Inc., based on nonpublic information about a major contract that Vaxart was entering into with trader’s employer, Attwill, for production of an oral COVID-19 vaccine under development. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included cease-and-desist, disgorgement of approximately $73k plus prejudgment interest, and a civil penalty of approximately $73k.
SEC v. Wahi, Press Release 2023-98 (May 30, 2023) – In a settlement of a litigated matter, a former Coinbase product manager and his brother were charged with a form of insider trading, by trading before announcements that certain crypto asset securities would be made available for trading on the Coinbase platform. Charges under Exchange Act Section 10(b) and Rule 10b-5. The defendants consented to injunctive relief, and in a parallel criminal proceeding, they pleaded guilty to wire fraud charges, received prison sentences of 20 and 10 months, and were ordered to forfeit certain crypto assets and cash.