The Nutter Securities Enforcement Update is a periodic summary of noteworthy recent securities enforcement activity, settlements, decisions, and charges.
Jarkesy v. S.E.C., No. 20-61007 (5th Cir. May 18, 2022) – The Court of Appeals for the Fifth Circuit held that SEC administrative proceedings before an ALJ are unconstitutional because (1) respondents have a constitutional right to a jury trial for fraud-like claims; (2) respondents have a constitutional right to a jury trading when the SEC seeks civil penalties; and (3) SEC administrative law judges are unconstitutionally appointed because they are “inferior officers” but cannot be removed by the President.
Investment Advisers/Investment Companies
Maplelane Capital LLC, Rel. IA-6011 (May 2, 2022) – In a settled matter, an RIA that manages private funds was charged with misidentifying 358 short sale orders as long sale orders, thus causing the executing broker dealers to violate Rule 200(g) of Reg SHO. Claims under IA Sections 204, 206(4) and Rules 204-2(a)(3), 204-2(a)(7)(iii) and 206(4)-7. Remedies included a cease-and-desist order, disgorgement of $555k plus interest, and a $250k penalty.
True Link Financial Advisors, Rel. IA-6012 (May 2, 2022) – In a settled matter, the RIA to two special needs pooled trusts for the benefit of Medicaid and SSI recipients was charged with putting the beneficiaries’ eligibility at risk by facilitating the management of the trusts by a for-profit entity in violation of Section 1917 of the Social Security Act. The Commission alleged that the RIA and its principal signed contracts under which the for-profit entity, rather than its nonprofit affiliate, would be paid fees. Charges under Securities Act Section 17(a)(3), and IA Section 206(4) and Rule 206(4)-8. Remedies included a cease-and-desist order and penalties of $200k (entity) and $20k (CEO).
Perini Capital, LLC, Rel. IA-6015 (May 6, 2022) – In a settled matter, an RIA and its principal were charged with making 33 principal trades between themselves and their advisory clients without disclosure and consent of the clients. Charge under IA Section 206(3). Remedies included censure, a cease-and-desist order, and penalties of $115k (firm) and $35k (principal).
Allianz Global Investors US, LLC, Rel. IA-6027 (May 17, 2022) – In a settled matter with a companion criminal case, the RIA to 17 private funds with about $11 billion in assets was charged with misrepresenting the strategy’s downside risk to investors and failing to implement its disclosed risk mitigation program. Respondents were also charged with concealing their misconduct in the period following the March 2020 market volatility. Individual executives were charged in parallel proceedings. Charges under Exchange Act Section 10(b) and Rule 10b-5, and IA Sections 206(1) and (2) and Rules 206(4)-7 and 206(4)-8. Remedies included censure, a cease-and-desist order, disgorgement of $315 million plus interest, and a $675 million penalty.
First Republic Investment Management, Inc., Rel. IA-6030 (May 19, 2022) – In a settled matter, First Republic Investment Management, Inc., an RIA, was charged with failing to disclose conflicts of interest related to the RIA’s affiliated broker’s agreement with a clearing broker under the clearing brokers’ no-fee-transaction (“NTF”) program that provided for revenue sharing. The SEC alleged that the RIA failed to adequately disclose that its investors indirectly paid the NTF revenue sharing payments and failed to adequately disclose that there were other share classes of the same fund offered with lower expense ratios and less or no revenue sharing. Charges under IA Section 206(4) and Rule 206(4)-7. Remedies included a cease-and-desist order, disgorgement of $1,332,664 plus interest, and a penalty of $250k.
BNY Mellon Investment Adviser, Inc., Rel. IA-6032 (May 23, 2022) – In a settled matter, BNY Mellon, an RIA, was charged with making material misstatements and omissions in mutual fund prospectuses and to the funds’ boards about its affiliated subadviser’s performance of ESG quality reviews as part of investment research process. BNY Mellon also failed to adopt and implement reasonably designed policies and procedures to prevent the misleading statements. Charges under IA Sections 206(2), 206(4), Rules 206(4)-7, 206(4)-8, and ICA Section 34(b). Remedies included a cease-and-desist order, censure, and a civil money penalty of $1.5m.
Virtua Capital Management, LLC, et al., Rel. 34-94967, IA-6033 (May 23, 2022) – In a settled matter, Virtua Capital Management, LLC, an RIA, and its founder and principal, chief global strategist, and president and manager, were charged with failing to adequately disclose conflicts of interest relating to their management of seven private investment funds. Respondents managed numerous real estate projects and invested fund assets nearly exclusively in those affiliated-real estate investments without adequately disclosing all of the fees that Virtua affiliates would charge to the projects the funds invested in. Charges under IA Sections 206(2), 206(4), and Rule 206(4)-8. Remedies included a cease-and-desist order, censure, a civil money penalty of $555,354, and disgorgement of $1,543.735.
SEC v. Andrew M. Middlebrooks, et al., Lit. Release No. 25399 (May 25, 2022) – In a litigated action, the Commission charged EIA All Weather Alpha Fund I Partners LLC and its sole owner for engaging in a fraudulent scheme that included the misappropriation and misuse of investors’ funds. The complaint alleges that EIA and its owner made false statements about the fund’s performance and total assets, provided false investor account statements, misrepresented that the fund had an auditor, and created and disseminated a fake audit opinion to its investors. The complaint further alleges that EIA and its owner misused new investor money to make payments to other investors and misappropriated investor funds for personal use. Claims under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, and IA Sections 206(1), 206(2) and 206(4) and Rule 206(4)-8.
Investment Company Names (Proposed Rule) Rel. IC-34593 (May 25, 2022) – The Commission proposed to revise the current investment company names rule, Investment Company Act Rule 35d-1, to expand the types of funds subject to the rule and to require fund investment policies to more closely track their names. In addition to funds with names suggesting focus on securities with geographical, industry, tax advantage, or type (debt or equity) attributes, the proposed rule would apply to funds with names suggesting other characteristics, such as “growth,” “value,” or ESG (environmental, social, governance) characteristics. Funds that consider ESG factors alongside other factors of equal or greater importance would be forbidden to include ESG factors in their names. The proposed rule would continue to require subject funds to invest a minimum of 80% of their assets in securities implied by their names, and to require advance notice to shareholders of any change. However, funds would have to correct within 30 days incidents in which qualifying investments fall below 80%, and would no longer be able to rely on date of purchase valuation. Comments will be due within 60 days of publication in the Federal Register.
TradeZero America, Inc. and Daniel Pipitone, Rel. 33-11066 (May 24, 2022) – In a settled matter, TradeZero America, Inc., a registered broker-dealer, and its cofounder, Daniel Pipitone, were charged with misstating or omitting facts regarding TradeZero’s compliance with an order issued by their clearinghouse requiring TradeZero to halt all purchases of GameStop, AMC Entertainment, and Koss Corporation stock in January 2021. TradeZero refused to implement this instruction for over two hours but then implemented the restriction for the remaining 10 minutes the order was in place. Pipitone conducted an “ask me anything” session on the Reddit community wallstreetbets and publicly stated that TradeZero refused to comply with the order but omitted to stated that TradeZero ultimately did comply with the order. TradeZero also issued a press release promoting its resistance to the order. Charges under Securities Act Sections 17(a)(2) and 17(a)(3). Remedies included a cease-and-desist order, and civil money penalties of $100k (company) and $25k (cofounder).
RiverSource Distributors, Inc. Rel. 34-94978, IC-34592 (May 25, 2022) – In a settled matter, the principal underwriter for the registered variable annuity separate accounts of a life insurance company was charged with making noncompliant exchange offers to current owners of variable annuities issued by the life insurer. Respondent’s wholesalers allegedly created lists of retail annuity owners who were out of their deferred sales charge period, ranked on the basis of the potential commission income from annuity exchange transactions, and provided that information to encourage retail brokers to solicit exchanges. This conduct allegedly violated Section 11 of the Investment Company Act, which limits exchange offers by registered companies or their principal underwriters to NAV-based transactions in most circumstances. Remedies included a cease-and-desist order, censure, and a civil money penalty of $5m.
SEC v. Stone, et al., No. 1:22-cv-03553 (S.D.N.Y. filed May 3, 2022) – In a litigated matter, the SEC obtained an asset freeze order against two individual defendants who were charged with obtaining and trading on pre-release stock recommendations from The Motley Fool, and selling after the recommendations became public to generate more than $12 million in trading profits.