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 Merrill Lynch, Pierce, Fenner & Smith Inc., Rel. 34-97242, IA-6271 (April 3, 2023) – In a settled matter, Merrill Lynch was charged for charging advisory clients more than $4 million in undisclosed foreign exchange fees for transfers to and from their account. Merrill Lynch offered programs to advisory clients in which the clients paid Merrill a fee in exchange for a range of investment advisory services, including foreign currency exchanges. In the program’s client agreements and brochures, Merrill Lynch disclosed that it charged a markup or markdown on foreign currency exchanges, but it did not disclose an additional fee it referred to as a production credit which was often equal to or greater than the disclosed markup or markdown. Merrill Lynch also failed to adopt and implement policies and procedures reasonably designed to prevent its disclosures from being misleading about the fees it charged on foreign currency exchanges. Charged under Advisers Act Sections 206(2) and 206(4). Remedies included cease-and-desist, censure, disgorgement of approximately $4.1m, PJI thereon of $760k, and a civil penalty of $4.8m.
In the Matter of Corvex Management LP, Rel. IA-9284 (April 14, 2023) – In a settled matter, a New York-based RIA was charged with failing to adequately disclose conflicts arising from personnel’s ownership interests in SPAC sponsors and its practice of investing client assets in private placement in public equity transactions in connection with the business combinations of affiliated SPACs and failing to adopt and implement reasonably designed policies and procedures. Charges under Advisers Act Section 206(2) and 206(4) and Rule 206(4)-7 thereunder. Remedies included cease-and desist, censure, and a civil penalty of $1m.
In the Matter of Betterment LLC, Rel. IA-6288 (April 18, 2023) – In a settled matter, an RIA was charged with misstating or omitting material information about changes, constraints, and coding errors associated with its automated tax-loss harvesting service. The RIA was also charged with failing to provide advance notice of certain material changes in its client advisory agreements, and with recordkeeping and policy and procedure violations related to those agreements. Charges under Advisory Act sections 204, 206(2) and 206(4), and rules 204-2(a)(10) and 206(4)-7. Remedies included cease-and-desist, censure, and a penalty of $9m.
SEC v. Premium Point Investments, LP, et al., Lit. Rel. 25698 (April 20, 2023) – In a settled litigation matter, a portfolio manager and a trader for a defunct investment adviser agreed to consent judgments on charges that they directed trades to a broker-dealer in exchange for providing inflated broker quotes on mortgage-backed securities, thereby inflating the stated value and performance of managed private funds. Charges under Exchange Act Section 10(b) and Rules 10b-5(a) and (c) thereunder, and Securities Act Sections 17(a)(1) and (3), and aiding and abetting violations of Advisers Act Sections 206(1), (2), and (4) of the Investment of 1940 and Rule 206(4)-8(a)(2). Remedies included injunctions against future violations.
SEC v. Beaxy Digital, Ltd., Lit. Rel. 25687 (April 3, 2023) – In a litigated matter, the SEC charged crypto asset trading platform Beaxy.com and its executives for failure to register as a national securities exchange, broker, and clearing agency. The SEC charged the founder of the platform, Atrak Hamazaspyan, and an entity he controlled with raising $8 million in an unregistered offering of the Beaxy token (BXY) and alleged that he misappropriated at least $900,000 for personal use. The SEC is litigating its claims against Hamazaspyan under Exchange Act Section 10(b), Rule 10b-5, Securities Act Sections 5(a), 5(c), and 17(a). The complaint also alleges that Nicholas Murphy and Randolph Bay Abbott, through a company they managed called Windy, Inc., maintained and provided Beaxy.com as a web-based trading platform that facilitated the buying and selling of crypto assets. Windy allegedly entered into an agreement with Brian Peterson and his companies, collectively the Braverock Entities, to provide market making services for BXY. Charges under Securities Act Sections 5, 15(a), and 17A, Exchange Act Sections 5, 15(a), 17A, 20(a). Remedies included certain undertakings, including ceasing all activities as an unregistered exchange and destroying all BXY in Windy’s possession, permanent injunctions, civil penalties (Windy, Abbott, and Murphy $79,200; Peterson $6,600; the Braverock Entities $80,000), and disgorgement (Windy $10,779, Braverock Entities $52,000) plus prejudgment interest.
SEC v. Bittrex, Inc., et al., Lit. Rel. 25694 (April 17, 2023) – In a litigated matter, the SEC charged defendant Bittrex, its co-founder and former CEO, and its foreign affiliate with operating an unregistered national securities exchange, broker, and clearing agency. The complaint specifically alleges that: both entities should have registered as an exchange because they brought together, using a shared order book, the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which the orders interacted; Bittrex should have registered as a clearing agency because it acted as an intermediary in making payments and deliveries upon matching sell and buy orders and maintained custody of customer assets, and Bittrex should have registered as a broker because it regularly engaged in the business of effecting transactions for the accounts of others in crypto assets that were offered and sold as securities. Charges against the entities under Exchange Act Sections 5, 15(a), and 17A(b), and against the former CEO under Exchange Act Section 20(a).
SEC v. DiScala, Lit. Rel. 25686 (April 3, 2023) – In a litigated action, the court entered final judgments against two defendants for a scheme to manipulate the securities of CodeSmart Holdings, Inc. The SEC alleged that one defendant, an attorney, helped execute the reverse merger of CodeSmart into a public shell company and then received and sold shares of CodeSmart, which were not registered, and obscured the holdings of others. The other defendant allegedly engaged in matched trading for the purpose of inflating the price of CodeSmart securities. Charged under Securities Act Sections 5(a), 5(c), and 17(a), Exchange Act Sections 9(a) and 10(b). Remedies included disgorgement ($292,409.11 and $27,529) and prejudgment thereon, the payment of which was deemed to satisfy the restitution order in the parallel criminal proceeding.
In the Matter of Chatham Asset Management, LLC, and Anthony Melchiorre, Rel. IA-6270, IC-24875 (April 3, 2023) – In a settled matter, a New Jersey-based RIA and its founder were charged with improper trading of American Media, Inc. (“AMI”) bonds. From 2016 to 2018, they allegedly engaged in cross-trades in AMI securities that resulted in one of their funds selling AMI bonds and a different one of their fund purchasing the same AMI bonds. This trading accounted for the vast majority of the trading in AMI bonds and therefore over time had a material effect on their pricing that was disconnected from economic reality. Charges under Advisors Act Section 206(2), Investment Company Act Sections 17(a)(1) and (2). Remedies included disgorgement of $11m, PJI thereon of approximately $3.4m, civil penalties of $4.4m (firm) and $600k (individual), and prohibitions from serving in certain positions in the investment industry.
Issuer Reporting/Audit and Accounting/Directors and Officers/Compliance
SEC v. Charlie Javice, No. 23-cv-02795 (S.D.N.Y.), Press Rel. 2023-74 (April 4, 2023) – In a litigated matter, the SEC charged Charlie Javice, the founder of the student loan assistance company previously known as Frank, with fraud in connection with the $175 million sale of the company to JPMorgan in 2021. The SEC alleges that Javice orchestrated a scheme to deceive JPMorgan into believing that Frank had access to valuable data on 4.25 million students who used Frank’s service when in reality the number was less than 300,000. Javice allegedly paid a data science professor to manufacture data required to close the deal with JPMorgan. Javice allegedly directly received $9.7 million in stock proceeds as a result of the $175 million acquisition, along with millions more indirectly through trusts, and a contract entitling her to a $20 million retention bonus as a new employee of JPMorgan. Charges under Securities Act Section 17(a), Exchange Act Section 10(b), Rule 10b-5. Remedies sought include injunctive relief, officer and director bar, disgorgement and prejudgment interest, and civil penalties.
In the Matter of James Fitts, CPA, Rel. 34-97259, AAER-4396 (April 6, 2023) – In a settled action, the SEC instituted administrative and cease-and-desist proceedings against James Fitts, CPA for failing to follow PCAOB auditing standards when he served as audit engagement partner on Tandy Leather Factory, Inc.’s 2018 audit. Fitts allegedly failed to obtain sufficient understanding of Tandy’s internal control regarding inventory evaluation, sufficiently evaluate company-produced audit evidence, and exercise due care. Violations of Exchange Act Section 4C and SEC Rule of Practice 102(e)(1)(ii) and caused Tandy’s violations of Section 13(a) and Rule 13a-1. Remedies included suspension from appearing and practicing before the SEC as an accountant, with the right to apply for reinstatement after one year, and a $25k civil penalty.
SEC v. Robert V.A. Harra, Jr., et al., Lit. Rel. 25691 (April 11, 2023) – In a litigated matter, the court entered final judgment against William B. North, the former Chief Credit Officer of Wilmington Trust, for making false or misleading public statements and omissions regarding Wilmington Trust’s loan portfolio. The SEC alleged North, and three other former Wilmington Trust officers, underreported its real estate loans, which were 90 days or more past due, by hundreds of millions of dollars and that North made or aided/abetted false and misleading statements regarding the credit quality of certain Wilmington Trust loans. Charges under Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(b)(5) and Rules 10b-5 and 13b2-1 thereunder. Remedies included permanent injunction and a civil penalty of $10k.
SEC v. SAExploration Holdings, Inc., et al., Lit. Rel. 25700, Rel. AAER-4402, (April 25, 2023) - In a settled litigation matter, the former CEO of SAExploration Holdings agreed to a consent judgment on charges that he caused the company to improperly record revenue from a series of data acquisition contracts with a purportedly unrelated company that was actually controlled by the CEO and another defendant. Charges also included misappropriation of funds. Charges under Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, 13b2-2, and 13a-14 thereunder, and Sarbanes-Oxley Section 304(a). Remedies included $1,116,987.27 in disgorgement plus prejudgment interest, and reimbursement of $1,206,626 in compensation pursuant to Section 304(a) of the SOX.
SEC v. Terraform Labs PTE Ltd. and Do Hyeong Kwon, Lit. Rel. 25692 (April 13, 2023) – In a litigated matter, the SEC charged Terraform Labs PTE Ltd., a private company based in Singapore, and Do Hyeong Kwon, Terraform’s sole director, chief executive officer, and majority shareholder, with offering and selling crypto asset securities in unregistered transactions and for perpetrating a fraudulent scheme that led to the loss of at least $40 billion of market value. According to the complaint, in addition to marketing an array of crypto asset securities that were offered and sold in unregistered transactions, Terraform and Kwon also repeatedly claimed the tokens would increase in value. One example highlighted in the complaint alleges that while marketing the LUNA token, Terraform and Kwon misled and deceived investors that a popular Korean mobile payment application, Chai, used the Terra blockchain to settle transactions that would accrue value to LUNA. Charges under Securities Act Sections 5(a), 5(c), 5(e), and 17(a) and Exchange Act Sections 10(b), 6(I), and 20(a) and Rule 10b-5 thereunder. Relief sought includes permanent injunctions, disgorgement, and civil penalties.
In the Matter of Up, Global, et al, Rel. 33-11179, 34-97401 (April 28, 2023) – In a settled matter, the respondents were charged with making an unregistered securities offering in their issuance and the sale of a crypto asset called “UpToken,” and with making false and misleading statements about the market for UpToken and the use of proceeds. Charges under Securities Act sections 5(a), 5(c) and 17(a), and Exchange Act section 10(b) and Rule 10b-5. Remedies included cease and desist, undertakings to destroy UpTokens in the respondents’ possession or control, and civil penalties totaling $3.9m for three respondents.