The Commission proposed a package of rules and interpretations focused on retail investors. At the center of the package is proposed Regulation Best Choice focused on the relation between brokers and their clients.
The agency brought another action against an investment adviser centered on false advertising. The case involved a proprietary trading system which was largely marketed without telling investors that it was back tested – or when it was the print was so small as to not be meaningful.
FINRA, joined by five exchanges, brought an action centered on market access. The DOJ secured a guilty plea to a money laundering charge by a foreign official tied to an FCPA/Anti-corruption case. And, the New York AG initiated a fact finding inquiry into the operations of trading platforms for cryptocurrencies.
Proposed rulemakings: The Commission proposed a package of rulemakings and interpretations which include Regulation Best Choice, designed to enhance protections and choices for retail investors. Under the proposals broker-dealers would be required to act in the best interest of their retail customers. The package would also reaffirm and clarify the Commission’s view of the fiduciary duty investment advisers owe to their clients and address investor confusion regarding the nature of their relationships with investment professionals through a short-form disclosure document. The proposals also restrict some uses of the terms “adviser” and “advisors” (here).
Public service announcement: The Commission published a Public Service announcement encouraging investors to check the background of those with whom they might invest (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 4 civil injunctive cases and 2 administrative proceeding, excluding 12j and tag-along proceedings.
Misappropriation: SEC v. Jumper, Civil Action No. 18-cv-02259 (W.D. Tenn. Filed Apr. 17, 2018). Defendant John Jumper was the CEO of, and a registered representative at, his wholly-owned broker-dealer, Alluvion Securities. He was also the President and an investment adviser representative of Alluvion Investments. The firms were located in the Memphis, Tennessee area. In 2006 Mr. Jumper was retained to assist with the sale of Snow Shoe Refractories LLC, a refractory products manufacture based in Clarence, Pennsylvania. Mr. Jumper marketed the firm to an acquaintance residing in Sarasota, Florida. The transaction took place in February 2007 at a purchase price of $8.2 million. Mr. Jumper was paid a $250,000 commission. As part of the transaction New Owner assumed responsibility for the administration of the Snow Shoe Pension Plan. It has assets of about $8.3 million, held at a local bank. The plan was underfunded by about $1.8 million. Despite never holding a position at Snow Shoe, or having any authority over the company or its pension plan, shortly after the deal closing, Mr. Jumper began forging a series of documents regarding the pension plan. He used those documents to move the pension plan assets to a different financial institution. Subsequently he took $5 million from the pension fund in two transactions in exchange for promissory notes using forged documents. He also took other funds from the pension plan, again using forged documents. The complaint alleges as to Mr. Jumper violations of Exchange Act section 10(b) and Securities Act sections 17(a)(1) and (2). A claim was also asserted against certain relief Defendants affiliated with Mr. Jumper where portions of the funds had been transferred. The action is pending. See Lit. Rel. No. 24116 (April 18, 2018). A parallel criminal action was filed by the U.S. Attorney’s Office for the Middle District of Pennsylvania.
Insider trading: In the Matter of Douglas Nelson, Adm. Proc. File No. 18439 (Apr. 16, 2018) centers on the August 14, 2014 announcement by Monster Beverage Corporation and Coca-Cola Company that the latter agreed to purchase 16.7% of the former’s stock. The purchase was made in connection with the execution of an agreement under which Monster would become Coke’s exclusive energy drink provider. Mr. Nelson learned about the proposed arrangement prior to the announcement from a relative who worked on the deal at Monster. Respondent misappropriated the information and purchased 1,005 shares of Monster stock. Following the announcement the share price increased 101% giving him unrealized gains of $15,141.97. The Order alleges violations of Exchange Act section 10(b). To resolve the proceedings Mr. Nelson consented to the entry of a cease and desist order based on the section cited in the Order. He will also pay disgorgement of $15,141.97, prejudgment interest of $1,740.39 and a penalty equal to his trading profits.
Advertising: In the Matter of Arlington Capital Management, Inc., Adm. Proc. File No. 3-18437 (Apr. 16, 2018) names as Respondents the firm, a registered investment adviser during much of the time involved here and a state registered adviser, and Joseph LoPresti, its owner. During the period 2012 through 2015 Respondents marketed what was called the Proactive Asset Allocation Strategy or PAAS, a proprietary investment tool. During the period Respondents continually backtested and then updated the results, sometimes without disclosing they were updated. In many instances the fact that the results were backtested was not disclosed while in others that fact was stated in fine print which made it effectively meaningless. This made the advertisements false and misleading. Mr. LoPresti served at the CCO of the firm. The Order alleges violations of Advisers Act sections 206(2) and 206(4). In resolving the proceedings Respondents will implement certain undertakings which include retaining a consultant and adopting the recommendations. To resolve the proceedings Respondents each consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. In addition, the firm will pay a penalty of $75,000 while Mr. LoPresti will pay $25,000.
Touting: SEC v. Lidingo Holdings, LLC, Civil Action No. 17-cv-01600 (W.D.Wa.) is a previously filed action against Vincent Cassano. Lidingo Holdings, LLC hired Mr. Cassano and others to publish hundreds of bullish articles on its clients which appeared as independent research articles but in fact were paid advertisements. The Court entered a final judgment by consent which permanently enjoined Defendant Cassano from future violations of Securities Act Sections 17(a) and 17(b) and Exchange Act Section 10(b). The litigation is continuing as to the company and other Defendants. See Lit. Rel. No. 24113 (Apr. 16, 2018).
Offering fraud: SEC v. Chahal, Civil Action No. 1:18-cv-00426 (E.D. Va. Filed Apr. 12, 2018). Defendant Amrit Chahal is the president of Defendant Kane Capital Investment Group, LLC. Despite the fact that he had no investment experience Mr. Chahal raised about $1.4 million from 50 investors beginning in February 2015 and continuing through February 2018. Investors were promised large returns. In fact Mr. Chahal lost much of the investor money through trading while misappropriating other portions. He also misrepresented the investment returns to the investors. The complaint alleges violations of Securities Act section 17(a), Exchange Act section 10(b) and Advisers Act section 206(1). The case is pending. See Lit. Rel. No. 24114 (April 16, 2018); see also U.S. v. Chahal, No. 1:18-mj-70 (E.D. Va.); CFTC v. The Kane Capital Investment Group, Civil Action No. 1:14-cv-00422 (E.D. Va. Filed Apr. 11, 2018). Each case is pending.
Financial fraud: SEC v. Kandelapas, Civil Action No. 18-cv-02637 (N.D. Ill. April 12, 2018) is an action which names as a defendant Andrew Kandelapas, the CEO of Wellness Center USA Inc., a holding company for four subsidiaries operating in the healthcare area. Beginning in 2013, and continuing into 2014, Wellness issued false and misleading Forms 10-K and 10-Q. Specifically, the filings concealed a scheme by Mr. Kandalepas, to misappropriate $450,000 from the firm. The company variously mischaracterized the payments to him as “salary,” “prepayments” or “loans” when in fact they were not. The firm also issued two false press releases in 2015 touting non-existent sales. In addition, the company caused Matthew Mushlin, a consultant, to violate Exchange Act Section 15(a) by acting as an unregistered broker regarding the sale of about $2 million worth of its stock in 2013, 2015 and 2017. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act sections 10(b). The case is pending. See Lit. Rel. No. 24111 (April 13, 2018).
Market access: Instinet, LLC was fined $1.575 million and censured by the regulator and five exchanges for violating the market access rule. The exchanges were BOX Options Exchange LLC, the CBOE BZX Exchange, Inc., Investors Exchange LLC, the NASDAQ Stock Market LLC and the New York Stock Exchange. The market access rule requires brokers who provide market access to clients to have adequate controls regarding the regulatory and financial risks that come with such access. The rule is designed to ensure that brokers appropriately control the risks associated with such access. Here Instinet provided market access to numerous clients but failed to supervise trading to detect and prevent potentially violate and manipulative activity.
Offering fraud: U.S. v. Erb, No. 17-CR-413 (E.D.N.Y) is an action in which Defendant Eric Erb previously pleaded guilty to a charge of wire fraud. On April 13, 2018 he was sentenced to serve 57 months in prison and pay $5.3 million in restitution, and a $5.3 million forfeiture judgment and to forefeit $215,000 in proceeds that he earned from the sale of his former residence. Mr. Erb admitted misappropriating $3 million from 38 investors in connection with a scheme in which he promised to invest the money entrusted to him in accord with investor directives. In fact he used portions of the money for his personal expenses, lost other portions and tried to cover all this up with false earnings statements.
Offering fraud: U.S. v. Haddow, No. 1:17-mj-04939 (S.D.N.Y.). Defendant Renwick Haddow, a U.K. citizen also known as Jonathan Black, was extradited from Morocco and returned to New York last week. In June of 2017 he was charged in a criminal complaint with conducting two fraudulent schemes. Prosecution of the case had to await his extradition. Bitcoin Store Inc. was at the center of one scheme operated by Mr. Haddow. A second scheme focused on Bar Works Inc. Over a three year period, beginning in November 2017, Mr. Haddow solicited investments for his two start-up enterprises. Bitcoin Store claimed to be an online platform for purchasing, selling and storing the digital currency known as “Bitcoin.” Barworks claimed to be engaged in the business of adopting restaurants, bar premises and other locations into co-working spaces. Investors were solicited for the two firms with a series of misrepresentations. Mr. Haddow concealed his interest in Bitcoin Store for example. Rather, he claimed the firm was operated by an experienced team of investment professionals which was false. Defendant Haddow used a similar approach with Barworks. There he claimed that Jonathan Black had an extensive background in finance. Mr. Black also claimed to have had a role in setting up “Car Share,” a car-sharing app. Again the claims were false. Investors were solicited through agent brokers and inCrowd Equity Inc., an app Mr. Haddow controlled. It was claimed to be a kind of crowdfunding portal through which investors could purchase shares of start-ups that supposedly had been vetted by inCrowd. Investors were unaware that Mr. Haddow controlled inCrowd and had interests in the firms being recommended. Defendant Haddow misappropriated the investor funds raised. He has been charged with two counts of wire fraud, one relating to each venture. The case is pending. See also SEC v. Haddow, Civil Action No. 1:17-cv-04950 (S.D.N.Y. Filed June 30, 2017).
Offering fraud: U.S. v Kantor, No. 18-CR-177 (E.D.N.Y.). Defendant Blake Kantor, also known as Bill Gordon, conducted a fraudulent investment scheme in which investor cash was converted to what was represented to be a valuable cryptocurrency – ATM Coin. Beginning in March 2014 Mr. Kantor established the Blue Bit Banc or Blue Bit Analytics, Inc. The firm sold binary options, a form of highly speculative investment that has been banned in some countries. Over a three year period Mr. Kantor and his confederates solicited investors for Blue Bit Bank, raising about $2.1 million from approximately 713 investors. Investors were not told that the computer software used by Blue Bit altered the data used in connection with the binary options in a manner which made it most difficult for them to make a profit. Investors were also not told that the ATM Coin they received was worthless. In October 2017 Mr. Kantor and others involved with the scheme took steps to evade detection. Customer lists were altered after FBI agents told Mr. Kantor that they were investigating. Mr. Kantor also met with the agents and misinformed them about the business, claiming he had not had any involvement with it for a period of time. Defendant Kantor is charged with conspiracy to commit wire fraud, obstruction of an official proceeding and making false statements to Special Agents of the FBI. The case is pending.
U.S. v. DeLeon, No. 4:17-cr-00514 (S.D.Tx.) is an action which named as a Defendant Cesar David Rincon Godoy or Cesar Rincon, the former general manager of Petroleos de Venezuela S.A. or PDVSA, the state owned Venezuela oil firm. He is one of five officials from the firm indicted on money laundering charges. The firm officials solicited bribes from 2011 through 2013 from corporate officials who wanted to do business with their company. At least $27 million in bribes were paid. Mr. Rincon was charged with four counts of money laundering. This week he pleaded guilty to one count of conspiracy to commit money laundering in connection with the scheme. The court imposed a personal money judgment in the amount of $7,033,504.71 against the Defendant who agreed to the entry of an order of forfeiture. Sentencing is scheduled for July 9, 2018.
U.S. v. Koolman, No. 1:18-cr-20276 (S.D. Fla.) is an action in which Egbert Yvan Ferdinard Koolman, a Dutch citizen residing in Florida, pleaded guilty to one count of money laundering. Mr. Koolman was an official of Servicio di Telecommunicacion di Aruba N.V. or Setar, an instrumentality of the Aruban government. From 2005 through 2016 Mr. Koolman conspired with Lawrence Parker, who previously pleaded guilty to FCPA violations, and others to engage in money laundering. Essentially in return for over $1.3 million in bribes over the period he used his position to award lucrative mobile phone and accessory contracts. The cash was paid through wire transfers using U.S. banks or at meetings in Miami and Aruba.
New York AG
Cryptocurrency: The New York AG’s office launched a fact finding inquiry regarding trading platforms for virtual currencies. Specifically, the NYAG sent letters to thirteen virtual currency trading platforms requesting disclosures regarding their operations. The letters are part of a fact finding inquiry designed to aid in protecting consumers.
Manipulation: The Australian Securities and Investment Commission banned Mark Menzies, sole director of Menzies Securities Pty, from providing financial services for a period of four years and canceled the registration of the firm. The action was taken in view of his manipulation of the MINIs – a derivative product traded in Australia. Effectively, Mr. Menzies used the MINIs to transfer the profit or loss from prior transactions which had the impact, or likely impact, of creating an artificial prices. The firm also failed to keep the required records.
Electronic trading: The Securities and Future Commission reprimanded and fined Instinet Pacific Limited $17.3 million in connection with its breaches of conduct tied to the firm’s electronic and algorithmic trading systems and alternative liquidity pool. Specifically, the firm failed to ensure that reasonable controls were in place to prevent its algorithmic trading system from generating and passing erroneous and disorderly orders to the market on three occasions in December 2014 and January 2016. In addition, the firm’s non-proprietary orders received execution priority over proprietary orders in May 2016 and it failed to comply with the documentary requirements of the Code of Conduct.
Remarks: Julia Leung, Deputy Chief Executive Officer, SFC delivered remarks titled New Technologies and Asset Management: A Time of Great Promise and Great Peril at the Hong Kong Investment Funds Association Luncheon (April 13, 2018). Her remarks addressed Reg Tech and Sup Tech initiatives, Fintech and the approach of the regulator to crypto assets which has been to apply the securities regulations where applicable while joining other regulators in urging the IOSCO to continue monitoring the developments (here).
Corruption: The Serious Frauds Office announced that it has opened a criminal investigation into suspected corruption in the conduct of business in Algeria by Ultra Electronic Holdings plc, its subsidiaries, employees and associated persons following a self-report by the firm.