Trending publication
Nutter Securities Enforcement Update: April 1, 2022
Print PDFThe Nutter Securities Enforcement Update is a periodic summary of noteworthy recent securities enforcement activity, settlements, decisions, and charges. For more information on these cases or about how they may impact you, contact your Nutter attorney.
Investment Advisers/Investment Companies
Educators Financial Services, Inc., Release IA-5976 (March 4, 2022) – In a settlement, an RIA was charged with improper billing practices by failing to aggregate household assets in compliance with firm policies and failing to refund pre-paid advisory fees to terminating clients. In addition, the firm was charged with failing to disclose conflicts of interest with respect to mutual fund share classes that paid 12b-1 fees, and with related compliance policy failures. Claims under IA Sections 206(2), 206(4) and Rule 206(4)-7. Censure, cease-and-desist, disgorgement ($728k), and civil penalty ($250k).
Alumni Ventures Group, LLC and Michael Collins, Release No. IA-5975 (March 4, 2022) – In a settlement, an exempt reporting adviser and its CEO were charged with misleading statements about management fees for venture capital funds by representing that it used an “industry standard ‘2 and 20’” when it actually took 20 percent of some investors’ investments up front. Respondents were also charged with making inter-fund loans and cash transfers between different managed funds in violation of the funds’ operating agreements and the managers’ fiduciary duties. Claims under IA Sections 206(2), 206(4) and Rule 206(4)-8. Censure, cease-and-desist, and civil penalties ($700k firm, $100k individual).
City National Rochdale, LLC, Release No. IA-5973 (March 3, 2022) – In a settlement, an RIA was charged with failing to disclose conflicts of interest by recommending proprietary mutual funds when less expensive competitor funds were available and by recommending proprietary mutual fund share classes that charged 12b-1 fees when less expensive share classes were available, and with related compliance policy failures. Claims under IA Sections 206(2), 206(4) and Rule 206(4)-7. Censure, cease-and-desist, disgorgement ($22m), and civil penalty ($5.5m).
SEC v. Cambridge Investment Research Advisors, Inc., Lit. Re. No. 25340 (March 2, 2022) – In a litigated action, the SEC charged an RIA with failing to disclose conflicts of interest when it recommended mutual funds and cash sweep products that paid revenue sharing when comparable lower cost options were available. In addition, the SEC alleges that the defendant converted accounts to more expensive wrap accounts without disclosure and without analyzing whether the conversion was in the clients’ best interest, and failed to disclose that its representatives received compensation in the form of forgiveable loans for meetings certain asset and client retention criteria. Claims under IA Sections 206(2), 206(4) and Rule 206(4)-7.
SEC v. Eric C. Malley, et al., Lit. Rel. No. 25343 (March 15, 2022) – In a litigated action, the court entered final consent judgment against Eric C. Malley and his company MG Capital Management L.P. The SEC’s complaint alleged that Malley, a licensed real estate broker with no investment management experience, solicited investments in real estate funds by falsely claiming they had successfully managed other funds and making other misrepresentations. Claims under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Permanent injunction and disgorgement with prejudgment interest ($12.1m). In a parallel criminal action, Malley was sentenced to 60 months in prison and ordered to pay $33.2 million in restitution and forfeit $5.6 million in ill-gotten gains.
SEC v. Ambassador Advisors, LLC, et al., Civ. A. No. 5:20-cv-02274-JMG (E.D. Penn.) (March 23, 2022) – After an eight-day trial, a jury ruled in favor of the SEC against an investment advisory firm and its principals for breaching fiduciary duties to its clients. The SEC alleged that the defendants violated their fiduciary duties by investing clients’ money in mutual funds that charged 12b-1 fees—which were then paid to a broker who had an agreement to transfer 95% of the fee to the defendants—even though they were eligible for non-12b-1 fee mutual funds. The court had previously granted the SEC’s motion for summary judgment on its claim that the defendants failed to implement written policies and procedures reasonably designed to prevent violations of the Investment Advisors Act of 1940 (including disclosing that the defendants received portions of the 12b-1 fees).
SEC v. Lemelson et al., Civ. A. No. 10-cv-11026 (D. Mass) (March 30, 2022) – After a trial in which the jury found that the defendant violated Exchange Act Section 10(b) but did not violate IA Section 206(1) or (2), the court denied the SEC’s request for civil penalties of $1.4 million and disgorgement and interest of $865,124. Instead, the court enjoined the defendants from violating Section Act 10(b) and Rule 10b-5 for five years and imposed a Tier III civil penalty in the amount of $160,000.
Updated Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors (March 30, 2022) – The SEC Staff recently updated guidance on the Staff’s views about how broker-dealers, investment advisers, and their associated persons can satisfy their obligations to retail investors when making account recommendations. Topics covered are areas of recent enforcement focus, including the intersection of Reg BI and fiduciary standards, disclosure of conflicts of interest, reasonable alternative product offerings, and consideration of account characteristics.
Broker-Dealers
SEC v. Keystone Capital Partners, Inc., Civil Action No. 1:17-mi—99999-UNA (N.D. Ga.) (March 22, 2022) – After a nine-day trial, a jury ruled in favor of the SEC against a former registered representative and the firm he co-founded. The SEC alleged that the defendant fraudulently sold variable annuities to federal employees nearing retirement age by falsely claiming he and his company were counselors hired by the federal government to educate federal employees about their retirement benefits and convincing them to roll over funds from their retirement accounts to fund the purchase of higher-fee variable annuity products.
Robinhood Financial LLC v. William F. Galvin, Secretary of the Commonwealth of Massachusetts, Civ. A. No. 2184cv00884 (Mass. Super. Ct.) (March 30, 2022) – A Massachusetts superior court declared that the Massachusetts Securities Division exceeded its authority in adopting the Fiduciary Duty Rule which provides that it is an “unethical or dishonest conduct or practice” for a broker-dealer to “fail to act in accordance with a fiduciary duty to a customer” when providing investment advice, recommending investment products, opening accounts, or purchasing, selling, or exchanging any security. The judge imposed a stay on his decision to allow the Securities Division to appeal.
Updated Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors (March 30, 2022) – The SEC Staff recently updated guidance on the Staff’s views about how broker-dealers, investment advisers, and their associated persons can satisfy their obligations to retail investors when making account recommendations. Topics covered are areas of recent enforcement focus, including the intersection of Reg BI and fiduciary standards, disclosure of conflicts of interest, reasonable alternative product offerings, and consideration of account characteristics.
Securities Offerings
SEC v. S-Ray Incorporated and Stephen Alexander Baird, Lit. Rel. No. 25344 (March 15, 2022) – In a litigation action, the SEC alleged that a private startup, S-Ray Incorporated, and its CEO, Stephen A. Baird, sold shares to investors by making false claims about customers, orders for its products, and revenue potential. Claims under Securities Act Sections17(a) and Exchange Act Section 10(b) and Rule 10b-5.
SEC v. Cell>Point, LLC, Terry A. Colip, and Greg R. Colip, Lit. Rel. No. 25345 (March 15, 2022) – The SEC obtained a preliminary injunction against Cell>Point L.L.C., its subsidiaries, CFO Terry A. Colip, and CEO Greg R. Colip. The SEC alleged that Cell>Point and the Colips fraudulently offered and sold approximately $10 million in securities to at least 151 investors. Claims under Securities Act Section 17(a) and Exchange Act Section 10(b), and Rule 10b-5.
SEC v. John Barksdale, JonAtina Barksdale, Lit. Rel. No. 25341 (March 8, 2022) – In a litigated action, the SEC charged siblings John and JonAtina Barksdale with defrauding thousands of retail investors of more than $124 million through two unregistered fraudulent offerings of securities involving a digital token called “Ormeus Coin.” The complaint alleges that in communications with investors, the defendants falsely stated that Ormeus Coin had a $260 million crypto mining operation and was producing $5.4 million to $8 million per month in mining revenues. Charges under Securities Act Sections 5(a), 5(c), 17(a) and Exchange Act Section 10(b), Rule 10b-5.
SEC v. Ripple Labs, Inc., et al., No. 20-cv-10832 (S.D.N.Y.) (March 11, 2022) – In ongoing litigation, a court denied the SEC’s motion to strike Ripple’s affirmative defense that it lacked fair notice that its conduct was in violation of law. The SEC charged that Ripple sold over $14.6 billion of a digital asset called XRP without registering those sales with the SEC. Ripple alleged that it did not sell XRP as an investment and it had no relationship with the vast majority of XRP holders. The court held that these facts, if true, would raise legal questions as to whether Ripple had fair notice that XRP was a security under the securities laws.
(NSEU 22-03)
This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.
