Trending publication

05.01.2022 | Legal Update

The 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

In re: HighPoint Advisor Group, LLC, Rel. No. IA-6003 (April 27, 2022) – In a settled action, the SEC charged HighPoint Advisor Group, LLC, a registered investment adviser, for investing client assets in higher-cost mutual fund share classes while failing to disclose conflicts of interest. Under HighPoint’s fee agreements, HighPoint was responsible for paying certain transaction fees. The SEC alleged that HighPoint avoided paying transaction fees by recommending no-transaction-fee (NTF) mutual fund share classes when more favorable value share classes of the same fund were available for a transaction fee. The SEC also alleges that HighPoint failed to disclose conflicts of interest associated with the NTF shares. Charges under Advisers Act Sections 206(2), 206(4), and Rule 206(4)7. Remedies included a cease-and-desist order, a civil penalty of $125,000, and disgorgement of $639,737.

In re: Wealth Plus, Inc., Rel. No. 33-33-11056 (April 27, 2022); In re: Alexandra H. Cock, Rel. No. 33-11055 (April 27, 2022) – In a settled action, the SEC charged Wealth Plus, Inc., a registered investment advisor, and its sole principal for misleading disclosures about fees. The SEC alleged that Cock and Wealth Plus sold unregistered securities in real estate investment and management companies, receiving about $90,000 in commissions or “referral fees” from the companies, while Cock was acting as an unregistered broker. The SEC also alleged that Wealth Plus and Cock received management fees for purported due diligence on the companies but overstated the scope of the review and that they failed to disclose a past criminal conviction of the companies’ founder. Charges under Securities Act Sections 5(a) and 5(c), Exchange Act Section 15(a), and Advisers Act 206(2). Remedies included bar from association with broker-dealer or investment adviser, investment company prohibition, and penny stock bar; $368,232 disgorgement; and $30,000 civil penalty.

Risk Alert:  Investment Adviser MNPI Compliance Issues (April 26, 2022) – The SEC Division of Examinations highlighted common compliance issues arising under Section 204A of the Investment Advisers Act, which requires investment advisers to establish and implement policies and procedures reasonably designed to prevent misuse of material, nonpublic information (MNPI), in particular insider trading. These included inadequate policies and procedures related to non-traditional or “alternative” sources of data, “value-add” investors deemed more likely to possess MNPI, “expert networks” consultants who may have access to MNPI, identification and pre-approval requirements for access persons, and reporting and review of access persons’ personal securities transactions, among others. 

Broker-Dealers

SEC v. Carebourn Capital, LP, et al., Civ. A. No. 21;-cv-2114 (KMM/JFD) (D. Minn.) – In pending litigation, the District of Minnesota denied the SEC’s motion to strike the defendants’ affirmative defenses that the SEC’s complaint (i) violated due process because defendants had no fair notice that the conduct could be unlawful and (ii) asserted claims that were inconsistent with the SEC’s own published guidance. In the underlying action, the SEC alleges that the defendants acted as unregistered “dealers” based on their regular business of buying convertible notes from penny stock issuers and later converting the notes to newly issued shares at a discount and selling them into the public market.

Insider Trading

SEC v. Lloyd D. Reed, Release No. 34-94591 (April 4, 2022) – In a settled matter, the SEC charged an individual with trading on material, nonpublic information of a publicly traded company in breach of his duty of trust and confidence owed to his business partner, who was a director of the company. Commissioner Peirce dissented, in part, because in her view the order assessed materiality based on the relationship between the respondent and his business partner rather than the nature of the information. Charges under Exchange Act Section 10(b), Rule 10b-5. Remedies included a cease-and-desist order, and a civil penalty of $233,000 (about twice the alleged profit on the trades).

SEC v. Bernard L. Compton, Lit. Rel. 25374 (April 22, 2022) – In a settled matter, the SEC charged a former accountant at Domino’s Pizza Inc. with insider trading. The SEC alleged that Bernard L. Compton used confidential information obtained in his role as accountant to trade ahead of 12 of Domino’s earnings announcements. The SEC further alleged that Compton spread these trades across seven different brokerage accounts belonging to himself and various members of his family. Charges under Exchange Act Section 10(b), Rule 10b-5. Remedies included permanent injunction, civil penalty of $1,921,394, and suspension of practice before the SEC.

Issuer Reporting/Audit and Accounting

Rollins, Inc. and Paul Edward Northen, Release Nos. 33-11052, 34-94742, AAE-4294 (April 18, 2022) – In a settled matter, the SEC charged a NYSE listed issuer and its former CFO with improper earnings management practices. Specifically, the respondents were charged with reducing corporate-level accounting reserves so that the company could report quarterly earnings in line with consensus analyst estimates. Charges under Securities Act Section 17(a)(2) and (a)(3), and Exchange Act Sections 13(a), 13(b)(2)(A) and (B) and 13(b)(5), and Rules 12b-20, 13a-11, 13a-13, 13a-15(a) and 13b2-1. Remedies included cease-and-desist orders and penalties of $8 million (company) and $100,000 (CFO).

David Hansen, Release No. 34-94703 (April 12, 2022) – In a settled matter, the SEC charged a co-founder and CIO of a privately funded, now-bankrupt technology company with impeding an employee whistleblower by cutting off the employee’s access to company computer systems and providing the CEO with passwords enabling access to the employee’s social media accounts through his company-issued computer. Commissioner Peirce dissented from the order on the grounds that merely cutting off an employee’s access to company systems does not deny the employee the ability to communicate with the SEC and is consistent with many cybersecurity requirements. Charge under Exchange Act Rule 21F-17(a). Remedies included a cease-and-desist order and a penalty of $97,523. 

Market Manipulation

SEC v. Anthony Salandra, Lit. Rel. No. 25358 (April 11, 2022) – In a settled matter, the SEC charged Anthony Salandra for his role in a market manipulation scheme. The SEC alleged that Salandra and others created false rumors about purported market-moving events, such as corporate mergers or acquisitions, involving publicly traded companies. The false rumors were disseminated through real-time financial news services, financial chat rooms, and message boards. Salandra allegedly was involved in the creation of and trading on at least 92 false rumors. Charges under Securities Act Section 17(a) and Exchange Act 10(b) and Rule 10b-5. Remedies included permanent injunction, disgorgement of $132,560 plus prejudgment interest, and a civil penalty in an amount to be determined at a later date.

Securities Offerings

In re: Medley Management Inc., Brook B. Taube and Seth B. Taube, Release Nos. 33-11057, 34-94819, IA-6008 (April 28, 2022) – In a settled matter, the SEC charged an alternative asset management firm and its co-CEOs for overstating AUM. The SEC alleged that respondents overstated AUM by including certain “commitment” amounts, when those purported commitments contained no legal or practical obligation to make investments and respondents knew clients were unlikely to invest the full “commitment” amounts. Charges under Exchange Act Sections 17(a)(2) and 17(a)(3), Advisers Act Sections 206(2) and 206(4) and Rule 206(4)-8, Exchange Act Sections 13(a) and 14(a) and Rules 12b-10, 13a-1, 13a-11, 13a-13, 13a-15(a), 13a-15(b), and 14a-9. Remedies included censure and civil money penalties of $4,000,000 to entity respondent and $4,000,000 and $2,000,000 to individual respondents, respectively.

The Legal Funding Group of Georgia, LLC and Benjamin Eichholz, Release No. 33-11053 (April 19, 2022) – In a settled matter, a company and its founder were charged with the unregistered sale of securities to unaccredited investors. According to the order, the respondents made small, short-term funding advances to plaintiffs in personal injury cases while their cases were pending, charging borrowers interest and a 30% processing fee in advance. Respondents raised money to fund the loans by soliciting investors in several states, with each investor funding specific loans and being entitled to 50% of the profits. Charges under Securities Act Sections 5(a) and 5(c). Remedies included cease-and-desist orders and penalties of $37,500 (company) and $12,500 (CEO).

(NSEU 22-04)

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.