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12.01.2022 | 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.

Remedies

SEC v. McDermott, Lit Rel. No. 25570 (Nov. 3, 2022) – In a litigated action, a district court declined to enter an “obey the law” injunction and assessed a smaller civil penalty than the SEC requested. After a trial, a jury found that an RIA firm and its principal failed to disclose certain conflicts of interest and failed to seek best execution in connection with recommendations of certain unit investment trusts (UITs) to fee-based advisory clients in violation of Advisors Act Sections 206(1), 206(2), and 209(f). In its final judgment, available here, the court rejected the SEC’s standard request for injunctions against future violations. The court ordered defendants to pay disgorgement of $143,379 and $50,983.60 in prejudgment interest, which were the amounts requested by the SEC. The court assess penalties of $160,000, less than the $480,000 requested by the SEC.

Investment Advisers/Investment Companies

In the Matter of Horter Investment Management, LLC, Rel. IA-6182 (Nov. 3, 2022) – In a partially settled matter, RIA Horter Investment and its founder and CEO were charged with failing to reasonably supervise an IAR who misappropriated $728,001 from Horter clients purportedly for his outside business activities, but instead the IAR used those funds to gamble, pay personal expenses, and repay other investors. The IAR was criminally charged and sentenced in 2019 to a 20-year term of imprisonment. Violations of Advisors Act Section 206(4) and Rule 206(4)-7. Horter agreed to a cease-and-desist order. The respondents agreed to continued proceedings to determine what, if any, civil penalties and other remedial actions are appropriate.

SEC v. Infinity Q Diversified Alpha Fund, Lit Rel. No. 25575 (Nov. 10, 2022) – In a settled litigation matter, the SEC charged that the Infinity Q Alpha Fund, a mutual fund, reported materially and falsely inflated net asset values (NAV) due to deliberate mismarking of its unlisted equity and OTC derivatives holdings by the Chief Investment Officer of the fund’s investment adviser. After the scheme was discovered, the fund’s board applied to the SEC for permission to suspend redemptions to facilitate liquidation of the fund, which was granted in February 2021. The fund was liquidated. The SEC charged the fund with violating the pricing provisions of Rule 22c-1 of the Investment Company Act. The fund agreed to settle the charges and consent to the appointment of a Special Master to oversee the payment of expenses and administer a process to return remaining funds to harmed investors. (Separate litigation is pending against the former CIO.)

In the Matter of Legal & General Investment Management America, Inc., Rel. IA-6188, IC-34756 (Nov. 21, 2022) – In a settled matter, a Chicago-based RIA was charged with effecting 44,125 principal transactions between clients and its principal accounts without making the required client disclosures or obtaining the required client consents and for effecting 547 cross trades between clients and other clients who were affiliated persons without complying with the statutory provisions governing cross trades. Charges under Advisers Act Sections 206(3) and 206(4) and Rule 206(4)-7 and Investment Company Act Sections 17(a)(1) and 17(a)(2) and Rule 38a-1 thereunder. Remedies included a cease-and-desist order, censure, and civil penalty of $500,000.

In the Matter of Goldman Sachs Asset Management, LP, Rel. IA-6189 (Nov. 22, 2022) – In a settled matter involving ESG disclosures, Goldman Sachs was charged with failing to implement policies and procedures to evaluate ESG factors for a strategy until “some time” after the strategy was adopted and failed to consistently follow them after they were adopted. Charge under Advisers Act Section 206(4) and Rule 206(4)-7. Remedies included a cease-and-desist order, censure, and a $4m penalty.

Broker-Dealers

SEC v. Syed Arham, Lit Rel. No. 25567 (Nov. 1, 2022) – In a litigated action, the SEC charged six individuals with conducting a freeriding scheme that defrauded multiple broker-dealers. The complaint alleges that the defendants made more than $2 million in bogus deposits from empty or underfunded bank accounts to deceive broker-dealers into providing instant deposit credit for online securities trading. One of the defendants is already serving a five-year sentence for running a Ponzi scheme from his fraternity house near the University of Georgia campus. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies sought include permanent injunction, disgorgement, and civil penalty.

SEC v. GEL Direct Trust, et al., Lit. Rel. No. 25579 (Nov. 17, 2022) – In a litigated action, the SEC filed charges against GEL Direct Trust, GEL Direct, LLC, Jeffrey K. Galvani, and Stuart A. Jeffery for engaging in the business of selling penny stocks and other securities for the accounts of GEL’s customers without being registered as brokers or being associated with a registered broker. The complaint alleges that the defendants take possession of its customers’ penny stocks, find executing brokers willing to sell the stocks in the market, direct the executing brokers on completing the sales, and facilitate settlement and disbursement of proceeds to their customers. The complaint further alleges defendants executed more than 19,000 trades of more than 300 billion shares of stock of more than 400 issuers and that the trades generated more than $1.2 billion of trading proceeds for their customers. Charges under Exchange Act Sections 15(a) and 20(a). Remedies sought include permanent injunctions, disgorgement, civil penalties, and barring from participating in any offering of any penny stock.

Market Manipulation

SEC v. Costello, Lit. Rel. No. 25572 (Nov. 4, 2022) – In a partial settlement of a litigated matter, the SEC settled with one of two defendants charged in a microcap stock promotion scheme. The SEC alleged that one individual promoted at least five microcap stocks on Twitter that another defendant owned, without disclosing that the other defendant intended to sell the shares and pay a portion of the profits to the promoter. Charges under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Remedies included a permanent injunction and monetary relief to be determined by the court.

Issuer Reporting/Audit and Accounting/Directors and Officers/Compliance

In the Matter of Koppers Holdings, Inc., Rel. 33-11129, Rel. 34-96193, Rel. AAER-4360 (Nov. 1, 2022) – In a settled matter, a publicly traded global provider of wood products and wood treatment chemicals was charged with failing to disclose material information about its debt reduction efforts that rendered statements it made misleading. The SEC claims the company announced a debt reduction target without disclosing that it achieved that target by delaying making certain material amounts of overdue payments to vendors. As a result, its net debt reduction was only temporary and was reversed soon after the close of each reporting period in 2019. Charges under Securities Act Section 17(a)(3), Exchange Act Section 13(a) and Rules 12b-20 and 13a-11, Rule 100(b) of Regulation G of the Exchange Act. Remedies included cease-and-desist and a civil monetary penalty of $1.3m.

Insider Trading

In the Matter of Michael E. Mueller, Rel. 34-96243 (Nov. 4, 2022) – In a settled matter, the SEC charged an individual with insider trading when he purchased securities of Layne Christensen Company based on a tip from his broker and childhood friend, who had been tipped by another friend who worked for a company that identified Layne Christensen Company as an acquisition target. The settling trader also recommended that a close relative purchase securities as well. The settling trader generated a profit of about $38,000. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included disgorgement of $38,075.32 and civil penalty of $52,118.87.

SEC v. Yang, et al., Lit. Rel. No. 25582 (Nov. 30, 2022) – In a litigated matter, the SEC obtained final judgments on insider trading charges against a former senior index manager at a nationally recognized index provider and a sushi restaurant owner. According to the SEC’s complaint, the index manager learned in advance of which publicly traded companies would be added to or removed from popular stock market indexes and used the second defendant’s account to buy put or call options on those companies before the announcements. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included permanent injunctions against both defendants and a civil penalty of about $250,000 for the second defendant. In a parallel criminal proceeding, the index manager was sentenced in July to time served plus a year of supervised release, and a forfeiture order of about $900,000.

Securities Offerings

SEC v. Braga, and SEC v. Tetreault, Lit. Rel. No. 25571 (Nov. 4, 2022) – In ongoing litigation matters, the SEC charged four individuals for their roles in Trade Coin Club. The SEC alleges that Trade Coin Club was a Ponzi scheme that raised 82,000 bitcoin valued at $295 million, from more than 100,000 investors, by promising profits from a purported crypto trading bot, when proceeds were actually used to pay Trade Coin Club’s founder and a network of promoters. Charges under Securities Act Sections 5 and 17(a), Exchange Act Sections 10(b), 15(a) and Rule 10b-5.

SEC v. LBRY, Inc., No. 1:21-cv-00260-PB (D.N.H., Nov. 7, 2021) – In ongoing litigation, a district court granted summary judgment to the SEC on charges that the defendants engaged in an unregistered securities offering of a digital token called LBC. In holding that LBC was a security, the court found that LBRY promoted LBC as an investment, and that LBC’s non-financial or “consumptive” uses for some purchasers did not overcome their investment purpose.

PIC Renegade Properties, LLC, Rel. 33-11132 (Nov. 9, 2022) – In a settled matter, the SEC charged the general partner of a real estate investment fund with conducting an unregistered public offering. Specifically, the general partner attempted to comply with the registration exemption of Rule 506(c) of Reg D but failed to take reasonable steps to verify the accreditation of a number of investors and sold interests in the fund to unaccredited investors. Charge under Securities Act Section 5. Remedies included a cease-and-desist order and a $400,000 penalty.

NRSROs

In the Matter of S&P Global Ratings, Rel. No. 34-96308 (Nov. 14, 2022) – In a settled matter, the SEC charged S&P Global Ratings, a Nationally Recognized Statistical Ratings Organization (NRSRO) and one of the “Big Three” credit rating agencies. This case arises out of S&P’s rating of a residential mortgage-backed security (RMBS) for an unnamed issuer. According to the SEC, the issuer threatened to sue and terminate its relationship with S&P after S&P revised its preliminary feedback that the RMBS met the criteria for a “AAA” rating and concluded that the transaction did not meet the AAA criteria. Believing that losing its relationship with the issuer would damage S&P’s reputation, S&P employees responsible for managing the relationship with the issuer then pressured their colleagues responsible for assigning credit ratings to find a way to give the issuer a AAA rating. The SEC charged S&P with violating Rules 17g-5(c)(8)(i) and 17g-5(c)(8)(ii) of the Exchange Act, which require NRSROs to keep sales and marketing considerations separate from the credit rating process. S&P was ordered to pay a civil money penalty of $2.5m.

(NSEU 22-11)

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.