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.
West Virginia v. E.P.A., 597 U.S. ___ (2022) – In a ground-breaking administrative law decision creating the “major questions doctrine,” the Court held that a federal agency exceeds its authority when it enacts “major policy decisions” through regulation absent “‘clear congressional authorization’ for the power it claims,” even if there is a “plausible textual basis” for the regulation. While the decision addresses an EPA regulation, the “major questions doctrine” could be applied in future cases to major policy decisions enacted by the SEC without clear congressional authorization.
Investment Advisers/Investment Companies
SEC v. Jennifer Campbell, Lit. Rel. No. 25408 (June 2, 2022) – In a litigated action, the Commission charged Jennifer Campbell, former Chief Compliance Officer of a previously registered investment adviser, with misappropriating client funds. The complaint alleges that Campbell, among other things, misused access to client accounts to modify account settings so that she could misappropriate funds from client accounts through fraudulent checks and wire transfers. Charges under Section 17(a)(1), Section 10(b), Rules 10b-5(a) and (c), and aiding and abetting violations of Sections 206(1) and 206(2).
In the Matter of Garrison Point Capital, LLC, Rel. IA-6039, Rel. IC-34607 (June 3, 2022) and In the Matter of Alphacentric Advisors, LLC, Rel. IA-6040, Rel. IC-34608 (June 3, 2022) – In settled matters, the sub-adviser and investment adviser to a mutual fund were charged with mispricing certain portfolio securities of the Fund when they purchased odd-lot bonds at a discount to round-lot prices quoted by the Fund’s pricing vendor and then marked the odd-lots at the higher prices, resulting in a 7% overstatement of the Fund’s NAV and related performance overstatements. The sub-adviser was charged with making misleading statements and causing the Fund’s violations of pricing rules. Claims against the sub-adviser under Advisers Act Sections 203(e) and (k), 206(4) and Rules 206(4)-7 and 206(4)-8, and ICA Sections 9(b), 9(f) and 34(b) and Rule 22c-1. Remedies included cease-and-desist, censure, and a penalty of $3.5 million. The investment adviser was charged with failing to adopt and implement policies and procedures related to the Fund’s securities valuation and oversight of the sub-adviser’s valuation practices. Claims against the investment adviser under Advisers Act Sections 203(e) and (k), 206(4) and Rule 206(4)-7, and ICA Section 9(b). Remedies included cease-and-desist, censure and a penalty of $300,000.
In the Matter of Kahn Brothers and Thomas Kahn, Rel. 34-95045, Rel. IA-6043 (June 6, 2022) – In a settled matter, an RIAand its CEO were charged with breaching fiduciary duties to advisory clients by failing to provide full and fair disclosure of conflicts of interest and receipt of commissions by an affiliated broker-dealer from transactions in client accounts, and by failing to seek best execution of such transactions. The affiliated broker charged regular commission rates based on industry schedules in effect before the deregulation of rates in 1975. Claims under Exchange Act Section 15(b), Advisers Act Sections 206(2), 206(4) and Rule 206(4)-7. Remedies included cease and desist, censure, disgorgement of approximately $700,000 plus interest and a penalty of $250,000.
Kathryn Jane Meredith d/b/a KM Advisory Services, Rel. 34-95046, Rel. IA-6044 (June 6, 2022) and John Paul Harnish d/b/a KM Advisory Services, Rel. 34-95047, Rel IA-6045 (June 6, 2022) – In settled matters, the founder and successor of an RIA organized as a sole proprietorship were charged with failing to disclose conflicts of interest and receipt of revenue in connection with commissions and 12b-1 fees on client investments in mutual funds, and failing to seek best execution. Remedies included cease-and-desist, censure, disgorgement of approximately $575,000 and $220,000 plus interest, respectively, and penalties of $100,000 and $75,000 respectively.
In the Matter of Trust Advisory Group, Ltd., Rel. IA-6064 (June 7, 2022) – In a settled matter, an RIA was charged with breaching its fiduciary duty to advisory clients by failing to provide full and fair disclosure of conflicts of interest arising from the receipt of revenue sharing payments by an affiliated broker-dealer on client investments in cash sweep products. Claims under Advisers Act Sections 206(2), 206(4) and Rule 206(4)-7. Remedies included cease and desist, censure, disgorgement of approximately $150,000 plus interest and a penalty of $50,000.
In the Matter of Charles Schwab & Co., et al., Rel. IA-6047 (June 13, 2022) – In a settled matter, certain investment adviser subsidiaries of Charles Schwab were charged with making false and misleading statements in their Form ADV filings about the pre-set percentage of assets held in cash in a no-advisory-fee robo-advisor product. Each model portfolio held a pre-set amount in cash so that the affiliated bank would earn at least a minimum amount of revenue for the spread on the cash by loaning out the money. Largely because of the revenue received from the spread, investors were not charged an advisory fee. Respondents failed to disclose their conflict of interest in setting the cash allocations. Respondents also did not disclose that under certain market conditions, other assets such as equities would outperform cash, and the cash allocations would lower investors’ returns by the same amount as an advisory fee would have. Charges under Advisers Act Sections 206(2), 206(4) and Rule 206(4)-7. Remedies included a censure, cease-and-desist order, disgorgement of $45.9m plus interest, and a civil monetary penalty of $135m.
In the Matter of Energy Capital Partners, LP, Rel. No. IA-6049 (June 14, 2022) – In a settled matter, a private fund advisor was charged fiduciary breaches when it made a deal with one group of investors that they would not bear certain deal-related costs in a going private transaction, thus shifting those costs to other investors without disclosure. Charges under Advisers Act Sections 203(e) and (k), 206(2) and 206(4) and Rule 206(4)-7. Respondent’s remedial efforts of reimbursing the expenses at issue were considered in reaching a resolution. Remedies included cease-and-desist, censure and a $1 million penalty.
In the Matter of UBS Financial Services Inc., Rel. 34-95168, Rel IA-6060 (June 29, 2022) – In a settled matter, a large dually registered broker-dealer and investment adviser was charged with failing to provide adequate training or dedicated supervisory oversight to its financial advisors regarding a “Yield Enhancement Strategy” sold to several hundred advisory clients. Described as an options overlay strategy designed to generate additional income from an existing portfolio of securities, the strategy could generate modest returns during periods of low market volatility subject to the risk of losses during periods of high volatility. Certain financial advisors and clients did not understand the significant downside risk, and losses were experienced in a 2018 market downturn. Charges under Exchange Act Section 15(b) and Advisers Act Sections 203(e) and (k). Remedies included cease-and-desist, censure, disgorgement of $5.8 million plus interest and a penalty of $17.4 million.
In the Matter of Hamilton Investment Counsel, LLC and Jeffrey Kirkpatrick, Rel.34-95189, Rel. IA-6061 (June 30, 2022) – In a settled matter, a former RIA and its principal and Chief Compliance Officer were charged with failing to adopt and implement policies and procedures reasonably designed to ensure that an IAR’s outside business activities were adequately reported and any related conflicts of interest disclosed to clients. The CCO failed to take adequate steps to supervise the IAR’s OBA after receiving notice that the OBA violated the firm’s compliance policies, that assets were being transferred out of the firm to the OBA, that the OBA was using the firm’s address, and that the OBA was attempting to evade the compliance policies of another broker-dealer. Charges under Advisers Act Section 206(4) and Rule 206(4)-7. Remedies included cease-and-desist, censure (firm), supervisory and compliance role bar (CCO) and penalties of $150,000 (firm) and $15,000 (CCO).
SEC v. LG Capital Funding, LLC., and Joseph I. Lerman, et al., Lit. Rel. No. 25410 (June 7, 2022) – In a litigated matter, the Commission charged LG Capital Funding, LLC and its managing member Joseph Lerman, for failing to register as securities dealers. In the latest of a series of cases against convertible debt financiers, the complaint alleges that LG Capital and Lerman engaged in the business of financing penny stock issuers through convertible notes, converting the notes into shares of stock at a large discount from the market price, and then selling the shares into the market at a significant profit. The complaint alleges that LG Capital and Lerman generated approximately $30 million and net profits of $20 million. Charges under Exchange Act Sections 15(a)(1) and 20(a).
SEC v. Western International Securities, Inc., et al., No. 2:22-cv-04119 (C.D. Cal., June 15, 2022) – In a litigated matter and one of the first Reg BI enforcement actions, the Commission charged a broker-dealer and five registered representatives with violating Regulation Best Interest by recommending and selling in aggregate over $13 million in unrated, high risk debt securities to retirees and other retail investors. The defendants allegedly failed to exercise reasonable diligence in understanding the bonds and recommended the bonds to several customers without a reasonable basis to believe that the bonds were in the customers’ best interest. Charges under Exchange Act Rule 15l-1(a)(1) (Reg BI) and Section 20(a) (control person).
In the Matter of Weiss Asset Management, LP, Rel. 33-95099 (June 14, 2022) – In a settled matter, an RIA was charged with purchasing shares in public offerings after selling the same stocks short, in violation of Rule 105 of Regulation M under the Exchange Act. The prophylactic rule is intended to deter potentially manipulative activity. Charge under Exchange Act Section 21C and Rule 105 of Reg M. Remedies included cease-and-desist, disgorgement of $6.5 million plus interest, and a penalty of $200,000.
SEC v. John Henderson, et al., Lit. Rel. No. 25405 (June 1, 2022) – In a litigated action, final judgment entered against John Henderson and his company, Global Resources, LLC (“GRL”) for conducting two unregistered and fraudulent securities offerings. The Court granted the SEC’s motion for summary judgment on all claims against Henderson, finding that his offers and sales of securities were based on knowing lies as part of a fraudulent scheme to obtain money that he immediately spent for personal use. Henderson was previously found liable for making false and misleading statements in connection with securities offerings targeting Christian investors. Remedies included permanent injunctions against Henderson and GRL, $50K in disgorgement, and $103K in civil penalties.
SEC v. Robert Samuel Shumake, Jr., et al., Lit. Rel. No. 25407 (June 2, 2022) – In a partial settlement of a litigated action, a consent judgment was entered against crowdfunding issuer, 420 Real Estate, LLC and its CEO, Willard Jackson. The SEC alleged that Robert Samuel Shumake, Jr., alongside Jackson, conducted a fraudulent and unregistered crowdfunding portal and raised more than $800K from retail investors through 420 Real Estate. Jackson and 420 Real Estate consented to entry of final judgments permanently enjoining them from violating Securities Act Sections 5 and 17(a), and Exchange Act Section 10(b) and Rule 10b-5. Jackson also consented to entry of an officer-director bar. Remedies included $360K in civil penalties and $477K in disgorgement and prejudgment interest.
Issuer Reporting/Audit and Accounting/Compliance
SEC v. Anthony Sirotka, Lit. Rel. No. 25406 (June 2, 2022) – In a litigated action, the Commission charged Anthony Sirotka, former Chief Administrative Officer and President of FTE Networks, Inc. for his role in a multi-year accounting fraud. According to the complaint, Sirotka, along with two other senior executives already charged by the Commission, inflated FTE’s revenue 108% by directing the then-NYSE listed public company to improperly recognize revenue and related accounts receivable for nonexistent construction projects. Charges include violations of antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Remedies sought include permanent injunction, civil money penalty, and officer-and-director bar.
In the Matter of Synchronoss Technologies, Inc., Rel. 34-95049, AAER No. 4302 (June 7, 2022) – In a settled matter, a public company was charged with making material misstatements in its audited and interim financial statements over two years due to improper recognition of approximately $190 million in cumulative revenues. The misstatements resulted from recognition of revenue on transactions for which there was not persuasive evidence of arrangements, double counting certain revenues in connection with license agreements and improper accounting for SaaS licensing income. Charges under Exchange Act Section 21C, 10(b), 13(a) and 13(b)(2)(A) and (B), and Rules 10b-5(c), 13a-1, 13a-11, 13a-13 and 12b-20. Remedies included cease-and-desist and a penalty of $12.5 million.
In the Matter of CohnReznick LLP, Rel. 34-95066, AAER No. 4309 (June 8, 2022) and In the Matter of Stephen M. Wyss, Stephen H. Jackson and Robert G. Hilbert, Rel. 34-95067, AAER No. 4310 (June 8, 2022) – In settled matters, a public accounting firm and three partners were charged with failing to meet professional standards in the cases of two public company audits. In one matter, the firm “should have known” that its client’s goodwill was fully impaired and failed to resolve related concerns raised by its national quality control office. In the other, the firm’s national office performed pre-issuance reviews that failed to ensure that the audit complied with PCAOB standards on related party transactions. Charges under Exchange Act Sections 4C, 21C, 13(a) and 13(b)(2)(A), Rules 12b-20, 13a-1, 13a-11 and 13a-13, Rule 2-02(b)(1) of Reg S-X, and Rule 102(e) of the Commission’s Rules of Practice. Remedies (firm) included cease-and-desist, censure and a penalty of $1.9 million. Remedies (individuals) included cease-and-desist, practice bar (two individuals) and censure (one individual), and penalties of $20,000 and $30,000.
SEC v. United Health Products, et al., Lit. Rel. No. 25413 (June 8, 2022) and In the Matter of Steven C. Avis, CPA, and Seven W. Hurd, CPA, Rel. 34-95071, AAER No. 4311 (June 8, 2022) – In settled matters, the issuer and its CEO and COO settled charges that they inflated the company’s revenue through sham sales transactions. Charges under the Securities Act Section 17(a); Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), and 16(a) and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, 13b2-2, and 16a-3. Remedies included injunctive relief against all defendants, disgorgement of stock sale profits of the CEO of over $1 million, and civil penalties of $450,000 (issuer), $240,000 (CEO) and $225,000 (CFO), and officer-and-director bars against the CEO and CFO. The audit partner and audit manager of the company’s independent auditors entered into a separate administrative settlement of charges that they failed to investigate or obtain sufficient audit evidence given “numerous red flags.” Charges under Exchange Act Sections 4C, 21C, 13(a) and 13(b)(2)(A), Rules 12b-20, 13a-1, and 13a-13, and Rule 102(e) of the Commission’s Rules of Practice. Remedies included cease-and-desist, practice bars, and a penalty of $20,000 (partner only).
In the Matter of Jae Cheol Oh, Rel. 34-95072 (June 8, 2022) – In a settled matter, the CEO of a public company was charged with arranging for the company’s subsidiary to guarantee his personal debts. Charge under Exchange Act Sections 21C and 13(k). Remedies included cease-and-desist and a penalty of $150,000.
Karimi, et al., v. Deutsche Bank AG, et al., No. 22-cv-2854 (S.D.N.Y., June 13, 2022) – In a private securities class action, Judge Rakoff denied the defendants’ motions to dismiss shareholder claims that Deutsche Bank’s public filings included misleading descriptions of its wealth management business’s Know-Your-Client and Anti-Money-Laundering policies and procedures because they described specific processes used to vet clients that were allegedly routinely ignored or undermined for “ultra-rich” clients. The court also found that circumstantial allegations of scienter, based on confidential witness statements, were sufficient to state claims against two CEOs, but insufficient to state claims against two CFOs.
In the Matter of The Brink’s Company, Rel. 34-95138 (June 22, 2022) – In a settled matter and the first such enforcement action in several years, a public company was charged with requiring several thousand employees to sign restrictive Confidentiality Agreements that lacked a whistleblower exemption for several years. Charge under Exchange Act Section 21C and Rule 21F-17(a). Remedies included a cease-and-desist and a $400,000 penalty.
In the Matter of Egan-Jones Ratings Company and Sean Egan, Rel. 34-95127 (June 21, 2022) – In a settled matter, a Nationally Recognized Statistical Rating Organization (“NRSRO”) and its owner were charged with violating conflict of interest rules when they issued credit ratings for a client where the individual owner had participated in both the rating and the sales and marketing processes, and issued a credit rating on a client which had provided the respondent with more than 10% of its net revenue. The firm was also found to lack adequate policies and procedures to mitigate such conflicts. Charges under Exchange Act Sections 15E(d) and 21C, and Rules 17g-5(c)(8)(i), 17g-5(c)(1), 15E(f)(2) and 15E(h)(1). Remedies included cease-and-desist, censure, disgorgement of $129,000 plus interest and a $1.7 million penalty.