Nutter Securities Enforcement Update: August 1, 2022Print PDF
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
SEC v. Dean Patrick McDermott, et al., Civ. A. No. 19-4228 (E.D. Pa., July 12, 2022) – In a litigated matter, a jury found against an RIA firm and its principal on charges that they failed to disclose conflicts of interest and failed to seek best execution in connection with recommendations of certain unit investment trusts (UITs) to fee-based advisory clients. The SEC alleged that the defendants recommended more expensive versions of the UITs when less expensive versions of the same securities were available, and that most of the additional charges were received by a related broker-dealer.
In the Matter of Equitable Financial Life Insurance Company, Rel. 33-11083 (July 18, 2022) – In a settled matter, a New York-based insurance company was charged with making materially misleading statements and omissions to 1.4 million investors in connection with variable annuity investments in 403(b) or 457(b) retirement plans, mostly for K-12 public school employees. Respondent’s annuity account statements gave investors the false impression that all fees charged during the period were detailed in account statements when the statements excluded asset-based fees on the annuity and underlying mutual funds, which were the most significant fees. Claims under Securities Act Sections 17(a)(2) and (3). Remedies included cease-and-desist and civil penalty of $50m. Respondent agreed to an undertaking to amend its account statements and provide notice of the settlement to all affected customers.
In the Matter of Private Advisor Group, LLC, Rel. IA-6069 (July 21, 2022) – In a settled matter, a New Jersey based RIA was charged with failing to provide full disclosure of conflicts of interest related to its use of mutual fund share classes offered through a no transaction fee (“NTF”) program. Under its arrangement with clients in wrap accounts, the RIA was responsible for paying trading costs and it deducted those costs from IARs’ compensation. The RIA and its IARs were charged with avoiding transaction fees by investing certain clients’ assets in mutual fund classes from a NTF program, even though other lower-cost share classes of the same funds were available to clients for a transaction fee. The RIA was also charged with breaching its duty of care by failing to undertake an analysis to determine whether the mutual fund classes it selected were in the best interests of its advisory clients. Charges under Advisers Act Sections 206(2) and 206(4) and Rule 206(4)-7. Remedies include cease-and-desist and a civil penalty of $5.8m. Respondent agreed to an undertaking to review and update all relevant disclosure documents, policies, and procedures, evaluate whether existing clients should be moved to a lower-cost share class or fund and move clients as necessary, and notify affected clients.
In the Matter of Mesirow Financial Investment Management, Rel. 34-95351, Rel. IA-6070 (July 22, 2022) – In a settled matter, an RIA was charged with failing to make full disclosure of compensation paid to an affiliated broker-dealer in connection with recommendations of mutual funds that paid revenue sharing when lower-cost classes of the same funds were available. The firm was also charged with failing to disclose related conflicts of interest and failing to seek best execution. Charges under Advisers Act Sections 206(2), 206(4) and Rule 206(4)-7. Remedies included cease-and-desist, censure, disgorgement of $488,000 plus interest, and a civil penalty of $170,000.
In the Matter of Aegis Capital Corp., Rel. 33-11086, Rel. 34-95390, Rel. IA-6076, Rel. LR-25459 (July 28, 2022) – In two settled matters, and one ongoing litigated matter, the SEC charged a Florida-based broker dealer and investment adviser, its former managing director, and one of its former registered representatives for recommending investments in variable interest rate structured products (“VRSPs”) to customers whose risk tolerance, investment objectives, and financial situation and needs were not well-suited for such a risky investment, as well as related supervisory, policy and procedure, and recordkeeping deficiencies. The firm was charged with violations of Securities Act Section 17(a)(2) and 17(a)(3), Rules 17a-3(a)(17)(i)(B)(1) and 17a3(a)(17)(i)(B)(3), and the Exchange Act Sections 10(b) and 17(a)(1) and Rules 10b-5 and 17a-3, and agreed to a settlement that included a censure, disgorgement of $166,000 plus interest, and a civil penalty of $2.3m. The former registered representative was charged with violations of Securities Act Section 17(a)(2) and (3) and agreed to a settlement that included disgorgement of $27,000 plus interest, a civil penalty of $25,000, and a 12-month suspension. The SEC filed a complaint against the managing director in the Southern District of Florida for violations of Securities Act Section 17(a), the Exchange Act Section 10(b), and Rule 10b-5. Commissioner Peirce dissented from the settlement order, stating that by giving cooperation credit to Aegis for adopting a policy prohibiting the use of VRSPs in retail accounts, the Order “inadvertently suggests that certain investment products, categorically, should be unavailable to certain types of investors.”
In the Matter of JP Morgan Securities, Rel. 34-95367, Rel. IA-6073 (July 27, 2022) and In the Matter of UBS Financial Services, Rel. 34-95368, Rel. IA-6074 (July 27, 2022) and In the Matter of TradeStation Securities, Rel. 34-95369 (July 27, 2022) – In settled matters, each broker-dealer firm was charged with violating Reg S-ID, the SEC’s Identity Theft Red Flags Rule. According to the SEC, the firms’ identity theft prevention programs did not include reasonable policies and procedures to identify relevant red flags of identity theft in connection with customer accounts, to respond to detected red flags, or to ensure periodic updates concerning changes in identity theft risks. The firms were also cited for failure to oversee third party service providers, failing to review all types of customer accounts, failure to adequately involve their boards of directors, and failure to train employees. Remedies included censure, cease-and-desist, and penalties of $1.2m (JP Morgan), $925,000 (UBS) and $425,000 (TradeStation).
SEC v. Schoengood, et al,. Lit. Re. No. 25446 (July 18, 2022) – In a litigated matter, the court approved a settlement with a stock promoter. The stock promoter was charged with concealing his role as a promoter of an issuer’s stock by entering into a sham business consulting contract with the issuer, in order to be able to sell the shares he received as compensation for his promotional activities without complying with Securities Act registration and disclosure requirements. The defendant was charged with violations of Exchange Act Section 10(b) and Rule 10b-5, and Securities Act Sections 17(a) and 5. The settlement remedies included an injunction, penny stock bar, disgorgement of $125,000 plus interest, and a civil penalty of $100,000. The case remains pending against the issuer and its CEO.
In the Matter of Health Insurance Innovations, Inc., now named Benefytt Technologies, Inc., and Gavin D. Southwell, Rel. 33-11084, Rel. 34-95323 (July 20, 2022) – In a settled matter, a Tampa based insurance industry technology company and its former CEO were charged with falsely stating to investors that 1) the company held its insurance distributors to high compliance standards; 2) the company had a 99.99% consumer satisfaction rating; and 3) state departments of insurance received very few consumer complaints about the company. According to the SEC, the company was aware of thousands of complaints about its insurance distributors. Charges under Securities Act Sections 17(a)(2) and (3), Exchange Act Section 13(a) and Rules 12b-20, 13a-1, and 13a-11. Remedies included cease-and-desist, $11m in civil penalties (company), $750,000 in civil penalties (CEO), $320,000 in disgorgement, and $41,511 in prejudgment interest (CEO).
Issuer Reporting/Audit and Accounting/Compliance
SEC v. Rio Tinto plc, et al., No. 21-2042-cv (2d Cir., July 15, 2022) – In a litigated matter with significant implications, the Second Circuit held that claims of participation in a fraudulent scheme require the SEC to allege that the defendant took actions beyond misrepresentations or misleading omissions. This ruling applies to so-called “scheme liability claims” under Securities Act subsections 17(a)(1) and (a)(3) and subsections (a) and (c) of Exchange Act Rule 10b-5, and it reaffirms and re-emphasizes the prior Second Circuit holding in Lentell v. Merrill Lynch, 396 F. 3d 161 (2d Cir., 2005). The SEC argued that the Supreme Court’s decision in Lorenzo v. SEC 139 S. Ct. 1094 (2019), required a different result. In Lorenzo, the Court held that a party who disseminates the false statement of another person, with knowledge of its falsity, could be charged with the scheme liability. Lorenzo thus permits the SEC to charge a knowing disseminator of a false statement with fraud, even if the person did not “make” the false statement themselves. In Rio Tinto, the Second Circuit held that the ruling in Lorenzo was not inconsistent with Lentell, because the defendant’s knowing dissemination of the false information was an additional act, beyond the making of a false or misleading statement, in furtherance of a fraudulent scheme.
In the Matter of Arcangelo Loberto, CPA, CA Rel AAER-4316, Rel. 34-95224 (July 8, 2022) – The Commission issued an order reinstating the respondent to practice as an accountant before the Commission. The respondent had been suspended on March 30, 2009, for a period of at least five years in connection with the grant of backdated in-the-money options to executives of Research in Motion, Inc.
SEC v. Ishan Wahi et al., No. 2:22-cv-01009 (W.D. Wash. filed July 21, 2022) – In a litigated matter, the Commission charged a former Coinbase product manager, his brother, and his friend with insider trading. The complaint alleges that, while employed at Coinbase, one of the largest crypto asset trading platforms in the U.S., defendant Ishan Wahi helped to coordinate the platform’s public listing announcements and would repeatedly tip the timing and content of upcoming listings to his brother and friend. The alleged scheme generated profits totaling more than $1.1m. Charges under Exchange Act Section 10(b) and Rule 10b-5. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York also announced criminal charges against all three individuals.
SEC v. Sung Mo Jun, et al., Lit. Rel. No. 25438 (July 6, 2022) – In a litigation settlement, the district court entered final judgments against the remaining four of five defendants charged in a scheme to trade on confidential information about Netflix’s subscriber growth data in advance of earnings announcements. Three defendants were Netflix employees, and two were tippees. In parallel proceedings, the defendants were ordered to forfeit over $3m, three of the defendants received prison sentences ranging from 13 to 24 months, and one received three years’ probation.
SEC v. Tavlin, et al., Lit. Rel. No. 25439 (July 7, 2022) – In a litigated matter, the SEC charged a former vice president of Mazor Robotic, Ltd with tipping two friends who traded in advance of Mazor’s announcement that it would be acquired by Medtronic plc. The vice president allegedly later sought and received a kickback from the traders. The SEC charged defendants with violations of Exchange Act Section 10(b) and Rule 10b-5, and seeks injunctive relief, disgorgement, and civil penalties.
In the Matter of Hugh Lee Sweeney, Rel. 33-11079, Rel. 34-95204 (July 7, 2022) – Catabasis Pharmaceutical clinical trial results. In a settled matter, the SEC charged a consultant engaged by Catabasis Pharmaceutical, Inc. with trading in advance of a public announcement of adverse results of a muscular dystrophy drug trial, in violation of a confidentiality agreement. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included cease-and-desist, disgorgement of approximately $58,000 plus interest, and a civil penalty of approximately $58,000.
SEC v. Klein, et al., Lit. Rel. No. 25458 (July 28, 2022) – In a partially settled matter, the SEC charged a scientific advisor for Ampio Pharmaceuticals with providing adverse clinical trial results to his brother in advance of the public announcement; the brother and the brother’s son-in-law were charged with trading on that information. Charges under Exchange Act Section 10(b) and Rule 10b-5. The scientific advisor agreed to a settlement including an injunction and a civil penalty of $226,000. Claims remain pending against the other defendants.
SEC v Davis, 2:20-cv-03271-SB-KS (C.D.Cal. July 29, 2022) – In a litigated matter, a jury found against defendant, a former Nordson vice president, on charges that he traded in advance of favorable earnings announcements involving Nordson’s largest division. The Court ordered that the defendant disgorge his trading profits net of capital gains taxes paid ($694,835.25), plus prejudgment interest, and ordered a $100,000 penalty, far less than the SEC’s request for a three-times penalty.
SEC v. Goel, et al., Lit. Rel. No. 25449 (July 25, 2022) – In a litigated matter, the SEC charged a former employee of a large investment bank with tipping a friend, a foreign exchange trader at another large financial institution, regarding impending acquisitions of four companies which were clients of the investment bank. The friend allegedly traded on the information and the two split the profits. Charges under Exchange Act Section 10(b) and Rule 10b-5.
SEC v. Buyer, et al., Lit. Rel. No. 25448 (July 25, 2022) – In a litigated matter, the SEC charged a former US congressman, and later principal of a business consulting firm, with trading in advance of impending corporate acquisitions that he learned of from consulting clients. The SEC further alleges that the defendant “spread” the purchases across accounts of his relatives and an acquaintance. Charges under Exchange Act Section 10(b) and Rule 10b-5.
SEC v. Bhardwaj, et al., Lit. Rel. No. 25450 (July 26, 2022) – In a litigated matter, the SEC charged the former Chief Information Security Officer of Lumentum with trading, and with tipping four friends who also traded, in advance of the announcements of two different corporate acquisitions by Lumentum. The SEC charged defendants with violations of Exchange Act Section 10(b) and Rule 10b-5, and seeks injunctive relief, disgorgement, and civil penalties.
SEC v. Markin, et al., Lit. Rel. No. 25451 (July 26, 2022) – In a litigated matter, the SEC charged the romantic partner of a law firm associate with secretly reviewing deal documents regarding a planned acquisition by the law firm’s client. The romantic partner allegedly traded on the information and tipped a friend, who also traded and gave a Rolex watch in thanks for the information. Charges under Exchange Act Section 10(b) and Rule 10b-5.
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