Nutter Securities Enforcement Update: November 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.
Jarkesy v. SEC, No. 20-61007 (5th Cir., Oct. 21, 2022) – The Fifth Circuit denied the SEC’s request for rehearing en banc of the ruling by a three-judge panel that the SEC administrative enforcement proceeding violated the defendants’ constitutional rights. In an administrative proceeding, the SEC had found the defendants liable for violating the Advisers Act by overvaluing assets under management and thereby overcharging their clients. The Court of Appeals vacated the SEC decision on the grounds that the SEC proceeding violated the defendants’ Seventh Amendment right to a jury trial, that Congress unconstitutionally delegated legislative power to the SEC, and that statutory removal restrictions on SEC Administrative Law Judges violate Article II of the Constitution by failing to give the President sufficient control over the ALJ’s exercise of executive functions. Six judges dissented from the rehearing denial.
Community Fin. Serv. Assoc. of America, Ltd. v. CFPB, No. 21-50826 (5th Cir., Oct. 19, 2022) – In a case that could have a significant impact on the securities industry, the Fifth Circuit held that the self-funding mechanism of the Consumer Financial Protection Bureau was unconstitutional because it deprived Congress of its constitutional power to appropriate funds. The court further held that because the unconstitutional funding mechanism funded the agency’s rulemaking efforts, the resulting rule before the court, the Payday Lending Rule, is invalid.
Investment Advisers/Investment Companies
SEC v. Springer, et al., Lit. Rel. No. 25557 (Oct. 14, 2022) – In a settled litigation matter, the SEC obtained a final judgment against an individual investment adviser and his firm on charges of deceptive client solicitation practices. The defendants were charged with, among other things, falsely claiming that they did not receive any incentives to recommend particular investment products. Charges under Advisers Act Sections 206(1) and (2). Remedies included an injunction, industry bar, and a $400,000 penalty.
SEC v. Cetera Advisors, et al., Lit. Rel. No. 25564 (Oct. 24, 2022) – In a settled litigation matter, the SEC obtained a final judgment against two investment advisory firms on charges that they failed to properly disclose conflicts of interest related to the firms’ receipt of mutual fund 12b-1 fees, administrative fees, and trade mark-ups. Charges under Advisers Act Sections 206(2) and 206 (4) and Rule 206(4)-7. Remedies included an injunction, disgorgement of $5.6m plus prejudgment interest, and a civil penalty of $1m each.
SEC v. Sugranes, et al., Lit. Rel. No. 25565 (Oct. 25, 2022) – In a settled litigation matter, the SEC obtained a final judgment against two individual representatives and two related investment advisory firms on charges that the defendants engaged in a cherry-picking scheme. The individuals allegedly diverted profitable trades of approximately $4.6 million to the accounts of one defendant’s parents, leaving unprofitable trades in the accounts of other clients. Charges against Sugranes and the firms under Securities Act Sections 17(a)(1) and (3), Exchange Act Section 10(b) and Rules 10b-5(a) and (c), and Advisers Act Sections 206(1) and (2); relief included disgorgement of $4.6m, partially on a joint and several basis with the other parties, plus prejudgment interest, and civil penalties of $500,000 for Sugranes and $250,000 for each firm. Charges against Garcia under Securities Act Section 17(a)(3) and Advisers Act Section 206(2); relief included disgorgement of $225,000 and a civil penalty of $100,000.
UBS Securities LLC, FINRA AWC Nos. 2016050211701 and 2017053779201 (Oct. 3, 2022) – In settled matters, FINRA charged UBS with violations of Reg SHO. In the first proceeding, UBS was charged with violating Rule 204 of Regulation SHO and FINRA Rule 2010, by improperly using revocable volume-weighted average price (VWAP) transactions or limit orders to address buy-in obligations for failure-to-deliver positions; when releasing shares from segregation in connection with customer long sales, erroneously considering those shares available to close out a fail-to-deliver, causing undercalculation of shares required to borrow or purchase to comply with Rule 204(a); and using order management systems that did not restrict all short sales in securities with an unsatisfied close-out requirement, in violation of Rule 204(b). Remedies included censure and a $2.5m fine. In the second proceeding, UBS was charged with improperly including securities positions of a foreign affiliate when calculating the net positions of four independent trading units, in violation of Reg SHO Rule 200(f) and FINRA Rule 2010. Remedies included censure and a $520,000 fine.
Barclays Capital, Inc., FINRA AWC No. 2014041808601 (Oct. 4, 2022) – In a settled matter, FINRA charged Barclays with violating its duty of best execution by routing customers’ electronic equity orders to its own alternative trading system without considering whether other venues could provide better prices or execution speed. Charges under FINRA Rules 5310, 3110, and 2010. Remedies included censure and a $2m fine.
Scotia Capital (USA) Inc., FINRA AWC No. 2019061945201 (Oct. 12, 2022) – In a settled matter, FINRA charged Scotia Capital with overreporting its short interest position over a seven-year period by erroneously including non-reportable short positions. These positions did not result from short sales as defined in the SEC’s Reg SHO and were not transactions marked long due to the firm’s or customer’s net long position at the time of the transaction. Charges under FINRA Rules 4560 and 2010. Remedies included censure and a $300,000 fine.
Dealerweb, Inc., FINRA AWC No. 2020067548401 (Oct. 17, 2022) – In a settled matter, Dealerweb, a specialist in executing fixed income securities orders for other broker-dealers, was charged with inaccurately reporting transactions in TRACE-eligible securities without the required “no remuneration” indicator, in violation of FINRA Rules 6730(d) and 2010. Remedies included censure and a $100,000 fine.
E1 Asset Management, Inc., FINRA AWC No. 2018059121201 (Oct. 18, 2022) – In a settled matter, El Asset Management and a supervisor were charged with failing to reasonably supervise the markups the firm charged to one registered representative’s clients; markups of 3.75% were charged on 80 bond transactions when median markup was 0.15%. Charges under FINRA Rules 3110, 2121, and 2010. Remedies included censure and restitution of approximately $38,000 for the firm; a month suspension and a fine of $5,000 for the supervisor.
In the Matter of Kimberly Kardashian, Rel. 33-1116 (Oct. 3, 2022) – In a settled matter, well-known media personality Kim Kardashian was charged with failing to disclose the fact that she was compensated for promoting a crypto asset security on her Instagram account and the amount of that compensation. Kardashian promoted EthereumMax’s offering of EMAX tokens on her Instagram account, which had about 225 million followers. Charges under Securities Act Section 17(b). Remedies included cease-and-desist, disgorgement of $250,000 plus interest, and a civil monetary penalty of $1m.
SEC v. Mauricio Chavez, et al., Lit. Rel. No. 25547 (Oct. 3, 2022) – In a litigated matter, the SEC charged Mauricio Chavez, Giorgio Benvenuto, and CryptoFX, LLC with engaging in a multi-million dollar securities fraud being directed at Latino investors. The SEC alleges that Chavez was running a Ponzi scheme and that rather than using investor funds for crypto trading, he used more than 90% of the funds to pay fake returns to investors, support his lifestyle, and purchase and develop real estate that he and Benvenuto controlled. Charges under Securities Act Sections 5(a), 5(c), and 17(a), Exchange Act Section 10(b) and Rule 10b-5, and Investment Advisers Act Sections 206(1) and 206(2). Remedies sought include permanent injunctions, civil penalties, and disgorgement of ill-gotten gains with interest, as well as bars against Chavez and Benvenuto from serving as officers or directors of any public company.
Issuer Reporting/Audit and Accounting/Directors and Officers/Compliance
SEC v. Davis, Lit. Rel. No. 25549 (Oct. 4, 2022) – In a final settlement of a larger litigation, the SEC obtained a consent judgment against the former CFO of the law firm Dewey & LeBoeuf on charges of falsifying financial statements used in a $150 million private bond issuance in 2010. Charges under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Remedies included an attorney practice bar, director and officer bar, injunctive relief, and disgorgement of approximately $86,000 plus interest.
Interlocking Directorate Enforcement Matters (Oct. 19, 2022) – The Justice Department announced that seven directors had resigned from corporate board positions at five companies. The Antitrust Division had expressed concern that each director held director positions at two competing firms, in violation of the Clayton Act’s prohibition on interlocking directorates. Each director resigned from one of the two board positions.
In the Matter of NewAge, Inc., Rel. 33-11120, Rel. 34-96106 (Oct. 19, 2022) and SEC v. Willis, No. 1:22-cv-02744 (D. Colo.), Lit. Rel. No. 25562 (Oct. 18, 2022) – In a settled matter and related ongoing litigation, the SEC charged NewAge, Inc., a developer and global seller of organic and healthy products, and its former CEO Willis with making false and misleading public statements about its business operations and activities, including its alleged development of a portfolio of CBD-infused beverages and its purported product distribution deals. The SEC alleged that NewAge’s CEO and member of its Board of Directors orchestrated and disseminated the false and misleading public statements to create the illusion that NewAge was a pioneer in the potentially lucrative CBD beverage market. The settled charges against the company were under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Remedies included cease-and-desist; the company also agreed to an undertaking to cooperate fully with the Commission with respect to this proceeding and any related judicial or administrative proceeding or investigation. The litigation against the CEO is ongoing.
In the Matter of Mattel, Inc., Rel. 33-11122, Rel. 34-96126, AAER-4355 (Oct. 21, 2022) – In a settled matter, the SEC charged Mattel, Inc. with understating their tax-related valuation allowance for the third quarter of 2017 by $109 million (a 15% understatement) and overstating the tax expense for the fourth quarter of 2017 by the same amount (a 63% overstatement). The SEC further alleged that Mattel had no internal control related to calculating a valuation allowance. In determining to accept Mattel’s offer, the Commission considered Mattel’s prompt remedial acts and cooperation. Charges under Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Rules 12b-20, 13a-1, 13a-11, and 13a-13. Remedies included cease-and-desist, and a civil money penalty of $3.5m.
In the Matter of Cronos Group, Inc., Rel. 33-11123, 34-96137, AAER-4357 (Oct. 24, 2022) and In the Matter of William Hilson, CPA, Rel. 33-11124, 34-96138, AAER-4358 (Oct. 24, 2022) – In a settled matter, the SEC charged the respondent, a cannabis distributor, and its former Chief Commercial Officer with improper revenue recognition in connection with simultaneous purchase and sale transactions with the same parties, and with failing to timely record impairment charges in connection with goodwill and intangible assets of a U.S. reporting unit. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rules 10b5-(a) and 10b-5(c), Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 13a-13, 13a-16, and 12b-20. The settlement requires the company to retain an independent compliance consultant but, in consideration of the respondent’s self-reporting, cooperation, and remedial measures, the Commission did not impose a civil penalty against the company. Remedies against the CCO included cease-and-desist, and accountant and officer-and-director bars; in recognition of a payment under a separate Ontario Securities Commission settlement, no penalty was assessed.
SEC v. Woodward, Rel. 34-96153, AAER-43359 (Oct. 25, 2022) – In a settled matter, the SEC charged the respondent, a certified public accountant, with purchasing shares of PFSweb, Inc. while engaged to provide accounting services in connection with the possible sale of a business unit. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies included a practice bar, cease-and-desist, disgorgement of approximately $21,000 plus prejudgment interest, and a civil penalty in the same amount.
SEC v. Moraes, Civ. A. No. 1:22-cv-08343 (SDNY Oct. 28, 2022) – In a further development concerning a previously reported settlement, the district court approved the settlement in an order that criticized the SEC’s routine use of “no admit, no deny” clauses as a “continued and misguided practice of restraining speech.” The settlement involved charges that the defendant traded in advance of the sale of Dun & Bradstreet to a private investor group, based on information about the acquisition obtained from his employer, a member of the investor group, under a nondisclosure agreement. Charges under Exchange Act Section 10(b) and Rule 10b-5.
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