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10.01.2023 | 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.

Because of the large number of September cases, we have separated this month’s update into two parts. Part 1 includes Investment Advisers/Investment Companies, Broker-Dealers, Private Funds, and Market Manipulation. Part 2 includes Issuer Reporting/Audit and Accounting, Securities Offerings, Public Finance, Insider Trading, and FCPA.

Investment Advisers/Investment Companies

SEC Charges Five Advisory Firms for Custody Rule Violations, Press Rel. No. 2023-168 (Sept. 5, 2023) – In settled matters, the SEC charged five RIAs with violating the Custody Rule by failing to have audits performed; deliver audited financials to investors in a timely manner; and/or ensure a qualified custodian maintained client assets. Charges under Advisers Act Sections 204(a) and 206(4) and Rules 204-1(a) and 206(4)-2. Penalties included censure, cease-and-desist, and civil penalties ranging from $50k to $225k.

SEC Charges Nine Investment Advisers with Marketing Rule Violations, Press Release 2023-173 (Sept. 11, 2023) – In settled matters, the SEC charged nine RIAs with violating the recently amended Marketing Rule by advertising hypothetical investment performance to a “mass audience” (e.g., the firms’ public websites) without having adopted and implemented policies and procedures reasonably designed to ensure that the performance figures were relevant to the financial situations and objectives of the intended audiences. In addition, two firms were charged with failing to maintain copies of their advertisements. Charges under Advisers Act Section 206(4) and Rule 206(4)-1(d). Remedies included censure, cease-and-desist, and penalties of $50k to $175k.

In the Matter of True Capital Management, Rel. 34-98354, IA-6415 (Sept. 12, 2023) – In a settled matter, an RIA was charged with failing to register as a broker-dealer. The firm allegedly received transaction-based compensation from the issuers and from fund clients for arranging sales to its advisory clients of equity interests in unaffiliated companies that owned particular real estate properties. Charges under Exchange Act Section 15(a)(1). Remedies included censure, cease-and-desist, disgorgement of approximately $600k plus interest, and a $150k penalty.

In the Matter of YieldStreet, Inc., et al., Rel. 33-11230, IA-6414 (Sept. 12, 2023) – In a settled matter, an RIA and its parent were charged with failing to disclose material information in connection with a private fund’s issuance of notes to finance ship deconstruction. The collateral for the loans included a first mortgage lien on each vessel and the aggregate value of the vessel. The firm allegedly proceeded with the fund offering after learning that some of the ships could not be located or were already broken up, resulting in the firm’s subsequently being unable to foreclose or mitigate investor losses. Charges under Securities Act Sections 17(a)(2) and 17(a)(3), Advisers Act 206(4) and Rule 206(4)-8. Remedies included censure, cease-and-desist, disgorgement of approximately $900k plus interest (partially offset by fee waivers), and a $1m penalty.

In the Matter of Artemis Wealth Advisors, LLC, Rel. 34-98381, IA-6421 (Sept. 13, 2023) – In a settled matter, an RIA was charged with failing to make quarterly Form 13F filings required of advisers that have investment discretion on over $100 million in exchange-traded securities over an approximately five-year period. Charges under Exchange Act Section 13(f)(1) and Rule 13f-1. Remedies included censure, cease-and-desist, and a $150k penalty.

In the Matter of GlennCap LLC, et al., Rel. 33-11234, 34-98392, IA-6422, IC-34997 (Sept. 14, 2023) – In a settled matter, an RIA and its principal owner were charged with “cherry-picking” by allocating a disproportionate number of trades with positive first-day returns to favored clients and accounts controlled by the adviser. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, and Advisers Act Sections 206(1) and 206(2). Remedies included censure (firm), bar (principal), disgorgement of approximately $2.75m plus interest, and a $500k penalty.

In the Matter of Summit Planning Group, Inc. and Richard Urciuoli, Rel. IA-6423 (Sept. 18, 2023) – In a settled matter, the SEC charged an RIA and its owner with investing client assets in a complex volatility-linked exchange-traded product (ETP) called VXX for extended periods without a reasonable basis. According to the Order, VXX is not meant for extended holding and Summit did not review the disclosure documents explaining these risks before investing in VXX for clients. The client accounts experienced losses of over $443,809. Charges under Advisers Act Section 206(2), 206(4), and Rule 206(4)-7. Remedies included cease-and-desist, censures, disgorgement of $8,476.36, prejudgment interest, and civil penalties of $100k.

In the Matter of Clark Reiner, Rel. 33-11237, 34-98432, IA-6425, IC-34999 (Sept. 19, 2023) – In a settled matter, the SEC charged the manager of Woodstock Capital, LLC, an unregistered investment adviser, for making false statements to two investors - a charter school and a real estate fund - who had invested in Woodstock Capital Partners, L.P. According to the SEC’s Order, the unregistered investment adviser provided inaccurate information to these investors about the investment strategy of Woodstock Master Capital, Ltd., the fund where Woodstock Partners placed its assets. The Order also states the unregistered investment adviser claimed that the fund would invest in government bonds and other debt securities, while it was actually involved in offshore trading, primarily focusing on derivative products. As a result, the Order found the two investors suffered losses exceeding $4 million of their respective $5 million capital investments. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5(b), and Advisers Act Section 206(4) and Rule 206(4)-8. Remedies included cease-and-desist, $24,995 in disgorgement, prejudgment interest, a $200k civil penalty, and an industry bar.

SEC v. Concord Management LLC et al., Press. Rel. 2023-186 (Sept. 19, 2023) – In a litigated matter, the SEC charged Concord Management LLC and its owner and principal Michael Matlin with operating as unregistered investment advisers. The complaint alleges that Concord and Matlin were responsible for supervising and managing a single client’s investments in United States-based funds and also arranged for investments worth billions of dollars in private equity and hedge funds on behalf of the client, a wealthy former Russian official, requiring Concord and Matlin to register as investment advisors, which neither did. Charges under Advisers Act Section 203(a). Remedies sought include injunctive relief, disgorgement with prejudgment interest, and civil penalties.

SEC v. Lufkin Advisors, LLC and Chauncey Forbush Lufkin III, Lit. Rel. 25839 (Sept. 20, 2023) – In a litigated matter, the SEC filed charges against an RIA and its President, Chief Compliance Officer, and majority owner. The SEC alleges an ongoing fraud involving failure to disclose a loss of control of crypto assets held for at least a year, improper investments with the owner’s spouse’s company without adequate disclosure to private fund investors, failure to account for withdrawals from the private funds, inadequate monitoring of fund investments, and a general neglect of their fiduciary duty to manage entrusted assets. Charges under Advisers Act Section 206(1); Section 206(2); Section 206(4), Rule 206(4)-8 and Advisers Act Section 207, Section 206(4) and Rule 206(4)-2; Rule 206(4)-7; Section 204A and Rule 204A-1; Section 204(a) and Rule 204-2(a); and Section 204(a).

In the Matter of Elsa M. Doyle, Rel. IA-6429, IC-6429 (Sept. 22, 2023) – In a settled matter, the SEC charged a portfolio manager with unlawful pre-arranged cross trades involving five money market funds, including four registered investment companies she managed. The Order alleges that the portfolio manager conducted cross trades between the funds, some of which involved direct engagement with a third-party broker-dealer to sell and repurchase securities between different funds. According to the Order, the portfolio manager also instructed a trader at a financial institution on how to execute such cross trades, costing the funds approximately $39,000. Charges under Investment Company Act Section 17(a)(1) and 17(a)(2). Remedies included cease-and-desist and a $30k civil penalty.

In the Matter of American Infrastructure Funds, LLC, Press. Rel. No. 2023-193, Rel. IA-6428 (Sept. 22, 2023) – In a settled matter, the SEC charged an RIA with both conflict disclosure violations and duty of care breaches by accelerating portfolio company monitoring fees, transferring a private fund asset from funds nearing the end of their term to a new fund, and loaning money from one private fund to another private fund advised by an affiliate. Charges under Advisers Act Section 206(2), 206(4) and Rules 206(4)-8 and 206(4)-7. Penalties included cease-and-desist, censure, a $1.2m penalty, and $445,460 in disgorgement and prejudgment interest.

In the Matter of Wellesley Asset Management, Inc., Rel. IA-6433 (Sept. 25, 2023) – In a settled matter, an RIA was charged with violations of the Advisers Act advertising rule. The firm was charged with advertising the performance of a convertible bond index that it had created without fulling disclosing the methodologies it used to create the index, specifically the inclusion of hypothetical performance. Charges under Advisers Act Sections 206(2) and 206(4) and Rules 206(4)-1 and 206(4)-7. Remedies included cease-and-desist, censure, and a $1m civil penalty.

In the Matter of DWS Investment Management Americas, Inc., Rel. IA-6431; In the Matter of DWS Investment Management Americas, Inc., Rel. IA-6432 (Sept. 25, 2023) – In separate settled matters, an RIA was charged with failing to implement certain provisions of its advertised ESG investment program and with failing to implement a reasonably designed mutual fund anti-money laundering program. In the ESG matter, the firm was charged with failing to ensure that all investment personnel understood, implemented, monitored, and documented compliance with its advertised ESG program’s requirements. In the AML matter, the SEC charged that the DWS mutual funds improperly relied on a sub-transfer agent AML system that was not regularly updated, closed most alerts without review, and failed to maintain all customer transactions. The firm was charged with causing the funds’ violations of Investment Company Act Rule 38a-1. The firm’s remedial efforts and cooperation were acknowledged. ESG charges under Advisers Act Sections 206(2) and 206(4) and Rules 206(4)-7 and 206(4)-8. Remedies included censure, cease-and-desist, and a $19m civil penalty. AML remedies included cease-and-desist and a $6m civil penalty without censure.

SEC v. MacWright, et al., Lit. Rel. 25849 (Sept. 25, 2023) – In a settled enforcement action, an RIA and its principal owner were charged with perpetrating a cherry-picking scheme. The complaint alleges that the RIA disproportionally allocated to a preferred account trades that had increased in value on the day they were executed. Trades that had decreased were allegedly allocated to the accounts of others, including accounts owned by the owner or his family members. Charges under Exchange Act Section 10(b) and Rule 10b-5(a) and (c), Advisers Act Sections 206(1), 206(2) and 206(4) and Rule 206(4)-7. Remedies included a permanent injunction, the owner’s disgorgement of over $1.1m plus prejudgment interest, and civil penalties of $400k (owner) and $150k (firm).

In the Matter of AssetMark, Inc., Press Rel. 2023-199, Rel. IA-6434 (Sept. 26, 2023) – In a settled matter, the SEC announced charges against an RIA related to undisclosed conflicts of interest because it failed to advise clients that it helps set the fee that its affiliate custodian received for operating the cash sweep program and that fee reduced the amounts of interest paid to those clients. The Order further alleges that the RIA received custodial support payments based on assets held in certain no-transaction-fee mutual funds, but failed to disclose to clients that, in some cases, there were lower-fee share classes with lower expense ratios available to clients which would have not resulted in payments to the RIA. Charges under Advisers Act Section 206(2), 206(4) and Rule 206(4)-7. Remedies included cease-and-desist, censure, civil penalty of $9.5m, disgorgement, prejudgment interest of more than $8.5m, and undertakings to revise disclosure documents and policies and procedures.

In the Matter of FSC Securities Corp. Rel. IA-6441; In the Matter of Osaic Wealth, Inc. Rel. IA-6442; In the Matter of Sagepoint Financial, Inc., Rel. IA-6443; In the Matter of Woodbury Financial Services Inc., Rel. IA-6444; (Sept. 28, 2023) – In settled matters, four RIAs were charged with violating the Custody Rule. Each of the firms worked with a clearing agent that held customer accounts. Because the firms’ customer agreements contained language, required by the clearing agent, that required the clearing agent to accept any instructions from the firm concerning the customer accounts, the firms were deemed to have custody of the customers’ assets. They failed to obtain verification of client funds and securities in those accounts by an independent public accountant, as required by the custody rule. Charges under Advisers Act Section 206(4) and Rule 206(4)-2. Remedies included censure, cease-and-desist, and civil penalties ranging of $100k each.

In the Matter of Apexium Financial LP, Rel. IA-6437 (Sept. 28, 2023) – In a settled matter, an RIA was charged for disclosing that it would manage a conflict of interest with an affiliated manager by documenting why it was in the clients’ best interest to use the affiliated firm, then failing to create such documentation, along with related policies and procedures violations. Claims under Advisers Act Sections 206(2) and 206(4) and Rule 206(4)-7. Remedies included cease-and-desist and a civil penalty of $150k.

In the Matter of Forepoint Capital LLC, Rel. IA-6438, AAER-4464 (Sept. 28, 2023) – In a settled matter, an RIA was charged with violating the Custody Rule by failing to timely deliver audited financials to investors. The firm was also charged with engaging in principal transactions with one of the funds it managed without providing the written disclosure before the transactions were completed and not properly disclosing other material conflicts of interest presented by the transactions. Charges under Advisers Act Sections 206(2), 206(3), and 206(4) and Rules 206(4)-2 and 206(4)-7. Remedies include censure and a civil penalty of $150k.

SEC v. Steven J. Jacobson and Advisor Resource Counsel, Lit. Rel. 25874 (Sept. 29, 2023) – In a litigated matter, an investment adviser representative was charged with using the RIA’s block account to cherry-pick profitable option trades for himself, his mother, and certain favored clients while allocating unprofitable trades to disfavored clients, and his former firm was charged with falsely stating in its ADV brochures that its allocation procedures would be fair and with failing to adopt policies and procedures to ensure fair trade allocations. Charges against the representative under Securities Act Section 17(a)(1), Exchange Act Section 10(b) and Rule 10b-5(a) and (c), and Advisers Act Sections 206(1) and 206(2). Charges against the investment adviser under Securities Act Section 17(a)(2) and Advisers Act Sections 206(2), 206(4), and 204(a) and Rules 206(4)-7, 204-2(a)(7), and 204-2(a)(14). Remedies sought include permanent injunctions, disgorgement with prejudgment interest, and civil penalties.

SEC v. Third Friday Management, LLC, et al., Lit. Rel. No. 25869 (Sept. 29, 2023) – In a litigated matter, the SEC charged an RIA and its owner with misrepresentations and omissions concerning a material change in the firm’s investment strategy. The SEC alleged that the defendants represented to investors that the fund used a strategy of “selling straddles on the S&P 500 over a portfolio of income generating securities” and failed to disclose that they changed its investment strategy and loaned more than $19 million to a distressed company that acquired and operated struggling hospitals. The complaint also alleged that the defendants misappropriated at least $4.7 million form the fund for personal use. The SEC seeks permanent injunctions, disgorgement, civil money penalties, conduct-based injunctions, and an officer-and-director bar.

In the Matter of Appomattox Advisory, Inc. and Oscar Gustavo Gil Vollmer et al., Rel. IA-6451 (Sept. 29, 2023) – In a settled matter, an RIA and its CEO were charged with making undisclosed withdrawals from the fund the advisor managed, totaling nearly $500,000, to pay the advisor’s operating expenses, including payments to the RIA’s CEO. Claims under Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 under the Advisers Act. Remedies included cease-and-desist, censure, suspension (12 months), and civil penalties of $150k for the RIA and $125k for the CEO.

In the Matter of D.E. Shaw & Co. L.P., Rel. 34-98641, IA-6452 (Sept. 29, 2023) – In a settled matter, an RIA was charged with violating whistleblower protection rules by requiring current employees and departing employees to agree to confidentiality provisions that did not include a carve-out for voluntary communications with regulators. Charges under Exchange Act Rule 21F-17(a). Remedies included a civil penalty of $10m.

Broker-Dealers

In the Matter of Simplex Trading, LLC, Rel. 34-98346 (Sept. 11, 2023) – In a settled matter, a registered broker-dealer was charged with executing short sales of millions of shares of the underlying stocks to hedge its proprietary options trading without locating shares of those stocks to borrow in improper reliance upon the bona-fide market making exception to the locate requirement of Rule 203(b)(1) of Regulation SHO. Charges under Rule 203(b)(1) of Reg SHO. Remedies included censure, cease-and-desist, and a $200k penalty.

SEC v. Virtu Financial, et al., Lit. Rel. 25827 (Sept. 12, 2023) – In a litigated matter, a broker-dealer and its parent company were charged with failing to wall off customer order execution data from its separate proprietary trading business because a database containing all post-trade customer order data was accessible to other parts of the company through widely-shared username and password credentials, creating the risk that the proprietary trading arm could anticipate and front-run customer orders. Charges under Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Section 15(g).

In the Matter of Pierre Economacos, Rel. 34-98418 (Sept. 18, 2023) – In a settled matter, the SEC charged a registered representative with failing to report suspicious transactions in a customer’s account to the firm’s AML group, resulting in a failure to timely file a SAR. According to the Order, the suspicious transactions involved a $50,000 wire transfer from the customer’s account to a relative’s account at another brokerage firm, followed by the relative’s significant financial activity, which was unusual based on past account history. The relative sent $280,000 back to the customer’s account shortly after the announcement of an acquisition that affected their stock prices. Charges under Exchange Act Section 17(a) and Rule 17a-8. Remedies included cease-and-desist and a $20k civil penalty. Commissioners Peirce and Uyeda dissented, on the ground that the Order failed “to explain adequately how and why a loan and subsequent repayment between close family members amounts to suspicious activity under the Treasury’s SAR rule.”

In the Matter of Carl M. Hennig, Inc., Rel. 34-98478 (Sept. 22, 2023) – In a settled matter, the SEC charged a broker-dealer with violating Regulation Best Interest (Regulation BI) by failing to have policies that clarified the factors or criteria to consider when making recommendations or assessing their alignment with the customer’s best interest, that had sufficient information about fees associated with brokerage services, that specified how or when customer disclosures would be updated, or that provided guidance on identifying, disclosing, mitigating, or eliminating conflicts of interest. The Order further noted that the broker-dealer had failed to update these procedures following FINRA and SEC examinations. Charges under Exchange Act Rule 15l-1(a)(1). Remedies included cease-and-desist, censure, and $50k civil penalty.

SEC v. J.H. Darbie & Co., Inc., Lit. Rel. 25844 (Sept. 22, 2023) – In a litigated matter, a final consent judgment was entered against a brokerage firm for its alleged failure to file SARs related to high volume transactions involving low-priced securities (penny stocks) in over-the-counter markets. According to the SEC’s complaint, the brokerage firm neglected to investigate and report numerous suspicious transactions, even when these transactions raised red flags specified in their anti-money laundering policies, procedures, and regulatory guidance. Charges under Exchange Act Section 17(a) and Rule 17a-8. Remedies include a final judgment consisting of a cease-and-desist order, a $125k civil penalty, and retention of an independent anti-money laundering compliance consultant.

In the Matter of Citadel Securities, LLC, Press Rel. No. 2023-192, Rel. No. 34-98482, Sept. 22, 2023) – In a settled matter, the SEC charged Citadel Securities LLC with violating the order-marking requirements of Regulation SHO. The Order alleges that during a five-year period Citadel Securities marked millions of orders inaccurately, denoting certain short sales were long and vice versa. The inaccurate marks were due to a coding error in Citadel Securities’ automated trading system, causing it to provide inaccurate data to regulators according to the Order. Charges under Reg SHO Rule 200(g). Penalties include censure, cease-and-desist, a $7m penalty, and remedial measures including a written certification the coding error has been fixed and review of the firm’s computer programming involved in relevant transactions.

In the Matter of Goldman Sachs & Co. LLC, Press Rel. No. 2023-191, Rel. 34-98479, IA- 6427 (Sept. 22, 2023) – In a settled matter, the SEC charged Goldman Sachs with providing deficient securities trading information, or blue sheet data, to the SEC. The Order alleges that Goldman made more than 22,000 deficient blue sheet submissions, for at least 163 million transactions, over approximately 10 years when the firm allegedly omitted responsive transactions, made submissions with inaccurate information about execution times, transaction types, ticker symbols and transaction prices, and reported aggregate rather than individual execution data for certain foreign affiliates. Charges under Exchange Act Section 17(a)(1) and Rules 17a-4(j) and 17a-25. Remedies included censure, cease-and-desist, and a $6m penalty.

In the Matter of Fieldman Rolapp & Associates, Inc. et al., 34-98510 (Sept. 25, 2023) – In a settled matter, a registered municipal advisor and its principal were charged with breaching their duty of care when providing advice to a California city about cost analyses of funding options for a community project. The advisor’s model for calculating the net present value of costs of the different financing options contained flawed assumptions that a 30-year 100% debt option would be the least expensive option when, in fact, other options would have been less expensive on a net present value basis. Charges under Exchange Act Section 15B(c)(1), MSRB Rule G-17, MSRB Rule G-42(a)(ii). Remedies included cease-and-desist, disgorgement of $56,548.50 and prejudgment interest of $11,368.77, and civil monetary penalties of $60k to the advisor and $30k to the principal.

SEC v. Long, et al., Lit. Release No. 25872 (Sept. 28, 2023) – In a litigated matter, the SEC charged that a trader and two entities he controls purchased convertible notes from microcap issuers, converted those notes into shares of stock at a large discount from the market price, and sold those shares into the market at a significant profit. The complaint alleges that, in total, the defendants sold nearly six billion newly-issued microcap stock shares into the market and made at least $20 million in profits. The SEC further alleges that, at the time of the conduct, the defendants were not registered as dealers, avoiding regulatory oversight and financial reporting.

SEC v. Michael Blumer, John Kuprianchik, David Page, Steven Thompson, and Joseph Todaro, Lit. Rel. 25863, (Sept. 28, 2023) – In a litigated matter, the SEC filed charges against five registered representatives of Salomon Whitney LLC (“SW Financial”) for advising sixteen retail customers to pursue a short-term, high-volume investment strategy, allegedly without a reasonable basis. According to the SEC’s complaint, these individuals recommended and executed over 2,000 trades in their clients’ accounts, and that the high volume of transactions and attendant commissions and fees made it virtually impossible for these customers to achieve a profit in their accounts. Charges under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5, as well as Regulation Best Interest. The SEC seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties.

In the Matter of Salomon Whitney LLC, Rel 34-98619 (Sept. 28, 2023) – In a settled matter, the SEC charged a broker-dealer with violating Reg BI by recommending and executing more than 2,000 trades in customers’ accounts where, according to the SEC, the high volume of transactions and attendant commissions and fees made it virtually impossible for these customers to achieve a profit in their accounts. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, as well as Regulation Best Interest. Remedies included a censure and disgorgement of $216,896, plus prejudgment interest. The firm was also expelled from FINRA membership.

In the Matter of Maxim Group, LLC, et al., Rel. No. 34-98605 (Sept. 29, 2023) – In a settled matter, the SEC charged a registered broker-dealer for facilitating order flow from other broker-dealers engaged in the sale of large volumes of low-priced, over-the-counter microcap securities, without adequately designing or implementing anti-money laundering policies. As a result, the broker-dealer failed to sufficiently investigate red flags and failed to file SARs. Charges under Section 17(a) of the Exchange Act and Rule 17a-8 and Rule 203(b)(1) and Regulation SHO under the Exchange Act. Remedies included cease-and-desist, censure, and a $800k civil money penalty.

In the Matter of Citigroup Global Markets, Inc. and Citi International Financial Services, LLC, Rel. 34-98609, IA-6440 (Sept. 28, 2023) – In a settled matter, CGMI, a registered broker-dealer and investment adviser, and CIFS, a registered broker-dealer, were charged with making securities recommendations to retail customers without complying with the disclosure obligation of Reg BI and the requirement to deliver Form CRS, by defaulting approximately 11,600 existing retail customers to electronic delivery of the required disclosure and form, along with related policies and procedures violations. Claims under Exchange Act Section 17(a)(1) and Rules 15l-1 and 17a-14(f)(3). Remedies included cease-and-desist, censure, and a civil penalty of $1.975m.

SEC Charges 10 Firms with Widespread Recordkeeping Failures, Press Release 2023-212 (Sept. 29, 2023) – In settled matters, the broker-dealer firms, including in some cases affiliated RIA firms, were charged with failing to maintain and preserve “off-channel” communications pertaining to their businesses. The SEC charged that employees communicated through personal text messages about the business of their employers, that the investment adviser firms’ employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given, and that the firms did not maintain or preserve the substantial majority of these off-channel communications. Charges under Exchange Act Section 17(a) and Rule 17a-4(b)(4) and (for investment advisers and dual registrants) Advisers Act Section 204 and Rule 204(-2(a)(7). Remedies included censure, cease-and-desist, independent compliance consultant undertakings, and penalties ranging from $35m to $2.5m. One firm, Perella Weinberg, was credited with self-reporting and received the lowest penalty.

SEC Charges Two Credit Rating Agencies with Longstanding Recordkeeping Failures, Press Rel. 2023-211 (Sept. 29, 2023) – In settled matters, two credit rating agencies were charged with failing to maintain or preserve “off-channel” communications related to their ratings businesses. The SEC charged that employees, including senior employees, sent and received text messages concerning credit ratings activities, and that the firms failed to retain these messages in violations of securities laws. In addition, DBRS was separately charged with failing to disclose changes in commercial mortgage-backed securities rating methods and related internal controls failures. Charges regarding off-channel communications under Exchange Act Section 17(a)(1) and Rule 17g-2(b)(7). Charges regarding internal controls under Exchange Act Section 15E(c)(3)(A) and Rules 17g-8(a)(1) and (2) and 17g-7(a)(1)(ii)(B). Remedies included censure, cease-and-desist, independent compliance consultant undertakings, and penalties of $4m and $6m for recordkeeping, and $2m for internal controls violations.

Private Funds

In the Matter of Prime Group Holdings, LLC, Rel. 33-11228 (Sept. 5, 2023) – In a settled matter, the SEC charged a private equity firm focused on alternative real estate asset classes with failing to adequately disclose millions of dollars in real estate brokerage fees that were paid to a real estate brokerage firm that was owned by its CEO. According to the Order, Prime Group made misleading statements in the fund’s offering materials because Prime Group failed to adequately disclose that an affiliate would be receiving these real estate brokerage fees. Between 2017 and 2021, the affiliated real estate brokerage firm received nearly $18 million in brokerage fees at the closing of the fund’s property acquisitions. Charges under Securities Act Section 17(a)(2). Remedies included cease-and-desist, a civil penalty of $6.5m, and disgorgement of $11.5m plus prejudgment interest.

Market Manipulation

SEC v. Philip Verges, et al., Lit. Rel. 25853 (Sept. 26, 2023) – In a litigated matter, the SEC filed charges against four individuals and an entity for their roles in an alleged scheme to pump-and-dump more than $112 million of stock in five penny stock companies. The SEC also named four relief defendants. The complaint alleges that the ringleader artificially inflated trading volume in the stocks by publishing more than 1,400 press releases, some of which were false and misleading, to ensure that the fraud participants sustained a market in which to sell their stock. The complaint alleges that the inflating trading volume allowed the participants to dump their discounted stock into the market for proceeds of more than $52 million. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5. Remedies sought included disgorgement with prejudgment interest, permanent injunctions, civil penalties, penny-stock bars, and officer-and-director bars.

(NSEU 23-11)

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.