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August 1, 2025 | Legal Update

The Nutter Securities Enforcement Update is a periodic update of noteworthy recent securities enforcement activity, settlements, decisions, and charges. We provide brief summaries that highlight recent enforcement action filings and developments to help identify enforcement trends, changes in the law, new theories, and new areas of enforcement focus. For more information on these cases or about how they may impact you, contact your Nutter attorney.

Remedies

In the Matter of Nano Magic, Inc., Initial Decision Rel. No. 1416, File 3-19787 (July 23, 2025) – In a contested administrative proceeding, an SEC administrative law judge denied a public company’s motion to recover its legal expenses under the Equitable Administration of Justice Act (EAJA). The SEC had suspended trading in the company’s securities for ten days on April 30, 2020 due to false statements circulating in the marketplace about the COVID virus filtering capabilities of the company’s cleaning products. The company timely petitioned to terminate the suspension in May 2020, arguing that it had not made or approved the statements. After several years of administrative proceedings, in October 2024 the Commission vacated the suspension as of the date it was issued. Although the ALJ found that the company was the prevailing party as required by EAJA, he denied the company’s motion based on his determination that a proceeding to terminate a trading suspension is not the type of adjudicated action that is within the scope of EAJA.

Investment Advisers/Investment Companies

SEC v. Caine, et al., Lit. Rel. 26338 (July 1, 2025) – In a litigated matter, the SEC settled charges against two advisers and two portfolio managers. The SEC alleged that the individuals and their firms made material misrepresentations about the worst-case loss estimates for the managed funds and their risks. These funds ultimately incurred trading losses of more than one billion dollars in February 2018. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, the Investment Advisors Act Sections 206(1) and 206(2), the Advisers Act Section 206(4) and Rules 206(4)-8 and 206(4)(7), the Investment Company Act Sections 34(b) and 15(c). Remedies included disgorgement of over $1.5m plus interest and a civil penalty of $500k for one adviser and $200k for the other adviser, and temporarily enjoining the advisers from managing or advising on securities investments.

SEC v. Prisno and PE Capital Investment Management Partners, Lit. Rel. 26339 (July 3, 2025) – In a litigated matter, an investment adviser and its CEO were charged with fraudulent billing practices. The complaint alleges that the adviser charged in excess of $2.4 million in unauthorized and undisclosed fees to its clients, and on occasion, the adviser bypassed their brokerage firm’s requirement that clients directly authorize additional fees by entering the client’s login credentials without consent. Claims under the Advisers Act Sections 206(1) and 206(2). Requested remedies included permanent injunctions, disgorgement plus interest, and civil penalties.

SEC v. Cobb, Lit. Rel. 26342 (July 9, 2025) – In a settlement of a litigated matter, an investment adviser representative was charged with executing a cherry-picking scheme in which he disproportionately allocated profitable securities trades to his and his wife’s accounts, and unprofitable trades to certain client accounts. He allegedly executed the scheme by buying securities in an omnibus account and then often waiting a day or longer to allocate the trades to see whether the securities had increased in price. The SEC also alleged that he placed clients in highly volatile and risky investments that were inconsistent with their investment profiles. The IAR consented to the entry of the judgment that included injunctive relief, association bars, disgorgement of $114,093 plus prejudgment interest, and a civil monetary penalty of $25k.

In the Matter of American Portfolio Advisors, Inc., Rel. IA-6893 (July 11, 2025) – In a settled matter, the SEC charged a former investment advisory firm for failing to adequately disclose conflicts of interest, overbilling its clients, and, through its former chief compliance officer and its former president, creating backdated documents and providing them to SEC staff during a compliance examination. The firm allegedly failed to fully and fairly disclose the nature and extent of conflicts of interest associated with certain compensation paid to the firm’s affiliated broker-dealer by an unaffiliated clearing broker in connection with trade execution and account services, resulting in additional costs to clients. Instead, the advisory firm allegedly misleadingly indicated that the unaffiliated clearing broker determined the amounts of the fees billed to the firm’s clients. The firm also allegedly erroneously billed and collected advisory fees on alternative investment positions, although no fees were supposed to be assessed on those positions, and failed to refund a pro rata portion of prepaid quarterly advisory fees when clients terminated their accounts, as provided in the firm’s client agreements. Finally, in response to a request for documents by SEC staff, the firm’s then-chief compliance officer created and backdated compliance documents for three calendar years that purported to memorialize contemporaneous annual compliance reviews required by the firm’s policies and procedures, and those documents were then signed by the firm’s chief compliance officer and president. Charges under Advisers Act Sections 204(a), 206(2), and Rule 204-2(a)(17)(ii). Remedies include cease-and-desist, censure, and a civil penalty of $1.75m. The former chief compliance officer and president separately settled the claims against them, consenting to cease-and-desist orders and censures and civil penalties of $10k and $20k, respectively.

In the Matter of Suzanne Ballek, Rel. IA-6896, Rel. IC-35678 (July 15, 2025) – In a settled matter, the SEC charged the former chief compliance officer of a registered investment adviser with altering records and creating fictitious documents in response to an SEC examination. The former CCO allegedly modified and backdated pre-clearance trading forms and fabricated forms to make it appear the firm’s compliance procedures were properly followed. The SEC found that the CCO’s conduct misled exam staff and obscured violations of the firm’s pre-clearance policy. Violations include aiding and abetting the firm’s violations of Advisers Act Sections 204(a), 206(4) and Rule 206(4)-7. Penalties include cease-and-desist, a $40k civil penalty, and a three-year bar from acting in any compliance capacity with registered entities.

In the Matter of Gary Steven Costello, Rel. 33-11380,34-103474, Rel. IA-6897 (July 16, 2025) – In a settled matter, the SEC alleged that a dually-registered registered representative and investment adviser representative shifted losing trades from his personal brokerage account into client and customer accounts of the broker-dealer/investment adviser. The SEC alleged that this “cancel‑rebill” scheme concealed significant personal trading losses by improperly rebilling those trades to clients. Violations under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, and Advisers Act Sections 206(1) and 206(2). Penalties include cease-and-desist, disgorgement of approximately $1.3m, prejudgment interest, and a $195k civil penalty.

SEC v. D’Ambrosio, Lit. Rel. 26354 (July 21, 2025) – In a litigated matter, the SEC charged the principal of an exempt reporting adviser with misappropriating funds from, and misleading investors about the assets and investments of, an unregistered pooled vehicle established for investments of the individual’s family and friends. Charges under Advisers Act Sections 206(1), 206(2) and 206(4), and Rule 206(4)-8(a). Remedies sought include injunctive relief, disgorgement, prejudgment interest, and penalties.

Broker-Dealers

SEC v. Craffy, Lit. Rel. 26363 (July 29, 2025) – In a settlement of a litigated matter, the SEC had charged a U.S. Army financial counselor who provided general financial education to family members of those in the army. The SEC alleged that the counselor instructed grieving family members to transfer benefits into a brokerage account that he managed while he worked full-time for a private brokerage firm. The counselor then traded those funds without authorization and in excess so that his customers were exposed to risks of higher loss, resulting in losses of approximately $1.79 million. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rules 10b-5 and 151-1(a)(1). The SEC declined to pursue disgorgement or civil money penalties in light of a parallel criminal proceeding against him in which he was sentenced to 151 months in prison followed by three years of supervised release and ordered to pay $4,085,988.32 in forfeiture and later ordered to pay $4,085,988.32 in restitution.

FCPA

SEC v. Coburn, et al., Lit. Rel. 26351 (July 15, 2025) – In a litigated matter, the parties filed a joint stipulation to dismiss, with prejudice, an ongoing civil enforcement action of two former IT company executives. The SEC had alleged that a senior official in Tamil Nadu demanded a $2 million bribe related to the construction of the IT company’s 2.7 million square foot Chennai campus. According to the SEC, the IT company’s then-president and chief legal officer allegedly approved the bribe, directed subordinates to conceal it through falsified contractor change orders, and authorized additional bribes totaling over $1.6 million. Charges under Exchange Act Sections 30A and 13(b)(5), Rules 13b2-1, and 13b2-2, and aiding and abetting violations of Exchange Act Sections 30A, 13(b)(2)(A), and 13(b)(2)(B). The SEC noted that its decision to exercise its discretion and dismiss the action rests on its judgment that the dismissal is appropriate as a policy matter, not on any assessment of the merits of the claims alleged, and that its decision does not necessarily reflect the Commission’s position on any other case.

Securities Offerings

SEC v. Palazzo, et al., Lit. Rel. 26343 (July 9, 2025) – In a settlement of a litigated matter, the SEC had charged a former Harvard football player and his corporate entities with engaging in two fraudulent schemes in which he allegedly stole more than $2 million from investors that included his former Harvard teammates, a professional athlete, and others. In the first scheme, the defendant allegedly used one of his corporate entities to raise investor funds through the purported repurchase of the assets of a sports media company. In the second, he allegedly used two other corporate entities to raise investor funds to develop and launch a sports betting app. In both instances, he allegedly misled investors about how their funds would be used and instead used the money to pay personal expenses, fund his children’s private school tuition, and pay for a trip to Disneyland, among other items. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5 thereunder. Remedies include disgorgement of $2.64m, a $150k civil penalty, a five-year bar from acting as officer or director of a public company, and a five-year bar from participating in the issuance, purchase, offer, or sale of any security other than for personal accounts.

SEC v. Frost et al., No. 25-cv-03826-MLB (N.D. Ga., July 10, 2025) – In a litigated matter, the SEC charged First Liberty Building & Loan, LLC and its founder and owner Edwin Brant Frost IV in connection with an alleged Ponzi scheme that defrauded approximately 300 investors of at least $140 million. According to the SEC, First Liberty and Frost offered and sold promissory notes and loan participation agreements to retail investors that offered returns of up to 18% by representing that investor funds would be used to make short-term bridge loans to businesses at relatively high interest rates. The SEC alleges that while some investor funds were used to make bridge loans, those loans did not perform as represented, and most loans ultimately defaulted and ceased making interest payments. The SEC also alleges that First Liberty operated as a Ponzi scheme by using new investor funds to make principal and interest payments to existing investors. Charges under Securities Act Sections 17(a) and Exchange Act Section 10(b) and Rule 10b-5. The SEC seeks emergency relief, including an order freezing assets, appointing a receiver over the entities, and granting an accounting and expedited discovery. Remedies sought in the complaint include permanent injunctions and civil penalties against the defendants, a conduct-based injunction against Frost, and disgorgement of ill-gotten gains with prejudgment interest against the defendants.

SEC v. Fernandez, Lit. Rel. 26346 (July 11, 2025) – In a settlement of a litigated matter, the SEC charged an individual with orchestrating a scheme in which she raised approximately $364,000 from at least 20 investors through the fraudulent offer and sale of securities by touting the false narrative that she was a successful businesswoman with access to no-risk, short-term investments. The SEC alleged that instead of investing investor funds as promised, the defendant used investor money to pay for her day-to-day living expenses and lavish hotel stays, fund numerous cash withdrawals, and make Ponzi-like payments to earlier investors. In a parallel criminal action brought by the United States Attorney’s Office for the Northern District of West Virginia concerning the same conduct, the defendant pleaded guilty to one count of wire fraud and was sentenced to 33 months in prison, restitution of $330,000, and forfeiture of $330,000. Charges under Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5 thereunder. Remedies include a permanent injunction, an injunction preventing the defendant from the offer or sale of a security, and disgorgement of $296k, which was deemed satisfied by her criminal forfeiture amount.

SEC v. Hunsicker, Lit. Rel. 26352 (July 18, 2025) – In a litigated matter, the SEC charged the co-founder, CEO, and chair of CaaStle, Inc. (formerly Gwynnie Bee, Inc.) with fraudulently raising over $250 million by providing investors with false financial statements and doctored audit reports. According to the SEC’s complaint, from at least February 2019 through March 2025, the CEO allegedly overstated CaaStle’s revenues by over 7,300% in some years and falsely represented the company as profitable despite its losses. She also allegedly doctored audit reports from an independent audit firm which she provided to investors. Further, the SEC alleges the CEO misled investors into believing they were participating in secondary transactions, when in fact they were purchasing newly issued shares, diluting existing ownership. She also allegedly provided false capitalization tables to conceal the dilution. Charges under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. Remedies sought include permanent injunctive relief, including a conduct-based injunction, an officer-and-director bar, disgorgement with prejudgment interest, and a civil penalty. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against the CEO.

Issuer Reporting/Audit and Accounting

SEC v. Cheetah X Inc. (d/b/a Go X), Debelov, and Salam, Lit. Rel. 26341 (July 3, 2025) – In a litigated matter, the SEC charged a scooter rental company, its CEO, and president of operations for misleading approximately 300 investors with claims about the company’s past performance, expected returns, and guaranteed refunds from July 2021 through November 2023. By the end of 2023, the SEC alleges, the company had paid investors less than half of their $4 million investment principal, failed to pay investors their requested refunds, and put investors at substantial risk due to the company’s poor financial performance. Charges under Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Remedies include permanent injunctions against future violations of these provisions, civil penalties, and disgorgement of the company’s gains with interest.

Insider Trading

SEC v. Vakil, et al., Lit. Rel. 26348 (July 11, 2025) – In a bifurcated settlement, the SEC charged a former senior employee at Elanco Animal Health and a friend with trading in the stock of Kindred Biosciences based on material nonpublic information about Elanco’s pending acquisition of Kindred. The employee allegedly learned about the acquisition when she was assigned to the due diligence team for the transaction and tipped her friend, who bought 38,000 shares of Kindred stock. Charges under Exchange Act Section 10(b) and Rule 10b-5. The two individuals consented to the entry of judgment, including injunctive relief, but monetary relief, if any, was agreed to be determined later by the court.

SEC v. Kashman, Lit. Rel. 26359 (July 22, 2025) – In a settled matter, the SEC charged an Arizona resident with trading on material nonpublic information shared in confidence by a friend, who was an insider at a trucking company, about the trucking company’s negotiations to acquire US Xpress Enterprises, Inc. The trader then bought 18,200 shares of US Xpress stock. Charges under Exchange Act Section 10(b) and Rule 10b-5. Remedies, subject to court approval, include injunctive relief, disgorgement of approximately $78k plus interest, and a one-time civil penalty of approximately $78k.

SEC v. Gupta, Lit. Rel. 26364 (July 30, 2025) – In the final resolution of a bifurcated settlement, the SEC charged a New Jersey resident with insider trading before an announcement of Ipsen Biopharmaceuticals, Inc.’s acquisition of Epizyme, Inc. The SEC alleged that the trader learned of Ipsen’s interest in acquiring Epizyme when he was an employee of Ipsen. Charges under Exchange Act Section 10(b) and Rule10b-5. The initial settlement included injunctive relief and an officer-and-director bar. The trader then agreed to disgorgement of over $260k plus prejudgment interest to be offset by forfeiture in a parallel criminal proceeding.

US v. Chastain, No. 23-7038 (2d Cir. July 31, 2025) – On appeal from a criminal conviction on wire fraud and money laundering charges, a divided panel of the Second Circuit vacated the judgment because the jury instructions incorrectly defined property interests under the wire fraud statute. The defendant was a former executive with NFT trading platform OpenSea who was responsible for choosing which NFTs would be featured on the OpenSea website. He was charged with purchasing NFTs before they were featured and later selling them at a profit. The district court had instructed the jury that the government need not prove that confidential information had commercial value to the business (OpenSea) in order to prevail. The Second Circuit disagreed, holding that, for purposes of the criminal wire fraud statute, confidential information qualifies as a property interest only if it has commercial value to the company that holds it.

Market Manipulation

SEC v. Hernandez, Lit. Rel. 26340 (July 3, 2025) – In the final resolution of a bifurcated settlement, the SEC had charged an individual for his role in a $2 million “free-riding” scheme. The SEC alleges that the individual and three others opened and used underfunded brokerage accounts to generate profits by conducting matched trading with other brokerage accounts the defendants controlled. The individuals opened the underfunded accounts at a broker that provided an instant deposit credit, which they then used to fund trades with the other account at manipulated pricing through thinly-traded options. The SEC further alleges that the individuals transferred the credit from the broker in the underfunded accounts to the other accounts. They then abandoned the underfunded accounts, leaving the broker with the loss. Throughout the scheme, the individuals used at least 600 brokerage accounts. Charges under Exchange Act Section 10(b), and Rule 10b-5(a) and (c) and Section 20(b). Remedies in the bifurcated settlement included disgorgement of over $500k plus interest and an injunction precluding the traders from opening a brokerage account without first providing the brokerage firm with a copy of this matter’s complaint and judgment. 

SEC v. Rosenbaum, et al., Lit. Rel. 26344 (July 10, 2024) – In a settled matter, three former penny-stock public company CEOs and a disbarred attorney were charged for their roles in an alleged $112 million pump-and-dump scheme alongside other previously-charged defendants. The CEOs allegedly signed, or allowed their signatures to appear on, disclosure statements published on a penny stock trading platform that they reasonably should have known contained materially false and misleading information regarding who prepared the penny-stock issuers’ financial statements and also concealed a previously-charged defendant’s control of the penny-stock issuers. The SEC also alleges that each CEO executed documents that facilitated share issuances to a previously-charged defendant’s nominees without exercising reasonable care in inquiring whether the issuances were appropriate. The disbarred attorney was also cited for allegedly authoring at least 17 attorney opinion letters for one of the nominees after being suspended from the practice of law, and an additional 73 opinion letters after he was disbarred. Charges against both CEOs under Securities Act Sections 17(a)(2) and (3) and charges against the disbarred attorney under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. Remedies against the CEOs include a permanent injunction, permanent penny-stock bar, permanent officer-and-director bar, disgorgement of $24k for one CEO, and civil penalties of $35k for two of the CEOs. One CEO was not subject to disgorgement or penalties based on the sworn representations in his statement of financial condition. The judgment against the attorney included permanent injunctions, a penny stock bar, and disgorgement and civil penalties to be determined later by the court. 

(NSEU 25-04)

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