The Nutter Securities Enforcement Update is a periodic summary of noteworthy recent securities enforcement activity, settlements, decisions, and charges.
SEC v. Liu, No. 21-56090 (9th Cir. Aug. 22, 2022) – In an appeal of the Liu case, after remand from the Supreme Court, the Ninth Circuit affirmed the District Court’s decisions not to deduct certain third-party vendor and other payments from the disgorgement award and to apply joint and several liability to the defendants.
Investment Advisers/Investment Companies
In the Matter of Deccan Value Investors LP and Vinit Bodas, Rel. IA-6079 (August 3, 2022) – In a settled matter, an RIA to a private fund, and the adviser’s principal, were charged with breaching fiduciary duties to two institutional investors which had requested redemptions out of the fund. Specifically, the SEC charged that, without full disclosure to the redeeming clients, the firm and its principal allegedly sold less liquid securities unreasonably slowly, did not reasonably seek to liquidate one holding, made material misstatements when advising an institution to sell a certain holding to other firm clients, and failed to disclose during redemption discussions the firm’s plan to allocate the client’s cash to a new illiquid investment prior to the redemption. Charges under Advisers Act Sections 206(2), 206(4), and 244(a) (recordkeeping) and Rules 206(4)-7 and 206(4)-8. Remedies included cease-and-desist, censure, civil penalties of $1.14m (firm) and $500,000 (principal), and engagement of a compliance consultant.
In the Matter of IFP Advisors, LLC, Rel. IA-6086 (August 10, 2022) and In the Matter of Richard Keith Robertson, Rel. 34-95462, Rel. IA-6085, Rel. IC-34669 (August 10, 2022) – These settled matters arise from charges that an individual investment advisory representative engaged in a cherry-picking scheme in which he allocated a greater portion of profitable trades to personal and family accounts and a greater portion of unfavorable trades to client accounts. The RIA was charged with failing to supervise the representative and failing to implement policies and procedures reasonably designed to prevent violations. The firm was charged under Advisers Act Sections 203(e)(6), 206(2), 206(4), and Rule 206(4)-7; remedies included cease-and-desist, censure, and a penalty of $400,000. The IAR was charged with direct violations of Exchange Act Section 10(b) and Rules 10b-5(a) and 10b-5(c), and Advisers Act Sections 206(1) and 206(2); remedies included cease-and-desist, industry bar, disgorgement of approximately $600,000 plus interest, and a $300,000 penalty.
In the Matter of Angel Oak Capital Advisors, LLC, et al., Rel. 33-11090, Rel. IA-6084 (August 10, 2022) – In a settled matter, an RIA and a portfolio manager were charged with making inaccurate disclosures of mortgage delinquency rates in connection with the securitization of residential mortgage loans. Respondents allegedly diverted funds from escrow accounts intended for a different purpose in order to reduce reported delinquency rates. Charges under Securities Act Sections 17(a)(2) and 17(a)(3) and Advisers Act Section 206(2). Remedies included cease-and-desist, censure, and penalties of $1.75m (firm) and $75,000 (portfolio manager).
In the Matter of Kovack Advisors, Inc., Rel IA-6098 (August 26, 2022) – In a settled matter, an RIA was charged with failing to review the accounts of advisory clients in wrap fee programs to determine whether the programs remained suitable for clients, and failing to disclose that they would be charged for trade execution by certain clearing brokers in addition to the wrap fee. Charges under Advisers Act Section 206(2), 206(4) and Rule 206(4)-7. Remedies included cease-and-desist, censure, disgorgement of $166,000 plus interest, and a penalty of $700,000.
SEC v. Lee A. Bressler, Lit. Rel. No. 26588 (August 30, 2022) – In a settled matter, the SEC charged a portfolio manager of an Oklahoma City hedge fund with defrauding the fund and its investors by making undisclosed trades. The SEC alleges that the portfolio manager represented to investors that the fund followed a conservative, low-risk investment strategy but that he engaged in unauthorized high-risk trading in two undisclosed margin accounts. The trading caused the fund to suffer a complete loss of investor capital totaling more than $10 million. Charges under Exchange Act Section 10(b) and Rule 10b-5; Securities Act Section 17(a); and Advisers Act Sections 206(1), 206(2), and 206(4) and Rule 206(4)-8. Remedies included permanent injunction from violations of charged provisions, director/officer bar, and a $184,000 penalty.
SEC v. Crown Bridge Partners, LLC, et al., Lit Rel. No. 25461 (August 2, 2022) – In the first settlement of its kind, the SEC alleged that a convertible note lender and its managing members failed to register with the SEC as securities dealers. The complaint alleged that the defendants met the Exchange Act definition of dealer, which covers parties “engaged in business of buying and selling securities” for their own accounts, under Exchange Act Section 3(a)(5), by purchasing convertible notes from over 100 microcap stock issuers, converting the notes to equity at a large discount to market, and selling the shares into the market. Charges under Exchange Act Sections 15(a)(1) (registration) and 20(a) (control persons). Remedies under the settlement included an injunction, disgorgement and prejudgment interest of approximately $8.4m, and a civil penalty of approximately $800,000. Several actions against other convertible note lenders are currently in litigation.
SEC v. Alpine Securities Corp., et al., Lit. Rel. No. 25465 (Aug. 10, 2022) – In a litigated action, the Commission charged broker-dealer Alpine Securities Corporation, its former CEO, and its current COO with engaging in a series of unauthorized securities transactions. The complaint alleges that Alpine without customer notice or approval: 1) sold $260,000 in customer securities to Alpine’s own proprietary account on the basis that Alpine deemed the securities worthless; and 2) declared 545 customer accounts abandoned and transferred the $54 million worth of securities out of these account into Alpine controlled accounts. Charges under Exchange Act Sections 10(b) and 15(c)(1)(A) and Securities Act Section 17(a)(1).
In the Matter of IMC Chicago, LLC, Rel. 34-95487 (August 12, 2022) – In a settled matter, the respondent, a broker-dealer that operated a single dealer platform for trades it executed in a principal capacity with other broker-dealers, was charged with violations of Reg SHO. According to the order, the respondent executed millions of short sale trades without complying with the “locate requirement” of Reg SHO, and was not eligible for the bona-fide market maker exception to the “locate requirement” because it did not post continuous firm quotations at or near the market on both sides. Charge under Reg SHO Rule 203(b)(1). Remedies included cease-and-desist, censure, and a $125,000 penalty.
SEC v. Spartan Securities Group, et al., No. 8:19-cv-00448 (MD Fla.), Lit. Rel. 25486 (August 26, 2022) – Following a jury trial, a broker-dealer, a transfer agent, and two principals were found liable for fraud in connection with the public listing of shares of “blank check” shell companies without restrictive legends. Charges under Exchange Act Section 10(b) and Rule 10b-5. The court subsequently ordered: permanent injunctive relief and a permanent penny stock bar against the transfer agent, a permanent penny stock bar against the broker-dealer (no longer in operation), and time limited injunctions and penny stock bars against the individuals. The court further ordered the transfer agent to disgorge net proceeds of $114,000 plus prejudgment interest to the US Treasury, and imposed civil penalties of $250,000 against each entity and $150,000 each against each individual defendant.
SEC v. RenovaCare, Inc., et al., Lit. Rel. No. 25487 (Aug. 29, 2022) – In a litigated action, the SEC charged RenovaCare, Inc., a development stage company headquartered in New York, its controlling shareholder, and various associates for their roles in a fraudulent scheme to artificially inflate the price of RenovaCare stock. The SEC alleges that the scheme generated over $7 million in illicit gains. The SEC’s complaint alleges that defendants employed a fraudulent “business model” to artificially increase the share price and trading volume of RenovaCare stock by promoting the company and its securities to investors through a paid third‑party promotional campaign while selling shares, an unlawful practice known as “scalping.” Charges under Securities Act Section 17(a); Exchange Act Sections 10(b), 15(d), and 20(b) and Rules 10b-5, 15d-11, and 12b-20.
In the Matter of DF Growth REIT II, LLC, Rel. 33-6860, File 3-20801 (August 1, 2022) – In an ongoing administrative action, the administrative law judge denied the motion of the respondent, the issuer of a Reg A offering, to vacate the SEC’s temporary suspension order and to dismiss the proceeding as moot. The SEC alleges that the respondent failed to comply with Reg A by engaging in a delayed offering in violation of Rule 251(d) and by raising the maximum offering amount through an offering circular supplement rather than a new offering statement or amendment. The SEC also claimed there were misleading disclosures in the offering statement and solicitation materials. The respondent argued that the suspension was moot because it voluntarily terminated the offering, as it was permitted to do under the terms of the offering. The ALJ rejected this argument, holding that Rule 152(d) does not provide the issuer with an absolute right to terminate, and that the subject of a suspension proceeding is not permitted to withdraw an offering without SEC approval.
In the Matter of Bloom Protocol, LLC, Rel. 33-11089 (Aug. 9, 2022) – In a settled matter, a technology startup hoping to revolutionize the credit scoring industry was charged with conducting an unregistered initial coin offering of crypto assets which raised approximately $30.9 million. The SEC found that the crypto assets were offered and sold as investment contracts, and therefore securities. A purchaser in the offering would have had a reasonable expectation of obtaining a future profit based upon the respondent’s efforts to increase the token’s value on crypto asset trading platforms. Charges under Securities Act Section 5. The respondent’s remedial efforts, including registering their crypto assets, were considered in reaching a resolution. Remedies included a cease-and-desist and a penalty of $300,000, which contains an additional springing penalty of up to $30.9m if the crypto assets were to remain unregistered.
Issuer Reporting/Audit and Accounting/Compliance
In the Matter of Surgalign Holdings Inc., et al., Rel. 33-11088, 34-95415, AAER No. 4318 (August 3, 2022) and SEC v. Hutchison, Lit. Re. No. 25462, AAER No. 4319 (August 3, 2022) – In a settlement and ongoing litigation, the SEC charged an issuer and two former executives with making misleading statements about company sales by “pulling forward” shipments of future orders and failing to disclose the practice to investors. The respondents were charged under Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1, and 13b2-2. Remedies against the company and its CFO included cease-and-desist, and civil penalties of $2m and $75,000 respectively. The CFO also agreed to return over $200,000 of incentive-based compensation to the company under SOX Section 304(a) and to a five-year Rule 102(e) bar from practicing before the SEC as an accountant. The SEC’s action against the CEO is ongoing.
In the Matter of Eagle Bancorp, Inc. Rel. 33-11092, Rel. 34-95505, AAER No. 4321 (August 16, 2022) and SEC v. Ronald Paul, Lit. Rel. No. 25471 (August 17, 2022) – In settled administrative and litigation matters, a bank holding company and its CEO were charged with failing to report loans made to CEO-affiliated family trusts as related party loans, and related misrepresentations to investors. The bank was charged under Securities Act Sections 17(a)(2) and (3), Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) and Rules 13a-1 and 14a-9. Remedies included cease-and-desist, disgorgement of $2.6m plus interest and a penalty of $10m. The CEO agreed to a two-year officer and director bar, and to pay disgorgement of $109,000 plus interest and a $300,000 penalty.
In the Matter of The Bancorp, Inc., Rel. 34-95589, AC-4323, File 3-20997 (August 24, 2022) – In a settled matter, the respondent was charged with valuation errors in its report of gains on the sale of commercial real estate loans. The SEC charged that the respondent failed to document and incorporate all reasonably available market data in its valuation assumptions for the interest-only component of one tranche of certificates it received in the sale transactions, in violation of GAAP standards for the fair value measurement of Level 3 assets. Charges under Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13. Remedies included cease-and-desist and a civil penalty of $1,750,000.
In the Matter of Farber Hass Hurley, LLP, et al., Rel. 34-95593, AAER No. 4324 (August 24, 2022) – In a settled matter, the SEC charged an audit firm and two partners with failing to perform sufficient examination procedures as a basis for custody examinations of SEC-registered investment advisers. The respondents were charged with failing to confirm account balances and transactions directly with custodial clients and failing to reconcile qualified custodian confirmations with the RIAs’ books and records. Remedies included censure of the firm and accounting practice bars for the partners.
In the Matter of James H. Roberts, Rel. 34-95609, AAER No. 4325, (August 25, 2022) – In a settled matter in which the respondent was not charged with misconduct, the former CEO of a publicly traded construction company agreed to a cease-and-desist order and agreed to reimburse incentive-based compensation of $629,000 pursuant to Section 304(a) of the Sarbanes-Oxley Act. The company had restated its prior financial statements due the improper deferral of certain expected costs, and Section 304(a) requires that a CEO and CFO reimburse incentive compensation received during the relevant 12-month period in the event of a restatement cause by misconduct even if the CEO or CFO is not aware of the misconduct.
In the Matter of Mark C. Kelly, CPA, Rel. 33-11096, 34-95612, AC-4329, File 3-21009 (August 26, 2022) – In a settled matter, the SEC charged the respondent, former Controller and Chief Accounting Officer of NYSE-listed PPG Industries, Inc., with making improper accounting decisions that ultimately led to the company having to restate its earnings. Specifically, the respondent was charged with directing his staff not to record certain expense accruals and to misclassify certain income as from continuing operations, in a manner inconsistent with GAAP. Charges under Securities Act Section 17(a)(2) and (3), Exchange Act Sections 13(a), 13(b)(5), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13b2-1. Remedies included cease and desist, accounting practice bar, and a $100,000 penalty.
SEC v. Taronis Technologies, Inc. et al., Lit. Rel. No. 25848, AAER No. 4328 (August 24, 2022) – In a settlement and ongoing litigation, the SEC charged Taronis Technologies, Inc., a subsidiary, and its former CEO and former CFO for engaging in a fraudulent scheme that included materially false and misleading press releases touting agreements and relationships with customers that did not exist or were exaggerated. The complaint also alleges that the former CEO and former CFO created fake and backdated orders, which resulted in Taronis Fuels improperly recognizing revenue for fake unit sales in the second and third quarters of 2020. From July to November 2020, Taronis Fuels raised approximately $30 million from investors in private placements, while making representations and warranties that its financial statements in SEC filings were prepared in accordance with GAAP. The subsidiary settled charges under Securities Act Section 17(a) and Exchange Act Section 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 10b-5, 12b-20, 12b-25 13a-11, and 13a-13. The subsidiary also agreed to pay disgorgement of $4,876,023 plus interest. The former CEO agreed to a bifurcated settlement, in which he consented to injunctions from future violations, a $150,000 penalty, a five-year officer and director bar, and a penny stock bar. He is litigating disgorgement and the SOX Section 304(a) clawback claim. The former CFO is litigating against the SEC.
SEC v. Dishinger, et al., Lit. Rel. No. 25479 (August 16, 2022) – In partially settled ongoing litigation, the SEC alleged that a finance manager at a public relations firm engaged by Equifax, Inc. tipped her significant other with then-nonpublic information about a large data breach at Equifax. The SEC charged the significant other and his brother with engaging in a scheme to purchase out of the money put options on Equifax shares. Charges under Exchange Act Section 10(b) and Rule 10b-5. The alleged traders settled, agreeing to injunctive relief, disgorgement of $9000 and $28,000 plus interest respectively, and penalties of $89,000 and 73,000 respectively. The litigation against the alleged tipper is ongoing.
SEC v. Daniel, Lit. Rel. No. 25473 (August 17, 2022) – In settled litigation, the SEC alleged that the defendant misappropriated nonpublic information regarding the upcoming acquisition of Cypress Technologies. The information was allegedly received in a phone call with the defendant’s mother, who was visiting a close relative who was a senior employee at Cypress. Charges under Exchange Act Section 10(b) and Rule 10b-5. The settlement included injunctive relief, disgorgement of approximately $350,000 plus interest, and a one-time civil penalty.