SEC Charges Prominent Pastor, Financial Planner in Scheme to Defraud Elderly Investors

The Securities and Exchange Commission yesterday charged the pastor of one of the largest Protestant churches in the country and a self-described financial planner in a scheme to defraud elderly investors by selling them interests in defunct, pre-Revolutionary Chinese bonds.

The SEC's complaint alleges that, in 2013 and 2014, Kirbyjon Caldwell, Senior Pastor at Windsor Village United Methodist Church in Houston, and Gregory Alan Smith, a self-described financial planner who the Financial Industry Regulatory Authority has barred from the broker-dealer business since 2010, targeted vulnerable and elderly investors with false assurances that the bonds—collectible memorabilia with no meaningful investment value—were worth millions of dollars.  Caldwell and Smith raised at least $3.4 million from 29 mostly elderly investors, some of whom liquidated their annuities to invest in this scheme. Caldwell and Smith are alleged to have taken approximately $1.8 million of investor funds to pay for personal expenses, including mortgage payments in the case of Caldwell and luxury automobiles in the case of Smith. Offshore individuals received most of the remaining funds.

"Our laws do not tolerate materially misleading statements to exploit vulnerable investors who, in this case, looked up to a prominent pastor," said Eric I. Bustillo, Director of the SEC's Miami Regional Office.  "Caldwell took advantage of his victims, encouraging them to remain faithful even as he and Smith broke that faith, stealing from elderly investors in an outright fraud."

The SEC encourages investors to check the backgrounds of people selling investments by using the SEC's investor.gov website to quickly identify whether they are registered professionals and confirm their identity.

The SEC's complaint alleges that Caldwell and Smith violated the registration and antifraud  provisions of the federal securities laws, and seeks civil penalties, disgorgement, and other forms of relief.

In a separate complaint, the SEC charged attorney Shae Yatta Harper of Monmouth Junction, New Jersey, with, among other things, aiding and abetting Caldwell's and Smith's antifraud violations. Harper agreed to settle the SEC's action against her without admitting or denying the SEC's allegations. Among other things, Harper agreed to pay a $60,000 civil penalty and to the issuance of an administrative order suspending her from appearing or practicing as an attorney before the Commission with the right to request reinstatement after five years.

The SEC's investigation was conducted by Jacqueline M. O’Reilly and Andre J. Zamorano, with assistance from Allen J. Genaldi, and supervised by Thierry Olivier Desmet in the SEC's Miami Regional Office. The litigation will be led by Wilfredo Fernandez.  

SEC Press Release

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SEC Charges Recidivist Broker-Dealer in Employee’s Long-Running Pump-and-Dump Fraud

The Securities and Exchange Commission announced charges against Wedbush Securities Inc. for failing to supervise employee Timary Delorme after the broker-dealer ignored numerous red flags indicating that Delorme was involved in a long-running pump-and-dump scheme targeting retail investors.  Delorme agreed to settle fraud charges stemming from the same scheme.  This is the second SEC action against Wedbush this year and the third since 2014.      

The SEC’s investigation found that Delorme – a registered representative of Wedbush – received undisclosed benefits for investing her customers in microcap stocks that were the subject of a “pump-and-dump” scheme orchestrated by Izak Zirk Engelbrecht, who was previously charged by the Commission and criminal authorities in separate actions.  According to the SEC’s order, Wedbush ignored multiple signs of Delorme’s fraud, including a customer email outlining Delorme’s involvement in the scheme and multiple FINRA arbitrations and inquiries regarding her penny stock trading activity.  In response to these clear red flags, Wedbush conducted two flawed and insufficient investigations into Delorme’s conduct but failed to take appropriate action.

“Brokerage firms play an important role in protecting retail investors from abusive conduct by brokers like Delorme,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “This case sends a clear message that we will not tolerate broker-dealers that fail to exercise appropriate supervision over employees, as alleged here.”

The SEC’s order instituting administrative proceedings against Wedbush charges that the broker-dealer failed reasonably to supervise Delorme with a view to preventing and detecting her violations.  The matter will be scheduled for a hearing before an administrative law judge, who will hear the case and prepare an initial decision.  A separate order finds that Delorme violated the antifraud provisions of the federal securities laws.  Without admitting or denying the findings, Delorme agreed to entry of the order, which requires her to pay a $50,000 penalty, imposes industry and penny stock bars, and orders her to cease and desist from future violations.

The SEC’s investigation was conducted by John O. Enright, Lindsay S. Moilanen, and Sheldon L. Pollock.  The litigation will be led by Mr. Enright, Ms. Moilanen, and Howard Fischer.  The case is being supervised by Lara S. Mehraban of the New York Regional Office.  The SEC previously charged Engelbrecht, 15 other individuals, and several entities in the related manipulation scheme:

• https://www.sec.gov/litigation/litreleases/2014/lr23087.htm
• https://www.sec.gov/litigation/admin/2016/34-78599.pdf
• https://www.sec.gov/alj/aljdec/2017/id1213ce.pdf
• https://www.sec.gov/litigation/admin/2016/34-78768.pdf
• https://www.sec.gov/litigation/admin/2016/34-78559.pdf
• https://www.sec.gov/litigation/admin/2016/34-78927.pdf
• https://www.sec.gov/litigation/admin/2016/34-78606.pdf
• https://www.sec.gov/litigation/admin/2016/34-79006.pdf

Eleven individuals, including Engelbrecht, pleaded or were found guilty in parallel criminal proceedings.
 

SEC Press Release

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SEC Charges Energy Storage Company, Former Executive in Fraudulent Scheme to Inflate Financial Results

The Securities and Exchange Commission today charged a California-based energy storage and power delivery product manufacturer and one of its former sales executives in a fraudulent revenue recognition scheme designed to inflate the company’s reported financial results.
 
According to the SEC’s order, Maxwell Technologies, Inc. prematurely recognized revenue from the sale of ultracapacitors - small energy storage and power delivery products - in order to better meet analyst expectations.  Van Andrews, a former Maxwell sales executive and corporate officer, allegedly inflated the company’s revenues by entering into secret side deals with customers and by falsifying records in order to conceal the scheme from Maxwell’s finance and accounting personnel and external auditors.  Maxwell’s former CEO David Schramm and former controller James DeWitt also were charged for failing adequately to respond to red flags that should have alerted them to the misconduct. 

“Maxwell recorded revenue before it was actually earned in order to make investors believe that the company’s most important business segment, ultracapacitors, was growing faster than it really was” said Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit.  “This action demonstrates our commitment to holding issuers and their executives accountable when they deny investors the ability to make investment decisions based on accurate financial information.”

The SEC’s order found that Maxwell and Andrews violated antifraud, books and records, and internal accounting controls provisions of the federal securities laws and that Andrews caused certain violations by Maxwell.  Both Maxwell and Andrews consented to the SEC’s order without admitting or denying the allegations and agreed to pay penalties of $2.8 million and $50,000, respectively.  Andrews also agreed to be barred from serving as an officer or director of a public company for five years.  Without admitting or denying the findings that they caused certain violations by Maxwell, Schramm agreed to pay a total of nearly $80,000 in disgorgement, prejudgment interest, and penalty and DeWitt agreed to pay a $20,000 penalty.  

The money collected in this proceeding will be used to establish a Fair Fund for the benefit of investors harmed by the accounting fraud.  Maxwell’s former CFO Kevin Royal, who was not charged with wrongdoing, has reimbursed the company $135,800 for incentive-based compensation he received during the period when the company was found to have committed accounting violations.  

The SEC’s investigation was conducted by James Valentino and Natalie Lentz with assistance from Kevin Lombardi.  The case was supervised by Tracy L. Price.
 

SEC Press Release

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Securities Defense Lawyer Blog: SEC Stops Ponzi-Schemer Targeting Retail Investors...

The SEC has filed charges and obtained a preliminary injunction and asset freeze against Niket Shah, a New Jersey resident who stole more than $250,000 in a Ponzi scheme in which his friends and coworkers invested.

Based on investor complaints, the SEC moved quickly to investigate and charge Shah. According to the SEC's complaint, unsealed on March 22, 2018, in federal court in Brooklyn, New York, Shah used Spark Trading Group, LLC to defraud more than 15 investors into contributing hundreds of thousands of dollars to two funds that Shah marketed. Shah obtained investments for the funds by lying about his success as a trader, Spark Trading's returns, and how he intended to use investors' money, including altering financial statements to make the funds appear profitable when they were actually losing money. For instance the complaint alleges that Shah promised investors he would pay them monthly returns and guaranteed against losses. According to the complaint, Shah misused investor money for his own benefit and suffered substantial losses on the amounts actually invested. When investors sought their money back, he lied and said the money had been frozen by government agencies, including the Commission.

"Fraudsters who swindle their friends and colleagues using doctored financial statements and outright lies should expect the Commission and its staff to act swiftly and decisively, as we have here today," said Melissa Hodgman, Associate Director of the SEC's Enforcement Division.

The SEC's Complaint charges Spark Trading and Shah with violations of the antifraud provisions of the federal securities laws. The SEC is seeking return of allegedly ill-gotten gains with interest and civil money penalties.

A court hearing was held on March 23, 2018, on the SEC's complaint and requested relief at which the Honorable Brian M. Cogan granted the SEC's request for a preliminary injunction, asset freeze, order against the destruction of documents, and an accounting. The court had previously issued a March 12, 2018, temporary asset freeze against Spark Trading and Shah, and ordered them to provide an accounting of all money received from investors.

Kinross Gold Charged With FCPA Violations

The Securities and Exchange Commission today announced a settled action against Canada-based Kinross Gold Corporation for Foreign Corrupt Practices Act violations arising from the company’s repeated failure to implement adequate accounting controls of two African subsidiaries. 

According to the SEC’s order instituting a settled administrative proceeding, Kinross Gold acquired the African subsidiaries in a $7.1 billion transaction in 2010, understanding that the subsidiaries lacked anti-corruption compliance programs and internal accounting controls.  It took Kinross Gold almost three years to implement adequate controls, despite multiple internal audits flagging widespread deficiencies. 

Even after implementing the controls, Kinross Gold failed to maintain them.  Among other things, Kinross Gold is found to have awarded a lucrative logistics contract to a company preferred by Mauritanian government officials, despite concerns that the company was a high-cost provider with poor technical capabilities, in contravention of Kinross Gold’s bidding and tendering procedures.  Kinross Gold also contracted with a politically-connected consultant to facilitate contacts with high-level Mauritanian government officials without conducting required, heightened due diligence.  In addition, the company paid vendors and consultants without ensuring the payments were consistent with policies prohibiting improper payments.

“Companies should take particular care to remediate known accounting controls issues when making acquisitions to mitigate the risk that company funds will be misused for unauthorized purposes,” said Tracy L. Price, Deputy Chief of the SEC Enforcement Division’s FCPA Unit.

The SEC’s order finds that Kinross Gold violated books and records and internal accounting controls provisions of the federal securities laws.  Without admitting or denying the findings, Kinross agreed to a cease-and-desist order, a penalty of $950,000 and undertakings to report on its remedial steps for a period of one year. 

The SEC’s investigation was conducted by Steven A. Susswein and Maria Boodoo of the FCPA Unit with assistance from Gregory Bockin.

SEC Press Release

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SEC Stops Ponzi-Schemer Targeting Retail Investors and Obtains Preliminary Injunction and Asset Freeze

The Securities and Exchange Commission today announced charges and a preliminary injunction and asset freeze against Niket Shah, a New Jersey resident who stole more than $250,000 in a Ponzi scheme in which his friends and coworkers invested.

Based on investor complaints, the SEC moved quickly to investigate and charge Shah. According to the SEC's complaint, unsealed on March 22, 2018, in federal court in Brooklyn, New York, Shah used Spark Trading Group, LLC to defraud more than 15 investors into contributing hundreds of thousands of dollars to two funds that Shah marketed. Shah obtained investments for the funds by lying about his success as a trader, Spark Trading's returns, and how he intended to use investors' money, including altering financial statements to make the funds appear profitable when they were actually losing money. For instance the complaint alleges that Shah promised investors he would pay them monthly returns and guaranteed against losses. According to the complaint, Shah misused investor money for his own benefit and suffered substantial losses on the amounts actually invested. When investors sought their money back, he lied and said the money had been frozen by government agencies, including the Commission.

"Fraudsters who swindle their friends and colleagues using doctored financial statements and outright lies should expect the Commission and its staff to act swiftly and decisively, as we have here today," said Melissa Hodgman, Associate Director of the SEC's Enforcement Division.

The SEC's Complaint charges Spark Trading and Shah with violations of the antifraud provisions of the federal securities laws. The SEC is seeking return of allegedly ill-gotten gains with interest and civil money penalties.

A court hearing was held on March 23, 2018, on the SEC's complaint and requested relief at which the Honorable Brian M. Cogan granted the SEC's request for a preliminary injunction, asset freeze, order against the destruction of documents, and an accounting. The court had previously issued a March 12, 2018, temporary asset freeze against Spark Trading and Shah, and ordered them to provide an accounting of all money received from investors.

The SEC's investigation, which is continuing, has been conducted by W. Bradley Ney, D. Ashley Dolan, and J. Ashley Ebersole in the SEC's Washington, D.C. office and supervised by Melissa Robertson. The litigation will be led by Kenneth J. Guido, W. Bradley Ney, and J. Ashley Ebersole, under the supervision of Fred Block. The SEC would like to thank the Nadex Exchange for its substantial assistance in connection with this investigation.


SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Broker Charged With Repeatedly Putting Customer Assets At Risk

The Securities and Exchange Commission today announced that Electronic Transaction Clearing (ETC), a registered broker-dealer headquartered in Los Angeles, has agreed to settle charges that it illegally placed more than $25 million of customers’ securities at risk in order to fund its own operations.

Among other things, the SEC found that ETC violated the Customer Protection Rule, which is intended to safeguard customers’ cash and securities so that they can be promptly returned if a broker-dealer fails.  It requires broker-dealers to maintain physical possession or control of customers’ fully paid and excess margin securities.

According to the SEC’s order, ETC put customer securities at risk numerous times in 2015.  ETC improperly transferred almost $8 million of fully paid securities belonging to cash customers to an account at another clearing firm to meet margin requirements on borrowed funds, and the firm used more than $17 million of securities of two customers to borrow funds without consent.  The order also finds that ETC improperly commingled customers’ securities and allowed a customer’s excess margin securities to be loaned out by the other clearing firm. 

“The SEC has brought several recent cases charging violations of the Customer Protection Rule, which establishes critical protections to ensure that investors’ securities are kept safe by broker-dealers,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office.  “As this case shows, no broker-dealer is allowed to use its customers’ securities to fund its own operations.”    

The SEC’s order charged ETC with violating the Securities Exchange Act and Customer Protection Rule as well as other related rules.  Without admitting or denying the SEC’s findings, ETC agreed to entry of the order, to pay an $80,000 penalty, to cease and desist from committing or causing any similar violations in the future, and to be censured.  ETC cooperated with the SEC’s investigation and has taken remedial steps to prevent future violations. 

The SEC’s investigation was conducted by Junling Ma and Sara Kalin of the Los Angeles Regional Office. The SEC examination that led to the investigation was conducted by Eric Cheng, Thomas Martinsen, and Tamara Heller.  

SEC Press Release

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SEC Announces Its Largest-Ever Whistleblower Awards

The Securities and Exchange Commission today announced its highest-ever Dodd-Frank whistleblower awards, with two whistleblowers sharing a nearly $50 million award and a third whistleblower receiving more than $33 million.  The previous high was a $30 million award in 2014.

“These awards demonstrate that whistleblowers can provide the SEC with incredibly significant information that enables us to pursue and remedy serious violations that might otherwise go unnoticed,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “We hope that these awards encourage others with specific, high-quality information regarding securities laws violations to step forward and report it to the SEC.”

The SEC has awarded more than $262 million to 53 whistleblowers since issuing its first award in 2012.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.  No money has been taken or withheld from harmed investors to pay whistleblower awards.

Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. 

Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million. As with this case, whistleblowers can report jointly under the program and share an award.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

For more information about the whistleblower program and how to report a tip, visit www.sec.gov/whistleblower.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Proposes Transaction Fee Pilot for NMS Stocks

The Securities and Exchange Commission today voted to propose new Rule 610T of Regulation NMS to conduct a Transaction Fee Pilot in NMS stocks.

The proposed pilot would subject stock exchange transaction fee pricing, including “maker-taker” fee-and-rebate pricing models, to new temporary pricing restrictions across three test groups, and require the exchanges to prepare and publicly post data.

“The proposed pilot is designed to generate data that will provide the Commission, market participants, and the public with information to facilitate an informed, data-driven discussion about transaction fees and rebates and their impact on order routing behavior, execution quality, and market quality in general,” said SEC Chairman Jay Clayton.  “I applaud the staff for their work in this important area and their enthusiasm for moving this issue forward.”

The proposed pilot includes a test group that would prohibit rebates and linked pricing, as well as test groups that would impose caps of $0.0015 and $0.0005 for removing or providing displayed liquidity.  The pilot would apply to all NMS stocks of any market capitalization and would include all equities exchanges, including “taker-maker” exchanges.  The pilot would last for up to two years with an automatic sunset at one year unless the Commission extends the pilot.  In preparing its proposal, the Commission considered a recommendation from the Equity Market Structure Advisory Committee to conduct an access fee pilot, as well as the views of those submitting comment letters on that recommendation. 

The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.

Fact Sheet

Transaction Fee Pilot

Action

The Commission proposed new Rule 610T of Regulation NMS to establish a Transaction Fee Pilot in NMS stocks.  The Pilot will generate data to facilitate analysis of the effects that transaction-based fees and rebates, and changes to those fees and rebates, may have on order routing behavior, execution quality, and market quality more generally.  Data from the Pilot will be used to inform the Commission, as well as market participants and the public, about the effects of transaction-based fees and rebates and facilitate a data-driven evaluation concerning the need for any potential regulatory action in this area, including possible changes to Rule 610(c) of Regulation NMS. 

Highlights

The key terms of the proposed Pilot are summarized below.

 

Duration	2 year Pilot with an automatic sunset at 1 year unless, no later than thirty days prior to that time, the Commission publishes a notice that the Pilot shall continue for up to another year; plus a 6 month pre- and 6 month post-Pilot period
Applicable Trading Centers	Equities exchanges (maker-taker & taker-maker)
Eligible Securities	NMS stocks with a share price ≥ $2 per share that do not close below $1 per share during the proposed Pilot and that have an unlimited duration or a duration beyond the end of the post-Pilot Period
Pilot Design	Test Group 1	$0.0015 fee cap for removing & providing displayed liquidity (no cap on rebates)
	Test Group 2	$0.0005 fee cap for removing & providing displayed liquidity (no cap on rebates)
	Test Group 3	Rebates and Linked Pricing Prohibited for removing & providing displayed & undisplayed liquidity (Rule 610(c)’s cap continues to apply to fees for removing displayed liquidity)
	Control Group	Rule 610(c)’s cap continues to apply to fees for removing displayed liquidity

The Pilot also will require the national securities exchanges to prepare and post on their websites public and downloadable data including:  (1) aggregated and anonymized order routing data, updated monthly and (2) an XML dataset of standardized information on their transaction fees and rebates.  Primary listing exchanges also will be required to post information on changes to the list of Pilot securities.

What’s next?

The Commission will seek public comment on the proposed Pilot for 60 days following publication of its proposal in the Federal Register.  

SEC Press Release

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SEC Proposes Targeted Changes to Public Liquidity Risk Management Disclosure

The Securities and Exchange Commission today proposed amendments to public liquidity-related disclosure requirements for certain open-end investment management companies.  Under the proposal, funds would discuss in their annual report the operation and effectiveness of their liquidity risk management program, replacing a pending requirement that funds publicly provide the aggregate liquidity classification profile of their portfolios on Form N-PORT on a quarterly basis. 

The Commission adopted the open-end fund liquidity rule in October 2016 in an effort to promote effective liquidity risk management programs in the fund industry.  Management of liquidity risk is important to funds’ ability to meet their statutory obligation — and their investors’ expectations — regarding redeemability of their shares.  Since adoption, staff has engaged in extensive outreach to identify potential issues associated with the effective implementation of the rule.

This outreach resulted in a series of actions taken by the Commission.  In addition to today’s proposal, the Commission previously adopted a rule that extends by six months the compliance date for the classification and classification-related elements of Rule 22e-4 and related reporting requirements.  In conjunction with this extension, the staff issued new guidance intended to assist funds in complying with the liquidity rule’s classification requirements.  Together with today’s proposal, these actions are aimed at providing investors with accessible and useful information about liquidity risk management of the funds they hold while providing sufficient time for funds to implement the requirement to classify their holdings in an efficient and effective manner.   

“Today’s proposed rule is another step toward completing the implementation of the 2016 final rule in a manner that protects investors while minimizing unnecessary costs on funds,” said Chairman Jay Clayton.  “I look forward to ongoing engagement with investors, funds, and other market participants as we continue enhancing our ability to be effective overseers of the U.S. mutual fund industry.”

SEC Press Release

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Theranos, CEO Holmes, and Former President Balwani Charged With Massive Fraud

The Securities and Exchange Commission today charged Silicon Valley-based private company Theranos Inc., its founder and CEO Elizabeth Holmes, and its former President Ramesh “Sunny” Balwani with raising more than $700 million from investors through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.  Theranos and Holmes have agreed to resolve the charges against them.  Importantly, in addition to a penalty, Holmes has agreed to give up majority voting control over the company, as well as to a reduction of her equity which, combined with shares she previously returned, materially reduces her equity stake.

The complaints allege that Theranos, Holmes, and Balwani made numerous false and misleading statements in investor presentations, product demonstrations, and media articles by which they deceived investors into believing that its key product – a portable blood analyzer – could conduct comprehensive blood tests from finger drops of blood, revolutionizing the blood testing industry.  In truth, according to the SEC’s complaint, Theranos’ proprietary analyzer could complete only a small number of tests, and the company conducted the vast majority of patient tests on modified and industry-standard commercial analyzers manufactured by others.

The complaints further charge that Theranos, Holmes, and Balwani claimed that Theranos’ products were deployed by the U.S. Department of Defense on the battlefield in Afghanistan and on medevac helicopters and that the company would generate more than $100 million in revenue in 2014.  In truth, Theranos’ technology was never deployed by the U.S. Department of Defense and generated a little more than $100,000 in revenue from operations in 2014.

“Investors are entitled to nothing less than complete truth and candor from companies and their executives,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “The charges against Theranos, Holmes, and Balwani make clear that there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage, or the subject of exuberant media attention.”

“As a result of Holmes’ alleged fraudulent conduct, she is being stripped of control of the company she founded, is returning millions of shares to Theranos, and is barred from serving as an officer or director of a public company for 10 years,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “This package of remedies exemplifies our efforts to impose tailored and meaningful sanctions that directly address the unlawful behavior charged and best remedies the harm done to shareholders.”

“The Theranos story is an important lesson for Silicon Valley,” said Jina Choi, Director of the SEC’s San Francisco Regional Office.  “Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.”

Theranos and Holmes have agreed to settle the fraud charges levied against them.  Holmes agreed to pay a $500,000 penalty, be barred from serving as an officer or director of a public company for 10 years, return the remaining 18.9 million shares that she obtained during the fraud, and relinquish her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares.  Due to the company’s liquidation preference, if Theranos is acquired or is otherwise liquidated, Holmes would not profit from her ownership until – assuming redemption of certain warrants – over $750 million is returned to defrauded investors and other preferred shareholders.  The settlements with Theranos and Holmes are subject to court approval.  Theranos and Holmes neither admitted nor denied the allegations in the SEC’s complaint.  The SEC will litigate its claims against Balwani in federal district court in the Northern District of California.

The SEC’s investigation was conducted by Jessica Chan, Rahul Kolhatkar, and Michael Foley and supervised by Monique Winkler and Erin Schneider in the San Francisco Regional Office.  The SEC’s litigation will be led by Jason Habermeyer and Marc Katz of the San Francisco office.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Former Equifax Executive Charged With Insider Trading

The Securities and Exchange Commission today charged a former chief information officer of a U.S. business unit of Equifax with insider trading in advance of the company’s September 2017 announcement about a massive data breach that exposed the social security numbers and other personal information of about 148 million U.S. customers.   

According to the SEC’s complaint, Jun Ying, who was next in line to be the company’s global CIO, allegedly used confidential information entrusted to him by the company to conclude that Equifax had suffered a serious breach.  The SEC alleges that before Equifax’s public disclosure of the data breach, Ying exercised all of his vested Equifax stock options and then sold the shares, reaping proceeds of nearly $1 million.  According to the complaint, by selling before public disclosure of the data breach, Ying avoided more than $117,000 in losses.

“As alleged in our complaint, Ying used confidential information to conclude that his company had suffered a massive data breach, and he dumped his stock before the news went public,” said Richard R. Best, Director of the SEC’s Atlanta Regional Office.  “Corporate insiders who learn inside information, including information about material cyber intrusions, cannot betray shareholders for their own financial benefit.”

The U.S. Attorney’s Office for the Northern District of Georgia today announced parallel criminal charges against Ying.

The SEC’s complaint charges Ying with violating the antifraud provisions of the federal securities laws and seeks disgorgement of ill-gotten gains plus interest, penalties, and injunctive relief.

The SEC’s investigation, which is continuing, has been conducted by Elizabeth Skola and Justin Jeffries.  The litigation is being led by Shawn Murnahan and Graham Loomis.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Georgia and the Federal Bureau of Investigation.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Foreign Affiliates of KPMG, Deloitte, BDO Charged in Improper Audits

The Securities and Exchange Commission today charged foreign affiliates of KPMG, Deloitte & Touche, and BDO for their involvement in audit work that circumvented the full oversight of the Public Company Accounting Oversight Board (PCAOB).

The firms agreed to settle the charges by paying penalties or disgorging their profits from the audits.

According to the SEC’s orders, the Zimbabwe affiliates of Deloitte & Touche and KPMG improperly audited the majority of assets and revenues of a publicly traded company without registering with the PCAOB.  The two principal auditors – KPMG’s affiliate in South Africa and BDO’s Canadian affiliate – were registered with the PCAOB but improperly relied upon the work of the two unregistered foreign component auditors to complete their audits of the company.  This violated PCAOB standards requiring sufficient analysis and inquiry when using the work of another auditor. 

“It’s in the best interest of Main Street investors that all firms substantially involved in the audit of a public company are properly registered with the PCAOB so they are subject to the oversight necessary to ensure accuracy and prevent fraud,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement.  “These unregistered foreign component auditors performed significant audit work outside the PCAOB’s regulatory purview, and the principal auditors failed to consider the registration status of these firms as they used their work.”    

The SEC’s orders find that Deloitte & Touche Chartered Accountants in Zimbabwe and KPMG in Zimbabwe violated Section 102 of the Sarbanes-Oxley Act, and BDO Canada LLP and KPMG in South Africa engaged in improper professional conduct, violated Rule 2-02 of Regulation S-X, and caused the audit client to violate its reporting obligations.

Without admitting or denying the findings, BDO Canada agreed to pay a $50,000 penalty, KPMG in South Africa agreed to pay a $100,000 penalty, Deloitte in Zimbabwe agreed to pay disgorgement and interest totaling $99,057, and KPMG in Zimbabwe agreed to pay disgorgement and interest totaling $141,305.

The SEC’s investigation was conducted by Andrew Elliott and supervised by Mr. Friestad and Amy Friedman.  The SEC appreciates the assistance of the PCAOB.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Charges Penny Stock “Mailman” With Scalping Investors In Gold Mining Stocks

The Securities and Exchange Commission has charged a penny stock promoter based in Florida with defrauding investors in a pair of gold mining stocks by secretly amassing shares before touting the companies publicly.  He allegedly sold the bulk of his stock and reaped more than $1.1 million in illicit profits after his promotions caused the share prices and trading volumes to skyrocket.

The SEC’s complaint alleges that Brian Robert Sodi, known in penny stock circles as “Mailman” for his pervasive participation in direct-mailed penny stock promotions, committed a fraud known as scalping.  He allegedly disseminated promotions recommending the purchase of the stocks in Southern USA Resources Inc. and Goff Corporation without disclosing he owned shares and planned to sell them through a foreign bank.  Sodi also allegedly hid from investors that he was being paid in stock for one of these promotions.  According to the SEC’s complaint, Sodi proceeded to unload hundreds of thousands of his own shares to the detriment of other investors who bought in to the hype.

“Everyday investors are the unwitting targets of scalping schemes, and we’re here to fight back for them,” said Melissa Hodgman, Associate Director in the SEC’s Enforcement Division.  “As alleged in our complaint, Sodi deviously used a foreign bank account not in his name in an effort to go undetected, but he failed to hide his illicit trading from us.”

Criminal charges were unsealed yesterday in a parallel action filed by the U.S. Attorney’s Office for the Northern District of Alabama.

The SEC’s complaint filed February 26 charges Sodi and two of his publishing houses, Capital Financial Media LLC and List Data Solutions LLC, with violating Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and Sections 17(a) and (b) of the Securities Act of 1933.  The complaint also charges Sodi with violating Section 13(d) of the Exchange Act and Rule 13d-1 as well as Sections 5(a) and (c) of the Securities Act.  Among other things, the complaint seeks an accounting of all of Sodi’s and his entities’ sales of all U.S. penny stocks that Sodi’s platform promoted within the last five years.

The SEC’s continuing investigation is being conducted in coordination with the Enforcement Division’s Microcap Fraud Task Force by John P. Lucas, Sarah R. Lamoree, Edward B. Gerard, and Benjamin D. Brutlag.  The case is being supervised by J. Lee Buck II and will be litigated by Charles Stodghill.  The SEC appreciates the assistance of the U.S. Attorney’s Offices for the Northern District of Alabama, District of New Jersey, Eastern District of New York, and Eastern District of Virginia as well as the Criminal Fraud Section of the U.S. Department of Justice, Federal Bureau of Investigation, U.S. Postal Inspection Service, U.S. Department of Homeland Security, Alabama State Securities Commission, Financial Industry Regulatory Authority, Alberta Securities Commission, British Columbia Securities Commission, Cayman Islands Monetary Authority, the Cyprus Securities and Exchange Commission, Dubai Financial Services Authority, Guernsey Financial Services Commission, Hong Kong Securities and Futures Commission, Liechtenstein Financial Market Authority, the Malta Financial Services Authority, the Mauritius Financial Services Commission, Investigation Section of the Financial Services Regulation Division of the Government of Newfoundland and Labrador, Ontario Securities Commission, Québec Autorité des Marchés Financiers, Monetary Authority of Singapore, Swiss Financial Market Supervisory Authority, United Arab Emirates Securities and Commodities Authority, and United Kingdom Financial Conduct Authority.

SEC Press Release

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SEC Foils Penny Stock Executive’s Plan to Pump Stock and Exploit Investors

The Securities and Exchange Commission today barred the president of a penny stock company from ever again serving as a public company officer or director after he was caught making false and misleading statements about the company to investors in an effort to increase demand for the stock.

The SEC confronted him quickly and the misstatements were removed from the Internet and social media before any dramatic spike in stock price typically seen in pump-and-dump schemes could occur.  Following such spikes, fraudsters dump their shares and stop hyping the stock, the price typically falls, and investors lose their money.

According to the SEC’s order, Robert Ritch of Spring Hill, Tennessee, began spreading false information on social media about his investment successes and the company’s prospects shortly after taking control of Manzo Pharmaceuticals (MNZO) in July 2017.  The order finds that despite Ritch’s statements that MNZO was a holding company that purported to invest in and acquire other companies, in reality it had a limited operating history and incurred continuing losses.  Contrary to his representations, Ritch had not founded, built, or exited any successful multi-million dollar business and did not complete more than $1 billion in transactions during his career.  In fact, according to the SEC’s order, he had not completed even $1 million in transactions during his career.  In addition, Ritch lied to investors by concealing his criminal history, which includes three felony convictions for crimes of dishonesty.

“Ritch used social media to tout widespread falsehoods about his company and track record designed to deceive the market and put investor money into his own pocket.  As here, we will continue to act quickly to stop manipulative conduct and minimize investor harm,” said Marc Berger, Director of the SEC’s New York Regional Office.

The SEC’s order finds that Ritch violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b).  Without admitting or denying the SEC’s findings, Ritch consented to a cease-and-desist order, officer-and-director bar, penny stock bar, and $50,000 penalty.  The SEC also has suspended trading in MNZO.

The SEC’s investigation was conducted by Bennett Ellenbogen, Thomas Feretic, and Sandeep Satwalekar of the New York office, and Ricky Tong of the Microcap Fraud Task Force.  The case was supervised by Lara Shalov Mehraban. 

SEC Press Release

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Investment Adviser Settles Charges for Cheating Clients in Fraudulent Cherry-Picking Scheme

The Securities and Exchange Commission today announced settled charges against an Austin, Texas-based investment adviser for defrauding his clients through a “cherry-picking” scheme.  The adviser, Robert Mark Magee, who is the principal, sole owner, and sole employee of Valor Capital Asset Management LLC, has agreed to be banned from the securities industry and pay more than $715,000 to resolve the charges.

According to the SEC’s order, for almost three years, Magee traded securities in Valor’s omnibus account but waited to allocate the trades to client accounts until after the securities’ performance changed over the course of the day.  Magee then “cherry-picked” the trades, disproportionately allocating profitable trades to his accounts and unprofitable trades to his clients’ accounts, reaping substantial profits for himself at his clients’ expense. The SEC’s order found that for most of the three-year period there was less than a one-in-a-trillion chance that the outsized performance of Magee’s personal account, compared to that of his clients’ accounts, was due to chance.

“This case echoes the several actions our office has brought in recent months aimed at protecting unsuspecting retail investors from investment advisers who allegedly cheat their clients by cherry-picking profitable trades,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.  “The settled order here finds that Magee and Valor cherry-picked trades to their clients’ detriment for almost three years.” 

The SEC’s order found that Magee and Valor each violated antifraud provisions of the federal securities laws.  Without admitting or denying the SEC’s findings, Magee and Valor agreed to the entry of a cease-and-desist order and to pay disgorgement, prejudgment interest, and civil penalties totaling $715,871.57. Magee also agreed to be barred from the securities industry. 

This is the fourth action arising out of an enforcement initiative to combat cherry-picking led by the SEC’s Los Angeles Regional Office and supported by the agency’s Division of Economic and Risk Analysis (DERA).  The previous actions were announced on Sept. 12, 2017 and Feb. 21, 2018. 

The investigation was conducted by Manuel Vazquez and supervised by Robert Conrrad.  Data analysis was performed by Scott Walster and Raymond Wolff in DERA.

SEC Press Release

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Voya Advisers Agree to Repay Clients and Settle Charges That They Failed to Disclose Securities Lending Conflict

The Securities and Exchange Commission today charged two investment adviser subsidiaries of Voya Holdings Inc. with failing to disclose conflicts of interest and making misleading disclosures in connection with their practice of recalling securities on loan so their affiliates could receive tax benefits.

The advisers agreed to pay approximately $3.6 million to settle the charges, including more than $2 million directly to the affected mutual funds for the benefit of their investors.

According to the SEC’s order instituting a settled administrative proceeding, Voya Investments LLC and Directed Services LLC served as investment advisers to certain insurance-dedicated mutual funds offered to annuity and life insurance customers through insurance companies affiliated with the advisers.  In order to generate additional income for the mutual funds and their investors, the Voya advisers lent securities held by the funds to parties looking to borrow the securities.  The Voya advisers recalled loaned securities before their dividend record dates so that the advisers’ insurance company affiliates, who were the record shareholders of the funds’ shares, could receive a tax benefit based on the dividends received.  But, as the order explains, the recall practice caused the funds and their investors to lose securities lending income without receiving any offsetting tax benefit.  The order found that the Voya advisers failed to disclose the conflict of interest to the funds’ board of directors or in the funds’ prospectuses.

“These funds and those investing in them weren’t told that they were losing income so that the Voya advisers could provide a tax benefit to their affiliates.  Now money will be heading back to the funds to help investors,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Investment advisers must not place the interests of their affiliates over those of clients, depriving them of information necessary to make informed investment decisions.”

The Voya adviser affiliates agreed to be censured and consented to the entry of the SEC’s order finding that they willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940, and Rule 206(4)-8.  The Voya advisers agreed to cease and desist from committing any further violations, and neither admitted nor denied the findings.

The SEC’s investigation was conducted by Ranah L. Esmaili and John Farinacci and supervised by Panayiota K. Bougiamas of the Asset Management Unit.

SEC Press Release

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SEC Obtains Partial Asset Freeze of Proceeds in Alleged Fraudulent Touting Scheme

The Securities and Exchange Commission has filed fraud charges in a scheme to inflate the share price of an Israeli medical marijuana company’s common stock.  The court today entered a partial asset freeze of the proceeds of the alleged fraud.

The SEC’s complaint, which was filed on March 5 in federal district court in Denver, alleges that Colorado resident Jeffrey O. Friedland touted OWC Pharmaceutical Research Corp. while misrepresenting both his own investment in OWC and the true nature of his professional relationship with the company.  As alleged in the complaint, Friedland was compensated with more than five million OWC shares for handling the company’s media and investor relations efforts.  Friedland then touted OWC to media, industry, and investors, creating the false impression that he was merely an early investor in OWC and later, a member of its advisory board, without disclosing his role as a paid promoter.  Friedland is alleged to have sold his OWC shares for almost $7 million, after which he and his spouse placed a portion of the proceeds in a investment account in the name of Lane 6552, acquired two homes in all-cash purchases, and made other purchases and uses of the funds.  Friedland’s sales took place from March through September 2017 and were made through accounts in the names of Lane 6552 LLC and Intiva Pharma LLC.  The United States District Court today, among other things, froze certain accounts that received proceeds of Lane 6552’s sales of OWC stock.

“Corporate insiders and hired experts must not be allowed to profit at the expense of retail investors by concealing the true nature of their interests and investments in companies,” said Associate Director Melissa Hodgman.  “If we determine that fraudsters are spending their illicit profits, the staff will act quickly to protect those assets in hopes of returning them to harmed shareholders.” 

The SEC’s complaint charges Friedland, Global Corporate Strategies LLC, and Intiva Pharma LLC with violations of Sections 17(a) and (b) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The SEC is seeking injunctions, disgorgement, prejudgment interest, penalties, and penny stock bars.  The complaint also named Kathy B. Friedland, Lane 6552 LLC, Aspen Upper Ranch LLC, Assurance Management, LLC, and the Jeffrey and Kathy Friedland Irrevocable Trust as relief defendants.

The investigation has been conducted by Michael T. Grimes, Keith O’Donnell, William Connolly, Shipra G. Wells, and Josh Felker, and supervised by Melissa R. Hodgman.  Christian Schultz and Timothy Halloran will lead the SEC’s litigation under the supervision of Fred Block.  The SEC appreciates the assistance of Financial Industry Regulatory Authority.

The SEC’s investigation is ongoing.

SEC Press Release

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SEC Charges Company and Executives in Oil-and-Gas Offering Fraud

The Securities and Exchange Commission has charged a Dallas-based oil-and-gas company and two of its executives with defrauding investors out of at least $950,000 through a string of fraudulent oil-and-gas securities offerings.

The SEC’s complaint, which was filed yesterday in federal court in the Northern District of Texas, alleges that Shezad Akbar used his company, Americrude, Inc., to defraud multiple investors in seven securities offerings that purportedly raised funds to acquire working interests in oil-and-gas prospects.  The SEC alleges that Americrude, Akbar, and Daniel Waite, who was Americrude’s nominal President, used a combination of cold calls, high-pressure sales pitches, and false and misleading statements to lure investors into Americrude’s fraudulent offerings.  The defendants misrepresented Americrude’s track record, the reserve potential of its oil-and-gas prospects, and its intended use of proceeds from the offerings.  Akbar is also alleged to have used an alias to conceal his involvement in the offering fraud and to hide his prior felony convictions from potential investors.   

“Cold calls and high-pressure sales tactics are commonly used in offering frauds,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office. “Investors should always use caution and never be induced to abandon their common sense.”  The SEC encourages investors to check the backgrounds of people selling investments by using the SEC’s investor.gov website to quickly identify whether they are registered professionals and confirm their identity.

According to the complaint, while investors only received back approximately $2,500 of their principal, Americrude and Akbar misused and misappropriated more than $196,000 of investor funds, which were allegedly spent on, among other things, retail and entertainment expenses.

The SEC’s complaint charges Americrude, Akbar, and Waite with violating Section 17(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder.  Additionally, the SEC’s complaint charges Waite with violating Section 15(a) of the Exchange Act based on his alleged role as an unregistered broker. 

Waite consented, without admitting or denying the SEC’s allegations, to the entry of a final judgment that permanently restrains and enjoins him from violating Sections 5(a), 5(c) and 17(a)(2) of the Securities Act and Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5(b) thereunder; restrains and enjoins him from participating in the issuance, purchase, offer, or sale of any oil-and-gas related securities, provided however that such injunction does not prevent Waite from purchasing or selling oil-and-gas related securities for his own personal account; and orders him to pay disgorgement of ill-gotten gains totaling $32,409.52, prejudgment interest of $1,763.30, and a penalty of $100,000.

The SEC’s investigation was conducted by Christopher Reynolds and Melvin Warren and supervised by Scott F. Mascianica and David Reece.  The SEC’s litigation against Americrude and Akbar will be led by Matthew Gulde. 

SEC Press Release

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Merrill Lynch Charged With Gatekeeping Failures in the Unregistered Sales of Securities

The Securities and Exchange Commission today announced settled charges against Merrill Lynch, Pierce, Fenner & Smith Inc. for its failure to perform required gatekeeping functions in the unregistered sales of securities on behalf of a China-based issuer and its affiliates.

The SEC’s order found that Merrill Lynch sold almost three million shares of Longtop Financial Technological Limited’s securities into the market despite red flags indicating that the sales could be part of an unlawful unregistered distribution.  Ultimately, the distribution generated almost $38 million in proceeds for the overseas issuer and its affiliates. 

“Broker-dealers are important gatekeepers,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement.  “A broker-dealer has a duty to conduct a reasonable inquiry and know its customers before effecting unregistered sales of securities. ”

The SEC’s order found that Merrill Lynch violated Sections 5(a) and 5(c) of the Securities Act of 1933.  In settlement, without admitting or denying the SEC’s findings, the firm agreed to be censured and consented to the order requiring it to cease and desist from committing or causing any future violations of the registration provisions of the Securities Act.  The order also requires Merrill Lynch to pay a penalty of $1.25 million and more than $154,000 in disgorgement and prejudgment interest from commissions and fees earned on the improper sales.  The SEC has revoked the registration of Longtop’s securities.

The SEC’s investigation of Merrill Lynch was conducted by Helaine Schwartz with assistance from Dean Conway, Christian Schultz and Hope Augustini.  The case was supervised by Lisa Deitch.

SEC Press Release

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NYSE to Pay $14 Million Penalty for Multiple Violations

The Securities and Exchange Commission today announced that it charged the New York Stock Exchange and two affiliated exchanges with regulatory failures in connection with multiple episodes, including several disruptive market events.  The charges arose from five separate investigations and include the first-ever charged violation of Regulation SCI.  The Commission adopted Reg SCI to strengthen the technology infrastructure and integrity of the U.S. securities markets, and today charged two NYSE exchanges with violating Reg SCI’s business continuity and disaster recovery requirement.  In settlement, the exchanges agreed to pay a $14 million penalty.

According to the SEC’s order, the violations include erroneously implementing a market-wide regulatory halt, negligently misrepresenting stock prices as “automated” despite extensive system issues ahead of a total shutdown of two of the exchanges, and applying price collars during unusual market volatility on Aug. 24, 2015, without a rule in effect to permit them – a move that resulted in order imbalances being resolved more slowly.

“Exchanges play an important role in protecting investors,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.  “For retail investors to have confidence in our markets, exchanges must provide accurate information and comply with legal requirements, including being equipped for unexpected market disruptions.”

The SEC’s order also finds, among other things, that the NYSE exchanges broke rules regarding business continuity and disaster recovery in violation of Regulation SCI and also violated Regulation NMS.  NYSE, NYSE Arca, and NYSE American neither admitted nor denied the findings in the SEC’s order, which includes more specific details about the charges.

“Two NYSE exchanges previously settled rule-filing violations in 2014, and now we’ve found further problems,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement.  “NYSE’s violation of the prior SEC order was a significant factor in assessing the civil penalties in this matter.”

The SEC’s investigations were conducted by the Market Abuse Unit and New York Regional Office, including Charu A. Chandrasekhar, Susan Cooke Anderson, Nicholas Chung, Alice Liu Jensen, Ainsley Kerr, Mandy Sturmfelz, Steven D. Buchholz, Michele T. Perillo, Diana K. Tani, Kristin M. Pauley, and Sheldon L. Pollock.  The cases were supervised by Robert A. Cohen and Sanjay Wadhwa.

SEC Press Release

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SEC Charges Unregistered Broker for Illegally Brokering Sales of EB-5 Securities

The Securities and Exchange Commission today charged a New York-based company with illegally brokering dozens of investments by foreign nationals seeking U.S. residency. 

Between April 2014 and March 2017, Edwin Shaw LLC solicited foreign nationals to invest in securities issued by a taxi and limousine company based in Queens, New York.  The investments were marketed to investors interested in applying for legal residency through the federal government’s EB-5 Immigrant Investor Program, which provides a path to legal residency for foreigners who invest directly in a U.S. business or private “regional centers” that promote economic development in specific areas and industries.

According to the SEC’s order, Edwin Shaw was not registered with the SEC as a broker or dealer when it engaged in the solicitations and otherwise effectuated these securities transactions, thereby violating Section 15(a) of the Securities Exchange Act of 1934.  For each successful investment, Edwin Shaw received a fee ranging from $5,000 to $50,000.  More than 30 foreigners invested in the program after solicitations by Edwin Shaw, which improperly used approximately $400,000 of the investor fees on its own expenses and personal expenses of Edwin Shaw’s principal.

“While raising money for an EB-5 project in the U.S., Edwin Shaw was not registered to legally operate as a securities broker,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “The registration requirements are crucial to investor protection and we will continue to vigorously enforce them.” 

Without admitting or denying the allegations in the order, Edwin Shaw agreed to a cease-and-desist order and agreed to pay disgorgement of $400,000 plus prejudgment interest of $54,209.20 and a penalty of $90,535.

The SEC’s investigation was conducted by Phil Fortino and Thomas P. Smith Jr. and was supervised by Lara S. Mehraban.  The SEC appreciates the assistance of U.S. Citizenship and Immigration Services.

SEC Press Release

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SEC Celebrates African American History Month

SEC Charges U.K. Brokerage Firm, Investment Manager, CEO, and Others for Manipulative Trading in U.S. Microcap Stocks

The Securities and Exchange Commission today announced securities fraud charges against a U.K.-based broker-dealer and its investment manager in connection with manipulative trading in the securities of HD View 360 Inc., a U.S.-based microcap issuer.  The SEC also announced charges against HD View’s CEO, another individual, and three entities they control for manipulating HD View’s securities as well as the securities of another microcap issuer, West Coast Ventures Group Corp.  The SEC further announced the institution of an order suspending trading in the securities of HD View.

These charges arise in part from an undercover operation by the Federal Bureau of Investigation, which also resulted in related criminal prosecutions against these defendants by the Office of the United States Attorney for the Eastern District of New York.

In a complaint filed in the U.S. District Court for the Eastern District of New York, the SEC alleges that Beaufort Securities Ltd. and Peter Kyriacou, an investment manager at Beaufort, manipulated the market for HD View’s common stock.  The scheme involved an undercover FBI agent who described his business as manipulating U.S. stocks through pump-and-dump schemes.  Kyriacou and the agent discussed depositing large blocks of microcap stock in Beaufort accounts, driving up the price of the stock through promotions, manipulating the stock’s price and volume through matched trades, and then selling the shares for a large profit.

The SEC’s complaint against Beaufort and Kyriacou alleges that they:

• opened brokerage accounts for the undercover agent in the names of nominees in order to conceal his identity and his connection to the anticipated trading activity in the accounts
• suggested that the undercover agent could create the false appearance that HD View’s stock was liquid in advance of a pump-and-dump by “gam[ing] the market” through matched trades
• executed multiple purchase orders of HD View shares with the understanding that Beaufort’s client had arranged for an associate to simultaneously offer an equivalent number of shares at the same price

A second complaint filed by the SEC in the U.S. District Court for the Eastern District of New York alleges that in a series of recorded telephone conversations with the undercover agent, HD View CEO Dennis Mancino and William T. Hirschy agreed to manipulate HD View’s common stock by using the agent’s network of brokers to generate fraudulent retail demand for the stock in exchange for a kickback from the trading proceeds.  According to the complaint, the three men agreed that Mancino and Hirschy would manipulate HD View stock to a higher price before using the agent’s brokers to liquidate their positions at an artificially inflated price.  The SEC’s complaint also alleges that Mancino and Hirschy executed a “test trade” on Jan. 31, 2018, coordinated by the agent, consisting of a sell order placed by the defendants filled by an opposing purchase order placed by a broker into an account at Beaufort.  Unbeknownst to Mancino and Hirschy, the Beaufort account used for this trade was a nominal account that was opened and funded by the agent.  The SEC’s complaint also alleges that, prior to their contact with the undercover agent, Mancino and Hirschy manipulated the market for HD View and for West Coast by using brokerage accounts that they owned, controlled, or were associated with –including TJM Investments Inc., DJK Investments 10 Inc., WT Consulting Group LLC – to effect manipulative “matched trades.”

“We allege that Kyriacou engaged in a scheme to manipulate the market of HD View stock by matching trades to create a false appearance of liquidity for unwitting investors.  The SEC and its law enforcement partners will continue to aggressively work together to root out such manipulation, wherever the alleged perpetrators and their brokerage firms reside, and despite their best efforts to conceal and disguise their methods,” said Marc P. Berger, Regional Director of the SEC’s New York office.

“This action demonstrates that we will continue to be vigilant in policing microcap markets and will continue to take action as appropriate against those that undermine the integrity of the market with manipulative practices, like matched trading, as alleged in our complaint,” said Antonia Chion, Associate Director of the SEC’s Enforcement Division.

The SEC’s complaint against Beaufort and Kyriacou charges the defendants with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  The SEC also charged Hirschy, Mancino, and their corporate entities with violating Section 17(a)(1) of the Securities Act of 1933, Sections 9(a)(1), 9(a)(2), and 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder.  The SEC is seeking injunctions, disgorgement, prejudgment interest, penalties, and penny stock bars from Beaufort and Kyriacou.  With respect to Hirschy, Mancino, and their corporate entities, the SEC is seeking injunctions, disgorgement, prejudgment interest, penalties, penny stock bars, and an officer-and-director bar against Mancino.

The investigation was conducted in the SEC’s New York Regional Office by Tejal Shah and Joseph Darragh, Lorraine Collazo, and Michael D. Paley of the Microcap Fraud Task Force and supervised by Lara S. Mehraban, and in Washington, D.C. by Patrick L. Feeney, Robert Nesbitt, and Kevin Guerrero, and supervised by Antonia Chion.  Preethi Krishnamurthy and Ms. Shah will lead the SEC’s litigation against Beaufort and Kyriacou.  Ann H. Petalas and Mr. Feeney, under the supervision of Cheryl Crumpton, will handle the SEC’s litigation against Mancino, Hirschy, and their entities.  The SEC appreciates the assistance of the Office of the United States Attorney for the Eastern District of New York, the Federal Bureau of Investigation, the Internal Revenue Service, the Alberta Securities Commission, the Ontario Securities Commission, the Financial Conduct Authority of the United Kingdom, and the Financial Industry Regulatory Authority.

The Commission’s investigation in this matter is continuing.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.