Office of International Affairs Director Paul A. Leader to Leave SEC

The Securities and Exchange Commission today announced that Paul A. Leder, Director of the Office of International Affairs (OIA), will leave the agency in June. Mr. Leder rejoined the agency as OIA Director in February 2014. OIA advises the Commission on cross-border enforcement and regulatory matters and coordinates the SEC's involvement with regulatory authorities outside the United States.

"Today's capital markets are global and the SEC must engage on a wide range of international issues affecting U.S. markets and our investors," said SEC Chairman Jay Clayton.  "For the past four years, Paul has led, with distinction, the SEC's engagement with domestic and foreign regulators to address consequential cross-border challenges, always with an eye on the interests of our Main Street investors."  

"When I joined OIA just after it was created, cross-border collaboration on enforcement, supervisory and regulatory issues was the exception," said Mr. Leder. "Today, the agency routinely addresses important international issues and the number of cross-border matters continues to grow. It has been an honor to work alongside the incredibly talented staff of OIA as we partner with other offices and divisions to tackle substantive issues of importance to U.S. investors and markets. I want to thank Chairman Clayton and the other Commissioners for their leadership and support."

Mr. Leder's broad portfolio has included addressing potential financial stability risks associated with the asset management industry in discussions at the Financial Stability Board and the International Organization of Securities Commissions (IOSCO); negotiating with foreign authorities to address the potential effects of legal and regulatory changes on U.S. markets and investors (e.g., with European regulators on MiFID II and MiFIR);and playing an integral role in the development of a new platform – the IOSCO ICO Network – to assist the SEC and its counterparts as they address the growth of Initial Coin Offerings (ICOs) and resulting regulatory and enforcement challenges. In the area of enforcement cooperation, Mr. Leder oversaw matters in which the SEC requested assistance from foreign counterparts on a variety of investigations, including insider trading and violations of the Foreign Corrupt Practices Act. He also participated in OECD Anti-Bribery Working Group missions to advance compliance with international anti-corruption commitments.  

Prior to his return to the SEC, Mr. Leder was a partner at Richards Kibbe & Orbe LLP. Previous to that, Mr. Leder spent more than a decade at the SEC, beginning as a trial attorney in the Division of Enforcement in 1987. Soon after OIA was established in 1989, Mr. Leder joined its initial leadership team, first serving as assistant director and later as deputy director. From 1997 to 1999, he also served as senior adviser for international issues to Chairman Arthur Levitt. He began his legal career as a trial lawyer at the Public Defender Service for the District of Columbia.

Mr. Leder earned his bachelor's degree at the University of Michigan and his law degree from the University of Michigan Law School.

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Panasonic Charged With FCPA and Accounting Fraud Violations

The Securities and Exchange Commission today announced that Japan-based Panasonic Corp. will pay more than $143 million to resolve charges of Foreign Corrupt Practices Act (FCPA) and accounting fraud violations involving its global avionics business.

According to the SEC’s order, Panasonic’s U.S. subsidiary, Panasonic Avionics Corp. (PAC), a provider of in-flight entertainment and communication systems, offered a lucrative consulting position to a government official at a state-owned airline to induce the official to help PAC in obtaining and retaining business from the airline.  At the time it orchestrated the bribery scheme, PAC was negotiating two agreements with the airline valued at more than $700 million.  PAC ultimately retained the official and paid approximately $875,000 for a position that required little to no work, using an unrelated third-party vendor to conceal the payments. 

The SEC’s order also found that Panasonic fraudulently overstated pre-tax and net income by prematurely recognizing more than $82 million in revenue for the fiscal quarter ending June 30, 2012.  The fraud was accomplished by PAC backdating an agreement with the airline and providing misleading information to PAC’s auditor.  

The SEC order further found that Panasonic lacked sufficient internal accounting controls and failed to make and keep accurate books and records in connection with purported consultants retained by PAC, as well as sales agents used to solicit business from state-owned airlines and other customers throughout the Middle East and Asia.

“Investors rightfully expect that the companies they invest in will not engage in bribery or fraud,” said Antonia Chion, Associate Director of the SEC’s Enforcement Division. “Issuers must implement effective controls for the selection and engagement of consultants and agents to ensure compliance with anti-bribery statutes.” 

“Issuers need to ensure that their rules and controls address the specific bribery and corruption risks they face when operating in global markets with customers that are state-owned entities,” said Charles Cain, Chief of the Enforcement Division’s FCPA Unit.  “It is not enough for a company merely to set up policies and procedures that are not enforced or are easily circumvented by employees.”

Panasonic consented to the SEC’s order finding that it violated the anti-bribery, anti-fraud, books and records, internal accounting controls, and reporting provisions of the Securities Exchange Act of 1934, and ordering it to pay approximately $143 million in disgorgement and pre-judgement interest.  In a related matter, the U.S. Department of Justice today announced that PAC would pay a criminal penalty of more than $137 million as part of a deferred prosecution agreement related to causing books and records violations of the FCPA.

The SEC’s investigation was conducted by Anik Shah, Dmitry Lukovsky, Mark Yost, Gregory Bockin, and Sonali Singh, and supervised by Mr. Cain, Ms. Chion, Stacy Bogert, and Kristen Dieter.  The SEC appreciates the assistance of the Department of Justice Criminal Division’s Fraud Section as well as the Swiss Financial Market Supervisory Authority, Ontario Securities Commission, Securities and Commodities Authority of the United Arab Emirates, Financial Services Agency of Japan, Monetary Authority of Singapore, Securities Commission of Malaysia, Australian Securities & Investments Commission, and the Securities and Exchange Commission of Pakistan.

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Eric R. Werner Named Associate Regional Director for Enforcement in Fort Worth Office

The Securities and Exchange Commission today announced that Eric R. Werner has been named the Associate Regional Director for Enforcement in the SEC’s Fort Worth Regional Office.  He succeeds Jessica B. Magee, who left the agency in February.

Mr. Werner joined the SEC in 1995 as an Investigative Staff Attorney in the Enforcement Division in Washington, D.C., where he later served in the division’s Office of Chief Counsel. Upon joining the Fort Worth Regional Office, Mr. Werner was promoted to Branch Chief in 2004 and to Assistant Regional Director in 2010.

During his tenure at the SEC, Mr. Werner has investigated or supervised more than 100 enforcement actions, including more than a dozen emergency actions, in cases ranging from offering and affinity frauds to misconduct by investment advisers to market manipulation.  Recent examples include the SEC’s actions in an $80 million oil and gas fraud allegedly orchestrated by a Dallas man who calls himself the “Frack Master,” and another halting an allegedly fraudulent initial coin offering that targeted retail investors to fund what it claimed to be the world’s first “decentralized bank.”

“Eric is an experienced and accomplished leader and we look forward to working more closely with him,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

Steven Peikin, Co-Director of the SEC’s Enforcement Division, added, “Eric’s expertise is widely respected across the Commission, and he will be an outstanding addition to our senior leadership team.”

Shamoil T. Shipchandler, Director of the Fort Worth Regional Office, said, “Eric’s experience in both headquarters and in Fort Worth has given him tremendous insight into virtually every kind of securities violation across the enforcement program. We are excited to have him lead and guide our talented enforcement staff.”

Mr. Werner said, “I am honored to have been selected as Associate Director. I look forward to working with the exceptional Fort Worth enforcement staff as we continue our efforts to protect investors and prosecute individuals determined to violate the securities laws.”

Mr. Werner has spent his career with the SEC, including as an intern before joining the staff full-time. He has a law degree from Washington University and a Bachelor of Arts degree in Economics from Occidental College.
 

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Altaba, Formerly Known as Yahoo!, Charged With Failing to Disclose Massive Cybersecurity Breach; Agrees To Pay $35 Million

The Securities and Exchange Commission today announced that the entity formerly known as Yahoo! Inc. has agreed to pay a $35 million penalty to settle charges that it misled investors by failing to disclose one of the world’s largest data breaches in which hackers stole personal data relating to hundreds of millions of user accounts.


According to the SEC’s order, within days of the December 2014 intrusion, Yahoo’s information security team learned that Russian hackers had stolen what the security team referred to internally as the company’s “crown jewels”: usernames, email addresses, phone numbers, birthdates, encrypted passwords, and security questions and answers for hundreds of millions of user accounts.  Although information relating to the breach was reported to members of Yahoo’s senior management and legal department, Yahoo failed to properly investigate the circumstances of the breach and to adequately consider whether the breach needed to be disclosed to investors.  The fact of the breach was not disclosed to the investing public until more than two years later, when in 2016 Yahoo was in the process of closing the acquisition of its operating business by Verizon Communications, Inc.  


“We do not second-guess good faith exercises of judgment about cyber-incident disclosure.  But we have also cautioned that a company’s response to such an event could be so lacking that an enforcement action would be warranted.  This is clearly such a case,” said Steven Peikin, Co-Director of the SEC Enforcement Division.


Jina Choi, Director of the SEC's San Francisco Regional Office, added, “Yahoo’s failure to have controls and procedures in place to assess its cyber-disclosure obligations ended up leaving its investors totally in the dark about a massive data breach.  Public companies should have controls and procedures in place to properly evaluate cyber incidents and disclose material information to investors.”


The SEC’s order finds that when Yahoo filed several quarterly and annual reports during the two-year period following the breach, the company failed to disclose the breach or its potential business impact and legal implications.  Instead, the company’s SEC filings stated that it faced only the risk of, and negative effects that might flow from, data breaches.  In addition, the SEC’s order found that Yahoo did not share information regarding the breach with its auditors or outside counsel in order to assess the company’s disclosure obligations in its public filings.  Finally, the SEC’s order finds that Yahoo failed to maintain disclosure controls and procedures designed to ensure that reports from Yahoo’s information security team concerning cyber breaches, or the risk of such breaches, were properly and timely assessed for potential disclosure.


Verizon acquired Yahoo’s operating business in June 2017.  Yahoo has since changed its name to Altaba Inc.


Yahoo neither admitted nor denied the findings in the SEC's order, which requires the company to cease and desist from further violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 13(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15.


The SEC’s investigation, which is continuing, has been conducted by Tracy S. Combs of the Cyber Unit and supervised by Jennifer J. Lee and Erin E. Schneider of the San Francisco office.  


Earlier this year, the SEC adopted a statement and interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.

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SEC Charges Additional Defendant in Fraudulent ICO Scheme

The Securities and Exchange Commission today announced additional fraud charges stemming from an investigation of Centra Tech Inc.’s $32 million initial coin offering. 

In an amended complaint filed today, the SEC charged one of Centra’s co-founders, Raymond Trapani, in a fraudulent scheme related to Centra’s 2017 ICO, in which the company issued “CTR Tokens” to investors.  Earlier this month, the SEC and criminal authorities charged Centra’s two other co-founders, Sohrab “Sam” Sharma and Robert Farkas, for their roles in the scheme. 

“We allege that the Centra co-founders went to great lengths to create the false impression that they had developed a viable, cutting-edge technology,” said Robert A. Cohen, Chief of the SEC Enforcement Division’s Cyber Unit.  “Investors should exercise caution about investments in digital assets, especially when they are marketed with claims that seem too good to be true.”

The SEC’s amended complaint alleges that Trapani was a mastermind of Centra’s fraudulent ICO, which Centra marketed with claims about nonexistent business relationships with major credit card companies, fictional executive bios, and misrepresentations about the viability of the company’s core financial services products.  The amended complaint further alleges that Trapani and Sharma manipulated trading in the CTR Tokens to generate interest in the company and prop up the price of the tokens. 

Text messages among the defendants reveal their fraudulent intent.  After receiving a cease-and-desist letter from a major bank directing him to remove any reference to the bank from Centra’s marketing materials, Sharma texted to Farkas and Trapani: “[w]e gotta get that s[***] removed everywhere and blame freelancers lol.”  And, while trying to get the CTR Tokens listed on an exchange using phony credentials, Trapani texted Sharma to “cook me up” a false document, prompting Sharma to reply, “Don’t text me that s[***] lol.  Delete.” 

The SEC’s amended complaint, filed in federal court in Manhattan, charges Trapani with violating the anti-fraud and registration provisions of the federal securities laws.  The amended complaint seeks permanent injunctions, the return of allegedly ill-gotten gains plus interest and penalties, as well as bars against Trapani prohibiting him from serving as a public company officer or director and from participating in any offering of digital or other securities.  

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Trapani. 

The Commission’s investigation, which is continuing, is being conducted by Jon A. Daniels, Luke M. Fitzgerald, and Alison R. Levine of the Cyber Unit and New York Regional Office. The case is being supervised by Valerie A. Szczepanik and Mr. Cohen.  The litigation is being conducted by Mr. Daniels, Mr. Fitzgerald, and Ms. Levine, and supervised by Ms. Szczepanik.  

The Commission wishes to acknowledge the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Manhattan District Attorney’s Office.  The Commission also acknowledges the assistance of the Conference of State Bank Supervisors, which maintains a database of state-licensed financial companies that investors can access before deciding to invest in a company claiming to have state licenses.

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Douglas Scheidt, Associate Director and Chief Counsel in the Division of Investment Management, to Leave Agency After 32 Years of Public Service

The Securities and Exchange Commission announced today that Douglas Scheidt, an Associate Director and the Chief Counsel in the Division of Investment Management, will retire from the SEC at the end of September.

Mr. Scheidt has led the Division’s Chief Counsel’s Office for over 21 years.  During his tenure, Mr. Scheidt has provided legal and policy guidance for the $82 trillion asset management industry on a wide variety of matters, with a focus on regulatory compliance and the duties of fund directors and investment advisers, including valuation, distribution, fiduciary duty, fund governance, affiliated transactions and portfolio management, under the Investment Company Act and the Investment Advisers Act.  He has provided critical counsel and assistance on numerous SEC rulemakings, technical assistance to Congress on legislation, and has managed the Division’s international program and its dealings with foreign regulators.  He also directed the Division’s responses to the financial crisis and the late trading and market timing scandals.  Since 2014, he has overseen the Division’s exemptive application program, which issues orders granting exemptive relief under the Acts.  And, for the past 27 years, he has directed the Division’s enforcement liaison program, providing insightful analytical guidance and assistance to the Division of Enforcement on many investigations and enforcement actions involving funds and investment advisers.  

“Doug has been an insightful and innovative leader, and his contributions will have lasting positive impact on our markets and our Main Street investors,” said SEC Chairman Jay Clayton.  “He has consistently crafted regulatory solutions that are grounded in investor protection and respond to the needs of our ever changing markets.”

“Doug is widely known and trusted throughout the Commission not only for his insights and thoughtful creativity in finding solutions to thorny problems, but also for the generosity with which he shares his talents with his colleagues across the SEC,” said Dalia Blass, Director of the SEC’s Division of Investment Management.  “Staff across the Commission have benefitted from Doug’s ability to provide lucid and concise explanations of even the most complex legal matters.” 

Mr. Scheidt said, “I have great regard for the SEC, where I have spent the most rewarding years of my career.  The work has been immensely interesting, and my colleagues have been exceptional.”

Mr. Scheidt has been an Associate Director and the Chief Counsel of the Division of Investment Management since 1997.  Mr. Scheidt previously served as an Associate Director (Compliance, Financial Analysis, Public Utilities and Investment Company Regulation) and as the Assistant Director of the Office of Enforcement Liaison.  He also has been a Lecturer at Howard University School of Law and Georgetown University Law Center.

In 2017, Mr. Scheidt received the Philp A. Loomis, Jr. Award for outstanding legal scholarship, analysis and draftsmanship, and over the years received six Law and Policy Awards, the Chair’s Award for Excellence, the Capital Markets Award, the Excellence in Information Technology Award, the Labor-Management Relations Award, and the Supervisory Excellence Award.

Before joining the Division of Investment Management in 1991, Mr. Scheidt served as Vice President and Associate General Counsel at The Boston Company Advisors, Inc., and as an attorney in private practice.  He also served as an attorney and Special Counsel in the SEC’s Office of the General Counsel.  Mr. Scheidt began his legal career as a law clerk to the Honorable Martin D. Van Oosterhout of the U.S. Court of Appeals for the Eighth Circuit.  He earned his bachelor’s degree from Northwestern University (cum laude) and his J.D. from Drake University Law School (Order of the Coif).
 

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SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals

The Securities and Exchange Commission today voted to propose a package of rulemakings and interpretations designed to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products.

Under proposed Regulation Best Interest, a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.  Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.

In addition to the proposed enhancements to the standard of conduct for broker-dealers in Regulation Best Interest, the Commission proposed an interpretation to reaffirm and, in some cases, clarify the Commission’s views of the fiduciary duty that investment advisers owe to their clients.  By highlighting principles relevant to the fiduciary duty, investment advisers and their clients would have greater clarity about advisers’ legal obligations.

Next, the Commission proposed to help address investor confusion about the nature of their relationships with investment professionals through a new short-form disclosure document — a customer or client relationship summary.  Form CRS would provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional, and would supplement other more detailed disclosures.  For advisers, additional information can be found in Form ADV.  For broker-dealers, disclosures of the material facts relating to the scope and terms of the relationship would be required under Regulation Best Interest.

Finally, the Commission proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors.  Investment advisers and broker-dealers would also need to disclose their registration status with the Commission in certain retail investor communications.

Taken as a whole, the proposed rules and interpretations would enhance investor protection by applying consistent principles to investment advisers and broker-dealers: provide clear disclosures, exercise due care, and address conflicts of interest.  The specific obligations of investment advisers and broker-dealers would be, however, tailored to the differences in the types of advice relationships that they offer.

SEC Chairman Jay Clayton stated, “The tireless work of the SEC staff has proven to me that we can increase investor protection and the quality of investment services by enhancing investor understanding and strengthening required standards of conduct.  Importantly, I believe we can achieve these objectives while simultaneously preserving investors’ access to a range of products and services at a reasonable cost.  The package of rules and guidance that the Commission proposed today is a significant step to achieving these objectives on behalf of our Main Street investors.”

The public comment period will remain open for 90 days following publication of the documents in the Federal Register.
 

*   *   *
 

FACT SHEET

SEC Open Meeting
Apr. 18, 2018

The Commission proposed two rules and an interpretation to address retail investor confusion about the relationships that they have with investment professionals and the harm that may result from that confusion.  Evidence indicates that retail investors do not fully understand the differences between investment advisers and broker-dealers, which could lead them to choose the wrong kind of investment professional for their particular needs, or to receive advice that is not in their best interest.  The Commission will therefore consider strengthening the standard of conduct that broker-dealers owe to their customers, reaffirming and, in some cases, clarifying the standard of conduct that investment advisers owe to their clients, and providing additional transparency and clarity for investors through enhanced disclosure designed to help them understand who they are dealing with, and why that matters.  The rulemaking package seeks to enhance investor protections while preserving retail customer access to transaction-based brokerage accounts and a broad range of investment products.

Proposal’s Highlights

Regulation Best Interest 

A broker-dealer making a recommendation to a retail customer would have a duty to act in the best interest of the retail customer at the time the recommendation is made, without putting the financial or other interest of the broker-dealer ahead of the retail customer.

A broker-dealer would discharge this duty by complying with each of three specific obligations:

• Disclosure obligation: disclose to the retail customer the key facts about the relationship, including material conflicts of interest.
• Care obligation: exercise reasonable diligence, care, skill, and prudence, to (i) understand the product; (ii) have a reasonable basis to believe that the product is in the retail customer’s best interest; and (iii) have a reasonable basis to believe that a series of transactions is in the retail customer’s best interest.
• Conflict of interest obligation: establish, maintain and enforce policies and procedures reasonably designed to identify and then at a minimum to disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives; other material conflicts of interest must be at least disclosed.

Investment Adviser Interpretation

An investment adviser owes a fiduciary duty to its clients — a duty that the Supreme Court found exists within the Advisers Act.  The proposed interpretation reaffirms, and in some cases clarifies, certain aspects of the fiduciary duty that an investment adviser owes to its clients.


Form CRS – Relationship Summary

Investment advisers and broker-dealers, and their respective associated persons, would be required to provide retail investors a relationship summary.  This standardized, short-form (4 page maximum) disclosure would highlight key differences in the principal types of services offered, the legal standards of conduct that apply to each, the fees a customer might pay, and certain conflicts of interest that may exist.

Investment advisers and broker-dealers, and the financial professionals who work for them, would be required to be direct and clear about their registration status in communications with investors and prospective investors.  Certain broker-dealers, and their associated persons, would be restricted from using, as part of their name or title, the terms “adviser” and “advisor” — which are so similar to “investment adviser” that their use may mislead retail customers into believing their firm or professional is a registered investment adviser.

Background

The Commission has been considering issues relating to changes in the market for investment advice, retail investor understanding of their advice relationships, and broker-dealer conflicts of interest, since the mid-1990s.  The staff studied these matters further pursuant to the Dodd-Frank Act’s mandate in Section 913.  Most recently, in June 2017, Chairman Jay Clayton sought public input on a variety of issues associated with standards of conduct for investment professionals.  Today’s proposed rules and interpretations are the outcome of the Commission and the staff’s extensive experience in and consideration of these issues.

What’s Next?

The Commission will seek public comment on the proposed rules and interpretations for 90 days.  This extended comment period will permit retail investors and other interested parties the opportunity to review the extensive material, and potentially to gather relevant data for submission in the comment file.
 

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Fee Rate Advisory #3 for Fiscal Year 2018

The Securities and Exchange Commission today announced that starting on May 22, 2018, the fee rates applicable to most securities transactions will be set at $13.00 per million dollars.  

Consequently, each SRO will continue to pay the Commission a rate of $23.10 per million for covered sales occurring on charge dates through May 21, 2018, and a rate of $13.00 per million for covered sales occurring on charge dates on or after May 22, 2018.  

The reduction in the fee rate for fiscal year 2018 is due, in part, to the substantially higher dollar amount of covered sales in recent months.  The Commission notes that if the dollar amount of covered sales deviates from current levels when the fee rate is next adjusted, a large reduction or increase in the fee rate may again be required; this is especially so if the next adjustment occurs later in the next fiscal year.  

For more information on the term “charge date,” please refer to Rule 31(a)(3) and Exchange Act Release No. 49928 at http://www.sec.gov/rules/final/34-49928.htm.

The assessment on security futures transactions will remain unchanged at $0.0042 for each round turn transaction.

The Commission determined these new rates in accordance with Section 31 of the Securities Exchange Act of 1934.  These adjustments do not directly affect the amount of funding available to the SEC.

The Office of Interpretation and Guidance in the Commission’s Division of Trading and Markets is available for questions on Section 31 at (202) 551-5777, or by e-mail at: tradingandmarkets@sec.gov

The Commission will issue further notices as appropriate to keep the public informed of developments relating to fees under Section 31.  These notices will be posted at the Commission's Internet Website at http://www.sec.gov.
 

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SEC Unveils Public Service Announcement to Promote Background Checks on Investor.gov

SEC Staff to Host Roundtable on Market Structure for Thinly-Traded Securities

The Securities and Exchange Commission today announced its staff will host a roundtable on April 23 that will address the market structure for thinly-traded exchange-listed securities, both equities and exchange-traded products.  The roundtable, which will be held at the SEC's headquarters at 100 F Street, NE, Washington, D.C., will discuss the challenges faced by participants in the market for thinly-traded exchange-listed securities and potential improvements that might be considered to the market structure for these securities.  

Smaller companies, the securities of which are often thinly traded, play an essential role in our economy.  Currently, there is a single equity market structure for all National Market System (NMS) securities, large and small, liquid and illiquid.  Staff is interested in views from a broad range of market participants as to whether targeted changes should be made to optimize the market structure for thinly-traded securities. 

The roundtable will be open to the public and webcast live on SEC.gov.  Information on the agenda and participants will be issued shortly.

Members of the public who wish to provide their views on the topic may submit comments electronically or on paper.  Please submit comments using one method only.  Information that is submitted will become part of the public record of the roundtable and posted on the SEC's website.  All comments received will be posted without change.  Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make publicly available.

Electronic Comments:

Use the SEC's Internet submission form or send an email to rule-comments@sec.gov.

Paper Comments:

Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, D.C. 20549-1090.

All submissions should refer to File Number 265-31, and the file number should be included on the subject line if email is used. 

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SEC Awards Whistleblower More Than $2.1 Million

The Securities and Exchange Commission today announced a whistleblower award of more than $2.1 million to a former company insider whose information led to multiple successful enforcement actions.  The whistleblower’s information strongly supported the findings in the underlying actions and the whistleblower provided ongoing assistance to the staff during the investigation.

“The SEC has issued nearly $90 million in whistleblower awards in the past month alone,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “As these awards demonstrate, we continue to receive high-quality information from whistleblowers, which we use to detect and prosecute securities violations and safeguard investors.” 

Since issuing its first award in 2012, the SEC has awarded more than $266 million to 55 individuals under the whistleblower program.  In that time, almost $1.5 billion in monetary sanctions have been ordered against wrongdoers based on actionable information received from whistleblowers, including more than $740 million in disgorgement of ill-gotten gains and interest, the majority of which has been or is scheduled to be returned to harmed investors.

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. 

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.
 

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SEC Charges Texas Company, Principals in Multimillion Dollar Ponzi Scheme Targeting Seniors

On April 6, 2018, the Securities and Exchange Commission charged two Texas companies and their principals in a $2.4 million Ponzi scheme and in a related, $1.4 million offering fraud targeting retirees.

The SEC's complaint alleges that, from 2010 to 2017, Clifton E. Stanley ran a Ponzi scheme through his retirement planning and real estate investment business, The Lifepay Group, LLC. Stanley is alleged to have lured at least 30 elderly victims to invest approximately $2.4 million of their retirement savings with baseless promises and claims of outsized investment returns. He kept the scheme afloat for years by paying early investors with later investors' funds and by convincing investors to roll over their investments.  The SEC further alleges that Stanley pilfered from the estate of an elderly woman's family trust, diverting nearly $100,000 to fund the Lifepay Ponzi scheme. In addition, the SEC's complaint alleges that, beginning in 2015, Stanley and Michael E. Watts orchestrated a second offering fraud through a company they controlled, SMDRE, LLC. Stanley and Watts allegedly used a collection of misrepresentations and empty promises to convince a group of predominantly elderly victims to invest roughly $1.4 million in SMDRE.
   
Stanley is alleged to have used roughly $1.3 million of the Lifepay offering proceeds for personal expenses, including country club memberships, daily living expenses, travel, and entertainment expenses. In addition, Watts and Stanley allegedly engaged in shell game transactions so they could use the vast majority of SMDRE investor funds for personal expenses and to keep the Lifepay Ponzi scheme afloat.

"Fraudulent conduct targeting the most vulnerable among us is reprehensible," said Shamoil T. Shipchandler, Director of the SEC's Fort Worth Regional Office. "As the U.S. population ages, financial exploitation of seniors is an increasing and serious problem. It is a Commission priority to protect senior investors through our enforcement and examination programs, and we encourage senior investors and their loved ones to use the resources available on the Commission’s website to help identify risks and red flags."
 
The SEC's complaint charges Stanley, Watts, Lifepay, and SMDRE with violating the registration and antifraud provisions of the federal securities laws. Stanley was also charged for conduct stemming from his role as an unregistered broker.

Also today, the SEC's Office of Investor Education and Advocacy (OIEA) and the Division of Enforcement’s recently-formed Retail Strategy Task Force (RSTF) jointly issued an Investor Alert to help seniors spot red flags of Ponzi schemes, such as promises of high investment returns with little-to-no risk. The alert also urges seniors to use the free search tool on Investor.gov to check whether an investment professional is licensed and registered. OIEA and RSTF will continue collaborating, including through Investor Alerts and other deterrence and detection initiatives, to help prevent frauds aimed at retail investors, including those that target vulnerable groups such as senior investors.

The SEC's investigation was conducted by Tom Keltner and Carol Hahn and supervised by Scott F. Mascianica. The SEC's litigation will be led by Timothy S. McCole.

SEC Press Release

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SEC Orders Three Investment Advisers to Pay $12 Million to Harmed Clients

The Securities and Exchange Commission today announced that three investment advisers have settled charges for breaching fiduciary duties to clients and generating millions of dollars of improper fees in the process.  

According to the SEC’s orders, PNC Investments LLC, Securities America Advisors Inc., and Geneos Wealth Management Inc. failed to disclose conflicts of interest and violated their duty to seek best execution by investing advisory clients in higher-cost mutual fund shares when lower-cost shares of the same funds were available. The SEC also charged Geneos for failing to identify its revised mutual fund selection disclosures as a “material change” in its 2017 disclosure brochure.  Collectively, the firms will pay almost $15 million, with more than $12 million going to harmed clients. 

“These disclosure failures cause real harm to clients,” said C. Dabney O’Riordan, Co-Chief of the Asset Management Unit.  “We strongly encourage eligible firms to participate in the recently announced Share Class Selection Disclosure Initiative as part of an effort to stop these violations and return money to harmed investors as quickly as possible.” 

The Share Class Selection Disclosure Initiative gives eligible advisers until June 12, 2018, to self-report similar misconduct and take advantage of the Enforcement Division’s willingness to recommend more favorable settlement terms, including no civil penalties against the adviser.

The SEC’s orders also found that PNCI and Geneos failed to disclose the conflict of interest associated with compensation they received from third parties for investing clients in particular mutual funds, and that PNCI improperly charged advisory fees to client accounts for periods when there was no assigned investment advisory representative.

The SEC’s orders find that PNCI, SAA, and Geneos each violated provisions of the Investment Advisers Act of 1940, including an antifraud provision.  Without admitting or denying the findings, the advisers each consented to a cease-and-desist order and a censure.  The orders require PNCI to pay $6,407,770 in disgorgement and prejudgment interest along with a $900,000 penalty. SAA must pay $5,053,448 in disgorgement and prejudgment interest along with a $775,000 penalty. Geneos must pay $1,558,121 in disgorgement and prejudgment interest along with a $250,000 penalty.

The SEC’s investigations were conducted by staff from the Asset Management Unit. Noel M. Franklin and Kimberly L. Frederick of the Denver Regional Office conducted the investigations of SAA and Geneos, respectively, and Oreste P. McClung of the Philadelphia Regional Office conducted the investigation of PNCI.  John Farinacci, an industry expert in the Asset Management Unit, assisted with all three investigations.  The investigations were supervised by Jason Burt and Brendan McGlynn.  The SEC examinations that led to the investigations were conducted by Denver Regional Office staff Nicholas F. Madsen, Craig A. Ellis, and Kevin Vincent, and Philadelphia Regional Office staff Eric Elefante, Ly Nguyen, Steven Morton, Daniel Faigus, Miguel Torres, Jonathan Vogan, and Kate Pope. 

SEC Press Release

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SEC Obtains Emergency Freeze of $27 Million in Stock Sales of Purported Cryptocurrency Company Longfin

The Securities and Exchange Commission has obtained a court order freezing more than $27 million in trading proceeds from allegedly illegal distributions and sales of restricted shares of Longfin Corp. stock involving the company, its CEO, and three other affiliated individuals.

According to a complaint unsealed today in federal court in Manhattan, shortly after Longfin began trading on NASDAQ and announced the acquisition of a purported cryptocurrency business, its stock price rose dramatically and its market capitalization exceeded $3 billion. The SEC alleges that Amro Izzelden “Andy” Altahawi, Dorababu Penumarthi, and Suresh Tammineedi then illegally sold large blocks of their restricted Longfin shares to the public while the stock price was highly elevated. Through their sales, Altahawi, Penumarthi, and Tammineedi collectively reaped more than $27 million in profits.

According to the SEC’s complaint, Longfin’s founding CEO and controlling shareholder, Venkata Meenavalli, caused the company to issue more than two million unregistered, restricted shares to Altahawi, who was the corporate secretary and a director of Longfin, and tens of thousands of restricted shares to two other affiliated individuals, Penumarthi and Tammineedi, who were allegedly acting as nominees for Meenavalli. The subsequent sales of those restricted shares violated federal securities laws that restrict trading in unregistered shares distributed to company affiliates. 

“We acted quickly to prevent more than $27 million in alleged illicit trading profits from being transferred out of the country,” said Robert Cohen, Chief of the SEC Enforcement Division’s Cyber Unit.  “Preventing defendants from transferring this money offshore will ensure that these funds remain available as the case continues.”

The SEC’s complaint, which was filed under seal on April 4, charges Longfin, Meenavalli, Altahawi, Penumarthi, and Tammineedi with violating Section 5 of the Securities Act of 1933. The complaint seeks injunctive relief, disgorgement of ill-gotten gains, and penalties, among other relief.

The SEC’s continuing investigation is being conducted by Ernesto Amparo, Robert Nesbitt, and Adam B. Gottlieb and supervised by Anita B. Bandy and Mr. Cohen. The litigation is being led by Sarah Heaton Concannon and Kevin Lombardi and supervised by Stephan Schlegelmilch and Cheryl Crumpton.

SEC Press Release

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SEC Issues Agenda for April 9 Meeting of the Fixed Income Market Structure Advisory Committee

The Securities and Exchange Commission today released the agenda for the Fixed Income Market Structure Advisory Committee meeting, which will be held on April 9, 2018 beginning at 9:30 a.m. ET. The Commission established the advisory committee to provide a formal mechanism through which the Commission can receive advice and recommendations on fixed income market structure issues.

The April 9 meeting will focus on presentations from the three subcommittees on matters such as block trade dissemination, liquidity considerations for bond exchange-traded funds, retail customer disclosure and education, and electronic trading in the retail market.  The meeting will be held at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C., and is open to the public. The meeting will be webcast live on the SEC’s website and will be archived on the website for later viewing.

Members of the public who wish to provide their views on the matters to be considered by the Fixed Income Market Structure Advisory Committee may submit comments either electronically or on paper, as described below. Please submit comments using one method only. Information that is submitted will become part of the public record of the meeting.

[sec:ruling_comment]

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SEC Fixed Income Market Structure Advisory Committee 
Agenda 
April 9, 2018

9:30 a.m.         Remarks by Chairman Clayton; Commissioners; Director, Division of Trading and Markets, Brett Redfearn; and Committee Chairman, Michael Heaney 

10:00 a.m.       Block Trade Dissemination Draft Recommendation

• Brian Archer, Managing Director, Head of Global Credit Trading, Citigroup
• Scott Krohn, Treasurer, Verizon
• Mihir Worah, Managing Director, Chief Investment Officer, Asset Allocation and Real Return, PIMCO

11:15 a.m.       Break  

11:30 a.m.       Liquidity Considerations for Bond ETFs

• Joe Arcadi, Head of North America Credit Index Trading, JPMorgan Chase
• Matt Berger, Global Head of Fixed Income and Commodities, Jane Street
• Sean Collins, Chief Economist, Investment Company Institute
• Krishna Memani, Chief Investment Officer, Head of Fixed Income, OppenheimerFunds
• Gregory Peters, Managing Director, Senior Portfolio Manager, PGIM Fixed Income

12:30 p.m.       Lunch Break/Administrative Session

1:30 p.m.         Retail Investor Disclosure and Education   

• Robert Colby, Chief Legal Officer, FINRA
• Melissa Gainor, Senior Special Counsel, Division of Investment Management, U.S. Securities & Exchange Commission
• Nick Goetze, Managing Director, Fixed Income Services, Raymond James
• Gary Mottola, Research Director, FINRA Investor Education Foundation

2:15 p.m.         Break

2:30 p.m.         Electronic Trading in the Retail Market

• Matthew Andresen, CEO, Headlands Technologies
• Robert Colby, Chief Legal Officer, FINRA
• Renzo Iturrino, Vice President, Fixed Income Product, Fidelity Capital Markets
• Kristin Maher, Managing Director, Head of Fixed Income Services, Wells Fargo Advisors
• Thomas Vales, Chairman and CEO, TMC Bonds

3:45 p.m.         Discussion of Committee Next Steps

4:00 p.m.         Adjournment 

SEC Press Release

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SEC Charges Medical Device Company The Eye Machine and Founder Pocklington With Fraud

The Securities and Exchange Commission today charged convicted felon and former NHL team owner Peter H. Pocklington, his medical device company, and others with defrauding investors by hiding Pocklington’s recidivist history and by misappropriating investor funds.  

The SEC alleges that in 2010, Pocklington pleaded guilty to a federal felony perjury charge and was later ordered to pay over $5 million as part of a settlement for unrelated state securities fraud and registration charges.  Pocklington subsequently founded and now controls California-based The Eye Machine LLC (now known as Nova Oculus Partners LLC), a medical device company that raised over $14 million between 2014 and 2017 from more than 260 investors in unregistered offerings. 

According to the SEC’s complaint, Pocklington and his attorney, Lantson E. Eldred, structured the ownership of The Eye Machine to conceal Pocklington’s role with the company and held Eldred out as the company’s “visual front.”  In the offerings, Pocklington, Eldred, and The Eye Machine allegedly failed to disclose Pocklington’s checkered history and involvement, and misrepresented how investor funds would be spent.  Pocklington allegedly misappropriated over $600,000 of investor funds for personal use, including funding his gold mining companies and paying personal legal and credit card bills.  The complaint also alleges that The Eye Machine paid millions of dollars in undisclosed and excessive sales commissions to defendants Yolanda C. Velazquez, Vanessa Puleo, and Robert A. Vanetten, who acted as unregistered brokers for the company.  According to the complaint, Velazquez – whom the SEC previously barred from acting as a broker-dealer – and Puleo used “boiler room” operations in Florida to “cold call” investors.

“Investors should know when a recidivist plays a central role in a company’s operations and offerings,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office.  “Investors should research the background of anyone offering an investment, but they can only do this if the offering accurately and adequately discloses the individuals involved.”  

The SEC’s complaint, filed in federal court in California, charges The Eye Machine, Pocklington, and Eldred with violating the antifraud and securities registration provisions of the federal securities laws.  The complaint also charges The Eye Machine’s majority shareholder, AMC Holdings, LLC, and Terrence J. Walton, The Eye Machine’s in-house accountant, with securities fraud violations.  In addition, the complaint charges Velazquez, Puleo, and Vanetten with broker-dealer registration and securities registration violations.  Velazquez is also charged with violating a prior SEC order barring her from associating with a broker-dealer.  The complaint seeks injunctive relief, disgorgement and interest, and penalties. 

The SEC’s investigation was conducted by Kathryn C. Wanner and Maria Rodriguez and supervised by Victoria A. Levin of the SEC’s Los Angeles Regional Office.  The litigation will be led by Douglas M. Miller and supervised by Amy J. Longo.

SEC Press Release

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SEC Awards More Than $2.2 Million to Whistleblower Who First Reported Information to Another Federal Agency Before SEC

The Securities and Exchange Commission today announced a whistleblower award of more than $2.2 million to a former company insider whose tips helped the agency open an investigation that led to an enforcement action.  The whistleblower first reported the information to another federal agency and later provided the same information to the SEC. 

This is the first award paid under the “safe harbor” of Exchange Act Rule 21F-4(b)(7), which provides that if a whistleblower submits information to another federal agency and submits the same information to the SEC within 120 days, then the SEC will treat the information as though it had been submitted to the SEC at the same time that it was submitted to the other agency. 

The whistleblower voluntarily reported information to a federal agency covered by the rule, which referred the matter to the SEC.  The SEC then opened an investigation.  Within 120 days of the initial report, the whistleblower provided the same information to the SEC and later provided substantial cooperation in the investigation.  Although the SEC report came after the staff had opened its investigation, the SEC treated the submission as though it had been made when the whistleblower provided the information to the other agency.

 “Whistleblowers, especially non-lawyers, may not always know where to report, or may report to multiple agencies,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “This award shows that whistleblowers can still receive an award if they first report to another agency, as long as they also report their information to the SEC within the 120-day safe harbor period and their information otherwise meets the eligibility criteria for an award.”

The SEC has awarded more than $264 million to 54 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.

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

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Joel R. Levin Named Director of Chicago Regional Office

The Securities and Exchange Commission today announced that Joel R. Levin has been named Director of the Chicago Regional Office.  He will join the agency next month.

Mr. Levin is a veteran federal prosecutor who has served in various senior leadership positions in the Department of Justice over the last 25 years.  Since 2014, he has served as the First Assistant U.S. Attorney in the U.S. Attorney’s Office for the Northern District of Illinois, where he manages a staff of approximately 290 attorneys and support personnel and oversees the operation of both the Criminal and Civil Divisions of the office. Mr. Levin also served as the Acting U.S. Attorney in that District from March to November 2017. 

Mr. Levin previously served as an Assistant U.S. Attorney in Milwaukee from 1980 to 1984 and in San Francisco from 1984 to 1997, where he rose to the position of Chief of the office’s Criminal Division.  In 1997, Mr. Levin joined the U.S. Attorney’s Office in Chicago, where he eventually was named as Deputy Chief of the Major Case Unit and Chief of the Financial Fraud and Special Prosecutions Section.  Mr. Levin was part of the trial team that successfully prosecuted former Illinois Governor George Ryan on corruption charges. From 2008 to 2014, Mr. Levin was a member of the White Collar & Investigations practice at the law firm Perkins Coie LLP.  Mr. Levin is a Fellow of the American College of Trial Lawyers and for the last ten years has served as an adjunct professor of law at Northwestern University. 

As Regional Director of the SEC’s Chicago Office, Mr. Levin will lead a staff of approximately 270 enforcement attorneys, accountants, investigators, and securities compliance examiners involved in the investigation and prosecution of enforcement actions and the performance of compliance examinations.  The nine-state region overseen by the SEC’s Chicago office is home to roughly 20 percent of the nation’s population.

“We are excited that Joel has agreed to bring his extensive law enforcement experience and judgment to the SEC’s Chicago Regional Office,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement.  “Under Joel’s leadership, the talented staff of the Chicago Regional Office will continue its important mission to protect investors and markets in one of the nation’s busiest regions.”

“Joel has spent years conducting or supervising investigations of complex securities frauds, financial crimes, and other white collar matters,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.  “His experience at the helm of one of the busiest U.S. Attorney’s Offices in the country makes him an excellent choice to lead our Chicago office.  We are very fortunate to have him join our team.” 

“Joel’s significant leadership experience will be a great complement to our talented and dedicated examination team in the Chicago office,” said Peter B. Driscoll, Director of the SEC’s Office of Compliance Inspections and Examinations.  “His years as a prosecutor and in private practice specializing in complex financial and white collar matters will be a great asset to our program.”

Mr. Levin added, “I am excited and honored to have this opportunity to lead the SEC’s Chicago office.  In my work at the U.S. Attorney’s Office, I have repeatedly witnessed the dedication and success of the SEC in protecting the integrity of the markets and bringing to justice those who target retail investors.  I very much look forward to joining the talented men and women of the Chicago SEC Office in continuing that important work.” 

Mr. Levin received an undergraduate degree from Yale University in 1976 and graduated from Harvard Law School in 1979. 

SEC Press Release

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SEC Names Peter Henry as Director of the Office of Equal Employment Opportunity

The Securities and Exchange Commission today announced that Peter Henry has been named Director of the agency’s Office of Equal Employment Opportunity (OEEO).  Mr. Henry joined the SEC as OEEO Deputy Director in 2014, and has been serving as the office’s Acting Director since 2016. 

OEEO’s responsibilities include analyzing potential barriers to equal employment opportunity and processing discrimination complaints.  By focusing on the prevention of employment discrimination and discriminatory harassment in the SEC’s workplace and providing a neutral process for resolving claims of bias, the office fosters a supportive working environment for SEC employees to contribute to the best of their ability.  

“Peter and his team have built a strong equal employment opportunity program at the SEC, and I’m very pleased that he will continue to serve the agency as our new OEEO Director,” said Chairman Jay Clayton.  “Peter’s demonstrated leadership skills and vision for using more data analytics and proactive engagement to expand OEEO’s effectiveness will help ensure the SEC remains focused on delivering a fair, respectful, and inclusive work environment for the agency’s dedicated staff.”

“It’s an honor to be named Director of the Office of Equal Employment Opportunity,” said Mr. Henry. “Chairman Clayton is a strong advocate of OEEO’s mission, and I look forward to continuing to work with him and my colleagues across the agency to foster equality of opportunity at the Commission.”

Mr. Henry has practiced federal employment and labor law for two decades.  Prior to joining the SEC in 2014, he served as an associate legal advisor at Immigration and Customs Enforcement, a component of the Department of Homeland Security, where he advised on EEO, performance, and labor matters under the civil rights laws and EEOC regulations.  He also spent 14 years at the U.S. Postal Service, including as senior counsel. 

Mr. Henry received his B.S. from the University of Virginia and his law degree from the University of Michigan.

SEC Press Release

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SEC Warns of Government Impersonators

The Securities and Exchange Commission today issued an Investor Alert warning investors of fraudsters claiming to be SEC employees in an attempt to trick investors into sending money or revealing sensitive account information.  The alert makes clear that the SEC does not contact investors to confirm trades, set up trading accounts, or record the details of trades.  The alert also notes that federal government agencies, including the SEC, do not endorse or sponsor any particular securities, issuers, products, services, professional credentials, firms, or individuals.
  
The alert includes an audio recording of an actual imposter making a fraudulent pitch, excerpted below:

“…I’m a senior compliance officer with the Securities and Exchange Commission… I am confirming a buy order from Mr. [REDACTED], who is a portfolio manager of [REDACTED]…in accordance to the regulations that are set forth by the Securities and Exchange Commission on the U.S. markets, Mr. [REDACTED], for the protection of both parties, what I’m going to do is record the details of the trade. It goes on file as a voice audio signature with the Securities and Exchange Commission as a regulated trade . . . It’s non-retractable…do I have your consent to place the order?”

“The audio recording is what fraud sounds like,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “We included the recording in our Investor Alert so investors can hear the lies and high pressure tactics imposters use to cheat potential victims out of their money.”

The SEC received the recording from a quick-thinking investor who suspected the call was fraudulent.  The investor did not hand over any money to the scam.

Investors who are unsure whether correspondence claiming to be from the SEC is authentic can call the SEC’s Office of Investor Education and Advocacy (OIEA) at 1-800-732-0330 or email Help@SEC.gov. OIEA responds to investors’ questions and complaints, engages in educational outreach, and provides free investment tools and resources on Investor.gov.

If you believe you have been contacted by someone pretending to be from the SEC, submit a Complaint Form to the SEC’s Office of Inspector General (OIG) or call the OIG’s toll-free hotline at (877) 442-0854.

SEC Press Release

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SEC Promotes Investor Awareness During National Financial Capability Month

As part of National Financial Capability Month, the Securities and Exchange Commission's Office of Investor Education and Advocacy (OIEA) is encouraging investors to go to Investor.gov to learn about the importance of saving and investing early, and to check out their investment professional before investing. Investor.gov also provides investors with free financial planning tools such as a compound interest calculator, information on investment products, risks and fees, as well as alerts on recent investment scams and bulletins on various securities topics.

In support of National Financial Capability Month, which was designated this year by presidential message, OIEA staff will participate in education programs and activities with military service members, students, seniors and the general public throughout the month of April in an effort to enhance Americans' understanding of financial principles and practices.  The office's public service announcements and additional investment resources are available online at Investor.gov.

"Education is a critical part of our efforts to empower investors to make informed investment decisions, not only during National Financial Capability Month, but every day throughout the year," said SEC Chairman Jay Clayton. "Learning how to invest wisely and be alert to risks can help all Americans reach their financial goals."

"National Financial Capability Month brings increased focus on the importance of financial literacy and provides an opportunity to remind investors of the work they must do to help themselves make smart investment decisions," said Lori J. Schock, Director of the SEC's Office of Investor Education and Advocacy.

Among the themes the SEC's investor education office will convey to investors this month:
 

• Learn About the Importance of Saving and Investing Early – Learn about the effect of compounding over time on your initial investment.
• Check Out Your Financial Professional on Investor.gov – Use free resources that are available to check the backgrounds of investment professionals before investing.  Learn some top tips for selecting a financial professional.
• Research and Understand Investment Products Before Making a Decision – Understand the basics of investing and how to research public companies before making an investment.  Learn about things to consider before investing in an IPO.  Learn more about risks involved with fixed-income investments or municipal bonds.
• Take Full Advantage of Company Matching – An easy way to boost your retirement savings is to take full advantage of the “free money” many employer-sponsored retirement plans offer.   
• Understand Investment Fees and Their Impact on Returns – Fees and expenses can have a real effect on your investments, including mutual funds and ETFs, variable annuities, and 529 college savings plans.
• Beware of the Red Flags of Investment Fraud – Be alert that claims of high returns with little to no risk are a common red flag for potential investment fraud.  Learn more about how to avoid investment scams, take steps to protect your online investment accounts from fraud and look out for potential scams involving public companies making ICO-related claims.

SEC Press Release

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SEC Proposes Targeted Changes to Public Liquidity ...

he Securities and Exchange Commission 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.   

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Corporate finance issues or questions? Call Mark Astarita at 212-509-6544 or visit The Securities Law Home Page

SEC Halts Fraudulent Scheme Involving Unregistered ICO

The Securities and Exchange Commission today charged two co-founders of a purported financial services start-up with orchestrating a fraudulent initial coin offering (ICO) that raised more than $32 million from thousands of investors last year.  Criminal authorities separately charged and arrested both defendants.   

The SEC's complaint alleges that Sohrab “Sam” Sharma and Robert Farkas, co-founders of Centra Tech. Inc., masterminded a fraudulent ICO in which Centra offered and sold unregistered investments through a "CTR Token."  Sharma and Farkas allegedly claimed that funds raised in the ICO would help build a suite of financial products.  They claimed, for example, to offer a debit card backed by Visa and MasterCard that would allow users to instantly convert hard-to-spend cryptocurrencies into U.S. dollars or other legal tender.  In reality, the SEC alleges, Centra had no relationships with Visa or MasterCard.  The SEC also alleges that to promote the ICO, Sharma and Farkas created fictional executives with impressive biographies, posted false or misleading marketing materials to Centra’s website, and paid celebrities to tout the ICO on social media.  

According to the complaint, Farkas made flight reservations to leave the country, but was arrested before he was able to board his flight.  Criminal authorities also arrested Sharma.  

"We allege that Centra sold investors on the promise of new digital technologies by using a sophisticated marketing campaign to spin a web of lies about their supposed partnerships with legitimate businesses,” said Stephanie Avakian, Co-Director of the SEC's Division of Enforcement.  “As the complaint alleges, these and other claims were simply false."

"As we allege, the defendants relied heavily on celebrity endorsements and social media to market their scheme,” said Steve Peikin, Co-Director of the SEC's Division of Enforcement.  “Endorsements and glossy marketing materials are no substitute for the SEC’s registration and disclosure requirements as well as diligence by investors.” 

The SEC’s complaint, filed in federal court in the Southern District of New York, charges Sharma and Farkas with violating the anti-fraud and registration provisions of the federal securities laws.  The complaint seeks permanent injunctions, return of allegedly ill-gotten gains plus interest and penalties, as well as bars against Sharma and Farkas serving as public company officers or directors and from participating in any offering of digital or other securities.  In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Sharma and Farkas.  

The SEC's investigation, which is continuing, is being conducted by Jon A. Daniels, Luke M. Fitzgerald, and Alison R. Levine of the SEC's Cyber Unit and New York Regional Office, and supervised by Valerie A. Szczepanik and Robert A. Cohen.  The litigation is being conducted by Mr. Daniels, Mr. Fitzgerald, and Ms. Levine, and supervised by Ms. Szczepanik.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority. 

Investors in the Centra ICO who believe they may be a victim should contact www.SEC.gov/tcr.  The SEC's Office of Investor Education and Advocacy has issued an Investor Bulletin on initial coin offerings and additional information is available on Investor.gov and SEC.gov.

SEC Press Release

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SEC Charges Fintech Company Founder With Scheme to Defraud Investors and Misappropriate Funds

The Securities and Exchange Commission has charged Michael Liberty, the founder of the fintech startup now known as Mozido Inc., with a scheme to trick hundreds of investors into investing in his shell companies instead of Mozido.  Liberty and his accomplices then allegedly stole most of the more than $48 million raised to fund a lavish lifestyle that included private jet flights, multi-million dollar residences, expensive cars, and movie production ventures. 

The SEC’s complaint, filed March 30, 2018, alleges that Liberty, his wife Brittany Liberty, his attorney George Marcus, his cousin Richard Liberty, and his cousin’s friend Paul Hess induced investors to purchase unregistered interests in shell companies controlled by Michael Liberty that supposedly owned transferrable interests in Mozido.  In reality, the shell companies either did not own or were not permitted to transfer interests in the company.  The SEC also alleges that Michael Liberty and his accomplices lied to investors about Mozido’s valuation and finances, the amount Michael Liberty had personally invested in Mozido, and the use of their funds.  According to the complaint, Michael Liberty and his accomplices later orchestrated a series of transactions in which they used investors’ own money to heavily dilute their interests and duped investors into trading securities for those worth more than 90 percent less. 

“As alleged in our complaint, these investments were sold as a chance to get in early with a seemingly promising fintech company,” said Paul Levenson, Director of the SEC’s Boston Regional Office.  “The prospect of investing in a non-public start-up company may hold considerable allure, but buyers need to understand what they are buying.  Unscrupulous operators make it difficult for ordinary investors to assess such ‘investment opportunities.’”  

The SEC’s complaint, filed in federal court in Maine, charges the defendants with violating the antifraud and registration provisions of the federal securities laws. 

The litigation is being led by Marc Jones, Peter Bryan Moores, Trevor Donelan, and Kevin Currid of the Boston 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.