SEC Charges Buffalo Advisory Firm and Principal With Fraud Relating to Association With Barred Adviser

The Securities and Exchange Commission today filed charges against a Buffalo, New York, investment advisory firm and its owner for misleading firm clients about its association with a barred investment adviser, who is also being charged for violating the bar.  

The SEC’s complaint alleges that in 2014, Walter Grenda sold his investment advisory assets, including his longstanding client base, to Grenda Group LLC and his son, Gregory Grenda, in anticipation of a negative outcome in an SEC fraud investigation. In 2015, the SEC barred Walter Grenda from association with an investment adviser, but the SEC alleges that Walter Grenda continued to associate with Grenda Group by meeting with a prospective client and current clients in the firm’s offices, as well as making discretionary changes to clients’ investment accounts. The complaint alleges that Grenda Group and Gregory Grenda permitted Walter Grenda’s association with the firm, failed to disclose his bar to their clients, and made misleading statements to clients who inquired about Walter Grenda’s bar. The SEC further alleges that Walter Grenda impersonated a Grenda Group client on a call to the firm’s broker-dealer and, while subject to the associational bar, Walter Grenda repeatedly impersonated his son on calls to the firm’s broker-dealer, after which the broker-dealer terminated its relationship with Grenda Group. The complaint alleges that Grenda Group and Gregory Grenda later made misleading statements to clients and failed to disclose material facts about the termination.

“Associational bars are designed to protect retail investors from those the SEC has deemed unfit to provide advisory services,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “Here, we allege that bar was circumvented, and took action to ensure investors are protected.”

The SEC’s Office of Investor Education and Advocacy (OIEA) recently issued an Investor Alert to encourage investors to check the background of anyone selling or offering them an investment using the free and simple search tool on Investor.gov. Investors can also use the SALI feature to find information about certain people who have had judgments or orders issued against them in SEC court actions or administrative proceedings. 

The SEC’s complaint charges Grenda Group, Gregory Grenda, and Walter Grenda with violating Section 203(f) of the Investment Advisers Act of 1940. It also charges Grenda Group and Gregory Grenda with fraud under the Advisers Act, and Walter Grenda for aiding and abetting their fraud. The complaint seeks penalties and permanent injunctions.

The SEC’s investigation was conducted by Kimberly A. Yuhas, a member of the Enforcement Division’s Retail Strategy Task Force, along with Haimavathi V. Marlier, Melissa A. Coppola, and Steven G. Rawlings in the New York office, and the litigation will be led by Ms. Marlier and Ms. Yuhas. The case is being supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

SEC Press Release

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SEC Charges Florida Cash Advance Company, Former CEO With Defrauding Retail Investors

The Securities and Exchange Commission today announced charges against 1 Global Capital LLC and its former chief executive officer for allegedly defrauding at least 3,400 retail investors, more than one-third of whom invested their retirement funds. The Florida-based cash advance company and former CEO Carl Ruderman allegedly fraudulently raised more than $287 million since 2014 in unregistered securities sold through a network that included barred brokers.

On August 23, the Honorable Judge Beth Bloom of U.S. District Court for the Southern District of Florida granted the SEC’s request for a temporary asset freeze against Ruderman and other Ruderman companies charged by the SEC as relief defendants. The court also granted the SEC’s request to appoint a receiver over certain of the relief defendants – Bright Smile Financing LLC, BRR Block Inc., Digi South LLC, Ganador Enterprises LLC, Media Pay LLC, and Pay Now Direct LLC. The court scheduled a hearing for September 7 for Ruderman and the relief defendants to show cause, if any, why the asset freeze order should not continue for the pendency of the litigation or until otherwise ordered by the court.

According to the SEC’s complaint unsealed Tuesday, although investors were promised profits from 1 Global’s loans to small and mid-sized companies, a large portion of their money went to Ruderman’s lavish personal spending and to his consumer-loan companies, Bright Smile Financing and Ganador Enterprises, which had nothing to do with 1 Global’s cash advance business. Investors in 1 Global allegedly were given bogus account statements and were falsely told that it had an independent auditor, and that its secured loans, typically for small amounts, had low default rates. According to the complaint, in contrast to what it told investors, 1 Global marketed itself to business borrowers as a low-hassle way to access cash quickly, often made large, unsecured loans, and had significant problems with collections. 1 Global declared bankruptcy in July and Ruderman resigned from the company.

“The misconduct that we’ve alleged occurred in this case directly impacted retail investors,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “We filed this action on an emergency basis to protect those investors from further harm.”

“We allege that 1 Global’s business model was a sham because instead of using investor funds as promised, 1 Global and Ruderman diverted significant funds, including to Ruderman himself for his personal benefit,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “The SEC’s investigation effectively stopped 1 Global’s offering and prevented further harm to investors and retirement funds.”

The SEC’s complaint charges 1 Global and Ruderman with violations of the antifraud, securities registration, and broker-dealer registration provisions of the federal securities laws. The SEC seeks disgorgement of allegedly ill-gotten gains and prejudgment interest from the defendants and relief defendants, and financial penalties against the defendants. 

The SEC’s continuing investigation is being conducted by Gary Miller and Mark Dee in the Miami Regional Office and supervised by Elisha L. Frank and Fernando Torres. The SEC’s litigation is being led by Christopher Martin and Robert K. Levenson. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Florida, the Federal Bureau of Investigation, the Florida Office of Financial Regulation, and the Colorado Division of Securities.

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.

SEC Press Release

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SEC Charges NFL Player and Former Investment Banker With Insider Trading

The Securities and Exchange Commission today charged a professional football player and a former investment banker with insider trading in advance of corporate acquisitions facilitated through coded text messages and FaceTime conversations.

The SEC alleges that after meeting at a party, Mychal Kendricks began receiving illegal tips from Damilare Sonoiki, an analyst at an investment bank who had access to confidential, nonpublic information about upcoming corporate mergers. Kendricks allegedly made $1.2 million in illegal profits by purchasing securities in companies that were soon to be acquired and then selling his positions after the deals were publicly announced, in one instance generating a nearly 400 percent return on his investment in just two weeks.

According to the SEC’s complaint, Kendricks rewarded Sonoiki for his tips and other assistance, which included setting up an online brokerage account that both men could access, by providing cash kickbacks, free NFL tickets, and an evening on the set of a pop star’s music video in which Kendricks made a cameo appearance.

“As alleged in our complaint, Kendricks paid cash and shared celebrity perks for illegal tips that enabled him to trade and profit on confidential information that the rest of the investing public didn’t have,” said Stephanie Avakian, Co-Director of the SEC Enforcement Division.

“Kendricks and Sonoiki allegedly tried to evade detection by using a variety of communication methods to hide their misconduct, but we were able to use methodical investigative work to piece together a trail of evidence and expose their insider trading scheme,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit.

The SEC’s complaint, filed in federal district court in Philadelphia, charges Kendricks and Sonoiki with fraud and is seeking the return of their ill-gotten trading profits plus interest and penalties.

The U.S. Attorney’s Office for the Eastern District of Pennsylvania today announced parallel criminal charges against Kendricks and Sonoiki.

The SEC’s investigation, which is continuing, has been conducted by Rachael Clarke and Patrick McCluskey of the Market Abuse Unit in the Philadelphia Regional Office, with the assistance of John Rymas of the unit’s Analysis and Detection Center. The litigation will be led by Jennifer Chun Barry. The case has been supervised by Mr. Sansone and Kelly L. Gibson. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of Philadelphia, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

SEC Press Release

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SEC Charges Moody’s With Internal Controls Failures and Ratings Symbols Deficiencies

The Securities and Exchange Commission today announced that Moody’s Investors Service Inc., one of the nation’s largest credit ratings agencies, has agreed to pay a total of $16.25 million in penalties to settle charges involving internal control failures and failing to clearly define and consistently apply credit rating symbols. This marks the first time the SEC has filed an enforcement action involving rating symbol deficiencies.

Moody’s agreed to pay $15 million to settle charges of internal controls failures involving models it used in rating U.S. residential mortgage-backed securities (RMBS) and will retain an independent consultant to assess and improve its internal controls. Moody’s separately agreed to pay $1.25 million and to review its policies, procedures, and internal controls regarding rating symbols. Moody’s did not admit or deny the SEC’s charges.

According to the SEC’s order in the internal controls proceeding, Moody’s failed to establish and document an effective internal control structure as to models that Moody’s had outsourced from a corporate affiliate and used in rating RMBS from 2010 through 2013. Moreover, Moody’s failed to maintain and enforce existing internal controls that should have been applied to the models. Ultimately, Moody’s corrected more than 650 RMBS ratings with a notional value exceeding $49 billion, due, in part, to errors in the models. Also, in 54 instances, Moody’s failed to document its rationale for issuing final RMBS ratings that deviated materially from model-implied ratings.

“Rating agencies play a critical role in our capital markets and need to have effective controls over their rating processes,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. “As our order notes, the SEC put Moody’s on notice about its internal controls obligations yet it did not develop an effective process to ensure the accuracy of the models it relied upon when rating residential mortgage-backed securities.”

In the SEC’s order relating to rating symbols, for 26 ratings of securities known as “combo notes” with a total notional value of about $2 billion, Moody’s assigned ratings to combo notes in a manner that was inconsistent with other types of securities that used the same rating symbols.  

“Investors expect and the law requires that symbols used by rating agencies be clearly defined and consistently applied,” said Reid Muoio, Deputy Chief of the Enforcement Division’s Complex Financial Instruments Unit. “Today’s proceeding is the SEC’s first enforcing the Universal Ratings Symbol requirement and we will continue to pursue failures that render rating symbols unclear or inconsistent.”

The internal controls case was investigated by Pei Chung, Greg Hillson, Jason Litow, and Pam Nolan and supervised by Deborah A. Tarasevich, Yuri B. Zelinsky, and Ms. Chion. Daniel Maher and Nicholas Margida of the Enforcement Division’s Trial Unit assisted with the investigation. The ratings symbols matter was investigated by Armita Cohen and Robert Leidenheimer and supervised by Mr. Muoio, of the Complex Financial Instruments Unit. Thomas Bednar of the Enforcement Division’s Trial Unit assisted with the investigation. Michael Bloise, Kristin Costello, Ilya Fradkin, Ken Godwin, Natasha Kaden, David Nicolardi, Warren Tong, David Bobillot, and Michele Wilham in the SEC’s Office of Credit Ratings also provided assistance.

SEC Press Release

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Legg Mason Charged With Violating the FCPA

The Securities and Exchange Commission today announced that Legg Mason Inc. will pay over $34 million to resolve an SEC charge that the company violated the Foreign Corrupt Practices Act (FCPA) in a scheme to bribe Libyan government officials.  

According to the SEC’s order, between 2004 and 2010, a former Legg Mason asset management subsidiary, Permal Group Inc., partnered with a French financial services company to solicit investment business from Libyan state-owned financial institutions. These entities engaged in a scheme to pay bribes to Libyan government officials through a Libyan middleman in order to secure investments. As a result of the corrupt scheme, Legg Mason, through its Permal subsidiary, was awarded business tied to $1 billion of investments for the Libyan financial institutions, earning net revenues of approximately $31.6 million. According to the SEC’s order, the middleman used the term “cooking” to describe his ability to cause Libyan government officials to invest by any means necessary, including bribes.

“Companies must take adequate steps to identify and mitigate the risks of bribery and corruption present in their global business. Those risks are particularly acute when, as here, agents and middlemen are used as part of a company’s efforts to obtain business with government clients,” said Charles Cain, Chief of the Enforcement Division’s FCPA Unit.

The SEC’s order finds that Legg Mason violated the internal accounting controls provision of the Securities Exchange Act of 1934. Legg Mason agreed to disgorge approximately $27.6 million of ill-gotten gains plus $6.9 million in prejudgment interest to settle the SEC’s case. Legg Mason had also previously agreed to pay $33 million to the U.S. Department of Justice in sanctions resulting from the firm’s involvement in the Libyan bribery scheme.  

The SEC’s investigation was conducted by Eric Heining and Paul G. Block of the FCPA Unit and Rory Alex and Martin F. Healey of the Boston Regional Office. The SEC appreciates the assistance of the Fraud Section of the Department of Justice, the U.S. Attorney’s Office for the Eastern District of New York, and the Federal Bureau of Investigation.

SEC Press Release

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Transamerica Entities to Pay $97 Million to Investors Relating to Errors in Quantitative Investment Models

The Securities and Exchange Commission today announced charges against four Transamerica entities for misconduct involving faulty investment models and ordered the entities to refund $97 million to misled retail investors.

According to the SEC’s order, investors put billions of dollars into mutual funds and strategies using the faulty models developed by investment adviser AEGON USA Investment Management LLC (AUIM). AUIM, its affiliated investment advisers Transamerica Asset Management Inc. (TAM) and Transamerica Financial Advisors Inc., and its affiliated broker-dealer Transamerica Capital Inc., claimed that investment decisions would be based on AUIM’s quantitative models. The SEC’s order finds that the models, which were developed solely by an inexperienced, junior AUIM analyst, contained numerous errors, and did not work as promised. The SEC found that when AUIM and TAM learned about the errors, they stopped using the models without telling investors or disclosing the errors. 

“Investors were repeatedly misled about the quantitative models being used to manage their investments, which subjected them to significant hidden risks and deprived them of the ability to make informed investment decisions,” said C. Dabney O’Riordan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

Without admitting or denying the SEC’s findings, the four Transamerica entities agreed to settle the SEC’s charges and pay nearly $53.3 million in disgorgement, $8 million in interest, and a $36.3 million penalty, and will create and administer a fair fund to distribute the entire $97.6 million to affected investors.

In separate orders, the SEC also found that AUIM’s former Global Chief Investment Officer, Bradley Beman, and AUIM’s former Director of New Initiatives, Kevin Giles, each were a cause of certain of AUIM’s violations. In particular, the Commission found that Mr. Beman did not take reasonable steps to make sure the mutual funds’ models worked as intended and that Mr. Beman and Mr. Giles both contributed to AUIM’s compliance failings related to the development and use of models. Beman and Giles agreed to settle the SEC’s charges without admitting or denying the findings and pay, respectively, $65,000 and $25,000 in penalties that also will be distributed to affected investors. 

The SEC’s investigation was conducted by David Benson, Anne Graber Blazek, and Paul Montoya of the Enforcement Division’s Asset Management Unit in the Chicago Regional Office, and Michael Cohn of the Asset Management Unit in the New York Regional Office.

SEC Press Release

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SEC Announces Agenda for Sept. 13 Investor Advisory Committee Meeting

The Securities and Exchange Commission today announced the agenda for the Sept. 13 meeting of its Investor Advisory Committee (IAC). The meeting will begin at 9:00 a.m. in the Multipurpose Room at SEC headquarters at 100 F Street, NE, Washington, D.C., and is open to the public. The meeting will be webcast live and archived on the committee’s website for later viewing.

The committee will hold panel discussions with outside speakers on two topics: a morning discussion on the U.S. proxy voting infrastructure (which may include two separate panels) and an afternoon session on the implications of passive investing. In addition, the committee will discuss the SEC’s Proposed Transaction Fee Pilot in NMS stocks (which may include a Recommendation of the IAC Market Structure Subcommittee).  

Members of the committee represent a wide variety of investor interests, including those of individual and institutional investors, senior citizens, and state securities commissions. For a full list of committee members, see the committee’s webpage.

The Investor Advisory Committee was established to advise the SEC on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The Committee is authorized to submit findings and recommendations to the Commission.

SEC Press Release

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SEC Names Matthew S. Jacques as Chief Accountant in Enforcement Division

The Securities and Exchange Commission today announced that Matthew S. Jacques has been named the new chief accountant in the SEC’s Division of Enforcement.

Mr. Jacques, who for six years served as a senior enforcement accountant in the SEC’s Boston Regional Office, rejoins the SEC enforcement staff from AlixPartners, where he has been a managing director since 2013.  He has led teams conducting complex forensic investigations in high-profile accounting, securities, anti-corruption and other financial matters.  He has nearly two decades of experience as a public accountant, regulator, expert witness and forensic accountant.  He is a certified public accountant and certified fraud examiner.

Mr. Jacques will start working at the SEC in October.

“Financial statement and accounting fraud are high enforcement priorities for the SEC, and accounting expertise is critical to unraveling this kind of wrongdoing,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.  “We are excited to have Matt rejoin the SEC and contribute to a strong and effective issuer reporting and disclosure enforcement program.”

“I’m pleased that Matt has agreed to lead our accounting staff,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement.  “Investors will benefit from Matt’s sound judgment and dedication to pursuing financial statement and accounting fraud.”

Mr. Jacques added, “I deeply appreciate the opportunity to rejoin the SEC’s Enforcement Division.  I am excited to team with the incredibly talented professionals across the agency as we work together to further the SEC’s mission.”

Prior to working at the SEC from 2007 to 2013, Mr. Jacques was a forensic accountant at Ernst & Young, where he was engaged by counsel to provide accounting expertise in investigations and litigation.  He began his career in public accounting as an auditor at Arthur Andersen.

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.

Barry Miller, Associate Director in Division of Investment Management, to Leave SEC After More Than 40 Years of Public Service

The Securities and Exchange Commission today announced that Barry D. Miller, Associate Director of Disclosure Review and Accounting in the Division of Investment Management, will retire from the SEC at the end of this month after more than 40 years of public service, including more than 30 years of service at the SEC.

As an associate director overseeing the division's disclosure and accounting review programs, Mr. Miller has been primarily responsible for the implementation of disclosure and accounting policy that impacts nearly 16,000 investment companies, including open-end, closed-end, exchange-traded funds, unit investment trusts, and business development companies. His work included overseeing the review of many novel funds involving new and unique structures and strategies, including some of the first exchange-traded funds. Mr. Miller also provided key counsel on all rules that impact or include disclosure and accounting requirements, from managing the overhaul of mutual fund disclosures following the 2009 "summary prospectus" reforms to building a new review system for fund annual reports as required by the Sarbanes-Oxley Act. Mr. Miller also has overseen the modernization of how the Division reviews fund disclosures, including incorporating the use of data to target key issues and increase the efficiency of the review process.

"For over 30 years, Barry has been a dedicated public servant who has worked hard every day to serve America's investors," said Chairman Jay Clayton. "He leaves a lasting legacy at the Commission."  

"Barry has been a transformative leader throughout his distinguished public service career. American investors have been well served by Barry's focused attention on fair and full disclosure," said Dalia Blass, Director of the Division of Investment Management. "For decades Barry has taught and mentored countless attorneys and accountants on the importance of disclosure to the American investor and our markets, often empowering the staff around him to become thought leaders themselves. His thoughtful leadership, commitment to the SEC's mission, and sound counsel will be missed," Ms. Blass added. 

"I feel extremely fortunate to have been able to learn from and work with the talented staff in the division and throughout the Commission," said Mr. Miller.  "I am very proud of the work we have done to provide full and fair disclosure to everyday investors and assist in capital formation. I can’t imagine a better place to have spent my legal career."

Mr. Miller has been recognized for his service on a number of occasions, including receiving the Byron Woodside Award in 2004 for his contributions to the Commission's full disclosure program. Prior to his role as Associate Director, Mr. Miller held several senior positions within the division, including Assistant Chief Counsel, Assistant Director in the Disclosure Review Office, and Senior Special Counsel in the Exemptive Applications Office, where he was a key member of the team that revised and recommended exemptive relief for the first exchange-traded fund, the S&P 500 ETF Trust ETF (SPDR), to the Commission. He began his career in the division in 1985 as a financial analyst. 

Mr. Miller began his federal government career in 1977, serving as a tax auditor at the Internal Revenue Service and later as a financial analyst at NASA's Goddard Space Flight Center. He earned his bachelor's degree from Wake Forest University, master's degree in business administration from the University of Maryland, and law degree from George Washington University.

SEC Press Release

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SEC Chairman Clayton Announces Additional Investor Roundtable in Baltimore for Main Street Investors to ‘Tell Us’ About Their Investor Experience

Securities and Exchange Commission Chairman Jay Clayton announced today that an additional investor roundtable to discuss the Commission’s recently proposed rules regarding the obligations of financial professionals to investors will be held in Baltimore on the evening of Sept. 20, 2018.  Commissioners Kara Stein and Robert Jackson are expected to join Chairman Clayton and senior SEC staff at this event.

Six roundtable discussions already have taken place in Houston, Atlanta, Miami, Washington, D.C., Philadelphia, and Denver.  In these roundtables, Main Street investors have had the opportunity to speak directly with Chairman Clayton and senior staff about the SEC’s efforts to enhance retail investor protection and promote choice and access to a variety of investment services and products.  

“These investor roundtables have been incredibly valuable, and I have enjoyed engaging directly with our Main Street investors.  It is important to me that we hear retail investors’ perspectives on how our proposed rules can better align standards of conduct with what they expect of their investment professionals,” said Chairman Clayton.  “We have had many insightful discussions and received some great ideas.  I look forward to speaking with more investors in Baltimore about their experiences.”

Chairman Clayton also today issued a statement discussing his impressions from the earlier investor roundtables.  Investors who have not been able to attend one of the roundtables in-person are invited to share their insights with the SEC by going to www.sec.gov/Tell-Us.

Details about the upcoming investor roundtable in Baltimore can be found below. The event is free and open to the public and the media. Participants should be retail investors who work with, or are considering working with, a financial professional and have no affiliation with the financial services industry.  Please note that the number of participants will be limited.

Location: The Reginald F. Lewis Museum of Maryland African American History & Culture, 830 E. Pratt Street, Baltimore, MD 21202

Date: Sept. 20, 2018

Time: 6:00-7:30 p.m. (ET)

RSVP: outreach@sec.gov

Background

On April 18, 2018, the Commission 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.  For additional information, see the Commission’s press release, fact sheet and proposed Regulation Best Interest rule here.

On April 24, 2018, Chairman Clayton issued a statement announcing that he had asked SEC staff to put together a series of roundtables focused on the retail investor to be held in different cities across the country.  The roundtables are intended to gather information directly from those investors most affected by the Commission’s rulemaking.

On June 29, 2018, Chairman Clayton issued a press release inviting Main Street investors to ‘Tell Us’ about their investor experience and providing details on the initial series of roundtables.  Transcripts of the prior roundtables are available in the comment file.

For general information about the investor roundtables, contact Suzanne McGovern from the SEC’s Office of Investor Education and Advocacy at: outreach@sec.gov

SEC Press Release

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SEC Charges Former Online Marketing Company Executives With Inflating Operating Metrics

The Securities and Exchange Commission today announced settled charges with two former top officers of Endurance International Group Holdings Inc. for overstating the company’s subscriber base, and charged a former executive of Constant Contact Inc. for making similar misrepresentations. 

The SEC’s orders find that Endurance’s former chief executive Hari Ravichandran and former chief financial officer Waruna Ellawala knowingly provided inflated subscriber figures for the Massachusetts-based online marketing company.  The SEC also filed a complaint in U.S. District Court in Massachusetts alleging that former Constant Contact CFO Harpreet Grewal hid its slowing customer growth from investors and inflated its publicly reported subscriber numbers.  Constant Contact became a subsidiary of Endurance after it was acquired by it in 2016.

The SEC filed a settled enforcement action in June against Endurance and Constant Contact in which Endurance agreed to pay an $8 million penalty.  In the latest action, Ravichandran and Ellawala agreed to settle the charges without admitting or denying them and pay $1.38 million and $34,000 respectively in disgorgement, interest, and penalties.  They also agreed to cease and desist from further violations of various antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. 

“For companies who provide subscription-based services, size and growth of subscriber base can be critical metrics,” said Paul Levenson, Director of the SEC’s Boston Regional Office.  “Investors depend on the integrity of management in reporting such figures, which commonly fall outside the scope of formal audits.  Holding senior executives accountable for failures of oversight as well as outright manipulation of such metrics is vital to protecting our markets.”

The SEC’s case is being handled by Michael J. Vito, David M. Scheffler, Rachel E. Hershfang, Patrick Noone, and Celia D. Moore of the Boston office.

SEC Press Release

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SEC Charges Technology Fund Adviser, Founder in Fraudulent Scheme

The Securities and Exchange Commission today charged the founder of San Francisco-based venture capital funds and his investment advisory firm with overcharging investors to fund personal projects, including sending millions of dollars to his own virtual reality production company.

The SEC’s complaint alleges that Michael B. Rothenberg, 34, marketed his advisory firm, Rothenberg Ventures LLC, as uniquely positioned to identify millennial entrepreneurs and invest in “frontier technology” companies. According to SEC filings, Rothenberg’s funds had nearly 200 investors and more than $64 million in assets. The SEC’s complaint alleges that over a three-year period, Rothenberg and his firm misappropriated millions of dollars from the funds, including an estimated $7 million of excess fees, which Rothenberg used to support personal business ventures he claimed were self-funded and to pay for private parties and events at high-end resorts and Bay Area sporting arenas.

“Venture capital investors provide important funding for start-ups but there are risks, including potential harm to investors from unscrupulous managers who defraud them, as we allege Rothenberg did in this case,” said C. Dabney O’Riordan, Co-Chief of the Enforcement Division’s Asset Management Unit. 

Without admitting or denying the allegations in the SEC’s complaint, Rothenberg and Rothenberg Ventures agreed to settle the charges. The settlement is subject to approval by the federal district court for the Northern District of California which would determine the amount of disgorgement and civil money penalties. Rothenberg also agreed to be barred from the brokerage and investment advisory business with a right to reapply after five years. An SEC order imposing the bar will be instituted following court approval of the settlement.  

The SEC’s investigation was conducted by Eric Brooks, Michael Foley, and Ellen Chen, and was supervised by Jeremy Pendrey of the Enforcement Division’s Asset Management Unit in the San Francisco Regional Office. The SEC’s litigation to determine the amount of disgorgement, prejudgment interest, and penalties, will be led by Barrett Atwood and Andrew Hefty 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.

Merrill Lynch Settles SEC Charges of Undisclosed Conflict in Advisory Decision

The Securities and Exchange Commission today announced that Merrill Lynch, Pierce, Fenner & Smith has agreed to pay approximately $8.9 million to settle charges that it failed to disclose a conflict of interest arising out of its own business interests in deciding whether to continue to offer clients products managed by an outside third-party advisory firm.  

The SEC’s order finds that the conflict of interest arose in Merrill Lynch’s handling of third-party products managed by a U.S. subsidiary of a foreign multinational bank, in which more than 1,500 of Merrill’s retail advisory accounts had invested approximately $575 million. According to the order, Merrill put new investments into these products on hold due to pending management changes at the third party, and Merrill’s governance committee planned to vote on a recommendation to terminate the products and offer alternatives to investors. According to the order, the third-party manager sought to prevent termination and contacted senior Merrill executives, including making an appeal to consider the companies’ broader business relationship. Following those communications, and in a break from ordinary practices, the governance committee did not vote and chose to defer action on termination. The governance committee later lifted the hold and opened the third-party products to new Merrill accounts. The SEC’s order found that Merrill failed to disclose to its clients the conflicts of interest in Merrill’s decision-making process. 

“By failing to disclose its own business interests in deciding whether certain products should remain available to investment advisory clients, Merrill Lynch deprived its clients of unbiased financial advice,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Retail clients must feel confident that their advisors are eliminating or disclosing such conflicts and fulfilling their fiduciary duties.”

Without admitting or denying the findings, Merrill consented to the SEC’s order, which finds that the firm was negligent in violating the antifraud and policies and procedures provisions of the Investment Advisers Act of 1940. Merrill agreed to pay more than $4 million in disgorgement, $806,981 in prejudgment interest, and a more than $4 million penalty, and to be censured and to cease and desist from further violations.  

The SEC’s investigation was conducted in New York by Megan R. Genet, Jennifer K. Vakiener, David Stoelting, and Steven G. Rawlings, and supervised by Lara Shalov Mehraban.

SEC Press Release

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SEC Adopts Rule Amendments to Improve Municipal Securities Disclosure

The Securities and Exchange Commission adopted amendments to enhance transparency in the municipal securities market. The adopted amendments to Rule 15c2-12 of the Securities Exchange Act will focus on material financial obligations that could impact an issuer’s liquidity, overall creditworthiness, or an existing security holder’s rights.

“Our municipal securities market is a $3.844 trillion dollar market, with new issuances of approximately $448.1 billion in 2017. Our Main Street investors are exposed to this market through many channels, including through mutual funds, money market funds, closed-end funds, and exchange-traded funds,” said Chairman Jay Clayton. “Disclosures required by these rule amendments will better equip investors and intermediaries to make informed investment decisions about municipal securities.”

Rule 15c2-12 of the Securities Exchange Act requires brokers, dealers, and municipal securities dealers that are acting as underwriters in primary offerings of municipal securities to reasonably determine that the issuer or obligated person has agreed to provide to the Municipal Securities Rulemaking Board (MSRB) timely notice of certain events. Today’s amendments add two new events to the list included in the rule:

• Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and
   
• Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

The compliance date for the amendments is 180 days after they are published in the Federal Register. 

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FACT SHEET

Amendments to Exchange Act Rule 15c2-12
SEC Seriatim Approval
August 15, 2018
 

Action

The Commission adopted amendments to Exchange Act Rule 15c2-12 designed to better inform investors and other market participants about the current financial condition of issuers of municipal securities and obligated persons. Specifically, the amendments facilitate timely access to important information regarding certain financial obligations incurred by issuers and obligated persons, which could impact an issuer’s or obligated person’s liquidity and overall creditworthiness and create risks for existing security holders.  

Background

Direct placements by issuers and obligated persons as financing alternatives to public offerings of municipal securities have increased since 2009, demonstrating the need for more timely disclosure. According to the FDIC Consolidated Reports of Condition and Income filed by financial institutions, the dollar amount of commercial bank loans to state and local governments has tripled since the financial crisis, increasing from $66.5 billion as of the end of 2010 to $190.5 billion by the end of the first quarter 2018. 

Individuals held, either directly or indirectly through mutual funds, money market funds, closed-end funds, and exchange-traded funds, approximately $2.567 trillion of outstanding municipal securities at the end of first quarter 2018.

Highlights

The amendments to Exchange Act Rule 15c2-12 amend the list of event notices that a broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities subject to Rule 15c2-12 must reasonably determine that an issuer or obligated person has undertaken, in a written agreement for the benefit of holders of municipal securities, to provide to the Municipal Securities Rulemaking Board within 10 business days of the event’s occurrence.

Specifically, the amendments add two new events to the list included in the rule:

• Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and
   
• Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

Under the amendments, the term “financial obligation” means a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term financial obligation shall not include municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board consistent with Rule 15c2-12.

What’s Next

The compliance date for the amendments is 180 days after they are published in the Federal Register.

SEC Press Release

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SEC Charges Unregistered Brokers Who Sold Woodbridge Securities to Main Street Investors

The Securities and Exchange Commission today charged five individuals and four companies for unlawfully selling securities of Woodbridge Group of Companies LLC to retail investors.  Woodbridge collapsed into bankruptcy in December 2017 and the SEC previously charged the company, its owner, and others with operating a massive $1.2 billion Ponzi scheme.

The Florida-based defendants named in the SEC’s complaints, Barry M. Kornfeld, Ferne Kornfeld, Lynette M. Robbins, Andrew G. Costa, Albert D. Klager, and their companies, were among Woodbridge’s top revenue producers, selling more than $243 million of its unregistered securities to more than 1,600 retail investors. The complaints allege that defendants reaped millions of dollars in commissions on their sales of Woodbridge securities even though they were not registered as broker-dealers and were not permitted to sell securities.  Barry Kornfeld also violated a prior SEC order which barred him from acting as a broker.

“The broker-dealer and securities registration provisions are vital protections for retail investors,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “Our actions allege the defendants, while not registered as broker-dealers, pocketed millions of dollars in unlawful commissions from their widespread sales of unregistered Woodbridge securities.”

According to the SEC’s complaints, the defendants touted Woodbridge as a “safe and secure” investment.  The Kornfelds allegedly solicited investors at seminars and a “conservative retirement and income planning class” they taught at a Florida university.  The SEC alleges that Klager pitched Woodbridge investments in newspaper ads while Costa recommended them during a radio program he hosted and Robbins used radio, television, and internet marketing.

Once Woodbridge filed for bankruptcy, investors stopped receiving monthly interest payments and have not received a return of their investment principal.  Woodbridge has since agreed to settle the liability portion of the SEC’s charges without admitting or denying the allegations and reached a resolution with the SEC and creditors in a bankruptcy action regarding the ongoing control and management of Woodbridge.  The SEC’s monetary claims against Woodbridge remain pending.

In its latest actions, the SEC filed charges seeking court-ordered injunctions, return of allegedly ill-gotten gains with interest, and financial penalties against the Kornfelds, Costa, Klager and their companies.  Robbins and her company, Knowles Systems Inc., agreed to settle the SEC’s charges in a separate action without admitting or denying the allegations and return more than $1 million of allegedly ill-gotten gains plus interest.  Robbins also agreed to pay a $100,000 civil penalty and to an industry and penny-stock bar.

The SEC’s investigation, which is continuing, has been conducted by Scott A. Lowry, Russell Koonin, Christine Nestor, and Mark Dee in the Miami Regional Office.  The case has been supervised by Jason R. Berkowitz and Fernando Torres, and the litigation will be led by Ms. Nestor, Mr. Koonin and Mr. Lowry under the supervision of Andrew O. Schiff.  The SEC appreciates the assistance of the State of Florida’s Office of Financial Regulation, the Financial Industry Regulatory Authority, and the North American Securities Administrators Association.

The SEC’s Office of Investor Education and Advocacy has issued an Investor Alert to help seniors identify signs of investment fraud and, in conjunction with the Division of Enforcement’s Retail Strategy Task Force, another Investor Alert about Ponzi schemes targeting seniors.  The SEC strongly encourages investors to use the agency’s Investor.gov website to check the backgrounds of people selling them investments to quickly identify whether they are registered professionals.

SEC Press Release

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SEC Adopts Amendments to Simplify and Update Disclosure Requirements

The Securities and Exchange Commission today announced that it has voted to adopt amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated in light of other Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (GAAP), or changes in the information environment.  

The amendments are intended to simplify and update the disclosure of information to investors, including long-term Main Street investors, and reduce compliance burdens for companies without significantly altering the total mix of information available to investors.

"It is important to review our regulations to ensure that they evolve along with our capital markets and remain effective and efficient," said SEC Chairman Jay Clayton. "Today's amendments are an example of how thoughtful reviews can prompt changes for the benefit of investors, public companies, and our capital markets."

The Commission is also referring certain disclosure requirements that overlap with, but require information incremental to, GAAP to the Financial Accounting Standards Board (FASB) for consideration for potential incorporation into GAAP.

The amendments will be effective 30 days from publication in the Federal Register.

FACT SHEET

The Securities and Exchange Commission voted to adopt amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated in light of other Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (GAAP), or changes in the information environment. The Commission is also referring certain disclosure requirements that overlap with, but require information incremental to, GAAP to the Financial Accounting Standards Board (FASB) for consideration for potential incorporation into GAAP.

Background

The amendments are part of an initiative by the Division of Corporation Finance to review disclosure requirements applicable to issuers to consider ways to improve the requirements for the benefit of investors and issuers. The amendments are also part of the Commission's efforts to implement the Fixing America's Surface Transportation (FAST) Act, which, among other things, requires the Commission to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated, or unnecessary.

Highlights 

These amendments apply primarily to public reporting companies (including foreign private issuers). Some of the amendments also apply to other entities the Commission regulates, including Regulation A issuers, investment advisers, investment companies, broker-dealers, and nationally recognized statistical rating organizations. 

The amendments would eliminate certain:

• Redundant and duplicative requirements, which require substantially similar disclosures as GAAP, International Financial Reporting Standards (IFRS), or other Commission disclosure requirements.  
• Overlapping requirements, which are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements.
• Outdated requirements, which have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment.
• Superseded requirements, which are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated GAAP.  

What’s Next?

The amendments will be effective 30 days from publication in the Federal Register.

SEC Press Release

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Citigroup to Pay More Than $10 Million for Books and Records Violations and Inadequate Controls

The Securities and Exchange Commission today announced that Citigroup has agreed to pay $10.5 million in penalties to settle two enforcement actions involving its books and records, internal accounting controls, and trader supervision. The charges stem from $81 million of losses due to trader mismarking and unauthorized proprietary trading and $475 million of losses due to fraudulently-induced loans made by a Mexican subsidiary.  

In the first action, Citigroup Inc. and its U.S. broker-dealer subsidiary Citigroup Global Markets Inc. (CGMI) agreed to pay a $5.75 million penalty to settle charges of inaccurate books and records and CGMI’s failure reasonably to supervise traders. Citigroup and CGMI settled without admitting or denying the SEC’s findings and agreed to cease and desist from future violations.  

The SEC found that from 2013 to 2016, three CGMI traders mismarked illiquid positions in certain proprietary accounts they managed, in two cases covering losses from widespread unauthorized trading. The discovery of the mismarking led to the termination of the traders and the recognition of $81 million in losses not previously reflected in CGMI’s or Citigroup’s books and records. The SEC’s order finds that CGMI failed to detect the traders’ misconduct earlier because it had inadequate supervisory procedures and systems and did not independently verify the valuations of the mismarked positions. 

In the second action, Citigroup agreed to pay a $4.75 million penalty to settle charges that it failed to devise and maintain adequate internal accounting controls. Citigroup settled without admitting or denying the SEC’s findings and agreed to cease and desist from future violations. The SEC’s order finds that Citigroup subsidiary Grupo Financiero Banamex S.A. de C.V. loaned approximately $3.3 billion to Oceanografia, S.A. (OSA) between 2008 and 2014 based on invoices and work estimates for services that OSA provided to Petroleos Mexicanos (Pemex), the Mexican state-owned oil company. According to the order, many of the OSA work estimates were fraudulent and did not reflect amounts Pemex actually owed to OSA. Citigroup ultimately lost approximately $475 million as a result of OSA’s fraud. The SEC’s order finds that Banamex and Citigroup lacked the controls necessary to verify the invoices before making loans to OSA and ignored numerous red flags that should have led to discovery of the fraud.

“Today’s charges reflect the Commission’s view that Citigroup fell short of its obligations to supervise its traders and maintain appropriate controls to guard against fraud,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Citigroup’s lax supervision and weak internal accounting controls allowed a handful of rogue traders to mismark positions over several years and, separately, resulted in the unnecessary loss of hundreds of millions of dollars of its shareholders’ assets to fraud.”

The mismarking and unauthorized trading investigation was conducted by Derek Schoenmann, Janna Berke and Celeste Chase. The Banamex investigation was conducted by Olivia Zach, Jorge Tenreiro, James Addison and Ms. Chase. Both investigations were conducted out of the SEC’s New York office and supervised by Sanjay Wadhwa.

SEC Press Release

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SEC Charges Ameriprise Financial Services for Failing to Safeguard Client Assets

The Securities and Exchange Commission today announced that Ameriprise Financial Services Inc. will pay $4.5 million to settle charges that it failed to safeguard retail investor assets from theft by its representatives. 

According to the SEC’s order, five Ameriprise representatives committed numerous fraudulent acts, including forging client documents, and stole more than $1 million in retail client funds over a four-year period. The SEC found that Ameriprise, a registered investment adviser and broker-dealer, failed to adopt and implement policies and procedures reasonably designed to safeguard investor assets against misappropriation by its representatives. 

The five representatives were based in Minnesota, Ohio, and Virginia, and three previously pled guilty to criminal charges. Each of the representatives was terminated by Ameriprise for misappropriating client funds. The SEC’s order found that Ameriprise has implemented a new system to safeguard clients’ money and that Ameriprise reimbursed all impacted clients for the losses they incurred due to the misconduct of the five representatives.

“A critical obligation of an investment adviser is to safeguard investor assets,” said Fuad Rana, an Assistant Director in the SEC’s Division of Enforcement. “Ameriprise failed to meet that obligation and as a consequence was unable to prevent the theft of its clients’ assets.”

The SEC’s order charged Ameriprise with failing to have reasonably designed policies and procedures to prevent its representatives from misappropriating client funds and failing to reasonably supervise the five representatives. Without admitting or denying the findings, Ameriprise agreed to be censured and pay a penalty of $4.5 million.

The SEC’s investigation was conducted by H. Norman Knickle and supervised by Mr. Rana, and was assisted by Thomas Meier, Josh Herbst, and Susan M. Weis of the Chicago Regional Office’s examination staff. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.     

SEC Press Release

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SEC Files Charges in Municipal Bond “Flipping” and Kickback Schemes

The Securities and Exchange Commission today charged two firms and 18 individuals in a scheme to improperly divert new issue municipal bonds to broker-dealers at the expense of retail investors.  According to the SEC’s complaint, the defendants – known in the industry as “flippers” – purchased new issue municipal bonds, often by posing as retail investors to gain priority in bond allocations. The defendants then “flipped” the bonds to broker-dealers for a fee. The SEC also charged a municipal underwriter for accepting kickbacks from one of the flippers.

The SEC alleges that from at least 2009 to 2016, Core Performance Management LLC, RMR Asset Management Co., their principals, and certain of their associates, misrepresented their identities to gain priority in new issue municipal bond allocations. Municipal issuers typically require underwriters to give retail investor orders the highest priority when allocating new issue bonds, particularly retail investors within the municipal issuer’s jurisdiction. According to the SEC’s complaint, these defendants used fictitious business names, falsely linked their orders to ZIP codes within the issuer’s jurisdiction, and split orders among dozens of accounts. After acquiring the bonds, the SEC alleges that the defendants quickly resold them to broker-dealers, typically for a fixed, pre-arranged commission, and often sought to hide the flipping activity from issuers and underwriters by manipulating sales tickets.

“More than a dozen of the individuals charged today are alleged to have engaged in plainly deceptive conduct,” said Stephanie Avakian, Co-Director of the Enforcement Division. “We are committed to investigating and charging individuals, especially where, as here, the alleged misconduct by many of these industry professionals harmed retail investors.”   

“By improperly placing retail orders on behalf of broker-dealers, we allege the flippers prevented true retail investors from receiving priority in municipal bond offerings,” said LeeAnn G. Gaunt, Chief of the Division of Enforcement’s Public Finance Abuse Unit.  “We are continuing our investigation to determine whether other market professionals had a role in these improper practices.”   

Core Performance and managing director James P. Scherr, RMR and its president, Ralph Riccardi, and 13 of their associates settled the SEC’s charges without admitting or denying the allegations, agreeing to injunctions, to return allegedly ill-gotten gains with interest, pay civil penalties, be subject to industry bars or suspensions, and to cooperate with the SEC’s ongoing investigation. The settlements are subject to court approval. The SEC’s charges against RMR associates Richard C. Gounaud, Jocelyn M. Murphy, and Michael S. Murphy will be litigated in U.S. District Court for the Southern District of California.  

In a related action, the SEC instituted settled proceedings against Charles Kerry Morris, the former head of municipal underwriting at broker-dealer NW Capital Markets Inc. The SEC found that Morris took kickbacks from Scherr and engaged in a parking scheme in which Morris allocated new issue bonds to Scherr with the understanding that Morris would repurchase them. As a result of this trading, the SEC found that Morris and NW Capital caused Scherr and Core Performance’s improper unregistered broker activity. The SEC found that Morris’s supervisor, James A. Fagan, failed reasonably to supervise Morris’s activities.  

Morris, NW Capital, and Fagan agreed to settle the charges without admitting or denying the SEC’s findings. Morris agreed to pay a total of $254,009 and to consent to an industry bar. NW Capital agreed to be censured and pay a total of $87,065 and Fagan agreed to pay a $10,000 penalty and to consent to a six-month supervisory suspension.

The investigation, which is continuing, is being conducted by the Division of Enforcement’s Public Finance Abuse Unit, including Joseph Chimienti, Laura Cunningham, Warren Greth, Cori Shepherd, and Jonathan Wilcox, with assistance from Deputy Unit Chief Mark Zehner and litigation counsel Nicholas Pilgrim. Kevin Guerrero and Ivonia Slade supervised the investigation.  Mr. Pilgrim will lead the litigation against Gounaud, Jocelyn Murphy, and Michael Murphy.

SEC Press Release

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SEC Bars Perpetrator of Initial Coin Offering Fraud

The Securities and Exchange Commission today obtained permanent officer-and-director and penny stock bars against the founder of a company who perpetrated a fraudulent initial coin offering (ICO) to fund oil exploration and drilling in California.

According to the SEC’s order, David T. Laurance and Tomahawk Exploration LLC attempted to raise money through the sale of blockchain-based digital tokens called “Tomahawkcoins.” The SEC’s order finds that the defendants’ promotional materials used inflated projections of oil production that were contradicted by the company’s own internal analysis and misleadingly suggested that Tomahawk possessed leases for drilling sites when it did not.  According to the order, the materials described Laurance as having a “flawless background” without disclosing his prior criminal conviction for his role in fraudulent securities offerings. The order also finds that Tomahawk claimed that token owners would be able to convert the Tomahawkcoins into equity and potentially profit from the anticipated oil production and secondary trading of the tokens.  Although the ICO failed to raise money, Tomahawk issued tokens through a “Bounty Program” in exchange for online promotional services.  

“Investors should be alert to the risk of old-school frauds, like oil and gas schemes, masquerading as innovative blockchain-based ICOs,” said Robert A. Cohen, Chief of the SEC’s Cyber Unit.  

The SEC’s Office of Investor Education and Advocacy (OIEA) today issued an Investor Alert to encourage investors to check the background of anyone selling or offering them an investment using the free and simple search tool on Investor.gov. OIEA’s Investor Bulletin about ICOs is another resource that describes potential warning signs of investment fraud including “guaranteed” high investment returns and unlicensed sellers.

The SEC’s order finds that Tomahawk and Laurance violated the registration and antifraud provisions of the federal securities laws. Without admitting or denying the SEC’s findings, Tomahawk and Laurance consented to a cease and desist order and Laurance consented to an officer and director bar, penny stock bar, and a $30,000 penalty.  

The SEC’s investigation was conducted by Victor Hong, Justin Lichterman, and Serafima Krikunova of the San Francisco Regional Office, with assistance from Joseph Dugan of the Fort Worth Regional Office. The case was supervised by Steven Buchholz of the SEC’s Cyber Unit and Mr. Cohen. The SEC appreciates the assistance of the California Department of Conservation’s Division of Oil, Gas, and Geothermal Resources.

SEC Press Release

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SEC Charges U.S. Congressman and Others With Insider Trading

The Securities and Exchange Commission today announced the filing of insider trading charges against Congressman Christopher Collins, the U.S. Representative for New York’s 27th Congressional District, his son, Cameron Collins, and a third individual, Stephen Zarsky. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced related criminal charges.

Christopher Collins, who served as an independent director of an Australian biotech company, Innate Immunotherapeutics Ltd., is charged with tipping Cameron Collins after receiving confidential information about negative clinical trial results for Innate’s multiple sclerosis drug. Cameron Collins and his girlfriend’s father, Stephen Zarsky, are charged with trading and tipping others on the basis of the material, nonpublic information.  

The SEC’s complaint alleges that Christopher Collins learned of the negative clinical trial results on the evening of June 22, 2017 in an email from Innate’s CEO to the board of directors, which stated that the CEO had “extremely bad news” indicating that drug trial results “pretty clearly indicate ‘clinical failure’.” The SEC alleges that Christopher Collins replied to the CEO’s email within minutes, expressing his surprise at the results, and then called and spoke to his son minutes later.

According to the SEC’s complaint, later that same evening, Cameron Collins drove to Stephen Zarsky’s home and tipped him. The next morning, almost two hours prior to the market opening, Cameron Collins and Zarsky allegedly entered orders to sell Innate shares, which were executed just after the market opened. Over the next two trading days, Cameron Collins allegedly sold a total of nearly 1.4 million Innate shares. According to the complaint, a few hours after the last of these sales, Innate publicly announced the negative results of the clinical trial. The company’s stock price then plummeted by more than 92 percent.  Through their sales, Cameron Collins and Zarsky avoided losses of more than $700,000. The complaint also alleges that they contacted other friends and family members who also sold Innate shares in advance of the negative announcement.

“We allege that Christopher Collins breached his duty of confidentiality to Innate’s shareholders, exploiting his access to nonpublic information about the company’s clinical trial results so that his son could avoid significant financial losses,” said Stephanie Avakian, Co-Director of the SEC Enforcement Division. “Our laws are designed to prevent and punish such misconduct, which undermines investors’ trust in the fairness and integrity of our markets.” 

“In the hours and days after learning of the drug trial results, Christopher Collins, his son, and their associates exchanged a flurry of calls,” said Steven Peikin, Co-Director of the Enforcement Division. “The investigation yielded a detailed footprint left by the defendants, revealing their frantic efforts to sell shares and warn others before Innate announced bad news.”     

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, charges Christopher Collins, Cameron Collins, and Stephen Zarsky with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(a) of the Securities Act of 1933. The complaint seeks disgorgement of ill-gotten gains plus interest, penalties, and permanent injunctions.  It also seeks an officer and director bar against Christopher Collins.  

The SEC also announced settled charges today against Lauren Zarsky, Cameron Collins’ girlfriend, and her mother, Dorothy Zarsky, for trading on the basis of material, nonpublic information. Lauren Zarsky and Dorothy Zarsky consented to the entry of final judgments without admitting or denying the charges that they sold their shares of Innate based on tips they received from Cameron Collins. Lauren Zarsky agreed to disgorge her ill-gotten gains of $19,440, plus prejudgment interest of $839, and pay a civil penalty of $19,440.  Dorothy Zarsky agreed to disgorge her ill-gotten gains of $22,600, plus prejudgment interest of $975, and pay a civil penalty of $22,600. The final judgments, which require court approval, would enjoin Lauren Zarsky and Dorothy Zarsky from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. Lauren Zarsky, a CPA, has also agreed to be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC’s order permits Zarsky to apply for reinstatement after five years.

The SEC’s investigation has been conducted by William Max Hathaway, Colby A. Steele, Patrick McCluskey, and Carolyn M. Welshhans in the Enforcement Division’s Market Abuse Unit. The case has been supervised by Joseph G. Sansone, Chief of the Market Abuse Unit, and Robert A. Cohen. The litigation will be led by Melissa Armstrong and Cheryl Crumpton. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

SEC Press Release

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SEC Charges Cloud Communications Company and Two Senior Executives With Misleading Revenue Projections

The Securities and Exchange Commission today charged a cloud communications company and two executives with providing misleading quarterly revenue estimates.  The company and executives agreed to pay over $1.9 million in penalties to settle the SEC’s charges.

According to the SEC’s order, Sonus Networks Inc.’s former CFO, Mark Greenquist, was aware of red flags which undermined the company’s first quarter 2015 revenue estimates.  These red flags included that Sonus had pulled forward deals initially projected to close in 2015 in order to achieve its revenue guidance for the fourth quarter of 2014.  Despite recognizing these risks, Greenquist said in a press release that he was comfortable with the consensus analyst revenue estimate of $74 million for the first quarter.  About six weeks later, the company issued guidance of $74 million which reflected certain forecasted sales that had been improperly reclassified, due to pressure from Michael Swade, Sonus’s Vice President of Global Sales, in order to support the $74 million estimate.

Seven days before the close of the quarter, Sonus announced that it was lowering its first quarter revenue estimate to between $47 million and $50 million.  Following this announcement, Sonus’s stock price dropped over 33 percent.

“The investing community expects that when companies choose to provide public financial projections, there is a reasonable basis underpinning those projections,” said Antonia Chion, Associate Director in the SEC’s Division of Enforcement.  “When a company ignores red flags or takes steps to make public financial projections inaccurate we will take appropriate action.”

Without admitting or denying the findings, Sonus, which following a merger conducts business as Ribbon Communications Inc., Greenquist and Swade consented to the entry of the SEC’s order, which found that they violated Section 17(a)(2) of the Securities Act of 1933, and that Ribbon violated, and Greenquist and Swade caused Ribbon’s violations of, the reporting provisions of the Securities Exchange Act of 1934, and ordered Ribbon, Greenquist and Swade to pay penalties of $1.9 million, $30,000, and $40,000 respectively.

The SEC’s investigation was conducted by Jonathan Austin and Elizabeth Doisy, with assistance from Peter Rosario, Avron Elbaum, Nick Pilgrim, and Cheryl Crumpton, and was supervised by Deborah Tarasevich and Ms. Chion.
 

SEC Press Release

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SEC Updates List of Firms Using Inaccurate Information to Solicit Investors

The Securities and Exchange Commission today announced that it has updated its list of unregistered firms that use misleading information to primarily solicit non-U.S. investors, adding 16 soliciting entities, four impersonators of genuine firms, and nine bogus regulators.

The updates by the SEC Division of Enforcement’s Office of Market Intelligence, in coordination with the SEC’s Office of Investor Education and Advocacy and the Office of International Affairs, are part of the agency’s continuing effort to protect retail investors.

The SEC’s list of soliciting entities that have been the subject of investor complaints, known as the Public Alert: Unregistered Soliciting Entities (PAUSE) list, enables investors to better inform themselves and avoid being a victim of fraud.  The latest additions are firms that the SEC staff found were providing inaccurate information about their affiliation, location, or registration.  Under U.S. securities laws, firms that solicit investors generally are required to register with the SEC and meet minimum financial standards and disclosure, reporting, and recordkeeping requirements.

“While SEC registration is no guarantee against fraud or mismanagement, it does bring a higher level of security and accountability to protect the public,” said Jennifer Diamantis, Chief of the SEC’s Office of Market Intelligence.  “Investors should proceed with caution if any unregistered entity attempts to solicit them.”

In addition to alerting investors to firms falsely claiming to be registered, the PAUSE list flags those impersonating registered securities firms and bogus “regulators” who falsely claim to be government agencies or affiliates.  Inclusion on the PAUSE list does not mean the SEC has found violations of U.S. federal securities laws or made a judgment about the merits of any securities being offered.

How to protect yourself:

Before you invest, the SEC strongly encourages you to check the background of anyone selling you an investment using the free and simple search tool on Investor.gov.  Always verify that the seller is currently licensed or registered.  This is a great first step toward protecting your money. 

For more information, explore these resources:

• Protect Your Investments
• Ask Questions
• Visit Investor.gov for tips on investing wisely and avoiding fraud

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.