We begin this week with a day of remembrance. September 11 will always be a special day and one to remember all those who died, were injured, and witnessed the unbelievable events that transpired. May we always recall what happened, the sacrifices of so many and be ever vigilant to ensure that such events never happen again. May we all find the wisdom and strength to use the terrible lessons of this day to help create a better world for all.
As we move forward the Commission is busy filing groups of cases to be counted for FY2023. In the past week thirteen actions were filed. Those include a group of cases centered on the application of certain GAAP provisions in determining revenue, if a firm’s termination policy violated the whistleblower provisions, misappropriation and an action centered on a Ponzi scheme.
Have a great and safe week.
Order: The Commission issued a directive to the Equity Exchanges and FINRA on September 1, 2023, regarding the governance of the equity exchanges. Specifically, the Order directs the SROs and FINRA to file a new national market system plan. It would replace the three existing national market system plans which currently govern the dissemination of real-time consolidated equity market data to the national market system stocks. The Order follows a determination by the D.C. Circuit on a petition filed by the SROs and FINRA that presented three points for resolution: 1) The inclusion of non-SRO representatives as voting members of the CT Plan’s operating committee; 2) the grouping of SROs by corporate affiliation for voting, and 3) the requirement that the CRT Plan’s administrator be independent of any SRO that sell proprietary equity market data. The Court granted the petition with respect to the inclusion of non-SRO voting members on the CT Plan operating committee but denied it with respect to the other challenges. The Court’s order was issued on September 1, 2023 (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 3 civil injunctive actions and 10 administrative proceedings, excluding 12j, tag-along proceedings and those presenting a conflict for the author.
Whistleblower protections: In the Matter of Monolith Resources, LLC, Adm. Proc. File No. 3-21629 (September 8, 2023). Over a three-year period, beginning in February 2020, the firm used employee separation agreements which included a provision that required employees to waive the right to monetary whistleblower awards. That provision violates the whistleblower provisions of the federal securities laws. The Order alleges violations of Exchange Act Rule 21F-17. Respondent consented to the entry of a cease-and-desist order based on the Rule. He also agreed to pay a penalty in the amount of $225,000.
Undisclosed use of IPO funds/RPT: SEC v. QI, Civil Action No. 1:23-cv-7924 (S.D.N.Y. Filed September 7, 2023) is an action which names as defendants Guosheng QI and Gridsum Holding Inc., the founder of the company and a cloud based analytics firm, respectively. From the time of the firm’s IPO until 2016 surplus funds from the offering were held and then later distributed in related party transactions involving family members that were valued at about Total value was about $7.1 million. Yet over a three year period, beginning in 2016, the annual reports of the company reported that the funds had been used to pay officers, directors or their associates. In fact the complaint claims that those individuals only received about $3.8 million of the proceeds while about $2.5 million were transferred to Defendant Q’s wife. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Sections 10(b), 13(a) and certain related rules. The case is pending. See Lit. Rel. No. 25822 (September 7, 2023).
Unregistered securities: In the Matter of Linus Financial, Inc., Adm. Proc. File No. 3-21627 (September 7, 2023) is an action which names a respondent, the firm. Beginning in March 2020 Respondent offered and sold interest-bearing accounts. Those account permitted U.S. citizens to tender fiat-currency in an exchange for a promise to provide periodic payments by converting the tendered assets into crypto assets and either transferring them into liquidity pools or directly lending them. About 500 investors tendered $5.2 million into the program. When the Commission announced the charges, the company voluntarily halted the program, the transactions were terminated and the assets were returned. The Order alleges violations of Securities Act Sections 5(a) and 5(c). Respondent consented to the entry of a ceases-and-desist order based on the Sections cited in the Order. No penalty was imposed based on cooperation.
Application of GAAP: In the Matter of Flour Corporation, Adm. Proc. File No. 3-21610 (September 6, 2023) is a proceeding which names as respondent the world-wide provider of engineering and related services. Respondent engaged in two fixed-price projects using the percentage of completion accounting method. To periodically record a project Estimate at Completion, Flour the required use of the Project Margin Analysis Report. It should have documented the project management’s most likely current estimate of the project revenue, cost and its Estimate of Completion. Personal were required to use this method and document the project quarterly. The firm, however, failed to maintain proper controls over the project. Although the accounting policy required that the project team determine the most likely EAC, it failed to maintain this control during the period. Accordingly, personnel failed to maintain the applicable controls and include all costs that were known or should have been known. As a result, improper revenue was included in the process. Ultimately the firm failed to maintain adequate control over either project. To resolve the matter the firm agreed to implement certain undertakings. The Order alleges violations of Exchange Act Section 13(a), 13(b)(2)(A), and 13(b)(2)(B). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The firm also agreed to pay a penalty of $14.5 million. See also In the Matter of Jon Eric Best, Adm. Proc. File No. 3-21612 (September 6, 2023)(CFO of the firm; settled based on a consent to a similar cease-and-desist order as above with the payment of a $15,000 penalty); In the Matter of James F. Brittain, Adm. Proc. File No. 3-21613 (September 6, 2023)(President; based on same facts as above; settled on same terms except with payment of a $25,000 penalty); In the Matter of Robin K. Chopra, CA, Adm. Proc. File No. 3-21614 (September 6, 2023)(V.P., controller and CAO; settled on same basis as above; payment of a $15.000 penalty); In the Matter of Bradley R. Scott, Adm. Proc. File No. 3-21615 (September 6, 2023)(controller and later CFO; settled on same terms as above except with payment of $25,000 penalty); and In the Matter of Kenny N. Smith, Adm. Proc. File No. 3-21616 (September 6, 2023)(senior v.p.; settled on similar terms to those above but with payment of $20,000).
Misappropriation: SEC v. Lee, Civil Action No. 3:23-cv-00125 (D. Conn.) is a previously filed action which names as defendants Seong Veoi Lee and Ameritrust Corporation. The complaint alleged that the firm and its CEO misled and misappropriated funds from investors in the U.S. and Korea between 2019 and 2023. During that period over $20 million was raised from investors largely in Korea. The funds went to accounts that Mr. Lee controlled. The funds were supposed to be used for the company. In fact, they were not. Judgements have been entered against Ameritrust and relief defendant Beespoke by default. As to the former, the judgment enjoined the firm from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It also directs the payment of disgorgement in the amount of $11,967,706, prejudgment interest of $1,602,391 and a penalty of $2,232,280. The judgment against Beespoke Capital orders the payment of disgorgement in the amount of $4,871,097 plus prejudgment interest of $325,421. The case is pending as to Mr. Lee and his three adult children. See Lit. Rel. No. 25821 (September 6, 2023).
Manipulation: SEC v. Koski, Civil Action No. 23-cic-07779 (S.D.N.Y. Filed September 1, 2023). Defendant created, and has now admitted that he created, a scheme to fraudulently increase the share price of COTRP. The shares are for J.C. Penney Debentures Corporate-Backed Trust Securities Certificates of Structured Products Corporation, a security issued by a trust. Defendant owns 300,000 CPTRPs. To implement the scheme, he created fake redemption notices claiming the securities could now be redeemed at full value. It also claimed the securities could be redeemed and exchanged for cryptocurrency. In fact, they could not. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25820 (September 1, 2023).
.Disclosure: In the Matter of Prime Group Holdings, LLC, Adm. Proc. File No. 3-21602 (September 5, 2023) is a proceeding which names as respondent the firm which is a property manager in self-storage real estate properties, including those owned by a controlled fund. The firm manages and oversees the operation of numerous self-storage real estate properties. Respondent retained employees and others to source real estate acquisition transactions. The fund’s offering materials included various memoranda and other materials but did not adequately disclose that certain brokerage fees would be paid to an affiliate or that those payments could create a conflict of interest. As a result, the firm violated Securities Act Section 17(a)(2). In resolving the matter Respondent took certain remedial steps considered by the Commission. To settle the proceedings Respondent consented to the entry of a cease-and-desist order based on the cited in the Order. The firm also agreed to pay disgorgement of $11,510,625 and prejudgment interest of $2,561,197.
Custody: In the Matter of Disruptive Technology Advisers LLC, Adm. Proc. File No. 3-21609 (September 5, 2023) is one of 5 similar proceedings initiated against registered investment advisers based on similar violations. Specifically, here the Adviser is alleged to have failed to: Custody assets properly, in some instances distribute audited financial statements and not made certain updates in its Form ADV. The Order alleges violations of Advisers Act Sections 204(a) and 206(4) and the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-order based on the Sections and rules cited as well as to a censure. The firm also agreed to pay a pay a penalty of $225,000. The other firms consented to the entry of similar cease-and-desist orders and remedies; the firms are listed here.
Ponzi scheme: SEC v. Tadrus, Civil Action No. 23-cv-5708 (E.D.N.Y. Filed July 28, 2023). The complaint names as defendants: Mina Tadrus and Tadrus Capital LLC, the founder and investment adviser, respectively. Beginning in 2022 Defendants solicited investors to purchase interests in what was labeled as the first high-yielding and fixed income quotative hedge fund using artificial intelligence. About $1.4 million was raised from investors. The claims were false; a portion of the investor money was misappropriated. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is in litigation. See Lit. Rel. No. 25823 (September 8, 2023).
Virtual currency: The Financial Crimes Enforcement Network warned investors about a virtual currency investment scam commonly known as “Pig Butchering.” The scheme focuses on investors who have acquired interests in legitimate virtual currency investment opportunities. At that point the schemers move to the “fattened pig” and attempt to defraud the investor with scams, according to the September 8, 2023 release (here).
Instruments: The Australian Securities and Investment Commission or ASIC has released four new legislative instruments. The Commission has also updated its guidance regarding the financial resource requirements that apply to some categories of Australian financial services licensees and platforms. They are set to expire on October 1, 2028 (here).
Risk: The European Securities and Markets Authority is cautioning investors about prevailing market uncertainty as downside risk rises. The warning comes as the second Trends, Risks and Vulnerabilities or TRV Report of 2023 (here).
Consultation: The Securities and Futures Commission and the Hong Kong Monetary Authority concluded a consultation on proposed amendments to the Clearing Rules for over-the-counter or OTC derivatives. The two regulators issued the results of their consultation on August 29, 2023 (here).
Consultation paper: The Monetary Authority of Singapore issued a Consultation Paper on proposed exemptions for approved exchange and recognized market operators that provide clearing and settlement services, according to a September 8, 2023 release (here).
Crypto: The Financial Conduct Authority issued a release that attempts to set expectations in advance of the new crypto marketing rules. Those rules seek to clarify rules for products and ban certain practices. The release is dated September 7, 2023 (here).