The Nutter Securities Enforcement Update is a periodic summary of noteworthy recent securities enforcement activity, settlements, decisions, and charges.
Investment Advisers/Investment Companies
SEC v. Edward S. Walczak, Lit. Rel. No. 25327 (W.D. Wisc., February 4, 2022) – In ongoing federal court litigation, the SEC won summary judgment on its claim that a former mutual fund portfolio manager committed negligence-based fraud where a portfolio manager repeatedly told investors that he used modeling software to stress test the fund’s portfolio on a daily basis when, in fact, he did not use the software on a daily basis. Claims under Securities Act Sections 17(a)(2), 17(a)(3) and IA Section 206(4).
SEC v. George S. Blankenbaker, et al., Lit. Rel. No. 25324 (February 8, 2022) – In a litigated action, the court entered a final consent judgment against an individual who, in connection with three of his companies, falsely told investors that their money would be used to make short-term loans to food exporters in Asia, when those funds were used for other purposes, including for his own personal benefit. Claims under Securities Act Sections 5, 17(a) and Exchange Act 10(b) and Rule 10b-5. Disgorgement and prejudgment interest ($1.92m), officer and director bar.
In the Matter of Wahed Invest LLC, Release No. IA-5959 (February 10, 2022) – In a settlement, a RIA which operates a robo-advisor business was charged with disseminating false and misleading marketing materials, breaching its fiduciary duty for failure to provide fair disclosure of conflicts of interest, and failure to adopt adequate policies and procedures. The RIA failed to disclose preference for and affiliation with an ETF that the RIA had financial interest in and received additional fees from. Claims under IA Sections 206(2), 206(4), Rules 206(4)-1, 206(4)-7. Undertaking to retain independent compliance consultant. Cease and desist, censure, and fine ($300k).
SEC v. James Velissaris, Lit. Rel. No. 25331 (February 17, 2022) – In a litigation action, the Commission charged former Chief Investment Officer and founder of Infinity Q Capital Management with engaging in a fraudulent scheme to overvalue assets by more than $1 billion. The complaint alleges that by altering inputs and manipulating the code of a third-party pricing service used to value the assets, Velissaris collected over $26 million in profit distributions without disclosing his activities to investors. Claims under Securities Act Sections 17(a), 10(b), Rule 10b-5, Investment Advisors Act Sections 2-6(a), 206(2), 206(4), 207, and Rule 206(4)-8, and Investment Company Act Sections 34(b); in the alternative, Exchange Act Section 10(b) and Rule 10b-5(b).
SEC v. Arthur S. Hoffman, Lit. Rel. No. 25334 (February 24, 2022) – In a litigation action, the Commission alleged that an investment advisor of Ameriprise Financial Services, LLC recommended securities to clients without disclosing conflicts of interest – namely, that the entity agreed to lend the advisor up to $1.5 million at two-percent interest per year for soliciting investors. The adviser consented to entry of a judgment imposing a permanent injunction, which is subject to court approval. Claims under Securities Act Section 17(a), Rule 10b-5 and Investment Advisers Act Sections 206(1), 206(2).
In the Matter of Ameritas Advisory Services, LLC, Release IA-5970 (February 25, 2022) – In a settlement, Ameritas Advisory Services, LLC, a registered investment advisor, was charged with breaching its fiduciary duty to advisory clients by failing to provide full and fair disclosure regarding third-party compensation received when the advisory business was part of a dually registered investment adviser/broker-dealer firm, Ameritas Investment Company, LLC (“AIC”). Claims under Advisers Act Sections 206(2), 206(4) and Rule 206(4)-7. Disgorgement ($3.3m), cease and desist, censure, and civil penalty ($750k).
SEC v. Marguerite Cassandra Toroian, et al., Lit. Rel. No. 25335 (February 27, 2022) – In a litigated action, the Commission charged Bell Rock Capital, LLC and its principal Toroian for operating a multi-year cherry-picking scheme that defrauded Bell Rock clients by disproportionately allocating profitable trades to accounts held by Toroian and her family member and allocating less profitable and losing trades to client accounts. Claims under Securities Act Sections 10(b), Rule 10b-5, Investment Advisers Act Sections 206(a), 206(2), 206(4), and Rule 206(4)-7.
Broker-Dealers
Brian Leggett et al. vs. Wells Fargo Clearing Services LLC et al., No. 2019CV328949, Superior Court of Fulton County, Georgia. (January 25, 2022) – The Georgia Superior Court for Fulton County vacated a FINRA arbitration award. The vacated award had denied investors’ claims against Wells Fargo over losses the investors incurred on their investments at Wells Fargo. The investors alleged that Wells Fargo permitted the account to be over-concentrated in single stocks and industries, resulting in losses totaling $1,178,446.78 investing in a merger arbitrage strategy. In vacating the arbitration decision in favor of Wells Fargo, the Georgia Superior Court found, among other reasons for vacating the decision, that Wells Fargo manipulated arbitrator selection process through an unwritten agreement with FINRA to exclude certain potential arbitrators.
FCPA
In the Matter of KT Corporation, Release 94279 (February 17, 2022) – In a settlement, KT Corporation, South Korea’s largest comprehensive telecommunications operator whose American Depository Shares are registered with the SEC and trade on the New York Stock Exchange, was charged with violations of the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act. The SEC charged that KT lacked sufficient internal accounting controls over expenses, including executive bonuses and gift card purchases, which enabled managers and executives to generate slush funds, which were used to provide money or other valuable items to government officials or related parties in the Republic of Korea and Vietnam. Claims under Exchange Act Sections 21C(a) and 13(b)(2)(A) and (B). Cease and desist, disgorgement ($2.3m) and fine ($3.5m).
Insider Trading
SEC v. Nathaniel Brown, et al., Lit. Rel. No. 25330 (February 11, 2022) – In a litigated action, the court entered final judgement consents against a revenue recognition manager who repeatedly tipped company results to his best friend and against tippee, who also tipped three other friends. Claims under Exchange Act Section 10(b) and Rule 10b-5. Permanent injunction and Rule 102(e) bar. In parallel criminal action, both defendants pled guilty. The revenue recognition manager sentenced to twenty-two months in prison and ordered to forfeit $30,000. Tippee sentenced to one year and one day in prison and ordered to forfeit $999,000.
Issuer Reporting/Audit and Accounting
In the Matter of Baxter International, Inc. and Related Cases, Release Nos. 33-11032, 34-94294, AAE-4283 (February 22, 2022) – In a settled matter, Baxter was charged with using a foreign exchange rate convention for its subsidiaries’ foreign currency transactions that was not in accordance with US GAAP, and with using this convention for the purposes of generating foreign exchange accounting gains or avoiding foreign exchange accounting losses over a period of at least 10 years. Claims under Securities Act Sections 17(a)(2) and (3), and Exchange Act Sections 13a-1, 13a-11 and 13a-13. Cease and desist and fine ($18m).
Market Manipulation
SEC v. Michael M. Beck, a/k/a @BigMoneyMike6, and Relief Defendant Helen P. Robinson, No. 2:22-cv-00812 (C.D. Cal. filed February 7, 2022) – The Commission charged Michael M. Beck with recommending penny stocks to investors – including via his Twitter handle @BigMoneyMike6 – without disclosing his intent to sell the stock, then selling at inflated prices. Claims under Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5.
SEC v. Global Wholehealth Partner Corp., et al., Lit. Rel. No. 25332 (February 17, 2022) – In a ligation action, the Commission charged California-based Global Wholehealth Partners Corp., its CEO, and four penny stock promoters with conducting a $1.95 million fraudulent pump-and-dump scheme through a series of false and misleading statements in press releases and SEC filings, including false assertions of the entity’s claimed emergency use authorization submissions for COVID-19 tests. In a parallel action, the US Attorney’s Office for the Southern District of California announced criminal charges. Claims under Securities Exchange Act Sections 10(b), 10b-5, 17(a), 17(b).
Securities Offerings
SEC v. LBRY, Inc., No. 21-1618 (1st Cir., February 17, 2022) – In ongoing litigation by the SEC against LBRY for failing to register digital assets (LBC) as securities, a nonprofit foundation created by LRBY and solely funded with LBC, moved to intervene. The Foundation claimed that LRBY’s defense was inadequate because it failed to challenge the SEC’s definition of “enterprise” under the WJ Howey standard. Both the SEC and LRBY opposed the intervention on the ground, among others, that LRBY adequately protects the Foundation’s interests and that pursuit of a different litigation strategy is insufficient to establish intervention as a matter of right. The New Hampshire District Court’s denied the motion to intervene, and the First Circuit affirmed.
