1. On April 28, 2022, the SEC charged publicly-traded asset manager Medley Management and its former co-CEOs, Brook Taube and Seth Taube, with making misrepresentations to investors and clients that created the illusion of Medley’s likely future growth. The respondents have agreed to settle the SEC’s charges and will collectively pay $10 million in civil penalties. Since at least August 2016, in multiple public filings, including bond offering materials, Medley overstated its assets under management by including “committed capital” amounts from non-discretionary clients, whose agreements with Medley imposed no obligation to invest with Medley and whose investing activity through Medley was minimal. The Taubes and Medley did not disclose that there was a risk that a significant amount of the clients’ capital would never be invested and would therefore never generate the fee income on which Medley’s financial growth depended. The order additionally finds that in June 2018 the Taubes used positive projections of Medley’s likely future growth, for which they had no reasonable basis, to recommend to advisory clients a merger whereby Medley’s two business development company clients would acquire Medley and give the Taubes contracts for high-paying jobs. The order finds that the materially misleading projections were incorporated into calculations of the “expected” benefit included in the proxy materials that encouraged investors to vote in favor of the transaction. The Taubes and Medley agreed to cease and desist, a censure, and agreed to pay a total of $10 million in civil penalties. https://www.sec.gov/news/press-release/2022-73
2. On April 27, 2022, the SEC announced settled charges against registered investment adviser HighPoint Advisor Group, LLC for breach of fiduciary duty to advisory clients for failures regarding conflicts disclosures, best execution, and duty of care. The SEC’s order finds that HighPoint invested certain wrap program clients in higher-cost mutual fund share classes than were otherwise available, while failing to disclose the conflicts of interest associated with those investment recommendations. Like many wrap programs, the order finds, HighPoint paid all client trading costs – including fees for buying and selling mutual funds. HighPoint and its investment adviser representatives avoided transaction fees by recommending mutual fund share classes from a no-transaction fee program offered by its clearing firm, including those that charged fees pursuant to Rule 12b-1 of the Investment Company Act of 1940, instead of lower-cost share classes of the same fund. Although HighPoint and its investment adviser representatives did not receive any 12b-1 fees, the no-transaction fee mutual fund share classes were more expensive than other share classes, and HighPoint benefited by not paying any transaction fees when recommending such mutual fund share classes. The order finds that HighPoint did not provide full and fair disclosure to clients concerning its recommendations of no-transaction fee mutual fund share classes and its associated conflicts of interest. Similarly, HighPoint breached its duty of care, including its duty to seek best execution, by causing wrap clients to invest in fund share classes that charged 12b-1 fees when share classes of the same funds that presented a more favorable value were available to the clients. The SEC’s order finds that HighPoint violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the findings, HighPoint consented to a cease-and-desist order and a censure, and agreed to pay disgorgement of $508,995, prejudgment interest of $130,742, and a civil money penalty of $125,000. HighPoint also agreed to distribute funds to harmed clients and comply with certain undertakings. https://www.sec.gov/enforce/ia-6003-s
3. On April 27, 2022, the SEC instituted administrative proceedings against Alexandra Cock. Wealth Plus, through Cock, raised more than $2.5 million for Professional Financial Investors, Inc. and Professional Investors Security Fund, Inc. real estate investment and management companies by selling unregistered PFI and PISF securities to Wealth Plus’s investment advisory clients while not registered as a broker-dealer or associated with a registered broker-dealer. The companies compensated Cock, through Wealth Plus, approximately five percent of the money Wealth Plus’s advisory clients invested in PFI and PISF, with Cock improperly receiving approximately $90,000 in commissions or “referral fees” from the companies while acting as an unregistered broker. Wealth Plus received approximately $440,000 in management fees from its advisory clients for, among other services, purportedly conducting due diligence on the PFI and PISF investments. Cock described the purported due diligence she conducted in misleading terms to clients by overstating the scope of her review. Cock also failed to disclose to her clients the past criminal conviction of the Companies’ founder, even though she was aware of his criminal history and that he exerted significant control over operations until his death. Wealth Plus’s clients did not have material information needed to make informed decisions about whether to invest in PFI and PISF. Cock was ordered to pay disgorgement of $329,546, prejudgment interest of $38,686, and a civil money penalty in the amount of $30,000. https://www.sec.gov/litigation/admin/2022/33-11055.pdf
4. On April 26, 2022, the Division of Examinations issued a risk alert to provide investment advisers with information concerning notable deficiencies that the staff has cited related to Section 204A of the Investment Advisers Act of 1940 and Rule 204A-1. Deficiencies related to Section 204A and the Code of Ethics Rule have been among the most commonly observed by EXAMS.
Below are examples of deficiencies and weaknesses associated with Section 204A observed by EXAMS staff:
- Policies and procedures related to Alternative Data. Exams staff observed advisers that used data from non-traditional sources (“alternative data”), but did not appear to adopt or implement reasonably designed written policies and procedures to address the potential risk of receipt and use of MNPI through alternative data sources.
- Policies and procedures related to so-called “value-add investors.” EXAMS staff observed advisers that did not have or did not appear to implement adequate policies and procedures regarding investors (or in the case of institutional investors, key persons) who are more likely to possess MNPI, including officers or directors at a public company, principals or portfolio managers at asset management firms, and investment bankers.
- Policies and procedures related to “expert networks.” EXAMS staff observed advisers that did not appear to have or did not appear to implement adequate policies and procedures regarding their discussions with expert network consultants who may be related to publicly traded companies or have access to MNPI.
Below are examples of deficiencies associated with the Code of Ethics Rule identified by EXAMS staff
- Identification of access persons. EXAMS staff observed advisers that did not identify and supervise certain employees as access persons in accordance with the Code of Ethics Rule. EXAMS staff also observed adviser codes that did not define “access person” or accurately reflect which employees are considered access persons.
- Access persons did not obtain required pre-approval for certain investments. EXAMS staff observed adviser access persons that purchased beneficial ownership in initial public offerings and limited offerings without requisite pre-approval.
- Personal Securities Transactions and Holdings. EXAMS staff observed deficiencies related to the required reporting of access persons’ personal securities transactions and holdings.
- Written acknowledgement of receipt of the code and any amendments. EXAMS staff observed instances where supervised persons were not provided with a copy of the code or did not provide written acknowledgement of their receipt of the code or any amendments. In other instances, the code did not contain provisions to reflect the written acknowledgment requirement of Rule 204A-1(a)(5).
In addition, the Commission discussed in the Code of Ethics Adopting Release a number of practices that advisers should consider in crafting their codes. Below are examples of related observations made by EXAMS staff:
- Trading investments on restricted list. The Commission stated that advisers should consider incorporating provisions into their codes to include “restricted lists” of issuers about which the advisory firm has inside information, and prohibit any trading in securities of those issuers while they remain on the restricted list. EXAMS staff observed instances where employees traded investments that were on the adviser’s restricted list.
- Allocation of investment opportunities. The Commission stated that advisers should consider incorporating procedures to ensure that investment opportunities must first be offered to clients before the adviser or its employees may act on them. The staff observed situations where the adviser or its employees purchased securities at a better price, ahead of the adviser’s clients in contravention of the adviser’s code.
In response to the issues identified in the deficiency letters, many of the advisers modified their codes of ethics and written policies, procedures and practices to address the issues identified by EXAMS staff. https://www.sec.gov/exams/announcement/mnpi-code-of-ethics-risk-alert
5. On April 20, 2022, the SEC instituted administrative proceedings against ARS Capital Advisors, Inc. ARS Capital’s failed to file with the Commission and to deliver to retail investor clients its Form CRS. ARS Capital was required to file its initial Form CRS with the Commission as Part 3 of its Form ADV and to begin delivering its Form CRS to prospective and new retail investor clients. ARS Capital was further required to deliver its Form CRS to existing retail investor clients. The firm failed to file and deliver Form CRS not becoming compliant. ARS Capital violated Advisers Act Section 204 and Rules 204-1 and 204-5. ARS Capital was ordered to pay a civil money penalty in the amount of $25,000. https://www.sec.gov/litigation/admin/2022/ia-6001.pdf
6. On April 20, 2022, the SEC instituted administrative proceedings against Gregory Lemelson. Lemelson made false and misleading statements to drive down the price of San Diego-based Ligand Pharmaceuticals Inc. After establishing a short position in Ligand through his hedge fund, The Amvona Fund LP, Lemelson made a series of false statements to shake investor confidence in Ligand and lower its stock price, thereby increasing the value of his fund’s position. The false statements included assertions that Ligand’s investor relations firm had agreed that Ligand’s most profitable drug was “going away” and that Ligand had entered into a sham transaction with an unaudited shell company in order to pad its balance sheet. Lemelson boasted about bringing down Ligand’s stock price through his “multi-month battle” against the company. The matter is being litigated. https://www.sec.gov/litigation/admin/2022/ia-6000.pdf
7. On April 20, 2022, the SEC instituted administrative proceedings against John Ellis, Jr. Ellis raised more than $3.9 million from more than a dozen investors by misrepresenting, among other things, Paul Ellis Investment Associates LLC investment strategies, assets under management, and investment performance. Ellis distributed false marketing materials to prospective advisory clients, and recruited others to solicit clients on behalf of PEIA. Ellis initially invested the funds, but then later diverted the funds to be used for improper purposes, which resulted in investor and client losses that exceeded $1.9 million. Ellis was barred. https://www.sec.gov/litigation/admin/2022/ia-5999.pdf
8. On April 19, 2022, the SEC filed an emergency action and charged Shawn Good with defrauding clients and misappropriating millions of dollars of investor funds. Good raised at least $4.8 million from five of his clients at Morgan Stanley-including retirees and a single mother of young children-to make supposedly low-risk investments in tax-free bonds and land-development projects. Rather than invest the money Good used the funds to repay other victims and to pay for his own personal expenses, including luxury cars, international travel, and approximately $800,000 in credit card bills. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25371.htm
9. On April 19, 2022, the SEC instituted administrative proceedings against Sica Wealth Management, LLC and Jeffrey Sica. SWM and Sica violated the federal securities laws by failing to adequately disclose to approximately 45 advisory clients conflicts of interest in connection with Sica’s recommendation that they invest more than $30 million in securities issued by Aequitas Commercial Finance, LLC one of numerous entities affiliated with an affiliate of Aequitas Management, LLC. Sica failed to disclose to advisory clients material facts regarding compensation that Aequitas provided to SWM and another firm owned and controlled by Sica which created conflicts of interest relating to SWM’s and Sica’s recommendations that clients invest in Aequitas Securities. Aequitas paid SWM and the Affiliated Adviser a total of approximately $2 million during the relevant period pursuant to consulting agreements and a loan agreement. The Aequitas agreements and the resulting compensation should have been disclosed to clients so that they could fairly evaluate the conflicts in deciding whether to invest in Aequitas securities. The SEC ordered the Sica to pay $236,029 in disgorgement, $62,664 in prejudgment interest, and $110,000 in civil money penalties, for a total of $408,693 to the Commission. https://www.sec.gov/litigation/admin/2022/34-94759.pdf
10. On April 19, 2022, the SEC instituted administrative proceedings against William King. King solicited clients to invest in a penny stock issuer, American Rebel Holdings, Inc. King did not disclose that he received $72,250 in AREB shares as a commission for soliciting sales nor that he retained $447,384 in AREB shares as fees. King operated as a broker-dealer through his solicitation of investors and other activities without registering to do so. The Commission ordered the King to pay $519,634 in disgorgement, $33,388 in prejudgment interest, and a $75,000 civil money penalty, for a total of $628,022 to the Commission. https://www.sec.gov/litigation/admin/2022/34-94758.pdf
11. On April 15, 2022, the SEC instituted administrative proceedings against Elliot Smerling. Smerling solicited prospective investors to invest in JES Global Capital, L.P. in his position as the managing principal of its managing partner JES Global Capital GP LLC. The JES Adviser, which was not registered with the Commission in any capacity, was tasked with, among other things, making all investment decisions on behalf of the JES Fund in exchange for a management fee, pursuant to the JES Fund’s offering materials. Smerling solicited investors in the JES Fund through materially false and misleading statements concerning the JES Fund’s audited financial statements, limited partners, capital commitments, and holdings, and that, subsequently, with respect to additional entities, Smerling sought and obtained approximately $140 million in collateralized loans on the basis of false and/or forged documents provided in connection with loan application materials. Smerling was barred. https://www.sec.gov/litigation/admin/2022/ia-5997.pdf
12. On April 13, 2022, the SEC filed fraud charges against Kay Yang and Xapphire LLC, for raising $16.5 million by making false and misleading statements to approximately 70 investors and for misappropriating more than $4 million of the investors’ funds. Yang and Xapphire LLC engaged in the unregistered offer and sale of securities issued by her entities AK Equity Group LLC and Xapphire Fund LLC. Yang falsely represented to prospective investors that she would invest their money primarily through foreign exchange trading, they could expect annual returns ranging from 20% to 50%, and the trading was consistently successful. Yang used less than half of the investors’ money for foreign exchange trading and had many months with large net trading losses, resulting in negative returns. Yang also misappropriated approximately $4,060,000 of the investors’ money to fund her and her family’s lifestyle, including spending on casinos, travel, homes, and cars, and to repay investors in a previous venture. The SEC also named Yang’s husband, Chao Yang, as a relief defendant for improperly receiving proceeds of the fraud according the complaint. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25362.htm
13. On April 12, 2022, the SEC instituted administrative proceedings against Brian Buckley. Buckley raised money in securities offerings by Arizona Investment Center (“AIC”) as an investor relations executive at AIC. AIC engaged in an $18 million offering fraud when it offered and sold promissory notes in three separate unregistered securities offerings by numerous business entities promising returns from: (i) the acquisition and development of beachfront property in Mexico; (ii) operating recycling facilities; or (iii) acquiring foreclosed properties for resale. AIC misappropriated investor funds and made Ponzi-like payments. Buckley promoted the securities offerings to potential investors through seminars, presentations and webinars, provided potential investors with offering materials, and received approximately $500,000 in commissions in connection with the sale of promissory notes through AIC offerings. Buckley was barred. https://www.sec.gov/litigation/admin/2022/34-94685.pdf
14. On April 11, 2022, the SEC obtained final judgments against Global Investment Strategy UK Ltd. charged with clearing and settling billions of dollars of U.S. securities transactions without registering as a broker-dealer in violation of the federal securities laws, and John William Gunn charged with aiding and abetting those violations. GIS-which has never been registered as a broker or dealer in the United States-provided clearance and settlement services to hundreds of U.S. customers for trades primarily between U.S. buyers and sellers and involving billions of dollars’ worth of securities. GIS was acting as an unregistered broker by providing the clearance and settlement services for its U.S. customers, receiving transaction-based compensation for the trades, extending margin to its customers, holding customer funds and securities, and soliciting customers for its brokerage services. By clearing through GIS, a customer could purchase securities valued at 20 or 30 times the equity in the account. This matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25360.htm
15. On April 8, 2022, the SEC instituted administrative proceedings against Charles Smigrod. Smigrod acted as an unregistered broker offering and selling securities in FCF to individual investors. Smigrod, going by the name “Charles David,” represented to investors that he was an employee of FCF and providing investors a unique opportunity to purchase a “limited number of shares” directly from the company; sales agents were personally invested in the company making significant money from their investment; FCF would have an initial public offering within a couple weeks or a month, with a trading price of $5 to $15; and that the former Chief Executive Officer of Apple Inc. and president of PepsiCo was a large investor in the company, and was also on the Board of Directors. Smigrod used a burner phone to continue to try to sell securities and did contact several of the victims. Respondent received $148,000.00 in the form of commissions from the sale of Sanomedics and FCF stock. Smigrod was barred. https://www.sec.gov/litigation/admin/2022/34-94659.pdf
16. On April 1, 2022, the SEC charged Dow Rockwell LLC and Richard Dow Rockwell for defrauding their investors. Dow Rockwell LLC and Richard Dow Rockwell raised approximately $8 million for PFI by selling PFI’s securities to their advisory clients. Rockwell and Dow Rockwell LLC earned approximately $400,000 in referral fees from PFI for soliciting and recommending PFI investments to their clients, and they failed to disclose the compensation they received. Dow Rockwell LLC and Rockwell did not disclose the past criminal conviction of PFI’s founder to their clients. Dow Rockwell LLC and Rockwell offered and sold PFI securities, neither was registered as a broker-dealer with the SEC or associated with a broker-dealer. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25354.htm