April 2024 SEC Updates

1. On April 29, 2024, , the U.S. District Court for the Western District of North Carolina entered final judgment against Martin Sumichrast, owner of Stone Street Partners, LLC, a private fund, for self- dealing.  Following the death of the fund’s co-manager, Sumichrast caused Stone Street to enter into various transactions with himself and a publicly-traded company of which he was the CEO and Chairman of the Board of Directors. These transactions included: (a) Sumichrast doubling his salary from Stone Street, from $100,000 to $200,000 (b) Stone Street purchasing restricted shares of the public company from Sumichrast; (c) Stone Street purchasing shares of a privately-held vaping company from Sumichrast; and (d) Stone Street purchasing from the public company shares in a microcap company shortly before the company’s initial public offering (“IPO”).  The microcap company was heavily in debt and at risk of failing at the time Stone Street acquired the shares, and Sumichrast arranged this transaction to remove those shares from the public company’s financial statements, thereby improving the company’s chances for a successful IPO. These transactions presented conflicts of interest and, according to the complaint, Sumichrast failed to disclose them in advance to Stone Street or obtain the consent from a majority of Stone Street’s investors for these transactions. Sumichrast was ordered to pay disgorgement in the amount of $225,000, prejudgment interest of $50,000 and a civil money penalty in the amount of $75,000.  https://www.sec.gov/litigation/litreleases/lr-25988

2. On April 24, 2024, the SEC instituted administrative proceedings against Catalyst Capital Advisors LLC (“CAA”), a registered investment adviser. CCA had an impermissible joint legal fee arrangement with its client, Mutual Fund Series Trust (“Trust”). CCA advised the Catalyst Hedged Futures Strategy Fund (“Hedged Futures Fund”), a series of the Trust that experienced significant losses. CCA and the Trust incurred $2.7 million in legal costs associated with the regulatory inquiries and two related private lawsuits, which involved overlapping facts and legal issues. Without the approval or knowledge of the Trust’s independent trustees, CCA arranged for the Trust to pay, at least initially, all of the legal fees and related costs resulting from the regulatory inquiries and the private lawsuits, including the expenses associated with CCA’s legal representation. CCA accrued as liabilities certain of the legal expenses and later reimbursed the Trust for a portion of CCA’s expenses. CCA benefited from this arrangement by deferring payment on its legal costs for multiple years, and by ultimately agreeing to an allocation with the Trust that was more advantageous to CCA than the final allocation determined by the Trust’s insurance carrier, which, subject to certain limitations, covered legal costs the carrier determined were allocable to and incurred by the Trust in connection with the regulatory inquiries and private lawsuits. CCA was ordered to pay disgorgement in the amount of $97,145, prejudgment interest of $30,081 and a civil money penalty in the amount of $200,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6597.pdf

3. On April 24, 2024, the SEC published a new report of Registered Fund Statistics, which is based on aggregated data reported by SEC-registered funds on Form N-PORT. The new report, which will be updated on a quarterly basis, is designed to provide the public with a regular and detailed picture of the registered funds industry—with its more than 12,000 funds and more than $26 trillion in total net assets under management. The report provides key industry statistics and shows trends over time, including information and trends related to portfolio holdings, flows and returns, interest rate risk, and other exposures across U.S. mutual funds, exchange-traded funds, closed-end funds, and other registered funds.  https://www.sec.gov/news/press-release/2024-49

4. On April 24, 2024, the SEC charged Craig Allen who perpetrated a multimillion-dollar fraud through the hedge fund he advised and controlled, the Cheetah Fund L.P. (“Cheetah Fund”). Allen raised approximately $9.9 million from investors in the Cheetah Fund by lying about the fund’s supposedly superlative performance. Allen incurred over $4.59 million of realized trading losses in the accounts of the Cheetah Fund and of C.M. Allen, a related company also controlled by Allen. Allen falsely indicated to investors that the Cheetah Fund used a specific accounting firm as an auditor and to prepare its Schedule K-1 tax forms. Allen’s compensation from the Cheetah Fund for managing its portfolio and Allen was to be compensated only when the fund profited. Despite incurring heavy trading losses and thus earning little if any legitimate compensation, Allen received at least $2.64 million from the Cheetah Fund and its investors. Allen has returned only about $900,000 to Cheetah Fund investors, resulting in investor losses of approximately $9 million. This matter is being litigated.  https://www.sec.gov/litigation/litreleases/lr-25984

5. On April 22, 2024, the SEC instituted administrative proceedings against William Miller who was affiliated with Woodstock Capital, LLC (“Woodstock Capital”), an unregistered investment adviser. Miller had a revenue-sharing agreement with Woodstock Capital through a limited-liability company he controlled but was not employed by Woodstock Capital. Woodstock Capital managed a “feeder” fund, Woodstock Capital Partners, LP (“Woodstock Partners”), which invested its assets into a “master” fund, Woodstock Master Capital, Ltd. (the “Woodstock Fund”). Miller solicited investors to invest in Woodstock Partners and in that context held himself out as a partner of Woodstock Capital and speaking on its behalf, was personally involved in decisions made by Woodstock Capital as to the Woodstock Fund’s investment strategy, and received management fees from Woodstock Capital. This matter is being litigated. https://www.sec.gov/files/litigation/admin/2024/ia-6594.pdf

6. On April 22, 2024, the SEC instituted administrative proceedings against LM Global Investments LLC, d/b/a Fratarcangeli Wealth Management (FWM), and Jeffrey Fratarcangeli who was an independent investment adviser representative (“IAR”) and registered representative associated with a dually registered broker-dealer and investment adviser. Respondents managed advisory client assets as part of the Adviser, which provided Respondents with a number of investment program options for FWM’s and Fratarcangeli’s clients. FWM invested client assets directly in investment strategies in which Adviser analysts or third-party managers approved by the Adviser selected the investments rather than FWM. FWM’s and Fratarcangeli’s written communications also at times used misleading language when describing to existing clients in the FWM models how their money was invested. FWM was ordered to pay a civil money penalty in the amount of $100,000. Fratarcangeli was ordered to pay a civil money penalty in the amount of $50,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6593.pdf

7. On April 17, 2024, the SEC published a Risk Alert sharing preliminary observations from examinations of investment advisers’ compliance with the Marketing Rule. The Risk Alert encourages accurate completion of the Marketing Rule items contained in Form ADV and compliance with the Compliance Rule, the Books and Records Rule and the Marketing Rule’s General Prohibitions.  https://www.sec.gov/exams/announcement/risk-alert-041724

8. On April 16, 2024, the SEC instituted administrative proceedings against Scott Lindell a former senior officer of a registered investment adviser, Infinity Q Capital Management LLC (“Infinity Q”). James Velissaris, Infinity Q’s founder and former Chief Investment Officer, actively manipulated the valuation models available from a certain third-party pricing service and altered inputs to mask the poor performance of the mutual fund and hedge fund that Infinity Q advised. Lindell negligently misrepresented to investors and potential investors, representatives of the mutual fund’s board, and others that the pricing service was “independent” of Infinity Q when, in fact, Velissaris exercised control over the pricing service. Lindell also made misstatements on various Infinity Q filings. Lindell was barred.  https://www.sec.gov/litigation/litreleases/lr-25977

9. On April 15, 2024, the SEC instituted administrative proceedings against Exchange Traded Managers Group LLC (“ETM”), ETF Managers Group LLC (“ETF”), and Samuel Masucci (“Masucci”). ETM, ETF and Massucci entered into a prohibited joint transaction to the detriment of Adviser’s client ETFMG Alternative Harvest ETF (“MJ”). Masucci and ETF violated their duty of loyalty to MJ by misleading MJ’s Independent Trustees about the financial conflicts of interest. Masucci and ETF also breached their duty of care by knowingly providing advice that favored their own interests over the best interest of their client MJ. ETM and ETF was ordered to pay a civil money penalty in the amount of $4,000,000. Massucci was ordered to pay a civil money penalty in the amount of $400,000.  https://www.sec.gov/files/litigation/admin/2024/34-99958.pdf

10. On April 12, 2024, the SEC instituted administrative proceedings against Luis Serrano and Julio Taffinder who solicited investors to invest in crypto asset securities in the form of Venture Agreements for CryptoFX, LLC (“CryptoFX”), advised investors about the merits of investments and received transaction-based compensation in the form of commissions on sales of crypto asset securities. Serrano and Taffinder were barred. https://www.sec.gov/files/litigation/admin/2024/34-99953.pdf and https://www.sec.gov/files/litigation/admin/2024/34-99952.pdf 

11. On April 12, 2024, the SEC instituted administrative proceedings against Hayden Greene who was employed by one or more entities controlled by Christopher Slaga (“Slaga”), who managed certain investment funds (the “Funds”). Greene solicited investors to purchase securities of the Funds, advised them on the merits of investing and provided them information about the Funds.. Greene received at least $85,000 in received transaction-based compensation for soliciting investors. Greene was barred.  https://www.sec.gov/files/litigation/admin/2024/34-99948.pdf

12. On April 12, 2024, the SEC charged Bradesco Global Advisors Inc. a registered investment adviser. Bradesco advertised hypothetical performance on its public website without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of the intended audience. Bradesco was ordered to pay a civil money penalty in the amount of $20,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6589.pdf

13. On April 12, 2024, the SEC charged Credicorp Capital Advisors LLC, a registered investment adviser. Credicorp advertised hypothetical performance on its public website without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of the intended audience. was ordered to pay a civil money penalty in the amount of $30,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6588.pdf

14. On April 12, 2024, the SEC charged Monex Asset Management, Inc., a registered investment adviser. Monex advertised hypothetical performance on its public website without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of the intended audience. Monex was ordered to pay a civil money penalty in the amount of $30,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6587.pdf

15. On April 12, 2024, the SEC charged InSight Securities, Inc., a registered investment adviser. InSight advertised hypothetical performance on its public website without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of the intended audience. Insight was ordered to pay a civil money penalty in the amount of $20,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6586.pdf

16. On April 12, 2024, the SEC charged Gea Sphere, LLC doing business as GeaSphere Advisors, a registered investment adviser. GeaSphere made false and misleading claims about its performance, failing to present net performance information alongside gross performance, being unable to substantiate performance claims, advertising hypothetical performance on its public website without adopting and implementing required policies and procedures, and failed to enter into written agreements with persons giving compensated endorsements. GeaSphere made misleading statements about its performance to its registered investment company client, which were incorporated in the client’s prospectus. GeaSphere did not maintain copies of advertisements that appeared on its website, nor did GeaSphere maintain books and records demonstrating the calculation of performance in its advertisements. GeaSphere also failed to conduct an annual review of its compliance policies and procedures and failed to implement certain of those policies and procedures. GeaSphere was ordered to pay a civil money penalty in the amount of $100,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6585.pdf

17. On April 11, 2024, the SEC charged Justin King who was offering interests in an entity named Elevate Investment Fund even though no such fund existed. All investor money was held in brokerage and bank accounts in the name of King, his wife, and/or his company, Elevate Investments, LLC (“Elevate”). King made false and misleading statements on Elevate’s publicly-accessible website and in investor account statements stating that King’s trading had historically resulted in profits for his clients, including a 61% return for all of his clients’ accounts when in truth King’s trading resulted in substantial losses. Elevate’s website also listed certain “Trusted Providers,” including broker-dealers with whom King and Elevate had no current dealings. This matter is being litigated. https://www.sec.gov/litigation/litreleases/lr-25974

18. On April 11, 2024, the SEC instituted administrative proceedings against Scott Wolfrum and Tyler Sadek. Wolfrum failed to disclose conflicts of interest when recommending that his advisory clients invest in Foundry Mezzanine Opportunity Fund (“FMOF” or the “Fund”), a private fund that provides lending to and invests in small businesses. Wolfrum sold more than $20 million in interests in FMOF, almost all of which were recommended by Wolfrum and sold to his advisory clients. Wolfrum failed to disclose to his clients the conflicts of interest created by his and his family member’s financial interests in two of the Fund’s holdings and Wolfrum’s receipt of $140,125.00 in finder’s fees for facilitating two different investments by the Fund. Tyler Sadek, a principal of Foundry Capital Group, LLC, a registered investment adviser to the FMOF. Sadek reviewed, edited, and approved newsletters issued to the Fund’s investors and prospective investors that contained misleading statements and omissions. The newsletters contained misleading statements and omissions about the financial and operational condition of Fund holdings and expected annual interest from Fund holdings. Wolfrum was ordered to pay disgorgement in the amount of $140,125, prejudgment interest of $21,354 and a civil money penalty in the amount of $30,000. Sadek was ordered to pay a civil money penalty in the amount of $30,000.  https://www.sec.gov/files/litigation/admin/2024/34-99945.pdf

19. On April 11, 2024, the SEC instituted administrative proceedings against Laurence Balter d/b/a Oracle Investment Research, a former registered investment adviser to the Oracle Mutual Fund (the “Fund”). Balter fraudulently allocated profitable trades to his own accounts to the detriment of several client accounts. Balter falsely told his SMA clients who invested in the Fund that they would not pay both advisory fees and Fund management fees for the portions of their accounts invested in the Fund. Balter made trades for the Fund that deviated from two of its fundamental investment limitations. Balter was ordered to pay disgorgement, prejudgment interest, and a civil money penalty in the amount of $4,577,810.  https://www.sec.gov/files/litigation/admin/2024/34-99944_0.pdf

20. On April 4, 2024, the SEC charged Commonwealth Equity Services, LLC d/b/a Commonwealth Financial Network (“Commonwealth”). Commonwealth had a revenue sharing agreement with the broker it required most of its clients use for trades in their accounts.  Under that agreement, Commonwealth received a portion of the money that certain mutual fund companies paid to the broker to be able to sell their funds through the broker, if Commonwealth invested client assets in certain share classes of those funds. Commonwealth received over $100 million in revenue sharing from the broker related to client investments in certain share classes of “no transaction fee” and “transaction fee” mutual funds. Commonwealth breached its fiduciary duty to its clients by failing to disclose the conflicts of interest created by its receipt of compensation through the revenue sharing agreement. This matter is being litigated. https://www.sec.gov/litigation/litreleases/lr-24550

21. On April 3, 2024, the SEC charged ClearPath and Patrick Churchville. ClearPath and Churchville’s fraudulent conduct caused at least $27 million in losses to the private funds they advised and controlled. ClearPath and Churchville misallocated and misappropriated investor assets, used fund assets to secure undisclosed borrowing that they repaid with monies due to investors, stole approximately $2.5 million of investors’ funds to purchase Churchville’s waterfront home, and engaged in a multi-million-dollar Ponzi scheme, using investor money to pay off a series of prior investments. Churchville and ClearPath was ordered to pay disgorgement in the amount of $22,553,095 and prejudgment interest of $4,577,810.  https://www.sec.gov/litigation/litreleases/lr-25966

22. On April 3, 2024, the SEC instituted administrative proceedings against Ronald Heineman who was a principal and Chief Compliance Officer of Halcyon Cabot Partners, Ltd. (“Halcyon”). Heineman ignored red flags related to trading in CodeSmart and the conduct of one of Halcyon’s registered representatives, as well as that he engaged in a scheme to manipulate the price of the stock of CodeSmart Holdings, Inc. by engaging in matched trading. Heineman was barred.  https://www.sec.gov/files/litigation/admin/2024/34-99903.pdf

23. On April 3, 2024, the SEC instituted administrative proceedings against Senvest Management, LLC (“Senvest”), a registered investment adviser. Senvest employees at various levels of authority communicated about Senvest-related business internally and externally using personal texting platforms and other non-Senvest electronic communication services (“off-channel communications”) in violation of the firm’s policies and procedures. Senvest supervisors, who were responsible for preventing such conduct by junior employees and for implementing the firm’s policies and procedures, also discussed Senvest business using off-channel communications. Three senior employees engaged in such discussions on personal devices set to automatically delete messages after 30 days. Senvest employees also failed to adhere to provisions of the firm’s code of ethics requiring them to obtain pre-clearance for all securities transactions in their personal accounts. Senvest supervisors failed to ensure that certain required personal-trading reviews were timely conducted in compliance with the firm’s pre-clearance policy. Senvest was ordered to pay a civil money penalty in the amount of $6,500,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6581.pdf

24. On April 3, 2024, the SEC instituted administrative proceedings against Thomas Brenner who was President of First American Securities, Inc., a dually registered broker-dealer and investment adviser. Brenner participated in a fraudulent Ponzi scheme that defrauded investors through the sales of securities in issuers that purported to conduct legitimate business, but whose operations were apparently limited or non-existent. Brenner offered and sold securities in these issuers to numerous investors, and provided investment advice to those investors and to potential investors. Brenner told investors that their funds would be invested in the issuers, but instead, Brenner and others enriched themselves by misappropriating investor funds. Brenner was barred.  https://www.sec.gov/files/litigation/admin/2024/34-99894.pdf

25. On April 2, 2024, the SEC instituted administrative proceedings against David Grzan who was associated with various registered broker-dealers as a registered representative, the President, Chairman and CEO of PreIPO Corp. (“PreIPO”). PreIPO, through its de facto principal and Grzan, raised at least $4.2 million from investors. PreIPO, Grzan and others told investors in the offering that their money would be used to develop an online platform that offers access to shares in private companies before their initial public offerings. PreIPO made undisclosed payments totaling about $1.7 million to PreIPO’s de facto principal, to Grzan and to others out of investor funds. PreIPO, the undisclosed de facto principal, and Grzan made material misrepresentations and omissions to investors regarding PreIPO’s management in order to conceal the de facto principal’s involvement in and control over the company. Grzan and others sought to conceal the de facto principal’s involvement in PreIPO because he pled guilty to conspiracy to commit securities fraud, securities fraud, wire fraud, and money laundering, and was sentenced to 132 months in federal prison. Grzan was barred.  https://www.sec.gov/files/litigation/admin/2024/34-99882.pdf

26. On March 27, 2024, the SEC published a Risk Alert regarding the shortening of the securities transaction settlement cycle. On May 28, 2024, the standard settlement cycle for most broker-dealer transactions in the U.S. will shorten from two business days after the trade date to one business day after the trade date (“T+1”). This is also the compliance date for new rules related to the processing of institutional trades by broker-dealers and certain clearing agencies, as well as certain recordkeeping amendments applicable to registered investment advisers. The Risk Alert provides registrants with additional information about the scope and content of the examinations and outreach.  https://www.sec.gov/exams/announcement/risk-alert-tplus1-032724