August 2024 SEC Updates

1. On August 30, 2024, the SEC charged Wisdom Capital Management Group Ltd. (“Wisdom”) for making material misrepresentations and unsubstantiated statements in SEC Form ADV regarding Wisdom’s organization, office location, assets under management and clients. Wisdom failed to respond to requests to provide records to substantiate the information on the Form ADV.  This matter is being litigated.  https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26089

2. On August 30, 2024, the SEC instituted administrative proceedings against Peter DeCaprio who was the president of FlowPoint Partners, LLC. FlowPoint and DeCaprio misrepresented to investors that the Funds were audited annually by an independent auditor. While FlowPoint and DeCaprio engaged an auditor to audit two of the four Funds, that auditor did not produce any audit reports and none of the Funds were audited. FlowPoint and DeCaprio did not correct their ongoing misstatements to investors despite knowing that the Funds were not actually audited by the auditor they had engaged. FlowPoint and DeCaprio breached their fiduciary duty to two of the Funds they advised by failing to obtain annual audits for those two Funds, as those Funds’ organizational documents (a limited partnership agreement and limited liability company agreement) required. FlowPoint and DeCaprio each to pay a $145,000.  DeCaprio was barred.  https://www.sec.gov/files/litigation/admin/2024/ia-6669.pdf

3. On August 28, 2024, the SEC charged Bernardo Mendia-Alcaraz and Toltec Capital LLC for conducting fraudulent and unregistered securities offerings. Mendia-Alcaraz, on behalf of Toltec Capital, raised approximately $3.3 million from investors by promising to invest their money in low-risk private funds that Toltec Capital managed, and guaranteeing a return of investor capital, among other assurances. Mendia-Alcaraz used investor funds to make Ponzi-like payments to other investors and unauthorized payments to himself for personal expenses and luxury items. This matter is being litigated.  https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26085

4. On August 28, 2024, the SEC instituted administrative proceedings against Perry Santillo who participated in a fraudulent Ponzi scheme that defrauded hundreds of investors. Santillo and another individual bought or took over books of business of retiring investment professionals from around the country. Then, Santillo or others persuaded these newly acquired clients to withdraw their savings from traditional investments and invest their savings in issuers controlled by Santillo or his associates. Although these issuers purported to conduct legitimate business, their operations were apparently limited or non-existent. Santillo offered and sold securities in these issuers to a number of investors and also provided investment advice to those same investors and to potentialinvestors. Santillo told investors that their funds would be invested in the issuers, but instead, among other things, Santillo, along with others involved in the scheme, enriched himself by misappropriating investor funds. Santillo and a co-conspirator made false and misleading representations and promises, and material omissions, in inducing these investors to invest in promissory notes, preferred stock offerings, or other investment offerings on behalf of issuers that Santillo and the other individual had created. Santillo was barred. https://www.sec.gov/files/litigation/admin/2024/34-100848.pdf

5. On August 26, 2024, the SEC charged QZ Asset Management Limited and its CEO, Blake Yeung Pu Lei, with fraud for lying to clients and prospective clients regarding the safety of their investments, the investment adviser’s relationships with certain well-known banks and law firms, and QZ’s holding company’s initial public stock offering. QZ Asset and Yeung defrauded hundreds of individuals out of at least $6 million dollars. QZ Asset and Yeung falsely claimed that QZ Asset would use its proprietary AI-based technology to help generate extraordinary weekly returns while promising “100%” protection for client funds and that well-known and reputable financial and legal firms were providing services to the company. QZ Asset and Yeung falsely claimed that QZ Global had applied to have its common stock listed on the Nasdaq Global Select Market and that they had positive communications with SEC staff regarding this effort. QZ Global touted its SEC filings, which were materially deficient, to lure clients and prospective clients into handing over their funds to QZ Asset. This matter is being litigated.  https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26083

6. On August 26, 2024, the SEC charged Sound Point Capital Management, LP, a registered investment adviser, for failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI) concerning its trading of collateralized loan obligations (CLOs). Because CLOs are generally collateralized by corporate loans, the price at which a CLO tranche trades may be impacted by the price at which the underlying loans trade.  Sound Point came into possession of MNPI about companies whose loans were held in the CLOs that Sound Point traded.  Sound Point did not, at any point during the relevant period, establish, maintain, or enforce any written policies or procedures concerning the misuse of MNPI about underlying loans in third-party CLOs, even though Sound Point was trading tranches of those CLOs. Sound Point was ordered to pay a civil money penalty of $1,800,000.  https://www.sec.gov/newsroom/press-releases/2024-106

7. On August 23, 2024, the SEC instituted administrative proceedings against Cedar Legacy LLC, formerly a registered investment adviser. Cedar failed to timely distribute annual audited financial statements prepared in accordance with generally accepted accounting principles to the investors in its private funds. Cedar failed to promptly update its Form ADV after receiving the fiscal year 2021 audit opinion and also failed to adopt and implement written policies and procedures. Cedar was ordered to pay a civil money penalty of $75,000. 

https://www.sec.gov/files/litigation/admin/2024/ia-6665.pdf

9. On August 19, 2024, the SEC instituted administrative proceedings against FPA Real Estate Advisers Group, LLC, a registered investment adviser, for having custody of the assets of its pooled investment vehicle clients. FPA failed to have the funds and securities of seven of those pooled investment vehicles verified by actual examination, or, in the alternative, have audits performed of those pooled investment vehicles and then timely distribute, to investors in the pooled investment vehicles, audited financial statements prepared in accordance with Generally Accepted Accounting Principles. FPA failed to implement its policies and procedures related to the custody rule, including the delivery of audited financial statements for pooled investment vehicle clients to investors. FPA further failed to implement its policies and procedures regarding the use of service providers affiliated with FPA Real Estate Advisers Group. FPA was ordered to pay a civil money penalty of $300,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6663.pdf

10. On August 19, 2024, the SEC instituted administrative proceedings against Obra Capital Management, LLC, a registered investment adviser, for failing to comply with “pay-to-play” rule which is designed to address pay-to-play abuses involving campaign contributions made by certain investment advisers or their covered associates to government officials who are in a position to influence the hiring of investment advisers to manage government client assets, including the assets of public pension funds and other public entities. An individual, before they were hired by Obra, made a campaign contribution within two years prior to his employment with Obra, to an incumbent for elected office in the State of Michigan, which office had influence over hiring investment advisers for a state public pension fund in Michigan. The individual was hired into a position in which the individual was a covered associate of Obra and subsequently solicited investment advisory services from government entities for OCM. after this contribution and after the individual became a covered associate of the Obra, Obra provided investment advisory services for compensation to the state public pension fund. Obra was ordered to pay a civil money penalty of f $95,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6662.pdf  

11. On August 14, 2024, the SEC charged 26 investment advisers, dually-registered investment advisers and broker-dealers, and broker-dealers for widespread and longstanding failures by the firms and their personnel to maintain and preserve electronic communications. The firms agreed to pay combined civil penalties of $392.75 million.  Below are all the 14 enforcement actions against stand-alone investment advisers and dually registered investment advisers/broker-dealers. https://www.sec.gov/newsroom/press-releases/2024-98 

12. On August 12, 2024, the SEC instituted administrative proceedings against Cadaret, Grant & Co., Inc., a dually registered investment adviser and broker dealer, for failing to provide full and fair disclosure regarding conflicts of interest associated with its receipt of: (1) revenue sharing payments from Cadaret Grant’s unaffiliated clearing broker (“Clearing Broker”) as a result of advisory clients’ investments in certain no-transaction fee (“NTF”) mutual fund share classes; (2) revenue sharing payments from its Clearing Broker as a result of sweeping cash into certain money market mutual funds (“money market funds”); (3) markups on the Clearing Broker’s fees for certain advisory clients’ transaction fees (“transaction fee markups”). Cadaret also breached its duty to seek best execution by causing certain advisory clients to invest in certain share classes of NTF mutual funds when share classes of the same funds were available to the clients that presented a more favorable value for these clients under the particular circumstances in place at the time of the transactions.  Cadaret also breached its duty of care by failing to undertake an analysis to determine whether the particular mutual fund share class and money market fund it recommended was in the best interests of its advisory clients. Cadaret was ordered to pay disgorgement of $4,213,351, prejudgment interest of $828,075 and a civil money penalty of $1,000,000. 

https://www.sec.gov/files/litigation/admin/2024/34-100691.pdf

13. On August 9, 2024, the SEC charged The Pacific Financial Group, Inc., a registered investment adviser, for failing to comply with amendments to the Marketing Rule.  Pacific Financial 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. Pacific Financial was ordered to pay a civil money penalty of $430,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6646.pdf

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