1. On January 31, 2022, the SEC instituted administrative proceedings against Robert Van Zandt. Van Zandt participated in a scheme to sell more than $35.5 million in bogus securities to 250 investors. Rather than invest their moneys as promised, Van Zandt used his investors’ funds to pay earlier investors and satisfy personal expenses. This matter is being litigated. https://www.sec.gov/litigation/admin/2022/34-94102.pdf. Below is a summary.
2. On January 27, 2022, the SEC’s Division of Examinations issued a follow-up risk alert to its alert issued on June 23, 2020. The latest alert details additional observations of the SEC EXAM Staff including: (a) failure to act consistently with disclosures; (b) use of misleading disclosures regarding performance and marketing; (c) due diligence failures relating to investments or service providers; and (d) use of potentially misleading “hedge clauses. The full risk alert can be found here: https://www.sec.gov/files/private-fund-risk-alert-pt-2.pdf
A. Conduct Inconsistent with Disclosures.
EXAMS staff has observed the following failures to act consistently with material disclosures to clients or investors:
• Failure to obtain informed consent from Limited Partner Advisory Committees, Advisory Boards or Advisory Committees (collectively “LPACs”) required under fund disclosures. EXAMS staff observed private fund advisers that did not follow practices described in their limited partnership agreements (“LPAs”), operating agreements, private placement memoranda, due-diligence questionnaires, side letters or other disclosures (“fund disclosures”) regarding the use of LPACs. For example, staff observed private fund advisers that failed to bring conflicts to their LPACs for review and consent, in contravention of fund disclosures. EXAMS staff also observed private fund advisers that did not obtain consent for certain conflicted transactions from the LPAC until after the transaction had occurred or obtained approval after providing the LPAC with incomplete information in contravention of fund disclosures.
• Failure to follow practices described in fund disclosures regarding the calculation of Post-Commitment Period fund-level management fees. EXAMS staff observed private fund advisers that did not follow practices described in fund disclosures regarding the calculation of the fund-level management fee during a private fund’s Post-Commitment Period. EXAMS staff observed that such failures resulted in investors paying more in management fees than they were required to pay under the terms of the fund disclosures. For example, private fund advisers did not reduce the cost basis of an investment when calculating their management fee after selling, writing off, writing down or otherwise disposing of a portion of an investment. Other private fund advisers used broad, undefined terms in the LPA, such as “impaired,” “permanently impaired,” “written down,” or “permanently written down,” but did not implement policies and procedures reasonably designed to apply these terms consistently when calculating management fees, potentially resulting in inaccurate management fees being charged.
• Failure to comply with LPA liquidation and fund extension terms. EXAMS staff observed advisers that extended the terms of private equity funds without obtaining the required approvals or without complying with the liquidation provisions described in the funds’ LPAs, which, among other things, resulted in potentially inappropriate management fees being charged to investors.
• Failure to invest in accordance with fund disclosures regarding investment strategy. EXAMS staff observed private fund advisers that did not comply with investment limitations in fund disclosures. For example, the staff observed private fund advisers that implemented an investment strategy that diverged materially from fund disclosures. EXAMS staff also observed advisers that caused funds to exceed leverage limitations detailed in fund disclosures.
• Failures relating to recycling practices. “Recycling” refers to contractual provisions that allow a fund to add realized investment proceeds back to the capital commitments of investors. EXAMS staff observed private fund advisers that did not accurately describe the “recycling” practices utilized by their funds or omitted material information from such disclosures. In some instances, this failure may have caused private fund advisers to collect excess management fees.
• Failure to follow fund disclosures regarding adviser personnel. EXAMS staff observed advisers that did not adhere to the LPA “key person” process after the departure of several adviser principals or did not provide accurate information to investors reflecting the status of key previously-employed portfolio managers.
B. Disclosures Regarding Performance and Marketing.
EXAMS staff has observed private fund advisers providing to investors or prospective investors misleading track records or other marketing statements that appear to violate Rule 206(4)-8. In addition, Advisers Act Rule 204-2(a)(16) requires advisers to maintain all accounts, books, internal working papers, and any other records or documents that are necessary to form the basis for or demonstrate the calculation of any performance or rate of return of any or all managed accounts or securities recommendations. EXAMS staff has also observed failures by private fund advisers to maintain these required records.
• Misleading material information about a track record. EXAMS staff observed private fund advisers that provided inaccurate or misleading disclosures about their track record, including how benchmarks were used or how the portfolio for the track record was constructed. For example, the staff observed advisers that only marketed a favorable or cherry-picked track record of one fund or a subset of funds or did not disclose material information about the material impact of leverage on fund performance. In addition, the staff observed private fund advisers that utilized stale performance information in presentations to potential investors or track records that did not accurately reflect fees and expenses.
• Inaccurate performance calculations. EXAMS staff observed private fund advisers that presented inaccurate performance calculations to investors. For example, the staff observed private fund advisers that used inaccurate underlying data (e.g., data from incorrect time periods, mischaracterization of return of capital distributions as dividends from portfolio companies, and/or projected rather than actual performance used in performance calculations) when creating track records, thereby leading to inaccurate and potentially misleading disclosures regarding performance.
• Portability – failure to support adequately, or omissions of material information about, predecessor performance. EXAMS staff observed private fund advisers that did not maintain books and records supporting predecessor performance at other advisers as required under Advisers Act Rule 204-2(a)(16). In addition, the staff observed private fund advisers that appeared to have omitted material facts about predecessor performance. For example, the staff observed private fund advisers that marketed incomplete prior track records or advertised performance that persons at the adviser were not primarily responsible for achieving at the prior adviser.
• Misleading statements regarding awards or other claims. EXAMS staff observed private fund advisers that made misleading statements regarding awards they received or characteristics of their firm. For example, the staff observed private fund advisers that marketed awards received, but failed to make full and fair disclosures about the awards, such as the criteria for obtaining them, the amount of any fee paid by the adviser to receive them, and any amounts paid to the grantor of the awards for the adviser’s right to promote its receipt of the awards. The staff also observed advisers that incorrectly claimed their investments were “supported” or “overseen” by the SEC or the United States government.
C. Due Diligence.
As a fiduciary, an investment adviser must have a reasonable belief that the advice it provides is in the best interest of the client based on the client’s objectives. A reasonable belief that investment advice is in the best interest of a client also requires that an adviser conduct a reasonable investigation into the investment that is sufficient to ensure that the adviser is not basing its advice on materially inaccurate or incomplete information.
EXAMS staff observed potential failures to conduct a reasonable investigation into an investment, to follow the due diligence process described to clients or investors, and to adopt and implement reasonably designed due diligence policies and procedures pursuant to the Compliance Rule:
• Lack of a reasonable investigation into underlying investments or funds. EXAMS staff observed advisers that did not perform reasonable investigations of investments in accordance with their policies and procedures, including the compliance and internal controls of the underlying investments or private funds in which they invested. In addition, the staff observed advisers that failed to perform adequate due diligence on important service providers, such as alternative data providers and placement agents.
• Inadequate policies and procedures regarding investment due diligence. EXAMS staff observed private fund advisers that did not appear to maintain reasonably designed policies and procedures regarding due diligence of investments. For example, the staff observed private fund advisers that outlined a due diligence process in fund disclosures, but did not maintain policies and procedures related to due diligence that were tailored to their advisory businesses.
D. Hedge Clauses.
EXAMS staff observed private fund advisers that included potentially misleading hedge clauses in documents that purported to waive or limit the Advisers Act fiduciary duty except for certain exceptions, such as a non-appealable judicial finding of gross negligence, willful misconduct, or fraud.
3. On January 26, 2022, the SEC charged German Nino with stealing $5.8 million from a client over nearly a six-year period and used the majority of the money, $4.2 million, on gifts for several women with whom he had romantic relationships. Nino employed various methods to conceal his misconduct from his client, including creating fake account statements, forging signatures on letters of authorization, and altering UBS records for an affected account to prevent electronic notifications of wire transfers. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25316.htm
4. On January 25, 2022, the SEC instituted administrative proceedings against Emmanuel Kouyoumdjia aka “Manny K”. Manny K illegally acted as an unregistered broker by selling the common stock of ForceField Energy Inc. and receiving commission compensation for these sales. The sales of ForceField stock that the Manny K brokered were not registered with the Commission in violation of the registration requirements of the Securities Act. Manny K was barred. https://www.sec.gov/litigation/admin/2022/34-94049.pdf
5. On January 24, 2022, the SEC instituted administrative proceedings against MVP Manager LLC. MVP was an investment adviser to and manager of two funds that offered interests to investors in venture-backed companies that had not yet conducted an initial public offering (“pre-IPO companies”). MVP personnel arranged to receive brokerage commissions from the counterparty who sold securities in pre-IPO companies to MVP’s advisory clients without adequate disclosure to the clients or to investors in the funds. This arrangement created a potential or actual conflict of interest for MVP in advising its client funds which MVP failed to adequately disclose. MVP paid disgorgement of $150,058, prejudgment interest of $19,681, and a civil penalty of $80,000, for a total of $249,740. https://www.sec.gov/litigation/admin/2022/34-94035.pdf
6. On January 24, 2022, the SEC instituted administrative proceedings against Anthony Cottone. Cottone and his now defunct unregistered investment adviser raised approximately $2.76 million from 11 investors in connection with the sale of preferred interests in a private fund through false and misleading representations and material omissions. The complaint alleges Cottone misappropriated at least $134,000 from the fund. The complaint further alleges that Cottone failed to disclose to investors that he used fund assets to pay investors in a prior unrelated securities offering, that he used fund assets to pay his unregistered investment adviser, that he received undisclosed commission payments out of fund assets, that he used fund assets to operate a start-up car dealership he formed and managed, and that he has a prior criminal conviction. In addition to his alleged misrepresentations and omissions, the complaint alleges Cottone sold securities in unregistered transactions and acted as an unregistered broker. Cottone was barred. https://www.sec.gov/litigation/admin/2022/34-94045.pdf
7. On January 21, 2022, the SEC instituted administrative proceedings against Benjamin Williams. Williams sold securities to clients in a series of unregistered oil and gas offerings sponsored by entities in which Williams had undisclosed financial interests. Williams received an undisclosed 10% commission when Savant clients purchased the oil and gas securities. Williams also owned an equity stake in certain of the issuers of the oil and gas securities. Williams received more than $86,000 in ill-gotten gains. Williams agreed to pay disgorgement of $86,181, prejudgment interest of $10,912, and a civil penalty of $50,000. https://www.sec.gov/litigation/admin/2022/33-11024.pdf
8. On January 21, 2022, the SEC instituted administrative proceedings against Cody Biggs. Biggs offered and sold millions of dollars of unregistered oil and gas securities, and received thousands of dollars of compensation in the form of sales commissions while not registered as a broker-dealer or associated with a registered broker-dealer. Biggs agreed to pay disgorgement of $77,103, prejudgment interest of $9,762, and a civil penalty of $25,000 to the Commission. Biggs was barred. https://www.sec.gov/litigation/admin/2022/33-11025.pdf
9. On January 19, 2022, the SEC instituted administrative proceedings against Ivan Acevedo. Acevedo previously pled guilty to one count of conspiracy to commit mail and wire fraud. Acevedo admitted that he and his co-conspirators caused Woodbridge to raise money from investors through the sale of Woodbridge Group of Companies, LLC (“Woodbridge”) securities. Investors were told that Woodbridge would use their funds to make secured loans to third-party borrowers. Acevedo knew, Woodbridge’s principal, Robert Shapiro, was using the vast majority of investor funds to purchase real properties for entities Shapiro controlled. Acevedo materially misrepresented the nature of Woodbridge’s securities and their associated risks with the intent to cause investors to purchase the securities and receive commissions from the sales. These commissions were funded by investor money. After Acevedo’s termination of employment with Woodbridge, he acted as an external sales agent for Woodbridge and recruited additional Woodbridge investors through his company iAlt Enhanced Income Portfolio, LLC. Acevedo received approximately $1.1 million in Woodbridge compensation. Acevedo was barred. https://www.sec.gov/litigation/admin/2022/34-94002.pdf
10. On January 18, 2022, the SEC instituted administrative proceedings against Daniel Swinyar. Swinyar acted as an unregistered broker on behalf of StarGrower Asset in connection with an unregistered offering of securities for which there was no applicable exemption. Swinyar raised approximately $3,549,140 for StarGrower Asset from the offer and sale of securities in unregistered transactions to 16 investors who were clients of his state-registered investment advisory firm or customers of Swinyar’s retirement planning business. Swinyar received approximately $105,103 in transaction based compensation from StarGrower Asset from those sales. Swinyar was not registered as a broker-dealer with the Commission or associated with a registered broker-dealer during this time period. Swinyar also failed to disclose to his advisory clients that he received transaction-based compensation from StarGrower Asset in the offer or sale of securities and the material conflict of interest that this compensation created. Swinyar was ordered to pay a penalty in amounts to be determined by the Court at a later date. https://www.sec.gov/litigation/admin/2022/33-11023.pdf
11. On January 13, 2022, the SEC instituted administrative proceedings against CMG Capital Management Group, Inc. CMG advertised hypothetical, back-tested performance results for its CMG Opportunistic All Asset Strategy (“OAAS”) without disclosing the differences between the funds and other products used in the OAAS back-test and the funds considered for inclusion in client portfolios by the actual, “live” version of the strategy. CMG maintained written policies requiring the firm to comply with Commission rules prohibiting the distribution of advertisements containing any untrue statement of a material fact, or which are otherwise false or misleading. Notwithstanding these policies, CMG failed to adopt and implement adequate policies and procedures reasonably designed to prevent the distribution of false or misleading advertisements marketing the hypothetical, back-tested performance results of trading strategies such as the OAAS. CMG also failed to preserve certain OAAS advertisements. CMG agreed to pay a civil money penalty of $70,000. https://www.sec.gov/litigation/admin/2022/ia-5945.pdf
12. On January 13, 2022, the SEC instituted administrative proceedings against Howard Richards. Richards engaged in a manipulative scheme to support the market price of the common stock of Gatekeeper USA, Inc. in order to help Gatekeeper to obtain financing. Richards also failed to disclose to his clients his significant conflict of interest arising from his ownership of Gatekeeper shares, in breach of his fiduciary duty as an investment adviser. The Commission ordered Richards to pay a total of $144,000 in disgorgement, prejudgment interest, and a civil money penalty over the period of one year. https://www.sec.gov/litigation/admin/2022/34-93980.pdf
13. On January 11, 2022, the SEC instituted administrative proceedings against Comprehensive Capital Management, Inc. (“CCM”). CCM misrepresented fee-related information and failed to disclose conflicts of interest in its SEC Form ADV Part 2A concerning commissions paid to an affiliated broker-dealer and its associated persons resulting in CCM improperly receiving $66,635. CCM’s advisory agreements included liability disclaimer language, commonly referred to as a hedge clause, which could lead a client to believe incorrectly that the client had waived a non-waivable cause of action against the adviser provided by state or federal law. CCM failed to maintain accurate records of its discretionary accounts, and failed to adopt and implement required compliance policies and procedures. CCM was ordered to pay a civil money penalty of $300,000. https://www.sec.gov/litigation/admin/2022/ia-5943.pdf
14. On January 11, 2022, the SEC instituted administrative proceedings against O.N. Investment Management Company (“ONIMCO”). ONIMCO in connection with its affiliated broker-dealer and parent company O.N. Equity Sales Company’s (“ONESCO”) receipt of third-party compensation from client investments without fully and fairly disclosing associated conflicts of interest. ONIMCO invested clients in: mutual fund share classes that paid fees pursuant to Rule 12b-1 under the Investment Company Act of 1940, certain mutual funds that also generated no-transaction fee (“NTF”) revenue for ONESCO and cash sweep products that likewise resulted in revenue sharing for ONESCO. ONIMCO provided no disclosure or inadequate disclosure of the conflicts of interest arising from ONESCO’s receipt of this compensation. ONIMCO did not self-report ONESCO’s receipt of 12b-1 fees to the Commission. ONIMCO also failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder in connection with its mutual fund share class selection practices, NTF revenue sharing, and cash sweep revenue sharing. ONIMCO agreed to pay disgorgement, prejudgment interest, and a civil penalty, totaling $1,238,653. https://www.sec.gov/litigation/admin/2022/ia-5944.pdf
15. On January 7, 2022, the SEC instituted administrative proceedings against Glenn Arcaro who fraudulently offered and sold investment contracts in the form of interests in the BitConnect lending program and used interstate means to sell and offer such investment contracts. During the period of Arcaro’s offers and sales of such investment contracts, Arcaro was not associated with a registered broker-dealer. Arcaro was barred. https://www.sec.gov/litigation/admin/2022/34-93930.pdf
16. On January 7, 2022, the SEC instituted administrative proceedings against Yaniv Avnon, Ran Armon and G Six Trading Y.R Ltd. Respondents perpetrated a fraudulent scheme in which Nonko and its associated persons misappropriated certain of Nonko’s customers’ funds and provided those customers with what the customers were led to believe were live securities trading accounts, but in reality were mere training accounts, operated by a trading simulator program. The defendants then pocketed these customers’ deposits and used the money for personal expenses and for Ponzi-like payments to customers who wanted to close their accounts. The Nonko team deliberately targeted traders who were inexperienced or had a history of trading losses, reasoning that such traders would be more likely to place losing “trades” and unlikely to seek a return of their funds. The Nonko fraud resulted in at least $1.4 million in net losses to over 260 investors, residing in over 30 countries worldwide, and that the fraud’s victims included at least 180 investors from the United States, who collectively lost nearly $1 million to the fraud. The Respondents were barred. https://www.sec.gov/litigation/admin/2022/34-93932.pdf
17. On January 7, 2022, the SEC instituted administrative proceedings against Michael Shillin. Shillin made numerous material misrepresentations to at least 100 advisory clients to entice them to place or keep their funds under his advisory management. Shillin’s misrepresentations were wide-ranging, and included misstatements and omissions of material fact regarding the nature of his clients’ investments; false claims that he had invested clients’ funds in initial public offerings (“IPOs”) or pre-IPO stocks; false claims about the value of clients’ portfolios; and misstatements regarding Shillin’s termination from a previous employer. Also, on January 22, 2021, the Wisconsin Department of Financial Institutions – Division of Securities issued a summary order permanently barring Shillin from registration and from making or causing to be made in or from Wisconsin to any person or entity any further offers or sales of securities. Shillin was barred by the SEC. https://www.sec.gov/litigation/admin/2022/34-93926.pdf
18. On January 5, 2022, the SEC charged Allen Giltman with allegedly participating in a long-running fraudulent scheme to lure investors into buying fictitious certificates of deposit (CDs). The scheme resulted in victims, primarily older adults investing their retirement savings, losing at least $40 million. Giltman purchased internet ads targeting investors searching for CDs with high interest rates. The ads included links to phony websites Giltman helped create, many of which mimicked those of existing financial institutions, in order to offer investors fictitious CDs, which the websites falsely claimed were FDIC-insured. When investors called the phone numbers listed on the websites, Giltman impersonated registered representatives at the legitimate firms and instructed victims to wire funds to domestic or foreign bank accounts, purportedly to purchase the CDs. The investor funds were then misappropriated as part of the scheme, with Giltman receiving a portion of the funds. Giltman used a variety of methods to evade detection, including attempting to anonymize his digital footprint by using the identities of victims to register for online services used in the scheme. Giltman has consented to permanent and conduct-based injunctions, with monetary relief to be decided later by the court. https://www.sec.gov/news/press-release/2022-1
19. On January 4, 2022, the SEC announced charges against BĂłveda Asset Management, Inc. and George Witherspoon, Jr., for failing to provide required books and records during a SEC examination and for other violations of the federal securities laws. The SEC staff requested books and records from BĂłveda and Witherspoon as part of an investment adviser examination. BĂłveda and Witherspoon did not produced the requested books and records, as required by law. BĂłveda is improperly registered with the Commission as an Internet investment adviser because it does not meet the applicable registration requirements, and does not otherwise appear to be qualified for registration with the Commission. BĂłveda and Witherspoon have had custody of client funds, but have failed to comply with requirements to safeguard those assets. BĂłveda and Witherspoon made material misstatements and omissions in BĂłveda’s Forms ADV filed with the Commission. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25299.htm
20. On January 3, 2022, the SEC instituted administrative proceedings against Securities America Advisors, Inc., (“SAA”). SAA failed to adopt and implement policies and procedures reasonably designed to prevent investments in, and recommendations of, volatility linked Exchange Traded Products (“ETP”) that were not suitable for SAA clients. SAA had no policies and procedures directed specifically at volatility-linked ETPs, even though it knew that certain of its investment advisor representatives were investing in certainly volatility-linked ETPs on behalf of retail clients or were recommending that retail clients buy and hold the products for extended periods. SAA was ordered to pay $3,399 in disgorgement, $377 in prejudgment interest, and a $600,000 civil money penalty, for a total of $603,776. https://www.sec.gov/litigation/admin/2022/34-93892.pdf