January 2023 SEC Updates

1. On January 30, 2023, the SEC’s Division of Examinations published a Risk Alert to highlight observations from examinations related to Regulation Best Interest. The Risk Alert is intended to assist broker-dealers in reviewing and enhancing their compliance programs related to Regulation Best Interest. The Risk Alert is helpful to investment advisers in understanding the regulatory requirements broker-dealers have towards advisory clients and can assist advisers in fulfilling their duty of best execution, and, particularly helpful for advisors who are dually hatted as both an investment adviser representative with an advisory firm and also registered representative at a broker-dealer. https://www.sec.gov/exams/announcement/exams-reg-bi-alert-13023

2. On January 30, 2023, the SEC proposed amendments to its ethics rules to strengthen and modernize its ethics compliance program. The amendments would add new requirements and prohibitions to the program, which already includes some of the most stringent ethics requirements in the executive branch for all agency employees, their spouses, and minor children.  https://www.sec.gov/news/press-release/2023-19

3. On January 27, 2023, the SEC instituted administrative proceedings against Abraham Mirman, head of the Investment Banking Department at John Thomas Financial (“JTF”), a broker-dealer that was then registered with the SEC.  Mirman aided and abetted the actions of another person to artificially inflate the price of the common stock of Liberty Silver Corp. (“Liberty Silver”), while failing to disclose the sale of 6,600,000 Liberty Silver shares to JTF’s retail customers.  Mirman substantially participated in offers of additional Liberty Silver shares as to which no registration statement was filed or in effect with the Commission.  Mirman was barred. https://www.sec.gov/litigation/admin/2023/34-96764.pdf

4.  On January 24, 2023, the SEC filed fraud charges against Austin Ellison-Meade alleging that he fraudulently raised millions of dollars from investors in an investment club he managed called Baycap.io.  Meade falsely claimed that Baycap.io’s trading strategy was based on a proprietary algorithm Meade developed that could accurately predict stocks that were poised for growth.  Meade raised at least $2.8 million for Baycap.io from approximately 31 individual investors based on representations that he would use the funds to engage in algorithmic securities trading and that the funds would be readily available upon request.  Meade never used investor funds to trade securities, but rather misappropriated money from Baycap.io to pay for personal expenses like luxury automobiles and make Ponzi-like payments.  Meade distributed fake account statements to cover up his fraud and to persuade investors to remain invested in Baycap.io.  Contrary to Meade’s representations, most Baycap.io investors were unable to withdraw their money upon request, with Meade offering a variety of excuses to explain why he was unable to access the funds.  Meade charged Baycap.io investors a 2% fee upfront based on the amount of capital they invested and a 20% quarterly fee on any profits he generated for them. https://www.sec.gov/litigation/litreleases/2023/lr25625.htm

5.  On January 24, 2023, the SEC announced that it filed an emergency action and obtained an asset freeze against Miami investment advisers Jack Ridall and Guss Capital, LLC (“Guss Capital”) for committing securities fraud through a scheme to deceive investors using fabricated audit reports and attorney letters.  Ridall and Guss Capital represented themselves as successful money managers and raised approximately $750,000 from at least four investors by representing that they would invest their money in a private fund.  Ridall and Guss Capital deceived investors by never investing their money as promised, using fabricated audit reports appearing to be from the global accounting firm KPMG LLP claiming Ridall managed $101 million in assets, and sending fake attorney letters purportedly from the international law firm of K&L Gates LLP lying about investors’ profits.  Ridall and Guss Capital misappropriated more than 75% of investor funds for personal expenses such as luxury vehicles, fine dining, and jewelry and shopping sprees in Miami Beach. https://www.sec.gov/litigation/litreleases/2023/lr25624.htm

6.  On January 23, 2023, the SEC announced settled charges against Bloomberg Finance L.P. (Bloomberg) for misleading disclosures relating to its paid subscription service, BVAL, which provides daily price valuations for fixed-income securities to financial services entities.  The SEC’s order finds that from at least 2016 through October 2022, Bloomberg failed to disclose to its BVAL customers that the valuations for certain fixed-income securities could be based on a single data input, such as a broker quote, which did not adhere to methodologies it had previously disclosed. The order finds that Bloomberg was aware that its customers, including mutual funds, may utilize BVAL prices to determine fund asset valuations, including for valuing fund investments in government, supranational, agency, and corporate bonds, municipal bonds and securitized products, and that BVAL prices, therefore, can have an impact on the price at which securities are offered or traded.  https://www.sec.gov/litigation/admin/2023/33-11150.pdf

7.  On January 19, 2023, the SEC instituted administrative proceedings against DaRayl Davis, an associated person of Investors Capital Corp. a dually registered investment adviser and broker-dealer.  Davis is now a resident of Milan Federal Correctional Institution in Milan, Michigan where he is serving a 160- month prison sentence.  Davis recommended and sold fictitious “corporate bond notes” and “guarantee bonds,” or similar products to approximately 30 individuals, taking in more than $5 million.  Davis sold these products through two entities through which he also purported to provide investment advisory services.  Based on Davis’ representations, people believed that they were investing in legitimate investment products when, in fact, no such products existed.  Instead of investing the money as promised, Davis used investors’ funds to afford luxury items including a rented mansion in the Hollywood Hills, a home in Maryland, cars, trips to night clubs, and frequent travel.  To conduct and conceal the fraud, Davis created and distributed fake investment documents and account statements, and used investors’ money to make payments to prior investors. https://www.sec.gov/litigation/admin/2023/34-96712.pdf

8.  On January 17, 2023, the SEC instituted administrative proceedings against Matthew Bell, a registered representative and an investment adviser representative who resides in San Antonio, Texas.  Bell was employed as an investment adviser representative at the registered investment adviser Alamo Investment Advisors LLC.  While at Alamo, Bell was concurrently a registered representative associated with registered broker-dealers WFG Investments, Inc. and Securities America, Inc.  Bell engaged in a scheme to inflate the price of the stock of CodeSmart Holdings, Inc. and then profit at the expense of his brokerage customers.  Bell sold unregistered securities.  Bell pled guilty to one count of conspiracy to commit securities fraud and one count of conspiracy to commit mail fraud and wire fraud in violation of 18 U.S.C. § 371 before the United States District Court for the Eastern District of New York, in United States v. DiScala, 14 cr. 399.  Bell has not yet been sentenced. https://www.sec.gov/litigation/admin/2023/34-96670.pdf

9. On January 12, 2023, the SEC charged Genesis Global Capital, LLC and Gemini Trust Company, LLC for the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program. Through this unregistered offering, Genesis and Gemini raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors. Investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.  https://www.sec.gov/litigation/complaints/2023/comp-pr2023-7.pdf

10.  On January 12, 2023, the SEC instituted administrative proceedings against Paul Hess.  Hess owned Braintree Mobiletech, LLC and Braintree Hill Ventures, LLC.  Hess was associated with a dually-registered investment adviser and broker-dealer.  Hess acted as an unregistered broker-dealer, promoting, selling and fraudulently offering securities.  The largest fraudulent scheme involved a start-up financial technology company called Mozido, LLC.  Hess and others used multiple shell companies to raise more than $49 million from hundreds of investors, who purchased notes issued by various shell companies, with the promise that the notes were a way to invest in Mozido.  To sell the notes, Hess and others made multiple material misstatements about Mozido’s business prospects and Defendant Michael Liberty’s past.  Hess fraudulently raised across multiple offerings involving different businesses more than $55 million through the sale of unregistered securities. Hess was barred. https://www.sec.gov/litigation/admin/2023/34-96650.pdf

11.  On January 10, 2023, the SEC entered a final consent judgment against defendant Jason Sugarman ordering him to pay over $10.2 million dollars in disgorgement, interest, and penalties.  The judgment resolves the SEC’s charges against Sugarman for his role in a scheme to defraud ten pension funds out of $43 million in connection with the issuance of limited recourse Native American tribal bonds.  Sugarman and his partner Jason Galanis acquired control of two investment advisers so that they and their associates could use the advisers’ clients’ funds to purchase Native American tribal bonds.  While the bond sale proceeds were supposed to be invested in annuities to benefit the tribal corporation and repay the bondholders, Sugarman and his associates instead misappropriated the proceeds for their own benefit, including using proceeds of the initial round of bond sales to finance the acquisition of a foreign insurance company that was, in turn, used to acquire the second investment adviser used in the scheme. https://www.sec.gov/litigation/litreleases/2023/lr25611.htm

12.  On January 5, 2023, the SEC instituted administrative proceedings against Randy Robertson, a former managing director at BlackRock Advisors, LLC (“BlackRock”) and a former co-portfolio manager for the BlackRock Multi-Sector Income Trust (“BIT”), a closed-end management investment company, failed to disclose a conflict of interest concerning the largest investment held by BIT, a lending facility in affiliates of Aviron Group, LLC (“Aviron” and the investment “Aviron Investment”).  BIT invested in the aggregate of approximately $85 million in a secured lending facility to fund the print and advertising expenses associated with particular films Aviron distributed.  Robertson played a primary role in identifying and selecting the Aviron Investment and a significant role in overseeing the Aviron Investment. Before and during the time of the Aviron Investment, Robertson requested generally that Aviron help his daughter’s career, and on occasions Aviron presented her with potential opportunities in the film industry.  Robertson was ordered to pay a civil money penalty in the amount of $250,000. https://www.sec.gov/litigation/admin/2023/ia-6211.pdf