January 2024 SEC Updates

1. On January 29, 2024, the SEC instituted administrative proceedings against Robert Armijo. Armijo acted as an unregistered broker or dealer by selling securities of the EquiAlt Funds. Armijo was never registered as, or associated with, a registered broker-dealer.  Armijo was barred. https://www.sec.gov/files/litigation/admin/2024/34-99437.pdf

2. On January 25, 2024, the SEC instituted administrative proceedings against Claire Shaughnessy. This matter involves conduct by Shaughnessy that was inconsistent with her duty to her client, the Pennsylvania Public School Employees’ Retirement System. Shaughnessy was a partner and investment adviser representative associated with Aon Investments USA Inc. (fka Aon Hewitt Investment Consulting, Inc.) Aon acted as an investment adviser for PSERS.  Shaughnessy was the lead partner on Aon’s engagement with PSERS.  Aon was responsible for, among other things, calculating PSERS’s investment returns, which were then used for calculating what is known as “risk share.” Aon reported to PSERS that the Risk Share Return Rate was 6.38% –just high enough to avoid triggering risk share. PSERS staff had repeatedly raised questions about Aon’s calculation of the Risk Share Return Rate. Prior to the Board certification, PSERS staff noted, and repeatedly asked Aon to investigate. In response to these inquiries from PSERS staff, Shaughnessy failed to adequately investigate the discrepancy and also misstated to PSERS that the discrepancy was not due to errors in the 2015 returns used to calculate the Risk Share Return Rate, but instead reflected retroactive adjustments to the returns reported in the Annual Financial Report to reflect updated figures received after quarter close. The SEC ordered Shaughnessy to pay a civil money penalty of $30,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6535.pdf

3. On January 24, 2024, the SEC instituted administrative proceedings against Marc Frankel, an investment adviser, and the owner of MJF Advisors, LLC, a dba of LPL Financial.  Frankel’s schemed to defraud his investment advisory clients by stealing and misappropriating their assets to pay his personal expenses and for other unauthorized purposes. Frankel pled guilty to one count of wire fraud. Through his scheme to defraud, Frankel caused losses totaling approximately $743,817. This matter is surprisingly being litigated. https://www.sec.gov/files/litigation/admin/2024/ia-6533.pdf

4. On January 24, 2024, the SEC charged Jesus Rodriguez, a former financial advisor, with Morgan Stanley Smith Barney, with fraud for misappropriating more than $3.475 million from ten brokerage account holders and advisory clients. While employed as a registered representative and investment adviser representative in the El Paso office Morgan Stanley Smith Barney, Rodriguez initiated more than 250 fraudulent and unauthorized disbursements from the accounts of ten of his brokerage customers and advisory clients.  Rodriguez allegedly used the funds he misappropriated for personal expenses including to pay credit card bills, to buy automobiles, and to pay his family members.  The SEC alleges that in many instances Rodriguez funded his misappropriations by incurring a debt for the account holder that was secured by the securities portfolios in their brokerage and/or advisory accounts. The SEC further alleges that Rodriguez engaged in deceptive conduct to further conceal his misappropriation scheme, including by fabricating authorizations for the transfers and by lying to his employer when asked about certain transactions involving the affected accounts. This matter is being litigated. https://www.sec.gov/litigation/litreleases/lr-25932

5. On January 22, 2024, the SEC instituted administrative proceedings against Douglas McKelvey, a registered representative and investment adviser representative of Morgan Stanley Smith Barney, a registered broker-dealer. McKelvey engaged in a fraudulent scheme through which he misappropriated more than $1.7 million from accounts of two elderly relatives who were brokerage customers while he served as their financial advisor. McKelvey sold securities from the customers’ accounts to generate some of the funds he misappropriated and took steps attempting to conceal his misconduct. McKelvey pleaded guilty to one count of money laundering. This matter is being litigated https://www.sec.gov/files/litigation/admin/2024/34-99412.pdf

6. On January 22, 2024, the SEC obtained final judgment against Grenda Group, LLC and its owner, president, and chief compliance officer, Gregory Grenda. According to the SEC’s complaint, Grenda Group and Gregory Grenda permitted Gregory Grenda’s father, Walter Grenda—whom had been barred in 2015 by the SEC from associating with an investment advisor—to associate with Grenda Group, including by meeting with clients in the firm’s office. Additionally, the SEC alleged that Grenda Group and Gregory Grenda failed to disclose Walter Grenda’s status as a barred investment advisor to their clients and made misleading statements to clients regarding Walter Grenda’s bar. Grenda Group and Gregory Grenda was ordered to pay civil penalties of $400,000 and $167,500, respectively. Grenda Group and Gregory Grenda was barred. https://www.sec.gov/litigation/litreleases/lr-25929

7. On January 18, 2024, the SEC instituted administrative proceedings against Richard Robertson, an investment adviser representative associated with and IFP Advisors, LLC (“IFP”). Robertson engaged in undisclosed “cherry-picking,” a practice of fraudulently allocating profitable trades to favored accounts at the expense of his advisory clients. Robertson allocated a disproportionate number of trades with positive first-day returns to his personal and family accounts, while allocating a disproportionate number of trades with negative first day returns to certain client accounts. Robertson was able to do this by buying securities in an omnibus account and then waiting until later in the day to allocate the securities to his or his clients’ accounts. The SEC further found that IFP failed to implement policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules and made false and misleading statements in its Forms ADV concerning supposed safeguards in place to prevent representatives from placing their own interests ahead of those of IFP’s advisory clients. The SEC ordered Robertson to pay disgorgement of $592,437.00, prejudgment interest of $28,173, and a civil money penalty of $300,000; and IFP to pay a civil money penalty of $400,000, for a collective total of $1,320,610 to the SEC. https://www.sec.gov/files/litigation/admin/2024/34-99389.pdf

8. On January 16, 2024, the SEC instituted administrative proceedings against J.P. Morgan Securities LLC. (“JPMS”), a dually registered investment adviser and broker dealer.  JPMS regularly asked certain advisory clients and brokerage customers to whom it had issued a credit or settlement over $1,000 in value to sign a confidential release agreement that impeded the clients from disclosing potential violations of the federal securities laws to the SEC unless responding to an inquiry from the SEC. Specifically, the release required the clients to keep confidential not only the release itself, but also all information relating in any way to the specified account at JPMS. While the release permitted clients to respond to inquiries from the SEC, it did not permit voluntary communications with the SEC concerning potential securities law violations. JPMS was ordered to pay a civil money penalty in the amount of $18 million. https://www.sec.gov/files/litigation/admin/2024/34-99344.pdf

9. On January 16, 2024, the SEC instituted administrative proceedings against Dean Tellone, president, founder, and sole owner of Tellone Management Group (”TMG”), an SEC registered investment adviser. Tellone engaged in a fraudulent scheme and breached his fiduciary duties to TMG’s advisory clients and to investors in TMG’s fund, the Tellone Mortgage Fund. Tellone misled the auditors about a loan’s status.  Tellone directed his individuals to falsely confirm to TMG’s auditors that the loan was still outstanding, and presented the auditors with a backdated letter that falsely implied that the loan was collateralized. TMF’s financial statements provided to investors falsely reported a 3.1% return on investment. TMG continued to collect its management fees on the discharged loan, which remained on its balance sheet, amounting to over $110,000. Tellone was barred. https://www.sec.gov/files/litigation/admin/2024/ia-6531.pdf

10. On January 9, 2024, the SEC’s social media account was hacked. Two statements issued on the Commission’s official account on social media site X (formerly known as Twitter) announcing that regulators had given permission for a Bitcoin exchange-traded fund were the work of hackers. The SEC said a SIM swap attack was to blame for the breach of its official account on X. An unauthorized party gained access to the @SECGov account and displayed a fake post claiming the agency had approved the first-ever spot bitcoin exchange-traded funds.

11. In January, a new 90-page 2024 FINRA Annual Regulatory Oversight Report from FINRA offers key insights from its Member Supervision, Market Regulation and Enforcement programs. The annual report—previously known as the Report on FINRA’s Examination and Risk Monitoring  Program—aims at delivering information firms can use “to strengthen their compliance programs.” Topics flagged as  “new for 2024” include crypto asset developments. For those jumping into crypto, FINRA suggests reviewing and evaluating your supervisory programs and controls, and compliance P&Ps, in areas such as cybersecurity, AML compliance, customer communications, manipulative trading, and performing due diligence on crypto asset private placements. The SRO also flags supervising associated persons’ and supervising associated persons’ involvement in crypto asset-related outside business activities and private securities transactions. Communications with the public about crypto were identified as a surveillance theme. FINRA noted that crypto asset-related communications reviewed by the SRO’s Advertising Regulation Department “have had a noncompliance rate that is significantly higher than that of other products.” A target exam trained on crypto asset retail communications was launched in November 2022. FINRA signaled in the new report that it is “working to complete this review and publish an update on findings and effective practices”  Also, outside business activities appear yet again on FINRA’s list of priorities for 2024 and recent enforcement actions undertaken by FINRA. FINRA rules requires registered persons to notify their firms in writing of proposed OBAs so firms can determine whether to prohibit, limit or allow those activities. FINRA recommends firms consider what methods they use to identify individuals involved in undisclosed OBAs and determine whether a firm’s compliance policies and procedures “explicitly” state when and how registered persons must notify your firm of a proposed OBA. https://www.finra.org/sites/default/files/2024-01/2024-annual-regulatory-oversight-report.pdf

12. On December 26, 2023, the SECannounced settled charges against New York-based registered investment adviser OEP Capital Advisors, L.P (“OEP”) for failing to maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, non-public information (“MNPI”) and to implement written policies and procedures reasonably designed to prevent misleading communications to current and prospective investors in the privately-offered, private-equity funds that OEP advises. OEP made numerous statements to current investors, potential investors and industry contacts that violated OEP’s policies and procedures concerning disclosure of merger-related MNPI and communication of OEP fund performance claims. The SEC claims OEP’s P&Ps prohibited the disclosure of material, nonpublic information or its funds’ confidential information “except as may be necessary for legitimate business purposes.” “However,” regulators claim in the eight-page order, “OEP senior personnel repeatedly violated these policies by, among other things, sending emails to current investors, potential investors, and industry contacts which, in certain cases, unnecessarily disclosed M&A-related MNPI concerning U.S. and foreign-listed public companies, typically in a marketing context. This MNPI and related, strategic information also constituted the OEP Funds’ confidential information.” OEP consented to a cease-and-desist order, censure and the payment of a civil penalty of $4,000,000.