July 2022 SEC Updates

1. On July 27, 2022, the SEC charged J.P. Morgan Securities LLC, UBS Financial Services Inc., and TradeStation Securities, Inc. for deficiencies in their programs to prevent customer identity theft, in violation of the SEC’s Identity Theft Red Flags Rule, or Regulation S-ID.  According to the SEC’s orders, from at least January 2017 to October 2019, the firms’ identity theft prevention programs did not include reasonable policies and procedures to identify relevant red flags of identity theft in connection with customer accounts or to incorporate those red flags into their programs. In addition, the SEC’s orders find that the firms’ programs did not include reasonable policies and procedures to respond appropriately to detected identity theft red flags, or to ensure that the programs were updated periodically to reflect changes in identity theft risks to customers. JPMorgan: The JPMorgan order also finds that the firm failed to exercise appropriate and effective oversight of all service provider arrangements and failed to train staff to effectively implement one of its identify theft prevention programs.  UBS: The UBS order also finds that the firm failed to periodically review new or existing types of customer accounts to determine whether and how its identity theft prevention program should apply to them; failed to adequately involve the board of directors in the oversight, development, implementation, and administration of the program; and failed to train its employees to effectively implement the program. TradeStation: The TradeStation order also finds that the firm failed to adequately involve its board of directors in the oversight, development, implementation, and administration of its identity theft prevention program and failed to exercise appropriate and effective oversight of service provider arrangements. The SEC’s orders find that each firm violated Rule 201 of Regulation S-ID. Without admitting or denying the SEC’s findings, each firm agreed to cease and desist from future violations of the charged provision, to be censured, and to pay the following penalties: JPMorgan: $1.2 million, UBS: $925,000, and TradeStation: $425,000.  https://www.sec.gov/news/press-release/2022-131

2. On July 25, 2022, the SEC instituted administrative proceedings against Paul Gallivan for unsuitable recommendations of highly-complex, variable interest rate structured products (“VRSPs”) to four customers. Most of the customers were senior investors with low or moderate risk tolerances; limited investment experience with structured products; investment time horizons of less than fifteen years; and moderate or higher liquidity needs. The customers also were unwilling to risk losing their entire invested principal from their investments, and they relied on periodic interest payments from their investments to meet their income needs. Gallivan made misrepresentations about the risks and characteristics of the VRSPs. Gallivan was ordered to pay disgorgement of $26,807, prejudgment interest of $3,166, and a civil money penalty in the amount of $25,000. https://www.sec.gov/litigation/admin/2022/33-11085.pdf

3. On July 25, 2022, the SEC instituted administrative proceedings against Christopher Burns. Burns recommended to his advisory clients the purchase of promissory notes issued by two entities that he wholly owned. Burns told prospective investors that the notes were part of a peer-to-peer loan program called Peer Connect and that the proceeds of the note sales would be loaned to small businesses. The notes offered returns between 5% and 15% per year. Burns made numerous misrepresentations to investors including the nature of the investment, how returns would be generated, and how investor funds would be used. The Peer Connect loan program was a sham, he misappropriated a significant portion of investor funds, and he used the remaining funds to pay purported returns to earlier investors in the scheme. Burns sold more than $10 million in fraudulent notes to investors. The matter is being litigated. https://www.sec.gov/litigation/admin/2022/ia-6072.pdf

4. On July 22, 2022, the SEC instituted administrative proceedings against Mesirow Financial Investment Management, Inc. Mesirow breached its fiduciary duty to its advisory clients by failing to provide full and fair disclosure regarding compensation paid to its affiliated broker-dealer, Mesirow Financial, Inc. and the related conflicts of interest. The affiliated broker received revenue sharing payments from an unaffiliated clearing broker as a result of Mesirow’s advisory clients’ investments in certain mutual funds. Certain of the mutual funds that paid revenue sharing were more expensive than lower-cost options available to clients, including instances when there were lower-cost share classes of the same mutual funds available to clients that did not result in any revenue sharing. Mesirow also breached its duty to seek best execution by causing certain advisory clients to invest in share classes of mutual funds that paid revenue sharing 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. Mesirow was ordered to pay a civil penalty of $752,834. https://www.sec.gov/litigation/admin/2022/34-95351.pdf

5. On July 21, 2022, the SEC announced insider trading charges against a former Coinbase product manager, his brother, and his friend for perpetrating a scheme to trade ahead of multiple announcements regarding certain crypto assets that would be made available for trading on the Coinbase platform.  The SEC’s complaint alleges that, while employed at Coinbase, Ishan Wahi helped to coordinate the platform’s public listing announcements that included what crypto assets or tokens would be made available for trading. According to the SEC’s complaint, Coinbase treated such information as confidential and warned its employees not to trade on the basis of, or tip others with, that information. However, from at least June 2021 to April 2022, in breach of his duties, Ishan repeatedly tipped the timing and content of upcoming listing announcements to his brother, Nikhil Wahi, and his friend, Sameer Ramani. Ahead of those announcements, which usually resulted in an increase in the assets’ prices, Nikhil Wahi and Ramani allegedly purchased at least 25 crypto assets, at least nine of which were securities, and then typically sold them shortly after the announcements for a profit. The long-running insider trading scheme generated illicit profits totaling more than $1.1 million.  The matter is being litigated. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against all three individuals. https://www.sec.gov/news/press-release/2022-127

6. On July 21, 2022, the SEC instituted administrative proceedings against Private Advisor Group, LLC. PAG invested certain clients’ assets in higher-cost mutual fund share classes than were otherwise available while failing to disclose the conflicts of interest associated with those investment recommendations. PAG offers a wrap program option to its advisory clients. Under its arrangement with clients in wrap accounts, PAG was responsible for paying client trading costs – including transaction fees on mutual fund investments – as part of the overall management fee clients paid to PAG. PAG deducted any transaction fees incurred in wrap accounts directly from its investment adviser representatives’ compensation. PAG 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 selection practices in its wrap program and the related disclosures of its associated conflicts of interest. PAG was ordered to pay a whopping penalty of $5,800,000. https://www.sec.gov/litigation/admin/2022/ia-6069.pdf

7. On July 20, 2022, the SEC instituted administrative proceedings against Health Insurance Innovations, Inc., Now Named Benefytt Technologies, Inc. and Gavin Southwell. HII and Southwell falsely told investors that HII held its insurance distributors to its high compliance standards, which prohibited insurance agents from making misrepresentations to consumers. HII and Southwell falsely stated that HII had 99.99% consumer satisfaction and misleadingly stated that state departments of insurance received very few consumer complaints regarding HII. HII and Southwell understated the amount of business that had been generated by its most productive distributor, Simple Health Plans LLC which amassed the most consumer complaints. HII and Southwell misrepresented that HII had terminated its relationship with a different distributor for compliance failures when HII re-hired this distributor despite continuing compliance problems. Southwell also disseminated misleading information about HII’s compliance to research analysts and a subscription news service, which included the information in research reports and a news article that were distributed to investors. HII was ordered to pay a whopping civil penalty of $11 million while Southwell was ordered to pay a civil penalty of $750,000. https://www.sec.gov/litigation/admin/2022/33-11084.pdf

8. On July 15, 2022, the SEC instituted administrative proceedings against Allianz Global Investors U.S. LLC. AGI US employed a complex options trading strategy known as Structured Alpha that AGI US marketed and sold to investors in various funds. The Structured Alpha Funds were intended to generate profits by using a portfolio of debt or equity securities as collateral to purchase and sell options principally on the S&P 500 Index. The Structured Alpha Funds performed well until the COVID-related market volatility when they suffered catastrophic losses, including losses in excess of 90% in certain funds. AGI US misled investors as to the significant downside risk of the Structured Alpha Funds which included misrepresentations and omissions made in connection with the purchase and sale of these securities. AGI US’s marketing materials misrepresented to investors the levels at which hedging positions were put in place. After COVID-related market volatility the portfolio management team engaged in numerous ultimately unsuccessful efforts to conceal their misconduct from the Commission staff. The Commission ordered AGI US to pay a $349.2 million in disgorgement and prejudgment interest and a whopping $675,000,000.00 civil money penalty. https://www.sec.gov/litigation/admin/2022/34-95293.pdf

9. On July 7, 2022, the SEC instituted administrative proceedings against James Davis. Davis pleaded guilty to three counts of mail fraud, conspiracy to commit mail, wire, and securities fraud, and conspiracy to obstruct the Commission’s investigation. A criminal judgment was entered against Davis, sentencing him to a prison term of 60 months, followed by three years of supervised release, and ordering him to forfeit $1 billion. The Court also found Davis to be jointly and severally liable with Stanford for $5.9 billion in disgorgement that was fraudulently acquired as a result of the scheme and for $861,189,969 in prejudgment interest. The Court also ordered Davis to pay a civil penalty of $5 million. https://www.sec.gov/litigation/admin/2022/34-95212.pdf

10. On July 7, 2022, the SEC instituted administrative proceedings against Richard Gearhart. Gearhart admitted that he and another individual “knowingly and intentionally engaged in a securities fraud scheme in which we obtained over $1.5 million dollars of investor funds from more than 25 victims through false statements, misrepresentations, and omissions of material facts, which resulted in misleading the investors into purchasing these securities through me and [the other individual].” Gearhart further admitted that he “directed individuals to invest their existing retirement funds – including funds from 401ks, IRAs, and annuities – with me and my company,” APS, and that the scheme “involved selling and promoting the sale of securities . . . to investors.” Gearhart and the other individual promised investors that their original investments would be returned to them upon request within a specified time period with interest and no loss of principal. Gearhart and the other individual used investor proceeds to fund businesses in which one or both of them were officers, owners, or members, to make Ponzi-like payments to other investors, and to pay for personal expenses. The matter is being litigated. https://www.sec.gov/litigation/admin/2022/ia-6064.pdf

11. On July 1, 2022, the SEC charged Eric Hollifield with misappropriating at least $1.7 million from two advisory clients and one brokerage customer and using the funds to pay for personal expenses, including the purchase of a home. Hollifield transferred client assets to an outside business over which he maintained control and without the clients’ permission, subsequently directed a portion of those funds to his own accounts, which he used to pay personal expenses. Hollifield used investor funds to purchase a 37-acre home for approximately $1.7 million. Hollifield moved at least $425,000 of client funds through the outside business and used a portion of that money as a partial payment for the property. Hollifield sold securities in a brokerage customer’s account and recommended that the customer transfer $1.24 million to another financial institution to accrue higher interest. After receiving the customer’s permission for the transfer, Hollifield instead sent the money immediately to a real estate closing agent to complete the purchase of his home. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25435.htm

12. On July 1, 2022, the SEC instituted administrative proceedings against Efrain Betancourt. Sky Group and Betancourt fraudulently raised more than $66 million from at least 505 investors through the offer and sale of promissory notes in Sky Group. Betancourt made to investors were that Sky Group would only use their funds to make payday loans, that Sky Group was profitable and had sufficient funds from its payday loan business to repay investors, and that Sky Group had an $80 million payday loan portfolio. Sky Group did not make more than $12 million in payday loans and used investor funds to pay its expenses and to repay other investors. Betancourt misappropriated more than $4.5 million in investor funds to pay his credit card bills and other expenses, including for a luxury wedding in France. Betancourt was barred. https://www.sec.gov/litigation/admin/2022/34-95194.pdf

13. On June 30, 2022, the SEC settled charges against Corona Associates Capital Management, LLC, a California-based unregistered investment adviser, and its principals, Julian Scurci and John Scurci, for making misrepresentations to investors in two private funds they managed.  According to the SEC’s order, from at least 2013 to the present, Corona represented in offering materials for its private funds that the funds’ financial statements were audited annually and that Corona would provide investors with audited financial statements, and also identified certain audit firms as auditors for the funds. The order finds that, while the Scurcis made efforts to engage an auditor, for years they failed to actually do so. Thus, according to the order, the funds’ financial statements were never audited and investors never received the promised audited financial statements. The SEC’s order finds that Corona, Julian Scurci, and John Scurci willfully violated the antifraud provisions of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Without admitting or denying the SEC’s findings, Corona, Julian Scurci, and John Scurci consented to a cease-and-desist order and a censure, and agreed to pay civil penalties of $50,000, $20,000, and $10,000, respectively. Corona also agreed to comply with certain undertakings, including the retention of an independent compliance consultant. https://www.sec.gov/enforce/ia-6062-s

14. In June it was reported that SEC Chairman Gary Gensler is pushing Commission staff to come up with new rule proposals that would change the definitions of accredited investors and shareholder of record.  Raising the wealth thresholds for accredited investors and pegging them to inflation. If the Commission does adopt something like that, regulators will also have to decide how to index inflation.  Forcing firms to file a Form D before they raise any cash.  Critics—especially state regulators—have complained for years that Reg D is too vague. It’s not clear whether firms must file a Form D at all, and if so, when.