July 2023 SEC Updates

1. On July 26, 2023, the SEC charged Joseph Lewis, a British billionaire, with insider trading.    Lewis is accused of tipping his then-girlfriend, Carolyn Carter, former Miss World U.S. Virgin Islands, and private jet pilots with material nonpublic information.  According to the SEC’s complaint, Lewis, a British national who resides principally in The Bahamas, controls and is majority owner of a biotechnology investment fund, from which he often received material nonpublic information concerning the fund’s portfolio companies. The SEC’s complaint alleges that, between approximately July and October 2019, Lewis breached a duty of confidentiality by illegally tipping material nonpublic information to Carter on at least two occasions and to O’Connor and Waugh on at least one occasion.  The matter is being litigated. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Lewis, O’Connor, and Waugh.  https://www.google.com/search?q=girlfriend%2C+Carolyn+W.+Carter&rlz=1C1VDKB_enUS985US989&oq=girlfriend%2C+Carolyn+W.+Carter&aqs=chrome..69i57.629j0j4&sourceid=chrome&ie=UTF-8

2. On July 26, 2023, the SEC proposed amendments to the rule permitting certain investment advisers that provide investment advisory services through the internet to register with the SEC. The proposed amendments generally would require an investment adviser relying on the internet adviser registration rule to have at all times an operational interactive website through which the adviser provides digital investment advisory services on an ongoing basis to more than one client. The proposed amendments would also eliminate the de minimis exception from the current rule by proposing to require that an internet investment adviser provide advice to all of its clients exclusively through an operational interactive website, and make certain corresponding changes to Form ADV. https://www.sec.gov/news/press-release/2023-141

3. On July 26, 2023, the SEC proposed new rules that would require investment advisers and broker-dealers (collectively, “firms”) to take certain steps to address conflicts of interest associated with their use of predictive data analytics and similar technologies to interact with investors to prevent firms from placing their interests ahead of investors’ interests. The use by firms of technologies to optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes has accelerated. Use of such technologies can be beneficial to investors in providing greater market access, efficiency, and returns. To the extent that firms are using certain technologies in a manner that places their own interests ahead of investors’ interests, however, investors can suffer financial harm. Given the scalability of these technologies and the potential for firms to reach a broad audience at a rapid speed, any resulting conflicts of interest could cause harm to investors in a more pronounced fashion and on a broader scale than previously possible. Building off existing legal standards, the proposed rules generally would require a firm to evaluate and determine whether its use of certain technologies in investor interactions involves a conflict of interest that results in the firm’s interests being placed ahead of investors’ interests. Firms would be required to eliminate, or neutralize the effect of, any such conflicts, but firms would be permitted to employ tools that they believe would address these risks and that are specific to the particular technology they use, consistent with the proposal. The proposed rules would also require a firm to have written policies and procedures reasonably designed to achieve compliance with the proposed rules and to make and keep books and records related to these requirements.  The Background section which begins on Page 12 on SEC’s proposed rule regarding conflicts of interest associated with the use of predictive data analytics (“PDA”) by investment advisers is highly interesting, so please check that out if you have time.  “…platforms may use a combination of AI, machine learning, NLP (natural language processing), and chatbot technologies to provide personalized investment recommendations to customers based on customer risk tolerance and investment goals.”  “…firms in the securities industry, are using AI in a multitude of ways, including responding to customer inquiries, automating back-office processes, quality control, risk management, client identification and monitoring, selection of trading algorithms, and portfolio management. Others are actively developing investment advisory services based on PDA-like technologies.”  https://www.sec.gov/news/press-release/2023-140

4. On July 25, 2023, the SEC announced that Natasha Vij Greiner and Keith Cassidy have been named interim Acting Co-Directors of the Division of Examinations, effective immediately, while Division Director Richard Best is on extended medical leave from the agency.  https://www.sec.gov/news/press-release/2023-137

5. On July 20, 2023, the SEC instituted administrative proceedings against Monroe Capital Management Advisors, LLC, a registered investment adviser, in connection with the firm’s activities related to certain special purpose acquisition companies. Monroe Capital failed to timely disclose conflicts of interest and failed to adopt reasonably designed written policies and procedures regarding Monroe Capital personnel’s ownership interests in SPAC sponsors and Monroe Capital’s practice of investing client assets in affiliated SPACs. Monroe Capital also failed to timely file amended reports on Schedule 13G concerning changes to its and its affiliates’ beneficial ownership of the common stock of a public company formed as a result of a SPAC business combination.  This matter is being litigated.  https://www.sec.gov/litigation/admin/2023/34-97957.pdf

6. On July 19, 2023, the SEC charged six individuals with a multi-million-dollar Ponzi-like fraud scheme orchestrated by criminal recidivist Eliyahu Weinstein of New Jersey. Along with Weinstein, Aryeh Bromberg, Joel Wittels, Richard Curry, Christopher Anderson, and Alaa Mohamed Hattab were charged for their roles in the fraudulent scheme, which involved raising investments to fund purported deals to purchase, distribute, and sell in-demand healthcare products. Weinstein, Bromberg, and Wittels raised money from investors for purported deals through Optimus Investments Inc. while concealing Weinstein’s identity, criminal history, and involvement from investors. Anderson and Curry began raising money for Optimus deals through Tryon Management Group LLC, and they joined the other defendants in actively concealing Weinstein’s role in the venture. Hattab provided substantial assistance to the other defendants in carrying out the scheme. Weinstein, Bromberg, Wittels, Curry, and Anderson undertook a fraudulent scheme to use funds raised from investors to make Ponzi-like payments to earlier investors while mischaracterizing them as investment returns. Collectively, the defendants’ fraudulent scheme raised at least $38 million from at least 150 investors. This matter is being litigated.  https://www.sec.gov/news/press-release/2023-134

7. On July 17, 2023, the SEC instituted administrative proceedings against Fifth Third Securities, Inc., a SEC registered investment adviser, broker-dealer and municipal advisor. Fifth Third’s failed to comply with Exchange Act Rule 15c2-12 (“Rule 15c2-12” or the “Rule”) when participating as an underwriter in certain primary offerings of municipal securities. Fifth Third, while serving as sole underwriter for 79 limited offerings, sold securities to broker-dealers and certain investment advisers without a reasonable belief that the broker-dealers and investment advisers were purchasing the securities for investment as required under Rule 15c2-12(d)(1)(i). Fifth Third lacked policies and procedures reasonably designed to determine if purchasers satisfied the exemption’s requirements. Fifth Third was ordered to pay a civil money penalty in the amount of $200,000.00.  https://www.sec.gov/litigation/admin/2023/34-97937.pdf

8. On July 17, 2023, the SEC instituted administrative proceedings against HCR Wealth Advisors, a SEC registered investment adviser. HCR failed to reasonably supervise Jeremy Drake, formerly an investment adviser representative of HCR, and failed to implement reasonable compliance-related policies and procedures in response to red flags about Drake’s handling of client accounts. Drake defrauded two HCR clients, a married couple, out of approximately $1.2 million in management fees, approximately $900,000 of which Drake received as incentive-based compensation from HCR. Drake misappropriated approximately $215,000 from the accounts of four HCR clients, including the married couple and two other individuals, to support a struggling restaurant that was majority owned by the married couple and in which Drake held a minority ownership interest. HCR was ordered to pay a civil money penalty of $220,000. https://www.sec.gov/litigation/admin/2023/34-97921.pdf

9. On July 14, 2023, the SEC instituted administrative proceedings against Ronald Flynn, a registered representative of the Income Network Company, a previously registered broker-dealer in California . Flynn controlled the entities Vuuzle Media Corp. and Vuuzle Media Corp. Limited (together, Vuuzle”).  Flynn and others defrauded investors by falsely presenting Vuuzle as a pre-IPO investment opportunity when it was little more than a boiler room controlled and directed by Flynn, which raised funds using a campaign of relentless and deceptive phone and email communications from Flynn and others. Vuuzle never made a profit, and that Flynn and others used the vast majority of investor funds to pay for personal expenses and pay undisclosed commissions to boiler room staff, Flynn, and others. Flynn acted as an unregistered broker-dealer in connection with this boiler room scheme. The matter is being litigated.  https://www.sec.gov/litigation/admin/2023/34-97907.pdf

10. On July 14, 2023, the SEC instituted administrative proceedings against Cantor Fitzgerald & Co. (“Cantor”) repeated failure to identify and report customers as large traders (“Large Traders”). Cantor violated Rule 13h-1(b) by failing to file Forms 13H on an annual basis or on a quarterly basis for any quarter in which information required by the form changed, or by filing Forms 13H that were inaccurate or incomplete. Cantor only filed an initial Form 13H and did not file any subsequent required annual Forms 13H. Cantor also violated Rule 13h-1(d)’s requirement to maintain records for persons that it had reason to know met the definition of a Large Trader but were unidentified as one (“Unidentified Large Traders”). Cantor violated Rule 13h-1(e) which requires broker-dealers to electronically report to the SEC upon request applicable information for all transactions in accounts for Large Traders and Unidentified Large Traders equal to or greater than the “reporting activity level.” Cantor was ordered to pay a civil money penalty in the amount of $1,400,000.  https://www.sec.gov/litigation/admin/2023/34-97906.pdf

11. On July 14, 2023, the SEC announced a final judgment in a previously-filed case against Cooper Morgenthau, the former CFO of African Gold Acquisition Corp., a special purpose acquisition company (SPAC), for orchestrating a scheme in which he stole more than $5 million from the company and from investors in two other SPACs that he incorporated. Morgenthau embezzled money from African Gold and stole funds from another SPAC series called Strategic Metals Acquisition Corp. I and II to pay for his personal expenses and to trade in crypto assets and other securities. Morgenthau concealed unauthorized withdrawals by falsifying African Gold’s bank account statements and then provided those falsified documents to African Gold’s auditor and accountants for purposes of preparing African Gold’s SEC filings. Morgenthau raised money from Strategic Metals’ investors based on misrepresentations that the money would be used to launch the Strategic Metals SPACs, when in fact Morgenthau misappropriated the money for personal uses, including to conceal his embezzlement of African Gold’s funds. Morgenthau was ordered to pay disgorgement of $5,111,335, plus prejudgment interest thereon in the amount of $221,237. https://www.sec.gov/litigation/litreleases/2023/lr25778.htm

12. On July 12, 2023, the SEC filed partially settled charges against Joseph Todd and his entities Todd Financial Services, LLC (“TFS”) and TFS Insurance Services LLC (“TFS Insurance”), for defrauding at least 20 brokerage customers of at least $3 million. Todd, while employed as a registered representative and investment adviser representative at a dually-registered broker-dealer and investment adviser, obtained investor funds through deceptive means by instructing his brokerage customers to write checks payable to TFS, TFS Insurance, or Todd by falsely assuring customers that he and his entities would invest the customers’ funds in various securities. Todd instead misappropriated investors’ funds and kept the money for his own personal use, spending it on real estate, boating, hunting, casinos, and adult entertainment. In order to conceal and continue his scheme, Todd presented defrauded customers with forged account statements or portfolio holdings statements that contained falsified entries indicating the customers were invested in the products promised by Todd. Many of the victims of Todd’s scheme were seniors and/or disabled individuals. Todd also made Ponzi-like payments to at least one customer by using other customers’ funds to make regular deposits from a TFS bank account into this customer’s account, which he falsely claimed were interest payments or regular distributions on an investment. This matter is being litigated.  https://www.sec.gov/litigation/litreleases/2023/lr25777.htm

13. On July 12, 2023, the SEC filed an emergency action to halt multimillion-dollar Ponzi scheme run by Nayeem Choudhury and his North Carolina-based hedge fund, Dream Venture Capital Group LLC. Choudhury raised at least $9.3 million from investors by promising a risk-free investment in his hedge fund and falsely touting its superlative performance. Choudhury’s track record consisted almost uniformly of monthly six- and seven-figure trading losses, and Dream Venture lost over $4.8 million in options trading. Choudhury misused investor funds by using new-investor money to repay existing investors and by paying personal expenses out of fund assets, including the purchase of a luxury automobile for $85,000. Choudhury and Dream Venture have only repaid investors approximately $3.5 million. The matter is being litigated.  https://www.sec.gov/litigation/litreleases/2023/lr25774.htm

14. On July 11, 2023, the SEC charged Merrill Lynch, Pierce, Fenner & Smith Incorporated and its parent company BAC North America Holding Co. (BACNAH) for failing to file hundreds of Suspicious Activity Reports (SARs) from 2009 to late 2019. Merrill Lynch agreed to pay a $6 million penalty to settle the SEC charges and, in a parallel action, Merrill Lynch agreed to pay a separate $6 million fine to settle charges brought by the Financial Industry Regulatory Authority (FINRA).  According to the SEC’s order, BACNAH assumed responsibility for creating and implementing Merrill Lynch’s SAR policies and procedures and for filing Merrill Lynch’s SARs. Over the course of a decade, however, BACNAH improperly used a $25,000 threshold instead of the required $5,000 threshold for reporting suspicious transactions or attempted transactions where a suspect may have been seeking to use Merrill Lynch to facilitate criminal activity and could not be identified. As a result, BACNAH caused Merrill Lynch’s failure to file hundreds of required SARs.  The SEC’s order finds that Merrill Lynch violated the books and records provisions of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder and that BACNAH caused those violations. Without admitting or denying the SEC’s findings, Merrill Lynch and BACNAH agreed to cease and desist from committing or causing violations of those provisions, and Merrill Lynch also agreed to a censure and the aforementioned $6 million civil penalty.  https://www.sec.gov/files/litigation/admin/2023/34-97872.pdf

15. On July 11, 2023, the SEC has obtained an order appointing a receiver over Legend Venture Partners LLC (“Legend”) and the five private Legend Funds that Legend managed and advised. Legend told investors that its sales agents did not receive upfront fees or commissions and that the firm only made money if the investor made a profit on an IPO. Legend charged exorbitant, undisclosed markups to the prices it paid for the pre-IPO shares, which averaged almost 60 percent, and reached as high as 105 percent per share, and paid its sales agents and principals more than $12.8 million in upfront compensation. This matter is being litigated.  https://www.sec.gov/litigation/litreleases/2023/lr25772.htm

16. On July 11, 2023, the SEC instituted administrative proceedings against Robert Gravette, the president and owner of Criterion Wealth Management and Insurance Services, Inc., formerly an investment adviser registered with the State of California. Gravette was also a registered representative associated with Ausdal Financial Partners, Inc.. Gravette failed to adequately disclose the compensation arrangements he negotiated with the fund managers of four private placement offerings he recommended to his clients. Gravette signed and caused to be filed with the SEC Forms ADV that contained false statements of material fact and that omitted material facts required to be stated in the Forms ADV. Gravette was barred.  https://www.sec.gov/litigation/admin/2023/34-97886.pdf

17. On July 11, 2023, the SEC instituted administrative proceedings against RSE Markets, Inc., operating as an unregistered exchange by maintaining and providing a market place and facilities for bringing together purchasers and sellers of securities, specifically equity interests in “collectible assets.”  RSE maintained and provided the Rally Platform, which consisted of the RallyRd.com website, the Rally App, and trading functionality (together, the “Rally Platform”), for U.S.-based retail investors to purchase and sell equity interests issued by RSE affiliates (the “RSE Securities”) in collectible assets such as valuable cars and watches. RSE neither registered the Rally Platform as a national securities exchange nor operated it pursuant to an exemption from such registration. Accordingly, RSE violated Section 5 of the Exchange Act.” RSE Markets Inc. was ordered to pay civil money penalty in the amount of $350,000.  https://www.sec.gov/litigation/admin/2023/34-97878.pdf

18. On July 11, 2023, the SEC instituted administrative proceedings against Ganesh Betanabhatla, the owner, managing partner, and chief investment officer of Ramas Capital Management, LLC (“RCM”), a private fund investment adviser. RCM was not registered with the Commission and filed as an exempt reporting adviser, based on the fact that it acted as an adviser to private funds and reported assets under management in the United States of less than $150 million. While acting as an investment adviser to a private investment fund he formed (Ramas Energy Capital IV, L.P., or “Fund IV”), Betanabhatla defrauded Fund IV’s only investor and breached his fiduciary duties to the fund. To induce the investor to invest $1 million in Fund IV, Betanabhatla falsely claimed that: (a) he had already raised at least $25 million for the fund; (b) the fund would use investor funds to make equity investments in a specified Texas-based oil and gas company (“Portfolio Company”); and (c) a well-known and respected energy investor that Betanabhatla identified by name was involved in the fund and supported the investment. Betanabhatla had not actually raised any money for Fund IV, the fund did not make any equity investments in the Portfolio Company, and the well-known energy investor was not involved in the fund.  Within days of receiving the investor’s $1 million, Betanabhatla—in direct violation of the promises made to the investor and contrary to Fund IV’s stated investment purpose—transferred most of the investor’s money to a completely different, undisclosed, and now non-operating oil and gas company in a failed attempt to bail out one of Betanabhatla’s earlier (and larger) investment funds. Betanabhatla was barred.  https://www.sec.gov/litigation/admin/2023/ia-6341.pdf

19. On July 11, 2023, the SEC instituted administrative proceedings against Vania May Bell, former comptroller of Executive Compensation Planners, Inc. (“ECP”), a registered investment adviser located in New York.  Bell handled ECP’s financial and administrative duties and her position titles have included “comptroller” and “compliance specialist.” Along with her father, Hector May, the President and Chief Compliance Officer of ECP, misappropriated at least $7.9 million from at least 15 investment advisory clients. ECP’s clients participated in certain advisory programs at the registered investment adviser Securities America Advisors, Inc. (“SAA”). May, with Bell’s assistance, offered to buy bonds for his clients, solicited their funds for the investments, and then diverted the money for his own use. In an effort to conceal and further perpetuate the scheme, May and Bell created and sent the clients fabricated account statements reporting fictitious purchases of bonds. May and Bell also used clients’ money to make Ponzi-like payments to other clients who sought to withdraw funds. This matter is being litigated which is very strange as he was convicted and sentenced to 80 months.    https://www.sec.gov/files/litigation/admin/2023/ia-6343.pdf and https://www.justice.gov/usao-sdny/pr/former-comptroller-investment-adviser-firm-sentenced-80-months-multimillion-dollar

20. On July 5, 2023, the SEC announced that it entered an order that imposes an asset freeze and prohibits the destruction of records on Spartan Trading Company, LLC (Spartan Trading).  Spartan Trading was a fraudulent pooled investment fund founded by Richard Myre, Dale Dahmen, and Dominick Dahmen that raised over $3.7 million from investors. Myre and the Dahmens signed up investors for Spartan Trading on the premise of pooled day trading – telling investors that Myre would manage the fund’s investments and that investors would keep half of all profits. Spartan Trading was a sham, Myre made very few actual investments, and those investments he did make often lost money. Investor funds were slowly eaten away by the over $1.9 million that Myre and the Dahmens withdrew from Spartan Trading accounts during the life of the fund. Myre and the Dahmens were found dead in a pickup truck in Minnesota in what local police reported to be a murder-suicide arising from a business dispute. The matter is being litigated.  https://www.sec.gov/litigation/litreleases/2023/lr25767.htm