1. On June 30, 2023, the SEC announced settled charges against Robert Benecke, the proprietor of Benecke Economics, for failing to register as a municipal advisor and for failing to disclose material facts about his registration status to his municipal entity clients. Benecke provided municipal advisory services in connection with eight municipal bond issuances for the benefit of three New Jersey municipal entities. These services included providing advice on the structure, timing, and terms of the issuances, preparing debt service and maturity schedules, coordinating the credit rating process, and reviewing and revising official statements in connection with the issuances. Benecke was not registered with the SEC when he provided these services. Benecke did not disclose to his clients that he was not a registered municipal advisor, despite knowing that he was required to be registered. Benecke was barred. https://www.sec.gov/litigation/admin/2023/34-97828.pdf
2. On June 30, 2023, the SEC settle an enforcement action against Damon Durante for unregistered broker activity for selling shares of Global Resource Energy, Inc. (“GBEN”). GBEN’s undisclosed control person directed Durante to work with a network of salespersons to solicit investors to purchase GBEN’s restricted shares. Durante received approximately 50% of these sales proceeds. Durante and a network of salespersons solicited investors to buy free-trading GBEN shares available in the open market, and Durante received approximately 35% of the sale proceeds as transaction-based compensation. Durante was barred. Durante pleaded guilty in a parallel criminal proceeding in the Northern District of Ohio, and he was sentenced to six months imprisonment. https://www.sec.gov/litigation/admin/2023/34-97827.pdf
3. On June 28, 2023, the SEC announced that it obtained a preliminary injunction, asset freeze, and other emergency relief against Legend Venture Partners LLC, a New York based unregistered broker-dealer, in connection with a fraudulent scheme involving the sale of interests in private companies that had the potential for a public offering. Last year, the SEC shut down a similar scheme by StraightPath Venture Partners LLC, for which Legend’s principals and many of its sales agents had previously worked. Legend ran boiler room operations that sold securities issued by the Legend Funds, which invested in shares or interests in shares of specific pre-IPO companies. The boiler rooms were staffed by a vast network of unregistered sales agents who made cold calls and raised at least $35 million from more than 300 investors. 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. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2023/lr25758.htm
4. On June 23, 2023, the SEC charged William Ichioka of New York with fraudulently raising $25 million from individual investors primarily in California and Oregon by making false claims about his investing success and promising large anticipated returns but instead using investor funds for gambling and to enrich himself. Ichioka solicited investments for his unregistered investment fund, Ichioka Ventures, by claiming he was an accomplished investor, promising oversized returns, and guaranteeing investors’ principal. Ichioka was unable to pay investors the promised returns and used money from new investors to repay other investors. Ichioka falsified a bank statement and other documents to create an appearance of success. Ichioka also misappropriated millions of investors’ funds for personal use, such as on luxury watches, cars, gambling, and a penthouse apartment. This matter is surprisingly being litigated. https://www.sec.gov/litigation/litreleases/2023/lr25753.htm
5. On June 23, 2023, the SEC charged Michael Williams, an investment adviser formerly registered with the State of Georgia and currently residing in Florida, and two businesses controlled by him, Highguard Capital, LP, and Guardian Opportunity Management, LP, with conducting a multipart offering fraud. Williams and Highguard Capital sold more than $1.8 million of securities interests to investors in Williams fraudulently represented that investors’ money would be used to launch and grow the Guardian Opportunity Fund, but instead diverted a large portion of their invested funds to repay investors in three prior funds that he was closing. Williams and Guardian Opportunity Management solicited and obtained at least $16 million from investors using false performance returns. Williams and Highguard Capital fraudulently sold over $1 million of securities interests in Guardian Opportunity Management to a Mississippi woman, telling her that the funds would be used to grow the Guardian Opportunity Fund when, in fact, Williams diverted her money to repay earlier Guardian Opportunity Management investors. This matter is being litigated. https://www.sec.gov/litigation/litreleases/2023/lr25752.htm
6. On June 20, 2023, the SEC instituted administrative proceedings against Joshua Coleman an investment adviser and founder of Vesta Advisors LLC, a previously SEC registered investment adviser. Coleman orchestrated a fraudulent scheme through Vesta Advisors and other companies under his control to obtain over $200 million in illicit loan proceeds from a series of lenders by misrepresenting his authority over, and the value of, securities pledged as collateral for the loans. Coleman cumulatively pledged over $160 million in advisory client securities as collateral for personal loans without his clients’ knowledge or authorization, and induced his lenders to issue loans by forging client signatures and fabricating account statements and other documents. Coleman used the illicitly obtained proceeds to fund private investments, repay earlier loans, and pay personal business expenses. Coleman lied to two private lenders concerning the existence of prior encumbrances on certain pledged collateral, misrepresented the intended use of the loan proceeds, and fabricated bank statements, UCC-3 termination statements, and other documents in furtherance of his scheme. Coleman ultimately defaulted on these loans. Coleman was barred. https://www.sec.gov/litigation/admin/2023/34-97755.pdf
7. On June 20, 2023, the SEC charged Insight Venture Management LLC (“Insight”), a private equity fund adviser, with charging excess management fees and failing to disclose a conflict of interest to investors relating to its fee calculations. Insight’s limited partnership agreements for certain funds it advised allowed it to charge management fees based on the funds’ invested capital in individual portfolio investments and required Insight to reduce the basis for these fees if Insight determined that one of these portfolio investments had suffered a permanent impairment. Insight charged excess management fees by inaccurately calculating management fees based on aggregated invested capital at the portfolio company level instead of at the individual portfolio investment security level, as required by the applicable limited partnership agreements. Insight failed to disclose to investors a conflict of interest in connection with its permanent impairment criteria. Insight’s investors were unaware that Insight’s permanent impairment criteria granted Insight significant latitude to determine whether an asset would be considered permanently impaired so as to reduce the basis used to calculate Insight’s management fees. Insight agreed to pay a $1.5 million penalty and $864,958 in disgorgement and prejudgment interest, which has already been paid back to the impacted funds. https://www.sec.gov/news/press-release/2023-112
8. On June 16, 2023, the SEC settled two enforcement actions against Pacific Investment Management Company LLC (“PIMCO”), a registered investment adviser. PIMCO agreed it will pay $9 million to settle two enforcement actions relating to disclosure and policies and procedures violations involving two funds PIMCO advises. PIMCO failed to disclose material information to investors concerning the use by PIMCO Global StocksPLUS & Income Fund (PGP) of interest rate swaps and the material impact of the swaps on PGP’s dividend. PIMCO failed to waive approximately $27 million of advisory fees as required by its agreement with the PIMCO All Asset All Authority Fund. PIMCO did not have adequate written policies and procedures concerning its oversight of advisory fee calculations and related fee waivers. PIMCO has since disbursed to investors the $27 million in fees that should have been waived, plus interest and a performance adjustment. PIMCO agreed to a cease-and-desist order and a censure in each action and to pay a combined $9 million penalty. https://www.sec.gov/news/press-release/2023-109
9. On June 14, 2023, the SEC charged Patrick Thayer, previously a dually-registered representative and investment advisory representative with LPL Financial, with misappropriating more than $1.3 million from an advisory client. Thayer surreptitiously established an account in a client’s name over which he maintained control and, without the client’s permission, regularly transferred client assets to the account, which he then used to pay personal expenses, including his mortgage. Thayer engaged in this conduct for nearly a decade, in total misappropriating over $1.3 million by periodically selling the client’s securities to fund transfers to the clandestine account. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2023/lr25747.htm
10. On June 14, 2023, the SEC charged investment adviser Sabby Management LLC, a SEC registered investment adviser, and its managing partner, Hal Mintz, with fraud in connection with a long running scheme involving misrepresentations and violations of rules for short selling and order making, as well as other violative trading, that generated more than $2 million in illegal profits. Sabby and Mintz repeatedly circumvented trading rules to conduct unlawful trades in the stock of at least 10 public companies. Sabby and Mintz engaged in illegal “naked short selling” by intentionally and improperly placing short sales when they knew or were reckless in not knowing that they had not borrowed or located the shares, and then failed to make timely delivery of the shares. The purpose of Sabby and Mintz’s fraudulent scheme was to earn profits they could not have gained through legal trading. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2023/lr25746.htm
11. On June 8, 2023 the Division of Examinations published a Risk Alert to inform investment advisers about additional areas of emphasis during examinations focused on the new SEC Marketing Rule. The Risk Alert sets forth these additional focus areas, which include: (1) testimonials and endorsements; (2) third-party ratings; and (3) Form ADV.
- Initial Marketing Rule Exam Areas of Review
As previously announced, the staff has been reviewing the following areas:
- Policies and procedures, such as whether advisers have adopted and implemented written policies and procedures that are reasonably designed to prevent violations by the advisers and their supervised persons of the Advisers Act and the rules thereunder, including the Marketing Rule.
- Substantiation requirement, such as whether advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.
- Performance advertising requirements, including whether advisers are in compliance with performance advertising requirements in the Marketing Rule.
- Books and records, such as whether advisers are in compliance with Advisers Act Rule 204-2, as amended, that requires advisers to make and keep certain records, such as records of all advertisements they disseminate, including certain internal working papers, performance related information, and documentation for oral advertisements, testimonials, and endorsements.
The staff’s focus on these areas continues. The SEC encourages advisers to review their websites and other marketing materials for compliance with the new Marketing Rule, including ensuring that they have a reasonable basis for believing they will be able to substantiate material statements of fact and that their performance advertising, including extracted performance and hypothetical performance, complies with the requirements of the Marketing Rule.
- Continuing Review for Compliance with the General Prohibitions
As a component of examinations that include a review of advisers’ marketing practices, the staff has, and will continue to, focus on whether advisers have disseminated advertisements that violate any of the following general prohibitions:
- including an untrue statement of a material fact, or omitting a material fact necessary to make the statement made, in light of the circumstances under which it was made, not misleading;
- including a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;
- including information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser;
- discussing any potential benefits to clients or investors connected with or resulting from the adviser’s services or methods of operation without providing fair and balanced treatment of any associated material risks or limitations;
- referencing specific investment advice provided by the adviser in a manner that is not fair and balanced;
- including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced; or
- including information that is otherwise materially misleading.
- Additional Marketing Rule Areas of Emphasis
The staff also is conducting focused examinations, as well as broad reviews, for compliance with
other aspects of the Marketing Rule, which include, but are not limited to:
Testimonials and Endorsements
The staff is reviewing whether advisers are in compliance with the Marketing Rule requirements regarding the use of testimonials and endorsements in an advertisement, including whether:
- Disclosures are provided, including clear and prominent disclosure of whether the person giving the testimonial or endorsement (the “promoter”) is a client or investor, that the promoter is compensated, if applicable, and of material conflicts of interest.
- Oversight conditions are met, such as whether advisers have a reasonable basis for believing that the testimonials or endorsements disseminated comply with the requirements of the Marketing Rule.
- Written agreements are entered into, where required, such as written agreements with promoters, unless the promoters are applicable affiliates of the advisers and such affiliation is readily apparent or disclosed or the promoters receive de minimis compensation (i.e., $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
- Ineligible persons have been compensated for testimonials or endorsements, if the adviser knew or reasonably should have known the person was ineligible, including certain “bad actors” that are prohibited from acting as promoters, unless such promoters meet the conditions for exemptions.
The staff will review whether advisers are in compliance with the Marketing Rule requirements regarding the use of third-party ratings in advertisements, including:
- The adviser provides, or reasonably believes that the third-party rating provides, clear and prominent disclosure of: (i) the date on which the rating was given and the period of time upon which the rating was based; (ii) the identity of the third party that created and tabulated the rating; and (iii) if applicable, that compensation has been provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating.
- Questionnaires or surveys used in preparation of a third-party rating meet certain conditions, such as that the adviser has a reasonable basis for believing that such questionnaire or survey is structured to make it equally easy for a participant to provide favorable and unfavorable responses, and is not designed or prepared to produce any predetermined result.
The SEC amended Form ADV to require advisers to provide additional information regarding their marketing practices. The staff will review whether advisers accurately completed these questions in their annual Form ADV amendments.
The full risk alert can be found at this hyperlink: https://www.sec.gov/files/risk-alert-marketing-rule-announcement-phase-3-060823.pdf
12. On June 8, 2023, the SEC entered a final judgment by default against Tarek Bahgat, an investment adviser formerly working at Cambridge Investment Research Advisors, Inc., a SEC registered investment adviser. Bahgat misappropriated over $378,000 from seven of his investment advisory clients. Bahgat illicitly obtained internet access to some of his clients’ brokerage accounts by impersonating, or having his co-defendant, Lauramarie Colangelo, impersonate Bahgat’s clients during telephone calls with broker-dealers holding the clients’ accounts. This enabled Bahgat to cause money to be transferred from the clients’ account to Bahgat and to his company, relief defendant WealthCFO, LLC. Bahgat was ordered to disgorge $378,021; $142,057 in prejudgment interest; and imposed a huge civil penalty of $378,854. https://www.sec.gov/litigation/litreleases/2023/lr25743.htm
13. On June 7, 2023, the SEC instituted administrative proceedings against Damian Ostertag. Ostertag acted as a broker for an unregistered fraudulent sports betting securities offering from QSA, LLC without being registered as a broker or associated with a registered broker-dealer. Ostertag solicited customers for, and effected the sale of, the securities of QSA without registering independently as a broker or being affiliated with any registered broker. Ostertag sold unregistered securities of QSA, when no registration exemptions applied. Ostertag, through QSA, received over $414,000 in commissions for selling QSA securities. Ostertag was barred. https://www.sec.gov/litigation/admin/2023/34-97660.pdf
14. On June 7, 2023, the SEC charged Douglas McKelvey, a former financial advisor at Morgan Stanley, with fraud for misappropriating more than $1.7 million from two elderly brokerage customers who were close relatives of McKelvey’s. While employed as a registered representative and investment adviser representative in the Southlake, Texas office of a large financial institution, McKelvey initiated over 300 fraudulent and unauthorized disbursements of funds from the two customers’ accounts to make payments on credit cards used by McKelvey and his wife to pay their personal expenses. McKelvey also sold securities from the customers’ accounts to generate some of the funds he misappropriated and took steps attempting to conceal his misconduct. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2023/lr25742.htm
15. On June 6, 2023, the SEC instituted administrative proceedings against Mark Heckele, managing member of Green Growth Ventures, LLC and Extraction Capital Tier 1, LLC, entities that engaged in unregistered securities offerings to ostensibly finance two marijuana-related businesses. Heckele made material misrepresentations to investors regarding expected returns on their investments by suggesting that GGV and ECT1 investors were guaranteed a return of 100 percent or more annually and in offering materials he prepared, Heckele made material misrepresentations concerning the financial projections of GGV’s and ECT1’s underlying businesses. Heckele sold unregistered securities and acted as an unregistered broker. Heckele was barred. https://www.sec.gov/litigation/admin/2023/34-97655.pdf
16. On June 1, 2023, the SEC instituted administrative proceedings against Carl Schwartz, managing member of RRBB Asset Management, Inc., a SEC registered investment adviser. Schwartz engaged in a fraudulent trade allocation or “cherry-picking scheme in breach of his and RRBBAM’s fiduciary duties to their advisory clients. Schwartz, who was the only person at RRBBAM with the authority to determine trades and allocations, used RRBBAM’s omnibus trading account to disproportionately allocate a number of favorable trades (i.e., trades that had a positive first day return) to accounts held by a new client, who was one of RRBBAM’s largest and most lucrative clients in terms of assets under management while disproportionately allocating a number of unfavorable trades (i.e., trades that had negative first day returns) to six accounts held by two long-term clients. The Favored Accounts enjoyed first day positive returns, while the Disfavored Accounts suffered negative first day returns. RRBBAM and Schwartz earned substantial management fees, misled the advisory client who received the favorable trades into thinking RRBBAM and Schwartz were better at managing their money than they really were so as to induce the favored client to invest additional sums with RRBBAM upon which RRBBAM and Schwartz would earn additional management fees, and disadvantaged their other clients by failing to allocate the trades in a fair and equitable manner, consistent with their fiduciary obligations to all of their advisory clients and their representations in RRBBAM’s brochures and other disclosures in which they claimed trades would be fairly and equitably allocated among all client accounts. Schwartz was barred. https://www.sec.gov/litigation/admin/2023/ia-6319.pdf