1. On March 31, 2022, the SEC obtained a final judgement against Gregory Lemelson, Lemelson Capital Management, LLC, and The Amvona Fund. Gregory Lemelson and Lemelson Capital Management, LLC were charged with making false statements to drive down the price of Ligand Pharmaceuticals Inc. and profit from a short position in Ligand’s stock. Lemelson and LCM were found liable for making three false and misleading statements about Ligand. The false statements Lemelson and LCM were found liable for include assertions that Ligand’s investor relations firm had agreed that Ligand’s most profitable drug was “going away” and that Ligand had entered into a sham transaction with an unaudited shell company in order to pad its balance sheet. Lemelson had boasted about bringing down Ligand’s stock price through his “multi-month battle” against the company. Lemelson was ordered to pay a third-tier civil penalty in the amount of $160,000. https://www.sec.gov/litigation/litreleases/2022/lr25353.htm
2. On March 31, 2022, the SEC entered a final judgment against Richard Duncan who defrauded two advisory clients who were retail investors by persuading them to invest in a scam originating in Turkey. Duncan breached his fiduciary duty as an investment adviser by ignoring, and failing to disclose, warnings from two banks that the Turkish investment opportunity was probably a scam. Duncan made materially false and misleading statements to at least one client, promising as much as a 100% return on the Turkish investment. The court ordered Duncan to pay a total of over $530,000. https://www.sec.gov/litigation/litreleases/2022/lr25352.htm
3. On March 31, 2022, the SEC instituted administrative proceedings against Stockman Kast Ryan & Co. LLP, Ellen Fisher and David Kast. This proceeding arises out of audits of six private funds by SKR, Fisher and Kast. Although SKR’s audit reports stated that the audits were conducted in accordance with Public Company Accounting Oversight Board auditing standards, Respondents engaged in improper professional conduct under Rule 102(e) by failing to conduct the audits in accordance with those standards. These audit failures were in connection with SKR’s engagement by an SEC-registered investment adviser to audit private funds so that the Adviser could comply with Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder. SKR was ordered to pay a civil money penalty in the amount of $96,384, $25,000 for Fischer and $10,000 for Kast. https://www.sec.gov/litigation/admin/2022/34-94570.pdf
4. On March 30, 2022, the SEC announced its 2022 examination priorities, including several significant areas of focus and many perennial risk areas. The Division will focus on private funds, environmental, social and governance (ESG) investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets. The Division publishes its examination priorities annually to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets.
The following are a selection of the Division’s 2022 priorities:
- Private Funds – The Division will focus on registered investment advisers (RIAs) who manage private funds. Examinations will review issues under the Advisers Act, including an adviser’s fiduciary duty, and will assess risks, including a focus on compliance programs, fees and expenses, custody, fund audits, valuation, conflicts of interest, disclosures of investment risks, and controls around material nonpublic information. The Division will also review private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas. In addition, EXAMS will review the practices, controls, and investor reporting around risk management and trading for private funds with indicia or signs of systemic importance.
- ESG – The Division will continue its focus on ESG-related advisory services and investment products, including mutual funds, exchange-traded funds, and private fund offerings. Examinations will typically focus on whether RIAs and registered funds are accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures, including review of their portfolio management processes and practices. Examinations also will review the voting of client securities in accordance with proxy voting policies and procedures, including whether the votes align with their ESG-related disclosures and mandates, and whether there are misrepresentations of the ESG factors considered or incorporated into portfolio selection.
- Retail Investors and Working Families – The Division will continue to address standards of conduct issues for broker-dealers and RIAs to ensure that retail investors and working families are receiving recommendations and advice in their best interests. Specifically, these examinations will focus on how registrants are satisfying their obligations under Regulation Best Interest and the Advisers Act fiduciary standard to act in the best interests of retail investors and not to place their own interests ahead of retail investors’. Examinations will include assessments of practices regarding consideration of investment alternatives, management of conflicts of interest, trading, disclosures, account selection, and account conversions and rollovers.
- Information Security and Operational Resiliency – The Division will review broker-dealers’, RIAs’, and other registrants’ practices to prevent interruptions to mission-critical services and to protect investor information, records, and assets. Examinations will continue to review whether firms have taken appropriate measures to safeguard customer accounts and prevent account intrusions; oversee vendors and service providers; address malicious email activities, such as phishing or account intrusions; respond to incidents, including those related to ransomware attacks; identify and detect red flags related to identity theft; and manage operational risk as a result of a dispersed workforce. In addition, the Division will again be reviewing registrants’ business continuity and disaster recovery plans, with particular focus on the impact of climate risk and substantial disruptions to normal business operations.
- Emerging Technologies and Crypto-Assets – The Division will conduct examinations of broker-dealers and RIAs that are using emerging financial technologies to review whether the unique risks these activities present were considered by the firms when designing their regulatory compliance programs. RIA and broker-dealer examinations will focus on firms that are, or claim to be, offering new products and services or employing new practices to assess whether operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations; advice and recommendations, including by algorithms, are consistent with investors’ investment strategies and the standard of conduct owed to such investors; and controls take into account the unique risks associated with such practices. Examinations of market participants engaged with crypto-assets will continue to review the custody arrangements for such assets and will assess the offer, sale, recommendation, advice, and trading of crypto-assets.
The published priorities are not exhaustive and will not be the only areas the Division focuses on in its examinations, risk alerts, and outreach. While the priorities primarily drive the Division’s examinations, the scope of any examination is determined through a risk-based approach that includes analysis of a given entity’s history, operations, services, products offered, and other risk factors. https://www.sec.gov/files/2022-exam-priorities.pdf
5. On March 30, 2022, the SEC instituted administrative proceedings against Spruce Investment Advisors, LLC. Spruce failed to timely distribute annual audited financial statements prepared in accordance with Generally Accepted Accounting Principles to the investors in certain private funds that it advised. Spruce also failed to timely distribute annual audited financial statements prepared in accordance with GAAP to the investors in certain funds of funds that it advised in each fiscal year. Spruce also failed to adopt and implement written policies and procedures reasonably designed to prevent violations. Spruce was ordered to pay a civil money penalty in the amount of $75,000. https://www.sec.gov/litigation/admin/2022/ia-5987.pdf
6. On March 28, 2022, the SEC instituted administrative proceedings against Goldstone Financial Group, LLC, Anthony Pellegrino and Michael Pellegrino. Respondents offered and sold $37 million of 1 Global Capital LLC securities to their advisory clients and insurance and annuity customers in unregistered transactions and did not adequately disclose to their clients the fees that they received from 1 Global. In total, Michael Pellegrino and Anthony Pellegrino, through GFG, received approximately $1.6 million in fees from 1 Global for selling the securities. GFG was ordered to pay a civil money penalty in the amount of $70,000, $30,000 for Anthony and $50,000 for Michael. https://www.sec.gov/litigation/admin/2022/33-11045.pdf
7. On March 22, 2022, the SEC instituted administrative proceedings against Adrian Ortega. Ortega pleaded guilty to forgery taking the identity of another with intent to defraud possessed a forged loan application. Ortega also took personal identifying information of a bank customer without consent and with the intent to obtain or use the identity for an unlawful purpose or to cause loss to a person or entity. Ortega was ordered to pay restitution in the amount of $20,185 and barred. https://www.sec.gov/litigation/admin/2022/34-94488.pdf
8. On March 18, 2022, the SEC instituted administrative proceedings against Robert Van Zandt. Van Zandt participated in a scheme to sell more than $35.5 million in bogus securities to 250 investors. Rather than invest their moneys as promised, Van Zandt used his investors’ funds to pay earlier investors and satisfy personal expenses. Van Zandt was barred. https://www.sec.gov/litigation/admin/2022/34-94477.pdf
9. On March 15, 2022, the SEC charged Mario Rivero Jr. with misappropriating over $680,000 from his advisory clients and brokerage customers, some of whom were elderly or suffering from memory loss. Rivero convinced at least five of his clients and customers to transfer funds from their investment accounts to their personal bank accounts and then, from their bank accounts, to entities with which Rivero was secretly associated. Rivero falsely told his victims that the purpose of these fund transfers was to make various investments on their behalf. Rivero siphoned hundreds of thousands of dollars from the entities that received the investor funds, for his own benefit. This matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25346.htm
10. On March 14, 2022, the SEC instituted administrative proceedings against Scott Fries. Fries raised approximately $458,000 from at least ten investors and spent that money on personal expenses. In order to hide his fraudulent activities, Fries lied to investors about the status of their investments, created and distributed false account statements purporting to show profitable investments, paid off an investor couple who had discovered that their account statement was fake, and subsequently lied to his employer about receiving investment funds from his brokerage customers. This matter is being litigated. https://www.sec.gov/litigation/admin/2022/34-94412.pdf
11. On March 14, 2022, the SEC instituted administrative proceedings against Halpern & Associates LLC and Barbara Halpern, CPA. The proceedings arise out of Respondents’ improper professional conduct in their audits of private equity fund ACP X, LLP. Halpern & Associates, LLC was the auditor for several entities owned and controlled by Allen. The Office of the New York Attorney General charged Allen with defrauding investors in his $17 million private equity fund, ACP X. Halpern was the engagement partner for the audits of ACP X. Halpern approved the issuance of audit reports for ACP X, which were issued despite having strong indications that Allen’s valuations of Holdings’ securities were speculative, based on inflated revenue projections, and used inconsistent inputs. This matter is being litigated. https://www.sec.gov/litigation/admin/2022/34-94410.pdf
12. On March 14, 2022, the SEC instituted administrative proceedings against Laurence Allen. Allen defrauded investors in his private equity fund, ACP X, by investing ACP X investor funds in his registered broker-dealer NYPPEX, contrary to the terms of ACP X’s private placement memorandum. Allen used ACP X investor funds to pay NYPPEX’s operating expenses and his own salary relating to his work for NYPPEX. Allen misappropriated funds from ACP X by making impermissible distributions to himself from ACP X, characterized as carried interest that should first have been distributed to the limited partners towards the return of capital and next, their preferred return. This matter is being litigated. https://www.sec.gov/litigation/admin/2022/34-94411.pdf
13. On March 9, 2022, the SEC entered final judgment against Stefan Qin, the founder and operator of Virgil Sigma Fund LP, a fraudulent investment fund Qin formed purportedly to engage in digital asset arbitrage trading. Qin defrauded investors in the Sigma Fund and an affiliated fund by making material misrepresentations about the funds’ investment strategies, assets, performance, and financial condition. Qin claimed in SEC filings that the funds had assets in excess of $90 million. Qin was actively attempting to misappropriate or improperly divert millions of dollars of investor assets at the time the SEC filed its action, and the SEC obtained an asset freeze followed by a preliminary injunction. A judgment was entered against Qin, ordering a term of 7.5 years’ imprisonment and 3 years’ supervised release, as well as forfeiture of $54,793,532. Qin was barred. https://www.sec.gov/litigation/litreleases/2022/lr25342.htm and https://www.sec.gov/litigation/admin/2022/ia-5974.pdf
14. On March 7, 2022, the SEC charged David Schamens with lying to retail investors about the use and value of their investments. Schamens solicited investments in a purported pooled investment vehicle that would invest in pre-selected stocks, which would then be “auto-traded” by a proprietary algorithm. Rather than using investor funds to engage in any type of trading, Schamens used the overwhelming majority of the money for personal expenses and to repay previous investors seeking redemptions. Schamens provided investors with fictitious monthly statements showing returns at times exceeding 80 percent and that he sought to conceal his actions by presenting investors with a phony audit letter verifying transactions and balances in the fund. Schamens was barred. https://www.sec.gov/news/press-release/2022-35
15. On March 4, 2022, the SEC instituted administrative proceedings against Alumni Ventures Group, LLC and Michael Collins. This matter involves materially misleading statements and improper transactions by AVG regarding its collection of management fees and effecting inter-fund loans and cash transfers and loans from AVG to funds it advised. AVG included misleading statements at various times in marketing documents for the funds it advised, emails to prospective fund investors, and on its website. AVG represented that its management fee for the venture capital funds that it managed was the “industry standard ‘2 and 20.’” This statement was misleading because it led a number of investors to believe that AVG would collect a two-percent management fee during each year of its funds’ 10-year term, and separately collect a 20-percent performance fee. AVG’s typical practice was to assess management fees totaling 20 percent of an investor’s fund investment (representing ten years’ of two-percent annual management fees) upon the investor’s initial fund investment. Collins approved of AVG employees using the misleading “industry standard ‘2 and 20’” language, and personally used it with fund investors and prospective investors. AVG was ordered to pay a civil money penalty in the amount of $700,000 and $100,000 for Collins. https://www.sec.gov/litigation/admin/2022/ia-5975.pdf
16. On March 4, 2022, the SEC instituted administrative proceedings against Educators Financial Services, Inc. Educators Financial violated the Advisers Act as a result of its billing practices and mutual fund share class selection for clients. Educators Financial failed to consistently aggregate the value of all accounts held by family members living in the same household when determining the fee rate, causing certain clients to pay a higher advisory fee than they should have and failed to refund pre-paid advisory fees after clients terminated the advisory relationship. Educators Financial also purchased, recommended, or held for advisory clients’ mutual fund share classes that charged 12b-1 fees instead of lower-cost share classes of the same funds that were available to the clients. Educators Financial failed to adequately disclose all material facts regarding this conflict of interest and breached its duty to seek best execution by causing certain advisory clients to invest in fund share classes that charged 12b-1 fees when share classes of the same funds that presented a more favorable value for these clients under the particular circumstances in place at the time of the transactions were available to the clients. Educators Financial 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 billing practices and its mutual fund share class selection. Educators Financial was ordered to pay disgorgement, prejudgment interest, and a civil penalty, totaling $1,107,490. https://www.sec.gov/litigation/admin/2022/ia-5976.pdf
17. On March 3, 2022, the SEC instituted administrative proceedings against City National Rochdale, LLC. This matter concerns breaches of fiduciary duty by registered investment adviser City National Rochdale relating to its use of proprietary mutual funds and share classes that charged some clients higher fees than others. Clients give CNR discretionary authority to trade in their accounts. CNR’s practice is to invest those assets in proprietary mutual funds that generate fees for the firm and its affiliates, rather than competitor funds within the same asset classes that may not generate such fees. Had CNR clients known of this practice, they could have directed the firm not to use proprietary mutual funds when investing some or all of their assets. CNR did not fully and fairly disclose this practice and the related conflicts of interest to its clients. CNR thus failed to provide its clients the information they needed to give informed consent to, or to reject, these conflicts of interest. CNR was ordered to pay a disgorgement, prejudgment interest, and a civil penalty, totaling $30,361,804. https://www.sec.gov/litigation/admin/2022/34-94352.pdf
18. On March 3, 2022, the SEC instituted administrative proceedings against Securities America Advisors, Inc. SAA failed to adopt and implement policies and procedures reasonably designed to prevent investments in two volatility-linked exchange-traded products that were not suitable for SAA clients. The Commission ordered the Respondent to pay $3,399 in disgorgement, $377 in prejudgment interest, and a $600,000 civil money penalty, for a total of $603,776. https://www.sec.gov/litigation/admin/2022/34-94360.pdf
19. On March 2, 2022, the SEC charged Cambridge Investment Research Advisors, Inc. with failing to disclose material conflicts of interest and breaching its duty of care related to its selection of mutual funds and wrap accounts for clients. CIRA repeatedly breached its fiduciary duty to advisory clients by failing to disclose material conflicts of interest by investing client assets in certain mutual funds and money market sweep funds that generated millions of dollars in revenue sharing payments to an affiliated broker-dealer, Cambridge Investment Research, Inc., instead of lower-cost share classes and investment options that would have yielded less or no revenue sharing. These undisclosed investment practices allowed CIRA to avoid paying millions of dollars in transaction fees. CIRA converted hundreds of accounts to its more expensive wrap account program without adequate disclosure and without analyzing whether doing so was in its clients’ best interests. CIRA failed to disclose that its investment adviser representatives received compensation in the form of forgivable loans in exchange for meeting certain criteria such as maintaining certain asset levels and tenure with CIRA. This matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25340.htm
20. On March 2, 2022, the SEC instituted administrative proceedings against Sivendran Vettivetpillai. The proceedings arise out of the misappropriation of fund assets from one private equity fund client of the Abraaj Group and an offering fraud against investors in another Abraaj fund, including actual and potential U.S.-based investors in the fund. Vettivetpillai took actions that assisted Abraaj Investment Management Limited in the misappropriation of assets from Abraaj Global Markets Health Fund. AIML falsely told U.S.-based investors in the Health Fund that their money would be invested in the securities of healthcare-related portfolio companies in emerging markets, while in fact AIML misappropriated the money to cover cash shortfalls and remediate insolvency at AIML and its parent company, Abraaj Holdings. Vettivetpillai also assisted AIML in misleading the investors and potential investors in Abraaj Private Equity Fund VI about the dire financial condition of AIML and its parent company, its misappropriation of the assets of the Health Fund and other AIML-managed funds to address the liquidity crisis, and AIML’s performance track record. Vettivetpillai thereby aided and abetted and caused violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act, and Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. Vettivetpillai was barred. https://www.sec.gov/litigation/admin/2022/33-11037.pdf