May 2023 SEC Updates

1. On May 30, 2023, the SEC announced its settlement with the former head of Wells Fargo & Co.’s Community Bank, Carrie L. Tolstedt, in which she has agreed to pay a $3 million penalty stemming from charges brought in 2020 for her role in allegedly misleading investors about the success of the Community Bank, Wells Fargo’s core business. The SEC previously settled related charges against Wells Fargo and its former CEO and Chairman, John Stumpf. According to the SEC’s complaint against Tolstedt, from mid-2014 through mid-2016, Tolstedt publicly described and endorsed Wells Fargo’s “cross-sell metric” as a means of measuring Wells Fargo’s financial success despite the fact that this metric was inflated by accounts and services that were unused, unneeded, or unauthorized. The complaint further alleges that Tolstedt knew the cross-sell metric did not accurately track accounts or products that customers needed or used, since she was aware of misconduct at the Community Bank that led to bankers pushing products on customers that they did not need or want, including the unauthorized opening of accounts. The complaint alleges that Tolstedt made misleading public statements to investors at Wells Fargo’s investor conferences in 2014 and 2016, and signed misleading sub-certifications as to the accuracy of Wells Fargo’s public disclosures when she knew or was reckless in not knowing that statements in those disclosures regarding Wells Fargo’s cross-sell metric were materially false and misleading.  Tolstedt agreed to a final judgment permanently enjoining her from violating, or aiding and abetting violations of, the antifraud and other provisions of the federal securities laws and imposing a permanent officer-and-director bar. In addition to the $3 million civil penalty, Tolstedt agreed to pay disgorgement of $1,459,076 plus prejudgment interest of $447,874.

2. On May 30, 2023, the SEC instituted administrative proceedings against RTW Investments, LP, a SEC registered investment adviser.  RTW failed to disclose conflicts of interest, made statements that omitted material facts, and failed to adopt reasonably designed written policies and procedures regarding RTW personnel’s ownership interests in SPAC sponsors and RTW’s practice of investing client assets in affiliated SPACs. RTW also failed to timely file accurate reports on Schedule 13G concerning the beneficial ownership of the common stock of a public company formed as a result of a SPAC business combination. RTW was ordered to pay a civil money penalty in the amount of $1.4 million.

3. On May 24, 2023, the SEC instituted administrative proceedings against Sciens Diversified Managers, LLC, a SEC registered investment adviser, and Sciens Investment Management, LLC, a formerly registered investment adviser. Sciens violated the Compliance Rule by failing to adopt and implement reasonably designed written compliance policies and procedures relating to valuation. Sciens advises a number of private funds that primarily invest in equity and debt of private companies or assets for which there is frequently no readily available market pricing information and for which no significant observable inputs are available. Sciens charges management fees to its private funds quarterly based on the net asset value of the applicable share class. Sciens’ written policies and procedures were not reasonably designed to prevent violations of the Advisers Act in light of Sciens’ operations, including the nature of the investment mandates of the funds managed by Sciens, giving only minimal guidance regarding how to value Level 3 Investments in accordance with Generally Accepted Account Principles and other standards set forth in the funds’ offering documents. Sciens’ was ordered to pay a civil money penalty in the amount of $275,000.

4. On May 22, 2023, the SEC entered a final consent judgment against Thomas Ronk, a former registered investment adviser representative, imposing a five-year bar, a five-year penny stock bar, and a civil penalty. Ronk was involved in three separate fraudulent schemes. First, Ronk was engaged in fraudulent promotional efforts in order to sell or assist in the sale of two microcap stocks by disseminating misstatements in newsletters.  Second, Ronk made false statements to prospective investors in connection with a private stock offering. Third, Ronk manipulated the price of common stock in the same two issuers for which he engaged in fraudulent promotional efforts. Ronk agreed to pay a civil penalty of $75,000.

5. On May 18, 2023, the SEC instituted administrative proceedings against Marcus Moon, a former registered representative.  Moon used an unregistered entity, Increase Financial, to enter into brokerage agreements with nine investors, provide them with investment advice for a fee, and “sell away” from his employer outside of its knowledge and supervision. Moon made multiple misstatements to investors, predominantly targeting African-American investors of the Christian faith, about Increase’s status as a purported broker-dealer, and held himself out as a “financial services professional” who “holds various registrations in the financial services space.” Moon directed investors to open accounts with online broker-dealers and to provide him with their passwords, so that he could trade in their individual accounts on their behalf. Moon accessed at least 18 different online brokerage accounts owned by nine investors, and conducted hundreds of trades that resulted in approximately $31,800 in losses; these same investors paid Moon $3,000 in fees for his services. Moon was barred.

6. On May 15, 2023, the SEC entered a final judgment against New York investment adviser Brian Callahan, Callahan’s brother-in-law Adam Manson, and Manson’s two entities for their role in a Ponzi scheme halted by the SEC’s emergency action. Callahan raised over $90 million from at least 45 investors for his five offshore funds. Callahan managed and made the investment decisions for the five funds through his two investment advisory entities and received inflated management fees. Callahan misused investor assets to pay certain other investors seeking redemptions and for personal expenses, and improperly diverted assets of the funds to Manson’s private real estate project on Long Island. Manson and his entities, Distinctive Investments, LLC and Distinctive Ventures, LLC, created a paper trail of inflated false promissory notes and false audit confirmations that helped Callahan conceal the scheme. The matter is being litigated.

7. On May 15, 2023, the SEC announced charges against California-based Red Rock Secured LLC, its CEO, Sean Kelly, and two of its former Senior Account Executives, Anthony Spencer and Jeffrey Ward, in connection with a fraudulent scheme that involved convincing hundreds of investors to sell securities in their retirement accounts to buy gold and silver coins at prices that included markups far greater than the defendants had promised. The defendants repeatedly solicited investors through false and misleading statements, telling them to “protect” their retirement savings by selling securities held in their federal employee Thrift Savings Plan accounts, 401(k) plans, and Individual Retirement Accounts to invest in gold or silver coins at only a 1 to 5 percent markup. In reality, Red Rock charged as much as 130 percent in markups, which allowed them to pocket more than $30 million of the more than $50 million they received from investors. The matter is being litigated.

8.  On May 11, 2023, the SEC charged HSBC Securities (USA) Inc. and Scotia Capital (USA) Inc. for widespread and longstanding failures by both firms and their employees to maintain and preserve electronic communications. To settle the charges, HSBC and Scotia acknowledged that their conduct violated recordkeeping provisions of the federal securities laws and agreed to pay penalties of $15 million and $7.5 million, respectively. The SEC’s investigation of HSBC Securities and Scotia Capital, both registered broker dealers, uncovered pervasive and longstanding use of off-channel communications at both firms. As described in the SEC’s orders, the firms admitted that their employees often communicated “off-channel” about securities business matters on their personal devices, using messaging platforms, such as WhatsApp. Neither firm maintained or preserved the substantial majority of these communications, in violation of the federal securities laws. The failings involved employees at multiple levels of authority, including supervisors and senior executives. Both HSBC Securities and Scotia Capital cooperated with the SEC’s investigation by, among other things, self-reporting the recordkeeping failures after gathering communications from the personal devices of a sample of the firms’ personnel.

9. On May 11, 2023, the SEC entered a final judgment against Carl Schwartz, the president, co-owner and managing member of RRBB Asset Management, LLC. RRBBAM and Schwartz engaged in a fraudulent trade allocation or “cherry-picking” scheme in breach of their fiduciary duties to their advisory clients. Schwartz traded securities in RRBBAM’s omnibus trading account and delayed allocating the securities to specific client accounts until he had observed the securities’ performance over the course of the day. Schwartz then allocated 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 associated with two elderly widows, including a charitable foundation of which Schwartz was a trustee. RRBBAM and Schwartz earned substantial management fees and made misrepresentations in RRBBAM’s brochures and other disclosures in which they claimed trades would be fairly and equitably allocated among all client accounts. Schwartz was ordered to pay disgorgement of $50,000, prejudgment interest of 13,754, and a civil penalty of $100,000.  Schwartz was also barred.

10. On May 11, 2023, the Division of Examinations published a Risk Alert regarding a series of examinations to assess investment adviser and investment company (“firms”) preparedness for the cessation of LIBOR. LIBOR is scheduled to be discontinued after June 30, 2023.  The Risk alert aims to remind firms of this transition and discusses certain practices firms have implemented to address the transition away from LIBOR.  The full risk alert can be found at this hyperlink:

11. On May 9, 2023, the SEC charged investment adviser Pinnacle Advisors LLC for aiding and abetting Liquidity Rule violations by a mutual fund it advised and whose Liquidity Risk Management Program it administered. The SEC also charged the fund’s two independent trustees, Mark Wadach and Lawton “Charlie” Williamson, and two officers of both Pinnacle Advisors and of the fund it advised, Robert Cuculich and Benjamin Quilty, with aiding and abetting Liquidity Rule violations by the fund. The fund held approximately 21 to 26 percent of its net assets in illiquid investments. Pinnacle Advisors and its officers, Cuculich and Quilty, classified the fund’s largest illiquid investment as a “less liquid” investment, ignoring restrictions, transfer limitations, and the absence of any market for the shares, and disregarding the advice of fund counsel and auditors. Pinnacle Advisors and its officers did not present the fund’s board with a plan to reduce the fund’s illiquid investments to 15 percent or lower or make required filings with the SEC, as required by the Liquidity Rule. Cuculich and Quilty misled the SEC’s Division of Investment Management about the basis for the fund’s liquidity classifications. The fund’s board had oversight responsibilities regarding the fund’s Liquidity Risk Management Program, and Wadach and Williamson, who knew that the shares were restricted and illiquid, aided and abetted the fund’s violation by recklessly failing to exercise reasonable oversight of the fund’s program. The matter is being litigated.

12. On May 8, 2023, the SEC announced settled charges against Stuart Joel Greenberg, the chief financial officer and manager of Infinity Capital Group,. LLC, (“Infinity Capital”), which was registered with the state of California as an investment adviser. On September 7, 2022, the Commissioner of California’s Department of Financial Protection and Innovation entered a final order against Greenberg, revoking Greenberg’s investment adviser certificate and barring him from any position of employment, management or control of any investment adviser, broker-dealer, or commodity adviser.  The Department of Financial Protection and Innovation’s Accusation and Claim for Relief in that action alleged that Greenberg, among other things, offered and sold securities in the form of limited partnership interests in a private fund managed by Infinity Capital. The Commissioner alleged that Greenberg offered these securities, commencing at least February 2014, by means of communications that included untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, by, among other things, representing to investors that they could withdraw their investments after two years of investing, when investors could not so withdraw their capital investments. The Accusations alleged other violations, including that Greenberg willfully failed to honor clients’ requests for return of funds from May 2017 through at least October 2020, and failed to provide mandatory quarterly investor statements from the 3rd quarter of 2018 through, at least, December 2020.

13. On May 5, 2023, the SEC instituted administrative proceedings against Ryan Riley the sole owner, officer, and employee of Calibre Consulting Group, LLC, an investment adviser registered with the State of Virginia. In connection with the sale of promissory notes and participating units, Riley misappropriated client and investor funds for personal use and trading and misled clients and investors by making materially false and misleading statements to those clients and investors regarding his use of their funds. Riley was barred.

14. On May 5, 2023, the SEC amended its complaint charging Safeguard Metals LLC and its owner Jeffrey Ikahn with engaging in a multi-million fraudulent scheme involving hundreds of investors who were at or near retirement age. Safeguard and Ikahn acted as investment advisers and persuaded investors to sell their existing securities, transfer the proceeds into self-directed Individual Retirement Accounts, and invest the proceeds into gold and silver coins by making false and misleading statements about the safety and liquidity of the investors’ securities investments, Safeguard’s business, and its compensation. Safeguard fraudulently marketed itself as a full-service investment firm with offices in London, New York City, and Beverly Hills that employed prominent individuals in the securities industry and had $11 billion in assets under management. Ikahn operated the company from a small leased space in a Woodland Hills, Calif. office building using sales agents. Safeguard’s sales agents used prepared scripts, some written by Ikahn, that were filled with false and misleading statements about how the market was going to crash and how their retirement accounts would be frozen under a new ‘unpublicized’ law. The matter is being litigated.

15. On May 5, 2023, the SEC charged Matthew Werthe (dba HSR Wealth Management), a San Diego, California-based investment adviser, for defrauding his clients by conducting a cherry-picking scheme and making related false and misleading statements. Werthe placed securities trades using a block trading account, which is intended to facilitate purchases of securities for multiple client accounts. Werthe placed the securities trades early in the trading day but did not allocate the trades to his and his clients’ accounts until later in the day. Werthe disproportionately allocated profitable trades to himself and unprofitable trades to his clients’ accounts, and derived at least $450,000 in ill-gotten gains from the scheme. Werthe also made false and misleading statements to his clients and prospective clients regarding his personal trading, his trading for clients, and the reasons for switching the clients’ account to a new broker-dealer custodian. The matter is being litigated.

16. On May 5, 2023, the SEC instituted administrative proceedings against Pinnacle Investments. Pinnacle, which is dually registered with the Commission as an investment adviser and a broker-dealer, violated antifraud, compliance, and reporting provisions of the Advisers Act. Pinnacle made false and misleading statements in its Forms ADV Part 2A regarding reviews of advisory client accounts; failed to adequately disclose its conflicts of interests in connection with the outside business activities and related compensation arrangements of an Investment Adviser Representative with an affiliated fund; failed to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder concerning reviews of client accounts and conflicts of interest; and failed to deliver to clients information about advisory personnel as required in Form ADV Part 2B. As a result of this conduct, Pinnacle willfully violated Sections 204(a), 206(2) and 206(4) of the Advisers Act and Rules 204-3 and 206(4)-7 thereunder. Pinnacle was ordered to pay disgorgement of $83,462, prejudgment interest of $11,874 and civil penalties of $393,381. and

17.  On May 4, 2023, the SEC announced settled charges against Fargo, North Dakota-based investment adviser Classic Asset Management LLC (CAM) and indirect part-owner and investment adviser representative Douglas G. Schmitz for breach of fiduciary duty in connection with the use of leveraged exchange traded funds (ETFs) in discretionary client accounts.  According to the SEC’s order, from at least 2017 through December 2020, CAM and Schmitz invested advisory clients in leveraged ETFs for extended periods of time, often in significant concentrations, despite warnings in the funds’ prospectuses that the products carried unique risks, were designed to be held for no more than a single trading day, and required frequent monitoring.  The order finds that CAM and Schmitz misunderstood these fundamental characteristics of the leveraged ETFs and thus lacked a reasonable belief that the leveraged ETFs were in their clients’ best interests. Further, according to the order, CAM and Schmitz failed to appropriately monitor the performance of these products and, consequently, did not evaluate whether the leveraged ETFs were in their clients’ best interests throughout the holding period. The order also finds that CAM failed to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act.  CAM and Schmitz agreed to pay $195,228 and $738,113, respectively, in disgorgement, prejudgment interest, and civil penalties.

18. On May 4, 2023, the SEC instituted administrative proceedings against Ronald Stevenson. Stevenson, through his company American Financial Security, LLC, an entity he controlled and operated, acted as an unregistered broker or dealer by selling securities of the EquiAlt Funds. Neither Stevenson nor AFS were registered as or associated with a registered broker-dealer. Stevenson, through AFS, sold the Funds’ securities. None of the Funds’ securities offerings were registered with the Commission. Stevenson sold investors the following type of securities: three-to-five-year term debentures bearing 8%-10% interest. In connection with the sale of these securities, Stevenson received approximately 8% of the amount invested by investors as sales commission. Stevenson earned approximately $1.7 million in transaction-based commissions for selling the Funds’ securities, raising at least $19 million from investors. Stevenson was barred.

19. On May 3, 2023, the SEC adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds. The amendments are designed to enhance the ability of the Financial Stability Oversight Council (FSOC) to assess systemic risk and to bolster the Commission’s oversight of private fund advisers and its investor protection efforts.  The amendments will require large hedge fund advisers and all private equity fund advisers to file current reports upon the occurrence of certain reporting events that could indicate significant stress at a fund or investor harm. Reporting events for large hedge fund advisers include certain extraordinary investment losses, significant margin and default events, terminations or material restrictions of prime broker relationships, operations events, and events associated with withdrawals and redemptions. Large hedge fund advisers must file these reports as soon as practicable, but not later than 72 hours from the occurrence of the relevant event. Reporting events for private equity fund advisers include the removal of a general partner, certain fund termination events, and the occurrence of an adviser-led secondary transaction. Private equity fund advisers must file these reports on a quarterly basis within 60 days of the fiscal quarter end.  The amendments will also require large private equity fund advisers to report information on general partner and limited partner clawbacks on an annual basis as well as additional information on their strategies and borrowings as a part of their annual filing.

20. On May 2, 2023, the SEC instituted administrative proceedings against Michael Sztrom and David Sztrom. Micahel and David breached their fiduciary duties and defrauded the clients whom they advised through APA. David Sztrom was complicit in misleading advisory clients because he assisted Michael Sztrom in accessing confidential information from the APA system, including client information, provided Michael Sztrom with access to APA’s broker-dealer, including the APA master account number, and was aware that Michael Sztrom was communicating with APA clients using his personal cell phone rather than the APA email system. Michael Sztrom’s use of his personal phone to exchange text messages with APA clients was not only in violation of APA’s corporate policies and procedures but also meant that Michael Sztrom’s communications with APA clients, including investment advice and messages about trades he was executing, were not monitored or preserved as required by the firm. Michael and David concealed from their advisory clients that Michael Sztrom was providing investment advice to them without being associated with APA and without compliance oversight by APA or any other entity. The matter is being litigated.