May 2024 SEC Updates

1. According to the SEC’s orders, from 2020 to 2022, New York City-based MassAve, an investment adviser that made Asia-focused investments and that held more than $1 billion in regulatory assets under management, made a series of materially false and misleading statements about its flagship opportunity fund’s holdings and exposures. The orders found that some of the false statements were the result of modifications Feng made to underlying portfolio data, which MassAve then included in investor communications, such as its monthly tear sheets, summary portfolio snapshots, and top 10 position lists. In addition, according to the SEC’s orders, from late 2022 to early 2023, MassAve did not report to its investors a conflict of interest arising from MassAve’s other co-founder operating a separate hedge fund in China. The SEC’s order against MassAve also found failures in the firm’s compliance policies and procedures.  MassAve was ordered to pay a civil money penalty in the amount of $350,000. Feng was ordered to pay a civil money penalty in the amount of $250,000.  In addition, Feng, who is also the chief investment officer and portfolio manager at MassAve, is suspended for 12 months from industry-related work. https://www.sec.gov/news/press-release/2024-64

2. On May 22, 2024, the SEC charged the Intercontinental Exchange, Inc. (ICE) for failing to timely notify the SEC of a cyber intrusion. ICE was potentially impacted by a system intrusion involving a previously unknown vulnerability in ICE’s virtual private network (VPN). ICE investigated and was immediately able to determine that a threat actor had inserted malicious code into a VPN device used to remotely access ICE’s corporate network. ICE personnel did not notify the legal and compliance officials at ICE’s subsidiaries of the intrusion for several days in violation of ICE’s own internal cyber incident reporting procedures. ICE was ordered to pay a civil money penalty in the amount of $10,000,000.  https://www.sec.gov/news/press-release/2024-63

3. On May 20, 2024, the SEC instituted administrative proceedings against Key Investment Services, LLC (KIS), a dually-registered broker-dealer and investment adviser. KIS failed to comply with Regulation BI’s Disclosure Obligation, Conflict of Interest Obligation, and Compliance Obligation, which require firms to provide certain prescribed written disclosures to their customers; have policies and procedures reasonably designed to identify and address conflicts of interest; and establish, maintain and enforce written policies and procedures reasonably designed to achieve compliance with Regulation BI. KIS, through its registered representatives and investment adviser representatives, recommended that certain of its brokerage customers and advisory clients transfer securities from Key Investment Services accounts to new investment accounts with Key Investment Services’ affiliate Key Private Bank, a wealth management firm that is part of the same parent organization, without disclosing that the representatives would receive compensation for making the recommendations and for any securities transfers. KIS was ordered to pay a civil money penalty in the amount of $223,228. https://www.sec.gov/files/litigation/admin/2024/34-100186.pdf

4. On May 20, 2024, the SEC instituted administrative proceedings against Raymond Lawrence Lent (Lent) dba The Putney Financial Group (Putney). Putney recommended to its advisory clients variable annuity investments sponsored by insurance companies that paid upfront sales commissions to Portsmouth Financial Services (“Portsmouth”), Putney’s affiliated broker, and to Lent in his capacity as a registered representative of Portsmouth. The insurance companies that sponsored these variable annuities charged ongoing asset-based fees to contract holders in these variable annuities that included, in part, fees to cover the cost of paying upfront sales commissions. Putney consistently recommended to its advisory clients the variable annuity products that paid Portsmouth commissions and did not fully and fairly disclose its financial conflict of interest in recommending those variable annuities to its clients. Putney also breached its duty of care to its advisory clients by failing to undertake any analysis as to whether a fee-based variable annuity contract was in its advisory clients’ best interest. Putney also failed to adopt and implement written compliance policies and procedures. Putney was ordered to pay disgorgement in the amount of $707,129, prejudgment interest of $183,236 and a civil money penalty in the amount of $175,000. https://www.sec.gov/files/litigation/admin/2024/34-100183.pdf

5. On May 17, 2024, the SEC instituted administrative proceedings against Varun Aggarwal, former Auditor at Newport Beach Commercial Real, for engaging in fraudulent conduct involving irregular billing practices that harmed three real estate investment trusts. Aggarwal assisted certain vendors controlled by his friends and family in either overcharging for services performed or billing never performed. Aggarwal was barred and sentenced to 3 years jail.  https://www.sec.gov/files/litigation/admin/2024/34-100165.pdf  and https://www.justice.gov/usao-cdca/pr/former-auditor-newport-beach-commercial-real-estate-agency-sentenced-nearly-3-years

6. On May 16, 2024, the SEC announced the adoption of amendments to Regulation S-P to modernize and enhance the rules that govern the treatment of consumers’ nonpublic personal information by investment advisers and brokers. The amendments update the rules’ requirements to address the expanded use of technology and corresponding risks that have emerged since the originally adopted Regulation S-P by:

•        Requiring institutions to develop, implement, and maintain written policies and procedures for an incident response program that is reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information;
•        Requiring that the response program include procedures for covered institutions to provide timely notification to affected individuals whose sensitive customer information was, or is reasonably likely to have been, accessed or used without authorization; and
•        Broadening the scope of information covered by Regulation S-P’s requirements. https://www.sec.gov/news/press-release/2024-58

7. On May 15, 2024, the SEC published a new report of Investment Adviser Statistics which is based on aggregated data filed by investment advisers on Form ADV. The new report, which will be updated on an annual basis, is designed to give the public a view into the investment advisory industry, with insights into areas such as business activities, client composition, and the types of funds advised. The report shows trends over time.  https://www.sec.gov/news/press-release/2024-57

8. On May 14, 2024, the SEC charged Hudson Valley Wealth Management Inc., a formerly registered investment adviser and its founder, Christopher Conover. Hudson and Conover advised a private investment fund and their individual clients to make investments in films produced Hudson Private, LP. (the “Fund”). Hudson and Conover failed to disclose to a conflict of interest to clients and Fund investors related to payments made to Conover. Hudson and Conover then later materially misled their clients and Fund investors regarding the nature of these payments and the associated conflicts of interest they posed. Hudson and Conover also breached their fiduciary duties to their clients who invested in the Fund by preferencing one Fund investor’s redemption request over the redemption requests of clients invested in the Fund. Conover received approximately $530,000 in executive producer compensation for the same films in which the Fund and the SMAs made investments. Hudson was ordered to pay a civil money penalty in the amount of $200,000. Conover was ordered to pay disgorgement in the amount of $531,787, prejudgment interest of $95,924 and a civil money penalty in the amount of $150,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6603.pdf

9. On May 13, 2024, the SEC and FinCEN jointly proposed a new rule that would require SEC-registered investment advisers and exempt reporting advisers to establish, document, and maintain written customer identification programs (“CIPs”). The proposal is designed to prevent illicit finance activity involving the customers of investment advisers by strengthening the anti-money laundering and countering the financing of terrorism (AML/CFT) framework for the investment adviser sector. The rule, if adopted, would require RIAs and ERAs to, among other things, implement a CIP that includes procedures for verifying the identity of each customer to the extent reasonable and practicable and maintaining records of the information used to verify a customer’s identity, among other requirements. The proposal is generally consistent with the CIP requirements for other financial institutions, such as brokers or dealers in securities and mutual funds.  https://www.sec.gov/news/press-release/2024-54

10. On May 10, 2024, the SEC instituted administrative proceedings against Brenda Smith, owner of Bristol Advisors, LLC (“Bristol”), a registered investment adviser, that purported to provide investment advisory services to its sole client, Broad Reach Capital, LP (the “Broad Reach Fund”). Smith misused and misappropriated investor funds, made materially false misrepresentations to investors; failed to state material facts necessary in order to make other statements made, in light of the circumstances under which they were made; not misleading; provided investors with false account statements and other documents indicating that investors’ funds were fully invested through profitable trading strategies and earning positive returns, and that the value of the Broad Reach Fund was secured by a multi-billion dollar bond issued by a publicly traded financial institution; and otherwise engaged in a variety of conduct which operated as a fraud and deceit on investors in the Broad Reach Fund. Smith was barred. https://www.sec.gov/files/litigation/admin/2024/34-100106.pdf

11. On May 10, 2024, the SEC instituted administrative proceedings against Michael Lewitt, owner of Third Friday Management, LLC (“Third Friday”), investment adviser to the Third Friday Total Return Fund, L.P. (the “Fund”). Lewitt made material misrepresentations and omissions to prospective investors and investors concerning a material change in the Fund’s stated investment trading strategy. Without notifying the Fund’s limited partners, Lewitt caused the Fund to make 45 loan advances totaling more than $19 million to a distressed company that acquired and operated struggling rural hospitals and filed for bankruptcy after receiving the majority of the Fund’s assets (the “Bankrupt Entity”). Lewitt failed to disclose, among other things, his financial interest in a group of private affiliated companies which had committed to investing $30 million to the Bankrupt Entity. Lewitt misappropriated at least $4.7 million of investor funds for personal use, including over $900,000 to pay an IRS lien, and took advanced management fees and performance fees on Fund assets which he had materially overvalued. Lewitt was barred. https://www.sec.gov/files/litigation/admin/2024/ia-6601.pdf

12. On May 10, 2024, the SEC instituted administrative proceedings against Geluk Capital Management Ltd (“Geluk Capital”) and Douglas Fathers. Geluk Capital and Fathers represented to investors and prospective investors that the Geluk Global Fund Limited SAC (“Geluk Fund”) had its own proprietary trading strategy and risk controls that had resulted in a multi-year track record of positive performance. Geluk Fund had none of these things and was instead sending investor money to a third-party manager. Geluk Capital and Fathers also charged the Geluk Fund fees in a manner that was inconsistent with fund governing documents. Geluk Capital and Fathers were ordered to pay disgorgement in the amount of $29,081, prejudgment interest of $3,607 and a civil money penalty in the amount of $60,000.  https://www.sec.gov/files/litigation/admin/2024/34-100100.pdf

13. On May 7, 2024, the SEC instituted administrative proceedings against Nashid Ali and Gainvest Legal Corp. (“Gainvest). Ali is the founder, sole owner and chief executive officer of Gainvest, a formerly registered investment adviser. Gainvest and Ali willfully made false and misleading statements in Gainvest’s Form ADV filings regarding Gainvest’s regulatory assets under management. Ali improperly registered Gainvest as an investment adviser, had custody of client funds without having those assets subject to an annual surprise examination and commingled client funds, failed to adopt and implement a compliance program and failed to make and keep certain books and records required. Ali was barred. Gainvest was ordered to pay a civil money penalty in the amount of $15,000.  https://www.sec.gov/files/litigation/admin/2024/ia-6600.pdf