November 2023 SEC Updates

1. On November 21, 2023, the SEC filed charges against Brite Advisors USA, Inc., a New York based SEC-registered investment adviser, for failing to comply with Commission requirements for the safekeeping of client assets and for failing to disclose material risks and conflicts of interest associated with Brite USA’s recommendations to clients to use a related firm in Australia as a custodian. Brite USA advises nearly $400 million of client assets maintained by Brite Advisors Pty Ltd, an Australian financial services company under common control with Brite USA. Registered investment advisers that have custody of client assets are subject to the “custody rule,” which requires that if a related person maintains client funds or securities, the investment adviser must obtain an internal control report as to the safeguarding of client funds and securities. When Brite USA began having a related firm, Brite Australia, maintain its clients’ assets, it failed to comply with the SEC’s custody rule. Brite USA breached its fiduciary duties to its clients by failing to fully and fairly disclose the material risks and conflicts of interest resulting from Brite Australia’s use of clients’ assets. Brite Australia borrowed millions of dollars using client assets as collateral to provide operational funding to Brite USA and other related companies. The matter is being litigated.

2. On November 21, 2023, the SEC obtained final judgments against Michael Shustek and his wholly owned investment advisory firm, Vestin Mortgage LLC. Shustek enriched himself and a REIT that he controlled, the Parking REIT, at the expense of two companies that he had founded. Shustek drained $29 million from the companies in order to funnel the money into Parking REIT and later directed the companies to enter into a series of money-losing transactions in which the same six buildings were repeatedly re-sold.  Shustek further consented to the entry of a final judgment ordering that he pay a $300,000 civil penalty.

3. On November 20, 2023, the SEC instituted administrative proceedings against Bradley Reifler a registered-representative associated with broker-dealers registered with the Commission. Reifler was the CEO and founder of Forefront Capital Holdings and was responsible for investing approximately $34 million of the insurance company’s assets according to guidelines contained in a trust agreement and investment advisory agreement. Some of the investments he recommended were ineligible under the applicable insurance regulations. Reifler had knowledge of an email that misrepresented the makeup of the portfolio. Reifler pled guilty to one count of wire fraud and was sentenced to a prison term of five years, three years supervised release, and ordered to pay restitution in the amount of $20,322,220

4. On November 20, 2023, the SEC instituted administrative proceedings against Marguerite Toroian an investment adviser with a registered investment advisory firm, Bell Rock Capital, LLC. Toroian engaged in a “cherry-picking” scheme where he placed trades through a master trading account on behalf of all of Bell Rock’s clients and disproportionately allocated profitable trades to accounts belonging to herself and her family members and disproportionately allocated unprofitable trades to many of Bell Rock’s clients. Toroian made material misrepresentations to clients in Bell Rock’s Form ADV and other communications, including, for instance, that Bell Rock and its associated persons would always act in their clients’ best interest and not put their interests before clients’. Toroian aided and abetted Bell Rock’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. Toroian was barred and Bell Rock Capital agreed to pay disgorgement of $883,597, prejudgment interest of $185,451 and combined civil penalties of $440,000.

5. On November 20, 2023, the SEC instituted administrative proceedings against Michael Murray and Richard Michalski bother of whom were registered representatives. Muray and Michalski made a series of recommendations to four retail customers without a reasonable basis to believe that the series of recommended transactions were not excessive when taken together in light of the retail customer’s investment profile and because the series of recommended transactions placed the financial interest of the registered representatives ahead of the interest of the retail customer. Muray and Michalski violated Exchange Act Rule 15l-1(a)(2)(ii), the Regulation Best Interest Care Obligation. Murray was ordered to pay disgorgement of $24,414 and prejudgment interest of $1,143 for a total of $25,558 while Michalski was ordered to pay a civil money penalty in the amount of $44,253.

6. On November 14, 2023, the SEC instituted administrative proceedings against Jack Ridall a Florida investment adviser. Ridall raised approximately $750,000 from at least four investors to invest in a fund. Ridall and Guss Capital misled investors by using fabricated audit reports misrepresenting past investment performance, as well as false attorney letters purporting to show significant investor returns. Ridall misappropriated more than 75% of the investments to fund his lavish lifestyle. Ridall was barred.

7. On November 14, 2023, the SEC issued their 2023 Enforcement Statics.  The report, which is 21 pages, can be found at the following hyperlink:

Below are key points:

  • The SEC maintained their unprecedented momentum culminating in over 500 “stand-alone” cases and the imposition of fines, disgorgements, and prejudgment interest totaling nearly $5 billion.
  • The SEC initiated 784 enforcement actions during fiscal 2023, representing a 3 percent uptick from the previous fiscal year. Within this total, 501 were new or “stand-alone” cases, signifying an 8 percent increase from fiscal 2022.
  • $5 billion were given in fines, disgorgements, and prejudgment interest and marked the second-highest amount in the Commission’s history. The record for the highest amount, surpassing $6.4 billion, was set in fiscal year 2022. Notably, disgorgements for fiscal year 2023 totaled almost $3.4 billion, while fines reached almost $1.6 billion—both figures establishing the second-highest benchmarks in SEC history.

8. On November 9, 2023, the SEC charged John Masanotti, Jr. a Connecticut-based investment adviser and his company, Middlesex Mortgage Group, LLC with fraud for lying to investors while taking at least $5.9 million from investors. Masanotti used investor money to make Ponzi-like payments back to investors and stole some of their money for Masanotti’s own personal purposes. Masanotti deceived multiple investors, mainly seniors, into giving him hundreds of thousands of dollars each. Masanotti promised to invest the money in a pooled investment vehicle that he called the “Middlesex Fund” or the “MMG Fund” (the “Fund”), which was to be advised by Masanotti and Middlesex. Many of the Middlesex investors liquidated securities they held in retirement accounts to invest in the Fund. Masanotti did not invest his clients’ money in the way he promised. Masanotti used most of the investors’ money to make Ponzi-like payments to investors or to enrich himself, paying personal expenses such as mortgages on properties in his wife’s name in Darien, Connecticut and Bonita Springs, Florida, personal credit card debt, luxury vehicle payments and a country club membership. This matter is being litigated.

9. On November 9, 2023, the SEC issued their 2023 SEC Agency Financial Report.  The full report, which is 200 pages, can be found at the following hyperlink:

Below are key points:

  • The SEC was approximately three percent larger than they were in FY 2016.  There are more than 4,600 employees.
  • There were approximately 15,000 investment advisers.
  • EXAMS published nine Risk Alerts.
  • For the year ended September 30, 2023, the SEC’s total budgetary resources equaled $3.3 billion, a 23 percent increase from FY 2022.
  • EXAM’s goals were not met in terms of number of examinations that request information related to an entity’s information security.
  • The SEC’s goal is to perform an examination of 15% of investment advisers each year.  In FY 2023, the SEC exceeded their goals.
  • 3,100 exams were conducted in one year, which is equal to about 20% of all investment advisers.  Thus, each adviser can generally expect to be examined once every five years.

10. On November 8, 2023, the SEC instituted administrative proceedings against Jeremy Shor a director and trader of non-agency securities at Premium Point Investments LP a Delaware limited partnership and New York-based registered investment adviser. Shor participated in a fraudulent scheme to inflate the value of securities held by several private investment funds managed by Premium Point. Shor and others at Premium Point sought to hide the funds’ poor performance, both to stem redemptions and to persuade investors to invest in a new fund. Shor was barred.

11. On November 8, 2023, the SEC instituted administrative proceedings against Ronald Molo an investment adviser representative and registered representative associated with Edward Jones. Molo misappropriated a total of approximately $800,000 from two of his investment advisory clients and one of his brokerage customers. Molo conducted a scheme to defraud and obtain money from clients through materially false and fraudulent pretenses, representations, and promises. Molo falsely advised multiple clients that he had a good investment opportunity for them, supposedly involving tax-exempt, interest-bearing bonds or bond funds. Molo fraudulently induced clients to transfer funds to his personal bank account and Molo then converted client funds for his own personal use. Molo was barred.

12. On November 2, 2023, the SEC charged John Hughes, president and chief compliance officer of registered investment adviser Prophecy Asset Management LP, for his involvement in a multi-year fraud that concealed losses of hundreds of millions of dollars from investors. Hughes led investors to believe that their investments were protected from loss, telling them the funds’ capital was shared among dozens of sub-advisers who traded in liquid securities and posted cash collateral to offset any trading losses they incurred. Most of the funds’ capital went to one sub-adviser, who incurred massive trading losses that far exceeded the cash collateral he had contributed. Hughes caused the funds to invest in highly illiquid investments, which also resulted in substantial losses to the funds. Hughes concealed these losses by fabricating documents and engaging in a series of sham transactions to cover-up the true financial condition of the funds. Hughes deceived investors about the diversification and trading strategies in two other funds. After losses in funds that Prophecy Asset Management managed amounted to more than $350 million. Hughes and Prophecy Asset Management indefinitely suspended redemptions by investors. This matter is being litigated.

13. On November 1, 2023, the SEC instituted administrative proceedings against Patrick Thayer. Thayer was an investment adviser representative associated with an investment adviser registered with the Commission. Thayer sold mutual funds in a brokerage customer’s account and transferred the funds to an account he established in the customer’s name which he then used for his personal benefit, all without the customer’s permission or knowledge. Thayer was barred.

14. On October 13, 2023, the SEC adopted a pair of rules to bring greater transparency to two important areas of the markets.  The SEC recently introduced two rules under the Exchange Act to enhance transparency and efficiency in the securities lending and short sale market, complying with mandates in the Dodd-Frank Act. These rules necessitate increased reporting on securities lending and short sale data. Below are the key changes:

1. Securities Lending Reporting (Exchange Act Rule 10c-1a):

  • “Covered persons” must report specific information about securities loans to a registered national securities association (RNSA) within defined timeframes.
  • Reporting involves details such as issuer name, loan terms, collateral, etc., aimed at improving market oversight and providing timely transaction information.
  • The reporting responsibility falls on lenders, unless an intermediary or a broker-dealer is involved.

2. Short Sale Disclosure (Exchange Act Rule 13f-2 and Form SHO):

  • Institutional investment managers need to file Form SHO monthly, disclosing their short positions for covered equity securities.
  • This data will be aggregated and published on the SEC’s EDGAR system, promoting greater transparency in short sale activities.
  • The CAT NMS Plan amendment requires reporting firms to indicate the use of a specific market making exception, aiding regulators in assessing qualifying activity.

Effective Dates:

  • Rule 10c-1a will be effective 60 days after publication, with compliance timelines for reporting.
  • Rule 13f-2 will also be effective 60 days after publication, with compliance deadlines set thereafter.