1. On November 27, 2024, the SEC announced that it updated its list of unregistered entities that use misleading information to solicit primarily non-U.S. investors, adding 14 soliciting entities, two impersonators of genuine firms, and four bogus regulators. The SEC’s list of soliciting entities that have been the subject of investor complaints, known as the Public Alert: Unregistered Soliciting Entities (PAUSE) list, enables investors to better inform themselves and avoid being victims of fraud. The latest additions are firms that SEC staff found were providing inaccurate information about their affiliation, location, or registration. https://www.sec.gov/newsroom/press-releases/2024-188
2. On November 26, 2024, the SEC charged FiveT Capital AG, an unregistered investment adviser, for purchasing stocks in fourteen public offerings of securities for advisory clients after selling short the same stock during a restricted period and then purchasing the same security in the offering, in violation Rule 105 of Regulation M of the Securities Exchange Act of 1934, which prohibits short selling an equity security during a restricted period. FiveT was ordered to pay disgorgement of $1,593,294, prejudgment interest of $357,199 and a civil money penalty of $805,000. https://www.sec.gov/enforcement-litigation/administrative-proceedings/34-101763-s
3. On November 26, 2024, the SEC charged Level Field Charter Partners, LLC, an unregistered municipal advisor, for failing to register as a municipal advisor and one its partners, David Endom, a registered representative of a registered broker-dealer, for failing to disclose material facts about the firm’s registration status to their charter school clients. Level Field and Endom provided municipal advisory services to four charter schools in connection with six bond offerings. Those services included advice on the structure, timing, and terms of the offerings, coordinating the credit rating process, providing information on debt financing structuring options, including the sale of municipal securities, assisting in the selection of other parties to the bond financings, including underwriters, bond counsel, and municipal advisors, advising on current interest rates, participating in the bond pricing process, and making substantive edits to key transaction documents. Level Field and Endom did not disclose to their clients that the firm was not a registered municipal advisor. Level Field was ordered to pay disgorgement of $25,007, prejudgment interest of $2,798 and a civil money penalty of $75,000. Endom was ordered to pay a civil money penalty of $40,000. https://www.sec.gov/enforcement-litigation/administrative-proceedings/34-101762-s
4. On November 25, 2024, the SEC charged Ken Leech, former Co-Chief Investment Officer of Western Asset Management Co., with fraud for engaging in a multi-year scheme to allocate favorable trades to certain portfolios, while allocating unfavorable trades to other portfolios, a practice known as cherry-picking. Leech placed trades with brokers and then routinely waited until later in the trading day to allocate the trades among clients in the portfolios he managed. Leech’s delay between placing and allocating trades gave him the opportunity to observe price movements, and then disproportionally allocate trades at a first-day gain to favored portfolios and trades at a first-day loss to disfavored portfolios. Leech allocated hundreds of millions of dollars of net first-day gains to favored portfolios, which also benefited Leech personally, and a similar amount of net first-day losses to disfavored portfolios. This matter is being litigated. https://www.sec.gov/newsroom/press-releases/2024-187
5. On November 22, 2024, the SEC issued their 2024 Enforcement Statistics. The report can be found at the following hyperlink: https://www.sec.gov/files/fy24-enforcement-statistics.pdf
Key points:
- The SEC’s momentum over the years is finally slowing in the context of the number of enforcement actions. However, there is a significant increase in fines, disgorgements and prejudgment interest.
- The SEC initiated 583 enforcement actions during fiscal 2024, (verses 784 enforcement actions in 2023), representing a 26% decline from the previous fiscal year. Within this total, 431 were new or “stand-alone” cases, which represents a 14 percent reduction from fiscal 2023.
- $8.2 billion were given in fines, disgorgements, and prejudgment interest and marked the highest amount in the Commission’s history representing a39% increase from the previous fiscal year. In 2023, the amount was just $5 billion and the previous record for the highest amount was $6.4 billion which was set in 2022. The $8.2 billion in remedies consisted of $6.1 billion in disgorgement and prejudgment interest, also the highest amount on record, and $2.1 billion in civil penalties, the second-highest amount on record.
Below are additional details:
- Off-Channel Communications
The Division continued its initiative to ensure that regulated entities, including broker-dealers, investment advisers, and credit ratings agencies, comply with the recordkeeping requirements of the federal securities laws. Compliance with those requirements is essential to investor protection and well-functioning markets. In fiscal year 2024, the Commission brought recordkeeping cases resulting in more than $600 million in civil penalties against more than 70 firms, including the Commission’s first cases charging recordkeeping violations against municipal advisors. Since December 2021, the initiative has resulted in charges against more than 100 firms and more than $2 billion in penalties.
- Marketing Rule
The Enforcement Division’s ongoing initiative investigating non-compliance with the Marketing Rule resulted in settled charges against more than a dozen investment advisers. The firms were charged for advertising hypothetical performance to the general public without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of the advertisement’s intended audience; using untrue or unsubstantiated statements of material fact and/or testimonials, endorsements, or third-party ratings that lacked required disclosures; and advertising misleading performance that was not fair and balanced.
- Emerging Technologies and Emerging Risks
Fiscal year 2024 saw heightened investor risk from emerging technologies and cybersecurity incidents and from market participants using social media to exploit elevated investor interest in emerging investment products and strategies. The Division kept pace, investigating noncompliance and false or misleading disclosures involving artificial intelligence, social media, cybersecurity, crypto, and more. Regarding Artificial Intelligence:
- The SEC charged QZ Asset Management for allegedly falsely claiming that it would use its proprietary AI-based technology to help generate extraordinary weekly returns while promising “100%” protection for client funds; and
- The SEC settled charges against investment advisers Delphia and Global Predictions with making false and misleading statements about their purported use of AI in their investment process.
- Disclosures of Holdings and Transactions by Insiders and Investment Managers
The federal securities laws require certain insiders and market participants to disclose their securities holdings and transactions. Compliance with those laws is essential for investors to make informed investment decisions. The SEC settled charges against 11 institutional investment managers for failing to disclose certain securities holdings in reports they were required to file because they have discretion over more than $100 million in certain securities.
6. On November 22, 2024, the SEC instituted administrative proceedings against Paulson Investment Company, LLC, a registered broker-dealer, for filing deficient Suspicious Activity Reports (“SARs”). Paulson failed to include all of the required details of the reported suspicious transactions that it knew or should have known in the narrative of the SARs, as required by regulation and FinCEN guidance. Paulson was ordered to pay a civil money penalty of $75,000. https://www.sec.gov/files/litigation/admin/2024/34-101706.pdf
7. On November 22, 2024, the SEC instituted administrative proceedings against Webull Financial LLC, a registered broker-dealer, for filing deficient Suspicious Activity Reports (“SARs”). Webull failed to include all of the required details of the reported suspicious transactions that it knew or should have known in the narrative of the SARs, as required by regulation and FinCEN guidance. Webull was ordered to pay a civil money penalty of $125,000. https://www.sec.gov/files/litigation/admin/2024/34-101707.pdf
8. On November 22, 2024, the SEC instituted administrative proceedings against Lightspeed Financial Services Group LLC, a registered broker-dealer, for filing deficient Suspicious Activity Reports (“SARs”). Lightspeed failed to include all of the required details of the reported suspicious transactions that it knew or should have known in the narrative of the SARs, as required by regulation and FinCEN guidance. Lightspeed was ordered to pay a civil money penalty of $75,000. https://www.sec.gov/files/litigation/admin/2024/34-101705.pdf
9. On November 21, 2024, the SEC charged James Burleson, principal of Burleson & Company, LLC, a formerly registered investment adviser, for defrauding clients by conducting a cherry-picking scheme. Burleson conducted his fraud by making risky options trades through his firm’s block trading account which allowed him to execute trades for multiple clients and then subsequently allocate them to individual client accounts. Burleson waited to see whether his options trades were profitable before deciding whether to allocate the trades to his own personal account or those of his clients. Burleson disproportionately allocated profitable options trades to his personal account and unprofitable trades to his clients. Burleson’s received over $1.8 million in first-day profits and his clients suffered over $2.8 million in first-day losses, as a result of Burleson’s cherry-picking. This matter is being litigated. https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26178
10. On November 21, 2024, the SEC charged David Kushner and his company La Mancha Funding Corp., an unregistered investment adviser, with defrauding nearly two dozen investors out of approximately $2.1 million in a series of private securities offerings. Kushner and La Mancha raised approximately $10.5 million from investors through a series of “LLCs” for the purpose of investing in short-term loans made to, among others, sports agents and professional athletes, including current and former NFL players. Kushner and La Mancha made material misrepresentations to the investors about what would be done with the investors’ funds, secretly taking hundreds of thousands of dollars in undisclosed “fees” for themselves out of the intended loan proceeds. Kushner and La Mancha also misappropriated nearly $1.5 million of loan repayments that, according to the terms of the LLC operating agreements, were supposed to go back to the investors. Kushner used those and other misappropriated funds, including the undisclosed fees, to pay personal expenses, such as payments for personal credit card bills, college tuition, country club dues, a luxury vacation, a Mercedes Benz, and a rental home in the Hamptons. This matter is being litigated. https://www.sec.gov/newsroom/press-releases/2024-183
11. On November 21, 2024, the SEC announced that its 33rd Chair, Gary Gensler, will step down from the Commission effective at 12:00 pm on January 20, 2025.. https://www.sec.gov/newsroom/press-releases/2024-182
12. On November 21, 2024, the SEC instituted administrative proceedings against Kevin Kane who was an investment adviser representative and a registered representative with Cambridge Investment Research, a dually-registered investment adviser and broker-dealer. Cambridge terminated Kane because he violated its policies and procedures and, following that termination, and in an efforts to convince clients to join Kane at a new investment advisory firm, Kane repeatedly defrauded and breached his fiduciary duty to these clients by: (1) falsely telling clients that Kane voluntarily ended his association with Cambridge , despite having been terminated for cause; (2) falsely telling clients that he was still associated with Investment Adviser 1 and could continue to effect transactions in their accounts; (3) failing to alert clients of Kane’s termination and inability to perform transactions in their accounts; and (4) to prevent clients from discovering the truth, impersonating clients in telephone calls with Cambridge to effect securities transactions. Kane was barred. https://www.sec.gov/files/litigation/admin/2024/34-101657.pdf
13. On November 15, 2024, the SEC charged Lion Street Financial, LLC (“Lion Street”) for not complying with Regulation BI in connection with recommendations to retail customers of corporate bonds called “L Bonds” offered by GWG Holdings, Inc. (“GWG”). Lion Street did not exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with the recommendations. Lion Street and one of its registered representatives also recommended L Bonds to six retail customers for whom Lion Street did not have a reasonable basis to believe that the recommendations were in the customers’ best interest based on the customers’ investment profiles and the potential risks, rewards, and costs associated with the L Bonds. Lion Street further did not establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation BI including written policies and procedures reasonably designed to identify and disclose, mitigate, or eliminate conflicts of interest associated with recommendations. Lion Street was ordered to pay disgorgement of $14,899, prejudgment interest of $3,683 and a civil money penalty of $135,000. https://www.sec.gov/files/litigation/admin/2024/34-101633.pdf
14. On November 8, 2024, the SEC filed two related litigated administrative proceedings against Epic Capital Wealth Advisors, LLC (“Epic Capital”) to determine whether its pending application for registration as an investment adviser should be denied, and David Anthony, President, CCO and owner of Epic Capital – to determine what, if any, remedial action is appropriate and in the public interest concerning Anthony given an injunction previously entered against Anthony by a Colorado state court prohibiting him from engaging in specified securities activities. This matter is being litigated. https://www.sec.gov/enforcement-litigation/administrative-proceedings/ia-6772-s
15. On November 8, 2024, the SEC charged Invesco Advisers, Inc., a registered investment adviser, for making misleading statements about the percentage of company-wide assets under management that integrated environmental, social, and governance (ESG) factors in investment decisions. Invesco told clients and stated in marketing materials that between 70 and 94 percent of its parent company’s assets under management were “ESG integrated.” However, in reality, these percentages included a substantial amount of assets that were held in passive ETFs that did not consider ESG factors in investment decisions. Furthermore, Invesco lacked any written policy defining ESG integration. Invesco was ordered to pay a civil money penalty of $17.5 million. https://www.sec.gov/newsroom/press-releases/2024-179
16. On November 7, 2024, the SEC instituted administrative proceedings against Dusan Varga, CEO and managing member of Pannon Investment Advisors LLC (“Pannon”), an unregistered investment adviser. Varga and Pannon made repeated material misrepresentations to investors including the use of investor funds, the profitability of trading activities, Varga’s background as a registered representative of a broker-dealer, and the risks of investing. Also, Varga and Pannon sold unregistered securities. Varga was barred. https://www.sec.gov/files/litigation/admin/2024/ia-6768.pdf
17. On November 7, 2024, the SEC instituted administrative proceedings against Christopher Turean, formerly an investment adviser representative associated with Valeo Financial Advisors , a registered investment adviser, for wire fraud and filing a false tax return. Turean knowingly devised a scheme to defraud an investor in order to obtain money or property by means of material misrepresentations or concealments of material fact, that he had the intent to defraud, and that he used wire communications in interstate commerce in furtherance of the scheme. Additionally, Turean willfully prepared, signed, and filed a materially false federal income tax return with the Internal Revenue Service. Turean was barred. https://www.sec.gov/files/litigation/admin/2024/ia-6766.pdf
18. On November 5, 2024, the SEC instituted administrative proceedings against Centaurus Financial, Inc. (“CFI”), Ricky Mantei, and Atul Makharia. Makharia and seven other registered representatives from CFI’s South Carolina branch office (“CFI RRs”) recommended the sale of complex variable interest rate structured products (“VRSPs”) to ninety-four retail customers for whom they knew, or reasonably should have known, such investments were unsuitable in light of each of the specific customers’ financial situation and needs. CFI and Mantei, the branch manager and owner of CFI’s South Carolina branch office, also failed reasonably to supervise the CFI RRs, and CFI failed to make and keep certain required records relating to certain customer accounts. CFI was ordered to pay disgorgement of $4,876, prejudgment interest of $623 and a civil money penalty of $750,000. Mantei was ordered to pay disgorgement of $92,650, prejudgment interest of $11,842 and a civil money penalty of $206,000. Makharia was ordered to pay a civil money penalty of $35,000. https://www.sec.gov/files/litigation/admin/2024/34-101512.pdf
19. On November 4, 2024, the SEC published a Risk Alert providing insight regarding the examination process for registered investment companies which included an attachment outlining the types of documents and information that are typically requested by examination staff. Examination observations related to certain core review areas are also highlighted to assist funds and their advisers in developing and enhancing their compliance programs and practices. https://www.sec.gov/compliance/risk-alerts/registered-investment-companies-risk-alert-11042024
20. On November 1, 2024, the SEC instituted administrative proceedings against Wahed Invest, LLC, a registered investment adviser, for failing to comply with Advisers Act Rule 206(4)-1 (the “Marketing Rule”). After the Marketing Rule’s compliance deadline, Wahed disseminated advertisements on its public website and via social media and email containing endorsements from several professional athletes that failed to provide the disclosures required under the Marketing Rule. Wahed disseminated advertisements on its public website that presented hypothetical, backtested performance without adopting and implementing required policies and procedures designed to ensure the hypothetical performance was relevant to the likely financial situation and investment objectives of the intended audience. Wahed was ordered to pay a civil money penalty of $250,000. https://www.sec.gov/files/litigation/admin/2024/ia-6763.pdf