October 2020 SEC Updates

On November 2, 2020, the SEC’s Division of Enforcement published its annual report for fiscal year 2020.  In fiscal year 2020, the SEC brought a diverse mix of 715 enforcement actions, including 405 “standalone actions”.   72% of standalone actions included charges against one or more individuals.  Over 20% of all enforcement actions were against investment advisers representing the second largest group just under securities offerings.  There were judgments and orders totaling approximately $4.68 billion in disgorgement and penalties – the highest amount on record.  Of concern is potential undisclosed conflicts such as an advisers’ use of cash sweep arrangements. Another potential area of concern is the transparency of fee structures around their accounts such as in “wrap fee programs”.  Fiscal Year 2020 was a record-breaking year for the whistleblower program.  https://www.sec.gov/files/enforcement-annual-report-2020.pdf


2. On October 29, 2020, the SEC released its agenda for the November 5, 2020, special meeting of the Asset Management Advisory Committee (AMAC).  AMAC was formed to provide the Commission with diverse perspectives on asset management and related advice and recommendations.  At the meeting, AMAC will consider recommendations concerning COVID-19 related operational issues, which may include electronic delivery, e-authorization, remote work, and dematerialization.  The meeting will be webcast live on SEC.gov, and will be archived on the website for later viewing.


3. On October 27, 2020, the SEC won a trial against an analyst charged with aiding and abetting a Pay to Play scheme involving the New York State Common Retirement Fund. https://www.sec.gov/litigation/complaints/2020/comp24953.pdf


4. On October 26, 2020, Mohammed Rashid, a former partner of Apollo Management, L.P., a private equity firm, agreed to settle charges for fraudulently claiming that his personal expenses were legitimate business expenses, and those expenses were thereafter paid by private equity funds advised by Apollo. The Commission further alleged that Rashid was reimbursed for approximately $290,000 in personal expenses fraudulently disguised as legitimate business expenses, including a New Year’s trip to Brazil, a friend’s bachelor party and wedding, a flight to the Super Bowl, and numerous dinners with friends and family at high-end Manhattan restaurants. Rashid agreed to pay a civil penalty in the amount of $240,000.  https://www.sec.gov/litigation/admin/2020/ia-5620.pdf


5. On October 22, 2020, Goldman Sachs Group Inc. settled an enforcement action for violations of the Foreign Corrupt Practices Act (FCPA) in connection with a bribe scheme to high-ranking government officials and agreed to pay more than $2.9 billion, which includes more than $1 billion to settle the SEC’s charges. According to the SEC’s order, beginning in 2012, former senior employees of Goldman Sachs used a third-party intermediary to bribe the officals.  https://www.sec.gov/litigation/admin/2020/34-90243.pdf


6. On October 22, 2020, EDG Management Company, LLC, a private fund adviser, settled charges for failing to reduce management fees as a result of write downs. The Limited Partnership Agreement (LPA) for the private fund EDG advises allows EDG to charge the fund, on a quarterly basis, a management fee based on total invested capital contributions. As described in the order, the LPA provides that the fee is calculated using an amount that should be reduced if certain triggering events occur, including write downs of portfolio securities. The order finds that, during the period from January 1, 2016 through October 1, 2019, certain portfolio securities were subject to write downs under the terms of the fund’s LPA. However, as stated in the order, EDG did not adjust thirteen quarterly management fee calculations to account for these write downs, causing the fund and, ultimately, its limited partners to pay approximately $900,000 more in management fees than they should have paid.  https://www.sec.gov/litigation/admin/2020/ia-5617.pdf


7. On October 22, 2020, Paul Horton Smith, Sr. agreed to settled charges that he conducted a Ponzi scheme targeting senior citizens and engaged in other fraudulent conduct by offering and selling securities in a private company in conjunction with his state-registered investment advisory firm. The complaint alleged Smith assured investors their principal would be safe, secure, and invested in purported “private annuity contracts,” and they promised investors guaranteed annual interest payments between 3 percent and 10.5 percent. The complaint alleged that Smith perpetrated this fraud by holding himself out as a trusted fiduciary through his position as an investment adviser representative with his investment advisory firm and by failing to disclose his disciplinary history in the securities industry.  https://www.sec.gov/litigation/admin/2020/ia-5618.pdf


8. On October 19, 2020, the SEC obtained a final judgement against an investment adviser who defrauded members of the Israeli-American community by defrauding at least 15 advisory clients out of more than $3 million through falsely claiming that the firm used sophisticated trading strategies to generate guaranteed returns, that the investments were risk-free, and that clients could withdraw their funds at any time. The judgment orders the firm’s CEO to disgorge $2,408,351 in ill-gotten gains plus prejudgment interest of $519,077, and to pay a civil penalty of $192,768.  https://www.sec.gov/litigation/complaints/2019/comp24435.pdf


9. On October 7, 2020, the SEC voted to propose a new limited, conditional exemption from broker registration requirements for “finders” who assist issuers with raising capital in private markets from accredited investors.  If adopted, the proposed exemption would permit natural persons to engage in certain limited activities involving accredited investors without registering with the Commission as brokers.  The proposed exemption seeks to assist small businesses to raise capital and to provide regulatory clarity to investors, issuers, and the finders who assist them. The proposal would create two classes of finders, Tier I Finders and Tier II Finders, that would be subject to conditions tailored to the scope of their respective activities. The proposed exemption would establish clear lanes for both registered broker activity and limited activity by finders that would be exempt from registration.  https://www.sec.gov/news/press-release/2020-248


10. On October 1, 2020, Phillip Timothy Howard, Esq., owner, president, and a director of Cambridge Capital Group Advisors, LLC f/k/a Cambridge Capital Advisors, LLC, an exempt reporting investment adviser, agreed to settle charges that he raised approximately $4.1 million from about 20 investors—primarily former professional football players who were plaintiffs in concussion-related litigation—through the sale of interests in two private investment funds. The complaint also alleged that Howard misrepresented the funds’ investment focus, and he used a portion of investors’ funds for his personal benefit. The complaint further alleged that Howard also failed to disclose to investors and in forms filed with the Commission that the co-defendant was previously subject to an anti-fraud injunction in a case brought by the Commission, had been barred by Commission administrative order from being associated with an investment adviser, and had a federal felony conviction for mortgage, tax, and bankruptcy fraud.  https://www.sec.gov/litigation/admin/2020/ia-5605.pdf