October 2022 SEC Updates

1. On October 26, 2022, the SEC proposed a new rule and rule amendments to prohibit registered investment advisers from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers. The proposal would require advisers to satisfy specific due diligence elements before retaining a service provider that will perform certain advisory services or functions, and to subsequently carry out periodic monitoring of the service provider’s performance. The rule would apply to advisers that outsource certain “covered functions,” which include those services or functions that are necessary for providing advisory services in compliance with the Federal securities laws and that if not performed or performed negligently would result in material negative impact to clients.  Additionally, the proposal would require advisers to conduct due diligence and monitoring for all third-party recordkeepers and obtain reasonable assurances that the recordkeepers will meet certain standards. Finally, the proposal would require advisers to maintain books and records related to the new rule’s oversight obligations and to report census-type information about the service providers covered under the rule.  https://www.sec.gov/news/press-release/2022-194

2. On October 24, 2022, the SEC obtained a final consent judgment against Ramiro Sugranes, Lina Garcia and two investment firms that the SEC had previously charged with an illegal cherry-picking scheme, as well as a final consent judgment against relief defendants who received ill-gotten gains from the scheme. Sugranes through UCB Financial Advisers, Inc. and UCB Financial Services, Limited engaged in a cherry-picking scheme to divert profitable trades to investment accounts held by Sugranes’s parents who were named as relief defendants and to saddle other clients with losing trades. The scheme resulted in approximately $4.6 million in unlawful profits. Garcia enabled the scheme by sharing broker-dealer trading platform login information with Sugranes, which he used to carry out the cherry-picking scheme. Sugranes and the UCB Entities was ordered to pay disgorgement of $4,600,000, partially on a joint and several basis with the other parties, with prejudgment interest, and a civil penalty of $500,000, and ordering each UCB Entity to pay a civil penalty of $250,000 while Garcia was ordered to pay disgorgement of $225,718, jointly and severally with Sugranes, along with prejudgment interest, and a civil penalty of $100,000. The relief defendants was ordered to pay disgorgement of $2,255,672. https://www.sec.gov/litigation/litreleases/2022/lr25565.htm

3. On October 24, 2022, the SEC obtained a final judgment against Cetera Advisors, LLC and Cetera Advisor Networks, LLC, whom the SEC previously charged with defrauding their advisory clients by failing to disclose several sources of compensation. Cetera breached their fiduciary duty and defrauded retail advisory clients by, among other things, failing to properly disclose conflicts of interest related to the firms’ receipt of compensation in the form of 12b-1 fees, revenue sharing, administrative fees, and mark-ups. The Cetera entities consented to entry of a final judgment permanently enjoining each of them from violations of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7. The Cetera entities was ordered to pay disgorgement of $5,614,509, plus prejudgment interest of $990,961 and was ordered to each pay a $1,000,000 civil money penalty.  https://www.sec.gov/litigation/litreleases/2022/lr25564.htm

4. On October 18, 2022, the SEC filed charges against the estate of Stephen Swensen for operating a fraudulent investment offering that raised over $29 million from more than 50 investors. Swensen, who died on June 6, 2022, fraudulently induced victims into investing in Crew Capital Group, LLC. Swensen falsely told investors that Crew Capital was a fund that was co-managed by a reputable firm and guaranteed investors a minimum 5% annual return and up to 10% if the S&P 500 performed well.  Crew Capital, which was owned and controlled by Swensen, did not invest in any securities. Swensen misappropriated essentially all investor funds to make Ponzi payments to other investors and to pay for Swensen’s personal expenses, such as real estate, vehicles and multiple private aircraft, and Swensen’s living expenses. This matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25560.htm

5. On October 14, 2022, the SEC obtained a final judgment against Keith Springer and his firm, Springer Investment Management, Inc. dba Springer Financial Advisors (SFA), whom were charged with defrauding hundreds of retail clients, most of whom were retirees or near-retirees. Springer and SFA agreed to settlements that included $400,000 in penalties and an associational bar against Springer. Springer and SFA engaged in deceptive practices while soliciting new clients, including falsely claiming that they did not receive any incentives to recommend particular investments when they in fact received compensation for recommending certain products. Springer and SFA breached their fiduciary duty by failing to disclose these arrangements and the conflicts of interest that resulted, filed false reports with the Commission, and failed to maintain an adequate compliance program and required books and records. Springer and SFA was ordered to pay, jointly and severally, a civil penalty of $400,000. Springer was barred. https://www.sec.gov/litigation/litreleases/2022/lr25557.htm

6. On October 13, 2022, the SEC charged National Realty Investment Advisors LLC (“NRIA”) and four of its former executives with running a Ponzi-like scheme that raised approximately $600 million from about 2,000 investors. NRIA and its executives raised funds by promising investors their money would be used to buy and develop real estate properties, which would generate profits through a fund that NRIA set up to invest in the projects. The four executives, Rey Grabato II, Daniel O’Brien, Thomas Salzano and Arthur Scutaro solicited investors in a nationwide campaign promising returns of up to 20 percent. The investor money was used to pay distributions to other investors, to fund an executive’s family’s personal and luxury purchases, and to pay reputation management firms to thwart investors’ due diligence of the executives. The matter is being litigated. https://www.sec.gov/news/press-release/2022-188

7. On October 7, 2022, the SEC instituted administrative proceedings against Charles Parrino a registered broker-dealer of Palm Beach Gardens, Florida. Parrino participated in a fraudulent scheme to manipulate the price of securities of publicly-traded companies and that Parrino generated $982,690 in illicit profits from trading while the prices of those securities were being manipulated. Parrino pleaded guilty to one count of conspiracy to commit wire fraud. In connection with that plea, Parrino admitted that he participated in a market manipulation scheme involving trading securities around the dissemination of false rumors about publicly traded companies. Parrino was barred. The matter is being litigated. https://www.sec.gov/litigation/admin/2022/34-96072.pdf

8. On October 11, 2022, the SEC instituted administrative proceedings against Andrew Dougherty, a registered representative with Northwestern Mutual Investment Services, LLC (“Northwestern”) and previously Voya Financial Advisors, Inc. (“Voya”). Dougherty was barred for engaging in fraudulent, dishonest, deceptive and unethical practices, including placing a customer’s initials on a financial disclosure form without authorization, altering a customer email to conceal the forgery, and providing inconsistent and materially false statements to the Iowa Insurance Division about his resulting for-cause termination from Northwestern. The Iowa Order also found that Dougherty had failed to notify the Division that his Nebraska non-resident producer license had been revoked due to his fraudulent conduct and, at the time that he originally applied for his Iowa insurance producer license, had lied about the existence of three prior misdemeanor convictions.  Dougherty was barred. https://www.sec.gov/litigation/admin/2022/34-96032.pdf

9. On October 7, 2022, the SEC instituted administrative proceedings against Shaun Golden owner and sole employee of Golden Wealth Management, Inc. (“GWM”). , Golden pleaded guilty to two counts of Grand Larceny in the Second Degree in violation of New York Penal Law § 155.40(1); one count of Grand Larceny in the Third Degree in violation of NYPL § 155.35(1); one count of Falsifying Business Records in the First Degree in violation of NYPL § 175.10; one count of Scheme to Defraud in the First Degree in violation of NYPL § 190.65(1)(a); and one count of violating the Martin Act in violation of New York General Business Law § 352-C(5) before the Supreme Court of the State of New York, in New York v. Golden, Indictment No. SCI-72550-2022. Golden made fraudulent statements to potential investors in his real estate business, many of whom were advisory clients of GWM, and used client and investor funds to purchase two properties in his own name. Golden was barred. https://www.sec.gov/litigation/admin/2022/ia-6164.pdf

10. On October 6, 2022, the SEC announced charges against The Hydrogen Technology Corporation, its former CEO, Michael Kane, and Tyler Ostern, the CEO of Moonwalkers Trading Limited, a self-described “market making” firm, for their roles in effectuating the unregistered offers and sales of crypto asset securities called “Hydro” and for perpetrating a scheme to manipulate the trading volume and price of those securities, which yielded more than $2 million for Hydrogen. Kane and Hydrogen created its Hydro token and then publicly distributed the token through various methods:  an “airdrop,” which is essentially giving away Hydro to the public; bounty programs, which paid the token to individuals in exchange for promoting it; employee compensation; and direct sales on crypto asset trading platforms. After distributing the token in those ways, Kane and Hydrogen hired Moonwalkers, a South Africa-based firm to create the false appearance of robust market activity for Hydro through the use of its customized trading software or “bot” and then selling Hydro into that artificially inflated market for profit on Hydrogen’s behalf. Hydrogen allegedly reaped profits of more than $2 million as a result of the defendants’ conduct. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25553.htm

11. On October 6, 2022, the SEC charged Justin Costello for using a false persona as a Harvard-educated military veteran and hedge fund billionaire, to defraud investors out of millions of dollars. The SEC also charged David Ferraro, an associate of Costello’s, for promoting the stock of several microcap companies on social media without disclosing their own simultaneous stock sales as market prices rose. Costello portrayed himself to the public as a seasoned, licensed investment professional who was building a conglomerate in the cannabis industry. Costello’s false representations included credentials as a Harvard MBA, experience managing a $1.15 billion hedge fund and years of experience on Wall Street. Costello used these fabricated accomplishments to secure approximately $900,000 of investments in two different companies from more than 30 investors. While acting as an investment adviser to a married couple, Costello sold the couple $1.8 million of shares in a penny stock at a markup of 9,000 percent over the price paid by Costello and used their $4 million brokerage account to trade at a significant loss, securities of microcap companies in which Costello had an undisclosed financial interest. Costello and Ferraro engaged in various stock promotion schemes in which Costello acquired shares of penny stocks and then directed Ferraro to promote those stocks to Ferraro’s Twitter followers and the public. Ferraro posted hundreds of tweets to hype those stocks and did not disclose that Costello intended to sell his shares once the stock price increased or that Ferraro would receive a share of Costello’s profits. Costello and Ferraro together made approximately $792,000 in illicit trading profits. This matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25552.htm

12. On October 6, 2022, the SEC instituted administrative proceedings against John Fisher, a former principal of Lifeco Insurance Services and Retirement Planning, Inc. and until December 2017, an associate with Journey Wealth Management Advisors, a state-registered investment advisor.  Most recently, in January 2018, he was the owner of Fisher-Caulkins Wealth Management, an investment advisor registered in California. Fisher, while not registered as or associated with a broker or dealer, offered and sold 1 Global Capital LLC securities to investors. 1 Global’s securities offering was not registered with the Commission. Fisher solicited investors to purchase 1 Global securities; advised investors about the merits of the investments and received commissions of approximately $329,000 that were transaction-based compensation for his sales of 1 Global securities. Fisher was barred. https://www.sec.gov/litigation/admin/2022/34-95989.pdf

13. On October 6, 2022, the SEC obtained a final judgment against Donald Kellen, whom the SEC previously charged with conducting a multi-year cherry-picking scheme that defrauded his clients. Kellen profited at his clients’ expense by cherry-picking profitable trades using an omnibus account, which is intended to facilitate purchases of securities for multiple client accounts. Kellen consented to entry of a final judgment. He agreed to pay disgorgement in the amount of $51,157 plus prejudgment interest thereon in the amount of $3,195 and a civil penalty in the amount of $25,648 for a total of $80,000. Kellen was also barred. https://www.sec.gov/litigation/litreleases/2022/lr25551.htm

14. On October 5, 2022, the SEC instituted administrative proceedings against Michael Conte, a controlling owner of Fusion Analytics Investment Partners, LLC (“FAIP”), an investment adviser registered with the SEC. Conte, through two entities he controlled—FAIP and FAIP’s holding company, Fusion Analytics Holdings, LLC (“Fusion Holdings”)—raised approximately $1.4 million for FAIP through the offer and sale of promissory notes to 10 individual retail investors and advisory clients, most of whom were retired and elderly, without disclosing material facts regarding FAIP’s declining financial condition. Fusion Holdings defaulted on most of the notes, and Conte renegotiated many of the notes without fully disclosing FAIP’s continuing financial decline. Conte was barred. https://www.sec.gov/litigation/admin/2022/34-95983.pdf

15. On October 3, 2022, the SEC filed an emergency action to stop an on-going fraudulent and unregistered crypto asset offering targeting Latino investors, run by Mauricio Chavez and Giorgio Benvenuto through a company Chavez founded and controlled, CryptoFX, LLC. The Court issued a temporary restraining order halting the offering, as well as temporary orders freezing assets and granting other emergency relief. The Court also granted the SEC’s motion for a receiver and extended the asset freeze. Chavez began holding paid classes for the ostensible purpose of educating and empowering the Latino community to build wealth through crypto asset trading. Chavez had no background, education, or training in investments or crypto assets. The seminars were merely conduits for soliciting investors to give their money to CryptoFX, which Chavez would then supposedly use to conduct crypto asset and foreign exchange trading. Chavez claimed to have earned outsized returns from crypto trading and to have “literally made over 5 millionaires in the last year.” Chavez also provided investors false documents that, among other things, grossly overstated his crypto experience and guaranteed that investors would not bear any losses. Chavez ultimately raised over $12 million from more than 5,000 investors. This matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25547.htm