October 2023 SEC Updates

1. On October 31, 2023, the SEC announced fraud charges against Eduardo Hernandez, Christopher Flagg, Daquan Lloyd, and Corey Ortiz, all currently or formerly of Long Island, New York, for perpetrating a multi-year “free-riding” scheme that generated more than $2 million in illicit profits. Hernandez, Flagg, Lloyd and Ortiz opened brokerage accounts (the victim accounts) that provided the defendants an instant deposit credit once the defendants initiated a transfer of funds to those accounts from related bank accounts, but before the fund transfer was completed. Hernandez, Flagg, Lloyd and Ortiz took advantage of the instant deposit credit feature to purchase illiquid securities from other brokerage accounts that they controlled, for prices at which no rational investor would have purchased them, thereby generating profits in the other brokerage accounts. Hernandez, Flagg, Lloyd and Ortiz caused those other brokerage accounts to repurchase the same securities from the victim accounts at or near the much lower market price, thereby closing out the positions and leaving the victim accounts with trading losses close to the amount of the instant deposit credits extended to the victim accounts. Hernandez, Flagg, Lloyd and Ortiz directed that the victim accounts be abandoned, never actually funding those accounts from the bank accounts. Through this scheme in which Hernandez, Flagg, Lloyd and Ortiz controlled both sides of the transactions, they were able to generate guaranteed profits at the victim accounts’ brokerage firm’s expense. Hernandez, Flagg, Lloyd and Ortiz conducted the fraudulent scheme through at least 600 brokerage accounts. This matter is being litigated.  https://www.sec.gov/news/press-release/2023-228

2. On October 30, 2023, the SEC announced settled insider trading charges against Joseph Conlan of New Jersey for trading in the securities of GAIN Capital Holdings, Inc. (“GCAP”) in advance of an announcement that Conlan’s former employer, StoneX Financial (then known as INTL FCStone, Inc.) (“INTL”), had agreed to acquire all outstanding shares of GCAP stock. Conlan who had worked at INTL as Global Head of FX Sales learned from a close friend and former colleague who still worked at INTL that INTL would be acquiring GCAP. Conlan misappropriated material nonpublic information about the upcoming acquisition by purchasing GCAP stock later that day. When GCAP’s stock price rose by approximately 66% Conlan obtained ill-gotten gains of $73,627. Conlan was ordered to pay disgorgement of $73,627, prejudgment interest of $12,134, and a civil penalty of $73,627. https://www.sec.gov/enforce/34-98824-s

3. On October 30, 2023, the SEC instituted administrative proceedings against Bradley Holts. Holts misappropriated $186,382 from three elderly investor customers. Holts falsely told these investors that he would invest their money in securities of mutual funds offered by the investment management firm Invesco Ltd.  Holts opened a bank account in the name of “Bradley Morgan Holts d/b/a Invesco Investment Texas” (“IIT”). On the account opening application, Holts listed his home address in Beaumont, Texas, as the address for IIT. Holts was the only individual with signature authority over the IIT bank account. The IIT d/b/a name used by Holts on the bank account is deceptively similar to Invesco’s name. However, Invesco had no relationship to IIT or control over the IIT bank account. Holts stole the investors’ money and used the money to pay personal expenses, including for clothing, tanning salons, adult and dating websites, and a divorce lawyer. Holts has not repaid the three Investors. Holts was ordered to pay a disgorgement in the amount of $186,382 plus prejudgment interest in the amount of $18,005, and a civil penalty of $186,382.  https://www.sec.gov/files/litigation/admin/2023/34-98823.pdf

4. On October 25, 2023, the SEC announced charges and obtained a consented-to asset freeze against a California-based investment adviser who allegedly defrauded her victim clients of over $2 million. Julie Darrah and her firm, Vivid Financial Management, Inc. (“VFM”), misappropriated approximately $2.25 million from at least nine clients who had hired Darrah and VFM to be their investment adviser. Darrah primarily targeted elderly female advisory clients, many of whom had come to rely on Darrah for their financial well-being, including one client who lives in a memory care facility. Darrah gained control of her victim’s assets by becoming the trustee of their trusts, using standing letters of authorization to transfer funds from their brokerage accounts to their bank accounts, becoming the signatory on their bank accounts, and/or obtaining power of attorney over their property and accounts. Darrah transferred her victims’ money to her personal bank accounts, where she commingled the funds with her own money that she used to buy and improve real properties, pay her personal expenses, buy luxury vehicles, and buy and operate restaurant businesses at a loss. Darrah concealed her scheme by, among other things, changing client account mailing addresses to her own address, falsely disclosing that she was not acting as the trustee for any clients, and having a client initial two backdated promissory notes that Darrah provided to the SEC in response to its subpoenas. This matter is being litigated. https://www.sec.gov/litigation/litreleases/lr-25885

5. On October 24, 2023, the SEC instituted administrative proceedings against Brian Hobbs who was the sole owner, officer and control person of TH Wealth Management, LLC, an investment adviser registered with the State of Texas. Hobb’s used TH Wealth’s omnibus, or block, trading account to perpetrate a fraudulent “cherry-picking” scheme to benefit himself, and to defraud four of his advisory clients, in breach of his fiduciary duties as an investment advisor to his clients. Hobbs received and defrauded his clients of more than $275,000 in trading profits. Hobbs also made materially false and misleading statements to his clients and prospective clients in TH Wealth’s Form ADV Part 2A filings, which misrepresented how Hobbs was trading securities for his clients. The firm’s brochures and other disclosures claimed the trades were being fairly and equitably allocated among the client accounts. In light of Hobbs’s cherry-picking scheme, that claim was false. Hobbs was barred. https://www.sec.gov/files/litigation/admin/2023/ia-6470.pdf

6. On October 24, 2023, the SEC charged BlackRock Advisors, LLC, an investment adviser, for failing to accurately describe investments in the entertainment industry that comprised a significant portion of a publicly traded fund it advised. BlackRock Multi-Sector Income Trust (BIT) made significant investments, through a lending facility, in Aviron Group, LLC, a company that developed print and advertising plans for one to two films per year. In many of BIT’s annual and semi-annual reports that were publicly available to investors and filed with the SEC, BlackRock inaccurately described Aviron as a “Diversified Financial Services” company. BlackRock stated that Aviron paid a higher interest rate than was actually the case. BlackRock identified these inaccuracies and BIT accurately reported the Aviron investment in reports going forward. BlackRock agreed to pay a $2.5 million penalty. https://www.sec.gov/news/press-release/2023-226

7. On October 19, 2023, the SEC announced settled charges against Canada-based Anson Advisors Inc. (“AAI”) for violating a SEC trading rule when it purchased stock in three public offerings for private fund clients after selling short the same stock for private fund clients, during a time period when the SEC rule prohibited those purchases. AAI violated Rule 105 which prohibits short selling an equity security during a restricted period (generally five business days before a covered public offering) and then purchasing the same security in the offering, absent an exception. The rule applies regardless of the trader’s intent and is designed to prevent potentially manipulative short selling before the pricing of covered offerings. AAI violated Rule 105 by participating in three follow-on offerings after it had engaged in short sales of the same securities during the restricted period, and that AAI’s violations stemmed from an incorrect understanding of how to comply with an exception to Rule 105. AAI has since undertaken remedial steps, including revising its Rule 105 policies and procedures. AAI was ordered to pay disgorgement of $2,469,109, prejudgment interest of $261,285, and a civil penalty of $600,000. https://www.sec.gov/enforce/34-98775-s

8. On October 17, 2023, the SEC instituted administrative proceedings against Anthony Brandel and M.Y. Consultants, Inc. Brandel has not been registered in any capacity. Brandel participated in an investment scheme that defrauded more than 30 investors out of approximately $11 million, engaged in fraudulent and deceptive conduct in connection with investors’ purchases of securities in furtherance of the scheme, and acted as unregistered brokers. Brandel and M.Y. Consultants served as the main point of contact with investors explaining the investments, collecting millions of dollars of investor funds through escrow agreements, and lulling investors about the status of the transactions. Brandel made misrepresentations to investors including that their funds would be used in trading programs from which investors were guaranteed to earn astronomical profits. Instead of utilizing investor funds for the promised transactions, Brandel misappropriated the investors’ funds or diverted the funds to other participants in the scheme. Brandel was ordered to pay disgorgement of $4,920,000, prejudgment interest of $1,015,020 and a civil penalty of $630,000. Brandel was barred. https://www.sec.gov/files/litigation/admin/2023/34-98763.pdf

9. On October 16, 2023, the SEC released its 2024 examination priorities to inform investors and registrants of the key risks, examination topics, and priorities that the Division plans to focus on in the upcoming year. This year’s examinations will prioritize areas that pose emerging risks to investors or the markets in addition to core and perennial risk areas. https://www.sec.gov/files/2024-exam-priorities.pdf

10. On October 11, 2023, the SEC instituted administrative proceedings against Thomas Martin, Jr. the president and owner of Carolina Financial Investments, LLC an unregistered investment adviser. Martin defrauded investors in connection with the sale of securities in Dynamic Equity Management Fund (“DEMF”), a private investment fund formed and managed by Martin. Martin induced his victims to invest, and leave their money invested, in DEMF by fraudulently misrepresenting the fund’s past monthly and annual performance. Martin also induced the investors to keep their money invested in DEMF by misrepresenting what he did with their funds – which in some cases were used to pay back prior investors who had suffered losses – and by misrepresenting the current value of their investments. Martin was barred.  https://www.sec.gov/files/litigation/admin/2023/ia-6460.pdf

11. On October 11, 2023, the SEC announced settled charges against Jason Reynolds, the sole member of Collaborative and Collaborative Financial Consulting LLC, a limited liability company for statements in a document provided to prospective and existing clients that gave misleading impressions about Reynolds’ qualifications and securities industry registrations. Collaborative and Reynolds held themselves out publicly as investment advisers and marketed the services Reynolds provided through a website, publications, and a podcast. Reynolds provided Client Agreements to prospective and existing clients that characterized Reynolds as “an Investment Adviser Representative. Reynolds drafted the representations included in the Client Agreements, knowing that he was not registered as an investment adviser or broker-dealer with the Commission or any state, or associated with a registered broker-dealer, or registered with one or more states as an investment adviser representative. The SEC finds that Collaborative’s Client Agreements gave misleading impressions about Reynolds’ qualifications and that Reynolds held active securities industry registrations related to the investment advice he was providing to clients through Collaborative. Collaborative and Reynolds was ordered to pay a civil money penalty in the amount of $20,000. Reynolds was also barred.  https://www.sec.gov/files/litigation/admin/2023/ia-6457.pdf

12. On October 11, 2023, the SEC instituted administrative proceedings against Ronald Filoramo, a registered representative and investment adviser representative with an SEC-registered broker-dealer and investment adviser. Filoramo misappropriated approximately $761,000 from two of his long-standing brokerage customers. Filoramo represented that he would invest the customers’ funds in securities he recommended but instead misappropriated the money for his personal benefit, namely for gambling and related expenses. Filoramo recommended to the customers that they purchase bonds from a purported MSSB client and instructed them to send their funds directly to that client. Filoramo also created fake documents that purported to show the bond purchases. The customers unknowingly transferred their funds to bank accounts controlled by one of Filoramo’s friends who transferred the funds to a bank account controlled by Filoramo. No bonds were ever purchased and Filoramo spent almost all of the money, mainly at casinos. Filoramo was barred.  https://www.sec.gov/files/litigation/admin/2023/34-98716.pdf

13. On October 10, 2023, the SEC adopted rule amendments governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. The amendments update Regulation 13D-G to require market participants to provide more timely information on their positions to meet the needs of investors in today’s financial markets. Exchange Act Sections 13(d) and 13(g), along with Regulation 13D-G, require an investor who beneficially owns more than 5 percent of a covered class of equity securities to publicly file either a Schedule 13D or a Schedule 13G, as applicable. An investor with control intent files Schedule 13D, while Exempt Investors and investors without a control intent, such as Qualified Institutional Investors and Passive Investors, file Schedule 13G.  https://www.sec.gov/news/press-release/2023-219

14. On October 10, 2023, the SEC instituted administrative proceedings against Wilmington Trust Investment Management, LLC (“WTIM”), a registered investment adviser. WTIM invested certain clients’ assets in higher-cost mutual fund share classes than were otherwise available while failing to disclose the conflicts of interest associated with those investment recommendations. WTIM offered a wrap program option to its advisory clients. Under its arrangement with clients in wrap accounts, WTIM was responsible for paying client trading costs – including transaction fees on mutual fund investments – as part of the overall management fee clients paid to WTIM. WTIM avoided incurring transaction fees for wrap client transactions by investing certain clients’ assets in higher-cost mutual fund share classes from a no-transaction fee program offered by its clearing firm instead of lower-cost share classes of the same funds that were available to clients for a transaction fee. WTIM also exchanged wrap clients’ existing assets in certain mutual funds for other investments in the same sector that had higher expense ratios to avoid paying transaction fees. WTIM was ordered to pay disgorgement of $999,559, prejudgment interest of $77,588, and a civil money penalty in the amount of $250,000, for a total of $1,327,147.  https://www.sec.gov/files/litigation/admin/2023/ia-6455.pdf

15. On October 5, 2023, the SEC announced that it has filed an application seeking an order directing Elon Musk to comply with an investigative subpoena calling for his appearance for testimony, with which Musk failed to comply. Musk failed to appear for testimony as required by the investigative subpoena served by the SEC, despite: agreeing to appear for testimony, having been served with a subpoena requiring his appearance for testimony in the SEC’s San Francisco Regional Office and raising no objection to the subpoena until two days before his scheduled testimony date, when Musk notified the SEC that he would not appear. Musk attempted to justify his refusal to comply with the subpoena by raising, for the first time, several spurious objections. This matter is being litigated. https://www.sec.gov/litigation/litreleases/lr-25880