The Compliance and Regulatory Consulting practice highlights various news and enforcement matters from the fourth quarter of 2020.
Opening Remarks at National Investment Adviser/Investment Company Compliance Outreach 2020: The Role of the CCO—Empowered, Senior and With Authority
On November 19, 2020 the Director of the SEC’s Division of Examinations, Peter Driscoll, published a speech echoing the November 19, 2020 Risk Alert on Investment Adviser Compliance Programs and the importance and authority of the CCO role.
Read more here.
CFTC Charges Wisconsin Firm and its Manager with Registration, Disclosure and Recordkeeping Violations
On October 7, 2020 the CFTC filed a civil enforcement action against a Wisconsin investment firm and its sole managing member for failing to register with the CFTC as a retail foreign exchange dealer, failing to provide customers with a written risk disclosure statement and failing to keep books and records.
The complaint alleges that the firm entered agreements, contracts or transactions in financed retail foreign currency derivatives (forex) with customers in the U.S. who were not eligible contract participants. The firm utilized their website, YouTube videos and in-person solicitations to offer and enter into such transactions in Vietnamese Dong, Iraqi Dinar and other foreign currencies.
Additionally, the firm failed to provide necessary written risk disclosure statements every time it opened an account for a customer who engaged in retail forex transactions and did not keep and maintain RFED-required books and records for such transactions.
Read more here.
SEC Wins Virtual Bench Trial Against Analyst Charged with Aiding and Abetting New York Pension Fund Pay-To-Play Scheme
On October 23, 2020 a former managing director and fixed income research analyst at a broker-dealer were found to have spent thousands of dollars in entertainment for the director of the New York pension fund. The managing director then sought reimbursement of those expenses from the broker dealer, submitted false expense reports to conceal that he entertained the pension fund’s director in order to receive state business. The former director and analyst then lied to internal investigators because he knew of the existence of an illegal quid-pro-quo relationship between his colleague and the pension fund director, who maintained investment responsibility for approximately $50 billion of the fund’s assets.
The SEC is seeking a permanent injunction and civil penalties.
Read more here.
SEC Charges Investment Adviser with Fraudulent Securities Offering
The SEC charged an unregistered investment adviser on November 3, 2020, who also allegedly concealed his criminal past, with defrauding his clients through the offer and sale of investments in a fictitious investment fund, as well as misappropriating a large portion of the funds raised. The adviser had a previous criminal record, convicted of identity theft and bank fraud, and utilized an alias to conceal his criminal records from investors.
The adviser raised approximately $5 million from approximately 40 investors during 2017 to 2020 for the fictitious fund. The adviser allegedly promised his clients an annual 12% dividend and advised his clients to transfer existing retirement and other savings to a self-directed IRA custodian to invest in the fictitious fund. Over $700,000 of capital invested into the fund was used for personal expenses and an additional $1.8 million was used to make purported dividend payments to prior investments in Ponzi-like actions.
The SEC seeks injunctive relief, civil penalties and disgorgement of ill-gotten gains plus prejudgment interest.
Read more here.
SEC Charges Former Finance Department Employee with Insider Trading
On November 23, 2020 the SEC charged a former employee who sat in both the product development department and finance department at a major sporting good retailer for allegedly trading options based on non-public information in advance of the company’s quarterly earnings announcements. The former employee is said to have made more than $27,500 in profits from selling put/call options, while acting on material non-public information he had access to because of his position in the company.
The former employee consented to a final judgment and ordering him to pay a civil penalty of $75,470. The settlement is subject to court approval.
Read more here.
SEC Settles with Investment Adviser Who Failed to Disclose Conflicts of Interest and Misled Advisory Clients About Investment Terms
The SEC settled charges on November 24, 2020 with an investment adviser and two companies he owns and controls. The SEC’s charges stated that he and his companies defrauded their advisory clients by misleading them about the terms of their investments, failed to disclose his self-dealing and receipt of commissions in connection with those investments and in doing so, offered and sold securities in unregistered offerings and also acted as unregistered broker-dealers.
The SEC's initial complaint alleged that the adviser advised his companies’ clients to invest in promissory notes offered by an individual who claimed to provide short-term high interest rate loans to real estate developers but, unbeknownst to the adviser, was in fact operating a Ponzi scheme.
The SEC is seeking injunctive relief, disgorgement of allegedly ill-gotten gains plus interest and civil penalties.
Read more here.
SEC Charges Corporate Controller and Brother-In-Law with Insider Trading Ahead of Merger Announcement
On December 11, 2020, the SEC charged the former corporate controller of an insights and technology company and his brother-in-law with insider trading in advance of a public announcement of the company’s acquisition for $2.6 billion. Their alleged insider trading scheme generated profits of $296,000.
The former corporate controller allegedly tipped his brother-in-law, repeatedly, in the months leading up to the merger. He then utilized that information to purchase highly speculative and out-of-the-money call options, while also directing his son to purchase the same options. The funding of these investments even stretched as far as liquidating his wife’s IRA, maxing out his line of credit and taking out a loan on his car.
The SEC's complaint charges the former controller and his brother-in-law with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks permanent injunctions, civil penalties and a bar from serving as an officer or director of a public company.
Read more here.
