The Commission continued to spotlight key market issues in rule making proposals and conferences. This week the agency announced a conference focused on the municipal securities markets. While the Commission has limited authority in this area, the agency can lead the way to improvements in these critical markets.
The battle over disgorgement, and whether the SEC has the authority to utilize that remedy, continues to heat-up. Certain members of Congress filed an amicus brief this week essentially arguing that disgorgement is a critical remedy for SEC enforcement. In the age of statutory interpretation delimited by the “read the statute” and “look up the words in the dictionary” approach, the obvious response to Congress is to amend the statute.
Enforcement continues to focus on retail investors. That means continuing what seems to be an endless series of offering fraud cases. The Commission did, however, score a significant victory last week, securing an order returning over $60 million to defrauded investors.
Report: The Commission published its annual report last week on credit rating agencies (Jan. 24, 2020 (here).
Municipal securities: The Commission announced a conference titled “Spotlight on transparency: A Discussion of Secondary Market Municipal Securities Disclosure Practices” to be held on March 10, 2020 at its Headquarters office (Jan. 23, 2020). The conference focuses on municipal securities (here).
Whistleblowers: The agency announced two whistleblower awards last week. The first involved information that helped shut down a fraudulent scheme. An award of $277,000 was made. The second involved an injured investor who furnished information that helped the agency uncover funds ultimately returned to investors. An award of $45,000 was made (Jan. 22, 2020).
SEC Enforcement – Filed and Settled Actions
The Commission filed 3 civil injunctive actions and 1 administrative proceeding last week, exclusive of 12j and tag-along actions.
Offering fraud: SEC v. Morgan, Civil Action No. 19 Civ 661 (W.D. N.Y.) is a previously filed action which named as defendants Robert Morgan, a residential and commercial real estate developer, Morgan Mezzanine Fund Manager LLC, the manager of three Note Funds, and Morgan Acquisition LLC, a firm used to put properties Mr. Morgan planned to acquire under contract. Over a five-year period, beginning in 2013, Mr. Morgan raised over $110 million from investors through the sale of securities. About $80 million of that amount was from investors in four Note Funds. Three of those funds were managed by Fund Manager and one was under the tutelage of Morgan Acquisitions. Investors in the Note Funds were told that their capital would be used to make unsecured subordinated loans to affiliated entities. Investors were also told that the target return for the Note Funds managed by Fund Manager was 11 % while those managed by Morgan Acquisitions were supposedly guaranteed by Mr. Morgan personally. Over 200 investors and entities in 17 states invested. Contrary to the representations made, investor funds were used to facilitate Ponzi type payments to pay down prior loans. The complaint alleged violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b) along with control person liability. When the complaint was filed the Commission obtained emergency relief, freezing assets and appointing a receiver responsible for marshalling the assets for the benefit of investors. Morgan voluntarily liquidated certain assets to generate funds for collection by the receiver. Earlier this week the Court approved the receiver’s plan to distribute over $63 million to harmed investors.
Manipulation – false opinion: In the Matter of Benjamin L. Bunker, Esq., Adm. Proc. File No. 3-19668 (Jan. 23, 2020) is an action which names as a respondent attorney Benjamin Bunker. Over a two-year period Attorney Bunker issued false attorney opinions to facilitate the distribution of shares of Greenway Design Group, Inc. that were not registered into an inflated market. Although the shares were not registered Respondent’s letters suggested that they were eligible for an exemption. They were not. The opinions facilitated the transfer and deposit of the shares into brokerage accounts. When the share price had been manipulated the securities were sold. The Order alleges violations of Securities Act Sections 5(a) and 17(a) and Exchange Act Section 10(b). To resolve the matter Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. He will also be denied the privilege of appearing and practicing before the Commission as an attorney. In addition, Respondent will pay disgorgement of $1,800 and prejudgment interest of $249.84. Those obligations are offset by the restitution order entered in the parallel criminal case.
Offering fraud – crypto: SEC v. Grybniak, Civil Action No. 1:20-cv-327 (E.D.N.Y. Filed Jan. 21, 2020) is an action which names as defendants Serghii Grybnialm and the firm he founded which is essentially his alter ego, Opporty International, Inc. Over a one year period, beginning in September 2017, Defendants conducted an ICO involving tokens called OPP Tokens. About $600,000 was raised from about 200 investors. The tokens, which are securities, were not registered. In addition, a series of misrepresentations were made in connection with the sales. Those included claims that thousands of investors were involved; false claims about small businesses supposedly involved with its platform; a representation that a major software firm was a partner; and assertions that the tokens were SEC registered and compliant. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24723 (Jan. 21, 2020).
Offering fraud: SEC v. Griffithe, Civil Action No. 8:20-cv-00124 (C.D. Cal. Filed Jan. 21, 2020). The complaint named as defendants two individuals and three entities: Guy S. Griffithe, supposedly an executive in the motion picture industry who holds positions with defendants Renewable Technologies Solution, Inc. and Green Acres Pharms, LLC; and Robert Russell, an owner and executive with defendant SMRB LLC. In November 2013 Defendant Russell and his wife formed SMRB in Washington State to engage in activities related to marijuana. After Washington state issued a license, Defendants Griffithe and RTSI paid $1.5 million for a stake in SMRB. Under the terms of the transaction an interest in the license holder was conveyed along with the right to receive a percentage of the net income from SMRB. Yet under the applicable state law, an equity interest in a licensee entity could not be conveyed without prior approval of the Washington State Board which had not been obtained. Nevertheless, over a two-year period, beginning the month the Board issued the license, Defendants offered and sold equity interests in SMRB to at least 25 investors in several states. Over $4.8 million was paid by those investors to Defendants. In soliciting those investments Defendants misrepresented the nature of the interests as well as the use that would be made of the offering proceeds. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24722 (Jan. 21, 2020).
Misappropriation: U.S. v. Geraci, No. 1:18-cr-00715 (S.D.N.Y. Sentencing Jan. 23, 2020) is an action which named as a defendant John Geraci, a principal and founder of Meridian Capital Asset Management. In February 2015 Defendant met Nicholas Mitsakos, the purported operator of Hedge Fund. Mr. Mitsakos told Defendant Geraci about the substantial returns achieved at the Hedge Fund. The two men then entered into an arrangement under which Mr. Geraci agreed to solicit money for Hedge Fund. Later the same year Mr. Geraci learned that Hedge Fund was a fraud and that Mr. Mitsakos had misappropriated substantial funds from the firm. Nevertheless, he continued to solicit investors, raising substantial sums from two investors. He also participated in a cover-up that forwarded fraudulent statements to investors. Mr. Mtsakos previously pleaded guilty. Mr. Geraci was sentenced this week to serve 24 months in prison for conspiring to commit securities fraud.
U.S v. Cevallos, No. 1:19-cr-20284 (S.D.Fla. Plea Jan. 23, 2020) is an action which named as a defendant Armengol Alfonso Cevallos Diaz, an Ecuadorian business man resident in Miami, Florida. Mr. Cevallos engaged in a three-year scheme beginning in 2012 to pay bribes of about $4.4 million to officials of PetroEcuador, the state owned oil company. He also sought to conceal the bribes by using a series of shell companies and purchasing Florida real state for government officials. Mr. Cevallos pleaded guilty to one count of conspiracy to violate the FCPA and one count of conspiracy to commit money laundering. Sentencing is scheduled for April 2, 2020.