Articles Posted in SEC Action

On January 14, 2021, the SEC issued an Order Determining Whistleblower Award Claims (the “Order”).   The Order grants “Claimant 1” a $600,000 award while completely denying any award to “Claimant 2.” The heavily-redacted Order makes it impossible to determine what Covered Action and monetary sanction triggered the claims for a Whistleblower Award.  You can quickly tell when reading the Order, however, that things are not going to go well for Claimant 2 when the commission notes early on in the Order that:

“Enforcement staff responsible for the Covered Action confirmed that they did not receive any information from Claimant 2, nor did they have any communications with Claimant 2, before or during the investigation.”

Claimant 2’s theory, we learn, is that his tip did not have to be communicated directly to the Enforcement Staff responsible for the Covered Action.  It turns out that Claimant 2 provided information about a company to Enforcement Staff in an entirely different regional office.  An investigation was commenced and Enforcement Staff was unable to substantiate Claimant 2’s claims.  The investigation was closed without commencement of an enforcement action.  The Commission pointedly defines the redacted company as the (“Unrelated Company”) and the investigation as the (“Unrelated Investigation”).

It has long been clear that the SEC opposes 12b-1 fees, the fees that funds use to compensate investment advisors for their sales and marketing efforts.  For the past two decades, the SEC has embarked upon various attempts to repeal Rule 12b-1 or render it meaningless.  The SEC, however, has never been able to build the political will to amend or repeal Rule 12b-1 and it remains the law.

The SEC’s latest attack on 12b-1 is a classic example of rule-making by enforcement.  On February 12, 2018, the SEC issued a press release announcing its new Share Class Selection Disclosure Initiative (SCSD Initiative).  The SCSD Initiative relies on Section 206 of the Investment Advisers Act of 1940 (the “Advisers Act”) which imposes a fiduciary duty on investment advisers to act in their clients’ best interests, including an affirmative duty to disclose all conflicts of interest.  When an adviser receives 12b-1 fees from a mutual fund it presents a possible conflict of interest if a less expensive share class is available.  Prior to the SCSD Initiative, the industry standard was to disclose this conflict of interest in a straight forward manner.

The SCSD Initiative and subsequent guidance put out through FAQs has effectively amended 12b-1 by requiring disclosure of:

If you are the target of an investigation by the Securities and Exchange Commission, do not assume it will go away on its own. Instead, it may linger for months or years, all the while you face the possibility of fines, loss of license and your job or business, and the possibility of criminal charges if the SEC refers your matter to the Department of Justice. When this happens, the smart thing to do is to become aware of the investigation as soon as possible and hire legal representation. If you need to know more about SEC investigations, here are some important details to keep in mind, as well as how New York securities attorneys at Herskovits PLLC can help you navigate this complex process.

Tips and Referrals

For an SEC investigation to begin, the agency usually relies on tips and referrals from various sources, such as:

If you exchanged an official email with any SEC employee recently, you have seen the banner for Howeycoins Travel Network. And if you like to get in on a profitable deal, you probably thought, “well, if the SEC is endorsing them, these guys must be legit.” Perhaps you clicked on the banner to see what it was all about. If so, you must have been surprised at what you found.

Pre-initial coin offering deals usually promise spectacular returns, and HoweyCoins are not the exception. The attractive website for the ICO shows alluring scenes from luxury travel destinations. As you scroll down, you will quickly find that HoweyCoins will yield returns of at least 1 percent daily.

If you are not sold yet, the site quickly boasts, “The average registered coin return over a two month period in 2017 was an amazing 72%.”

Wells Fargo will pay $480 million to resolve fraud and insider trading allegations brought in a class action in California.

According to the plaintiffs, top executives at the bank engaged in insider trading after employees were directed to create millions of accounts under customer names, without the customers’ consent.

While litigation in California state court continues, the settlement will end the federal lawsuit.

Jehu Hand, a California-based attorney has been found guilty of securities fraud and is now awaiting sentencing. Following his trial, which took place in Boston, the defendant could be facing  up to eight years in prison.

The federal jury found that Hand conspired with his two brothers to run a pump-and-dump scheme by falsifying documents. According to the evidence presented during trial, the defendant and his co-conspirators fraudulently obtained $1.5 million through the scheme.

Hand and his brothers allegedly misrepresented Greenway Technology Inc. as a company with tremendous potential, which was about to acquire lucrative gay-friendly hotels in California and Nevada.

In a complex and shifting global scenario, the financial industry faces numerous challenges relating to anti-money laundering (AML) compliance. In a rapidly changing regulatory environment, within an unstable geopolitical context, financial institutions have to adapt to new technologies and innovative operating models.

As regulators worldwide coordinate to increase transparency and target wrongdoers, AML has taken center stage when it comes to compliance programs.

The 2017 Global Anti-Money Laundering and Sanctions Compliance Survey by AlixPartners shed light on many observable industry trends. A survey of 361 financial institutions, the report is a valuable tool for anyone trying to understand the industry’s current perceptions and expectations.

Last week, federal prosecutors charged Delaney Equity Group with participating in a fraudulent scheme involving the sale of bogus shell company shares. The Florida-based broker-dealer allegedly conspired to sell shares of fraudulent microcap companies to investors at a profit. The Department of Justice has accused the defendant of “unlawfully” selling “unregistered securities” between late 2009 and mid 2013.

According to prosecutors, Delaney Equity Group recruited individuals to pose as CEOs for shell companies which were used to fraudulently register securities with the SEC. In order to be able to market shares of the shell companies, Delaney and the straw CEOs allegedly submitted numerous fraudulent documents to government agencies. Among other falsehoods, the documents stated that the ‘CEOs’ owned a control block of restricted shares in their respective companies.

Delaney Equity Group could be fined up to $500,000 or double the proceeds from the misconduct. The case has been assigned to Miami District Judge Cecilia M. Altonaga.

The over 80 subpoenas recently issued to companies in the cryptocurrency sector have provided a logical corollary to the agency’s many warnings about ICOs potential violations of security laws.

The time for warnings is over. Now, the SEC’s intentions have evolved into enforcement actions, forever changing the scenario for new cryptocurrency initiatives.

In late 2017, Bitcoin’s spectacular rise in value lured both would-be cryptocurrency developers and new investors with the promise of returns higher than 2,000 percent. Although the digital currency’s value eventually stabilized, these price fluctuations and the surge in ICO initiatives raised alarm among regulators, who pointed to issues of valuation, liquidity, and arbitrage.

Hip-hop star Shawn Carter, aka Jay-Z, has just received a subpoena to appear in court after he failed to testify in connection with the SEC’s probe into Iconix Brand Group’s accounting practices.

Iconix acquired intangible assets from Jay-Z’s clothing brand Rocawear in 2007, which boasted $700 million in annual sales at the time. The agreement was that Carter and Iconix would work on the joint development of new brand opportunities following the sale. But Iconix went on to announce two write-downs of Rocawear, one in 2016, of $169 million, and another one of $34 million earlier this year.

Iconix, which describes itself as, “the world’s premier brand management company and owner of a diversified portfolio of strong global consumer brands across fashion, sports, entertainment, and home,” markets retail brands such as Joe Boxer, Candie’s, Bongo, Pony, Umbro, and Material Girl.

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