RIA Compliance Blog
On June 3, 2020, the U.S. Securities and Exchange Commission filed suit against a company claiming to be an internet-only investment adviser, based on the firm’s failure to respond to a request for documents and information, in violation of the Investment Advisers Act and rules. The company, E*Hedge Securities, Inc., is registered as an investment adviser with the SEC. The complaint also alleges, however, that E*Hedge is not properly registered, as it is ineligible to claim the basis for registration of an “internet only” adviser under Rule 203A-2(e), and does not meet any other qualification for federal registration. E*Hedge’s President, Devon W. Parks, is also named as a defendant in the complaint.
The complaint alleges that in March 2020, E*Hedge began marketing investment opportunities relating to COVID-19 related products and services, particularly tests and treatments. The firm began operating a website at www.Covid19invest.com. It also used social media websites for the same purposes. Together the websites touted investments in companies involved in manufacturing vaccines, diagnostic tests, and treatments for COVID-19. E*Hedge’s website identifies the company’s primary business is to provide a platform for initial public offerings, offerings under Regulation A+, and private offerings under Rule 506 (c).
The complaint portrays a history of regulatory avoidance by E*Hedge. In October 2017, the SEC’s Los Angeles office Examination Staff attempted to serve notice of an examination by telephone and delivery, but the Staff was unable to accomplish delivery by either method, thus thwarting the attempted examination. However, on April 14, 2020, the Exam staff successfully contacted Parks by telephone and announced the commencement of an examination. Follow up written correspondence was sent via encrypted mail service to an email address Parks provided during the phone call. An initial document request letter requested the production of client information, advisory agreements, advertisements, written policies and procedures, and other items. Documents were due to be produced by April 22, 2020. However, Parks claimed to be unable to access the secure email “due to the COVID-19 pandemic,” according to the complaint.
Eventually, Parks acknowledged receipt of the document request and participated in a call with the SEC Staff. Parks informed the SEC that E*Hedge was a “developmental stage company” that had no clients. Parks, however, refused to answer any other questions, requesting instead that the SEC submit written questions. He also asked for an extension of time to produce the requested documents. The SEC complied with both requests, submitting written questions, and extending the time for E*Hedge to respond. Nevertheless, neither Parks nor E*Hedge ever responded.
During this period, Parks also claimed that the Executive Stay-At-Home Order issued by the state of Florida precluded him from answering any of the questions or producing documents. E*Hedge still managed, however, to publish new blog posts and host a webinar between late April and late May 2020.
In its complaint, the SEC alleges that E*Hedge violated the Advisers Act and Rules by: (1) failing to produce records; (2) registering with the SEC in violation of the registration prohibition for ineligible investment advisers. Parks is also charged with aiding and abetting E*Hedge’s violations. The complaint seeks an order of expedited discovery and the imposition of civil penalties, among other things.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.