Articles Tagged with Enforcement

Last year, the Securities and Exchange Commission announced that it was creating a Retail Strategy Task Force as part of the Enforcement Division’s continuing endeavors to shield retail investors.  The newly created Task Force has already in 2018 published an Investor Alert relating to Ponzi schemes, as discussed below.

The Enforcement Division has had “a long and successful history of bringing cases involving fraud targeting retail investors.”  In recent years, it has seen a substantial number of cases pertaining to fraud that impacted retail investors, such as the sale of structured products that were not suitable to the relevant retail investor and microcap pump-and-dump schemes.  The Retail Strategy Task Force will put into practice the education obtained from those cases in order to pinpoint “large-scale misconduct affecting retail investors.” Continue reading

Last month, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Valor Capital Asset Management, LLC, a registered investment adviser, and its owner, Robert Mark Magee.  The SEC’s Order alleges that between July 2012 and May 2015, Magee “disproportionately allocated profitable or less unprofitable trades from Valor’s omnibus trading account to his personal accounts, while disproportionately allocating unprofitable or less profitable trades to Valor client accounts,” a practice known as “cherry-picking.”  Valor and Magee each submitted offers of settlement in conjunction with the Order.

According to the SEC’s Order, Valor had discretionary authority pertaining to the client accounts that were in Magee’s cherry-picking scheme.  Since Magee was Valor’s sole owner and employee, he was tasked with making trades and allocations for Valor’s clients’ accounts.  The SEC alleged that over a three-year period Magee mainly distributed the most unprofitable trades to clients’ accounts and mainly distributed the most profitable or less unprofitable trades to his own account.  The SEC also alleged that whenever Magee bought a block of securities using Valor’s omnibus account, he would delay allocating the block of securities “until after the relevant security’s intraday price changed.”  If the price increased, Magee allegedly would make a sale and allocate the trade to his own account, obtaining a gain.  If the price decreased, Magee allegedly would sell the security that same day and allocate the trade to Valor clients, resulting in a loss.  Alternatively, he would hold the security and allocate the purchase to Valor clients, which gave them an unrealized first-day loss. Continue reading

Following its publication of a Risk Alert in late 2017 detailing findings from examinations of municipal advisers, the SEC’s Office of Compliance Inspections and Examinations (OCIE) continues to examine municipal advisers in 2018.  In 2014, OCIE established the Municipal Advisor Examination Initiative to perform an examination on municipal advisers who recently registered for the first time.  OCIE performed over 110 examinations in the course of the Initiative and found that many municipal advisers did not have adequate knowledge of regulatory requirements for municipal advisers.  As a result, many municipal advisers were found not to be in adequate compliance with regulatory requirements pertaining to registration, recordkeeping, and supervision.  OCIE hoped that in publishing the 2017 Risk Alert, municipal advisers will be compelled to evaluate their policies and procedures to find possible areas for improvement.

Municipal advisers are obligated to register with the SEC pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  The SEC established its municipal adviser registration rules in September 2013, and the rules became effective in July 2014.  The Dodd-Frank Act also established the Municipal Securities Rulemaking Board (“MSRB”), which exercises regulatory authority over municipal advisers.  OCIE’s examinations of municipal advisers covered “compliance with regulatory obligations including registration, statutory fiduciary standard of care, fair dealing, recordkeeping, and supervision, among other things.”  OCIE discovered that the most common deficiencies among municipal advisers related to registration, books and records, and supervision requirements. Continue reading

On February 26, 2018, the Securities and Exchange Commission issued an Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order against EquityStar Capital Management, LLC, an unregistered investment adviser, and its owner, Steven Zoernack.  According to the SEC’s Order, EquityStar and Zoernack offered and sold investment interests in two unregistered investment funds from about May 2010 to about March 2014.  The SEC’s Order alleges that in the course of making these offers and sales, EquityStar and Zoernack “made material misrepresentations and omissions and engaged in a fraudulent scheme involving this and other deceptive conduct.”

Zoernack was tasked with writing and publishing marketing materials for the funds that EquityStar managed.  In these marketing materials, Zoernack allegedly claimed that the funds’ manager, whose name was not disclosed, had “an impeccable and unblemished past record with the SEC.”  According to the SEC, however, Zoernack was in fact the manager, and he had “two criminal fraud convictions, had previously filed for bankruptcy, and had numerous money judgments and liens against him.”  The Order also claims that Zoernack made various efforts to hide his criminal record and negative financial history, including paying a search-engine manipulator to make positive information about him appear before negative information in search engine results. Continue reading

Susan A. Schroeder, the Executive Vice President and Head of Enforcement at the Financial Industry Regulatory Authority, recently discussed FINRA’s Enforcement Department’s day-to-day activities and goals at an event sponsored by the Securities Industry and Financial Markets Association (“SIFMA”).  Schroeder discussed FINRA’s efforts to combine two enforcement groups into one unit, as well as FINRA’s intention to continue to devote its time to “vigorous enforcement” despite calls for less regulation in Washington.

In early 2017, FINRA began what Schroeder described as “a comprehensive self-evaluation and organizational improvement initiative called FINRA360.”  Before FINRA360, FINRA employed two separate enforcement teams.  One was tasked with administering disciplinary events pertaining to trading-based matters discovered by FINRA’s Market Regulation oversight division.  The other was tasked with administering disciplinary events brought forward by FINRA’s other regulatory oversight divisions, such as Member Regulation and Corporate Financing.  FINRA concluded through FINRA360 that combining these two enforcement groups into one unit could bring about “more efficiency and greater effectiveness through better communication.” Continue reading

On November 15, 2017, Stephanie Avakian and Steven Peikin, the Co-Directors of the Securities and Exchange Commission’s Division of Enforcement, published the Division’s Annual Report for fiscal year 2017.  Avakian and Peikin emphasized the Division’s commitment to enforcing the federal securities laws in order to “combat wrongdoing, compensate harmed investors, and maintain confidence in the integrity and fairness of our markets.”  They also emphasized their goals of shielding investors, discouraging misconduct, and reprimanding and penalizing those who violate the federal securities laws.  To accomplish these goals, five core principles, according to Avakian and Peikin, will serve as the Division’s road map.

First, the Division will focus primarily on retail investors, who Avakian and Peikin believe are not only the most common market participants, but also are the most susceptible and least equipped to handle financial loss.  The Division plans to keep confronting violations of the securities laws that can have a strong impact on retail investors, such as accounting fraud, sales of unsuitable products, Ponzi schemes, and pump and dump schemes.  The Division has also established a Retail Strategy Task Force to formulate competent methods of confronting securities law violations that affect retail investors.  The Retail Strategy Task Force will work with the SEC’s examination staff and the Office of Investor Education and Advocacy to pinpoint risk areas common to retail investors. Continue reading

Earlier this year, Securities and Exchange Commission Chairman Jay Clayton appointed Stephanie Avakian and Steven Peikin as co-directors of the SEC’s Enforcement Division.  In an interview with Reuters, Avakian and Peikin expressed particular concern about cyber threats and how the SEC should make cybersecurity an enforcement priority.  According to Peikin, “The greatest threat to our markets right now is the cyber threat… That crosses not just this building, but all over the country.”

The SEC has expanded of investigations relating to cybercrimes.  There also appears to be an increase in incidents of hackers attempting to gain access to brokerage accounts.  In response, the SEC has begun obtaining statistics about cybercrimes to assess market-wide issues. Continue reading

On June 5, 2017, the United States Supreme Court, in a unanimous decision, ruled that disgorgement, a remedy that the SEC frequently utilizes to recover so-called “ill-gotten gains” from respondents in enforcement proceedings, is subject to 28 U.S.C. § 2642’s five-year statute of limitations for “an action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture.”  As discussed previously, the Supreme Court agreed to hear the underlying case, SEC v. Kokesh (“Kokesh”), after a split in the appellate judicial circuits over whether SEC disgorgement was a “penalty” subject to the five-year statute of limitations.

The Supreme Court’s decision in Kokesh is not the first time that the Supreme Court has placed limitations on the SEC’s enforcement powers.  In Gabelli v. SEC, a case from 2013, the Supreme Court ruled that civil monetary penalties were subject to the five-year statute of limitations.

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On January 13, 2017, the United States Supreme Court agreed to examine a case involving the Securities and Exchange Commission’s (“SEC’s”) ability to seek disgorgement of ill-gotten gains in fraud cases, including fraud cases involving investment advisers.  The case, Kokesh v. SEC, raises the issue of whether claims for disgorgement are subject to a five-year statute of limitations on civil penalties.  Oral arguments were heard by the Supreme Court in April.

The underlying case involves a New Mexico investment adviser named Charles R. Kokesh (“Kokesh”), who acted as an investment adviser to various funds organized as limited partnerships.  The SEC filed suit against Kokesh, alleging that from 1995 through 2006, Kokesh ordered the funds’ treasurer to take money from the funds to pay various expenses, including $23.8 million for salaries and bonuses to the funds’ officers, including Kokesh, $5 million for office rent, and $6.1 million characterized as “tax distributions.”  According to the Tenth Circuit, the payments violated the funds’ contracts because the contracts did not permit payments for salaries of the funds’ controlling persons, including Kokesh, until 2000.  The contracts also did not address bonus payments, and they only permitted payment of tax obligations if certain prerequisites were present.  A jury found that Kokesh violated the Investment Advisers Act of 1940, among other statutes, and the District Court ordered Kokesh to pay a $2.4 million civil penalty, plus disgorgement of $35 million based on amounts going back to 1995.

In response, Kokesh appealed to the Tenth Circuit Court of Appeals, arguing that the disgorgement was a penalty subject to a five-year statute of limitations under 28 U.S.C. § 2462.  The SEC argued that the disgorgement was remedial and not punitive, and therefore not a penalty subject to the statute of limitations.  The Tenth Circuit agreed with the SEC and held that disgorgement was not a penalty.

On April 10, 2017, the Financial Industry Regulatory Authority’s (“FINRA”) National Adjudicatory Council (“NAC”) updated FINRA’s Sanction Guidelines.  The purpose of these updates is to “ensure that the guidelines reflect recent developments in the disciplinary process, comport with changes in FINRA’s rules, and accurately reflect the levels of sanctions imposed in FINRA disciplinary proceedings.”

FINRA’s Sanction Guidelines are designed to acquaint FINRA-member firms with common securities-industry rule violations that take place and the variety of disciplinary sanctions that may be imposed because of those rule violations.  The Sanction Guidelines also serve as a tool to help FINRA’s adjudicators find suitable sanctions in disciplinary proceedings.  From time to time, FINRA conducts reviews of the Sanction Guidelines to account for “changes in FINRA’s rules” and to reflect accurately “the levels of sanctions imposed in FINRA disciplinary proceedings.” Continue reading