SEC Obtains Asset Freeze in Microcap Pump and Dump Scheme Targeting Elderly Retail Investors

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The Securities and Exchange Commission today announced an emergency action charging two individuals with running a pump and dump scheme targeting retail investors. The SEC also obtained an emergency court order freezing the defendants’ assets.

According to the SEC’s complaint, Florida resident Garrett M. O’Rourke and Maryland resident Michael J. Black worked together between 2016 and 2018 to fraudulently sell the stock of several microcap companies to investors, including elderly retail investors, using high pressure stock promotional campaigns. The SEC alleges that, as part of the scheme, O’Rourke aggressively touted the companies to prospective investors through unsolicited cold calls during which he repeatedly lied about his association with legitimate financial institutions and the prospects of the microcap companies. According to the complaint, O’Rourke also told prospective investors that he had their best interests in mind and that he had found promising investment opportunities for them. In actuality, however, O’Rourke was calling them to convince them to buy the stocks so that he and Black could sell their holdings in the same stocks for a profit. O’Rourke and Black also allegedly schemed to disguise their control over at least one of the microcap companies, EnviroTechnologies International, Inc., in order to facilitate their illegal sales of the company’s stock in the public securities market, generating millions of dollars in proceeds.

“The SEC continues to aggressively pursue microcap fraud, an ongoing source of harm to retail investors,” said John T. Dugan, Associate Director of Enforcement in the SEC’s Boston Regional Office. “Investors should beware of parties using the types of sales techniques alleged in our complaint, including unsolicited calls and high-pressure sales tactics.”

“We were able to halt O’Rourke’s and Black’s scheme and freeze their assets despite their elaborate attempts to conceal their conduct using overseas trading platforms and a fictitious name,” said Lara Shalov Mehraban, Associate Regional Director of Enforcement in the SEC’s New York Regional Office.

The SEC’s complaint, filed on July 17, 2019, in U.S. District Court for the Eastern District of New York, charges Black and O’Rourke with violating the antifraud and registration provisions of the federal securities laws. In addition to the asset freeze and other temporary relief obtained, the SEC is seeking permanent injunctions, return of allegedly ill-gotten gains with prejudgment interest, civil penalties, and penny stock bars.

In a parallel criminal case, the U.S. Attorney’s Office for the Eastern District of New York today announced criminal charges against O’Rourke.

Investors can find additional information about pump-and-dump scams, including the warning signs of fraud, on Investor.gov. The Office of Investor Education and Advocacy and Division of Enforcement’s Retail Strategy Task Force have also issued Investor Alerts about these types of fraud, including Investor Alert:  Fraudulent Stock Promotions, Investor Alert: Don’t Invite Investment Scams to Find You, and Investor Alert: Beware of Stock Recommendations on Investment Research Websites.

The SEC’s investigation was conducted by Trevor Donelan, Eric Forni, Kathy Shields, and Amy Gwiazda of the Boston Regional Office, and Rhonda Jung, Melissa Coppola, and Sandeep Satwalekar of the New York Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Offices for the Eastern District of New York and District of Massachusetts, the Federal Bureau of Investigation, the Royal Canadian Mounted Police, the British Columbia Securities Commission, the Malta Financial Services Authority, the Mauritius Financial Services Commission, the Hong Kong Securities and Futures Commission, the Monetary Authority of Singapore, and the Financial Industry Regulatory Authority.

SEC Press Release

— Looking for a securities lawyer for litigation, arbitration or an SEC or FINRA Investigation?, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from The Securities Law Home Page – SECLaw.com

SEC Charges Portfolio Manager with Mispricing Fund Investments

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The Securities and Exchange Commission today announced settled administrative proceedings against Swapnil Rege, a North Brunswick, New Jersey portfolio manager and trader, for mispricing private fund investments, resulting in a large personal bonus.

According to the SEC’s order, from June 2016 to April 2017, while employed by the fund’s adviser, Rege manipulated the inputs he used to value interest rate swaps and swap options to create the false impression that his investments for the fund were profitable. Rege’s conduct, the SEC’s order finds, artificially inflated the fund’s reported returns and caused the fund to pay too much in fees. Rege took steps to conceal his mispricing from the fund’s adviser. Because of Rege’s inflated valuations, he received a $600,000 bonus. The order states that the adviser ultimately fired Rege, closed the fund, and returned the excessive management fees to the fund.

“Rege overvalued fund assets to benefit only himself and then tried to cover it up,” said C. Dabney O’Riordan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Today the SEC, along with our colleagues at the Commodity Futures Trading Commission, are holding him accountable for his misconduct, which harmed both the fund and its investors.”

The SEC’s order finds that, based on the above conduct, Rege aided and abetted and caused the adviser’s violations of the antifraud provisions of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Without admitting or denying the findings in the SEC’s order, Rege agreed to a cease-and-desist order, an associational bar and investment company prohibition with a right to apply for reentry after three years, disgorgement of ill-gotten gains of $600,000 plus prejudgment interest, and a civil penalty of $100,000.

The Commodity Futures Trading Commission (CFTC) today also entered a consent order against Rege, involving substantially the same conduct as described in the SEC’s order. The CFTC’s order finds that Rege violated the Commodity Exchange Act and imposes a trading ban for a period of at least three years, disgorgement that will be deemed satisfied by the payment of disgorgement under the SEC’s order, and an additional penalty of $100,000.

The SEC’s investigation in this matter was conducted by Cynthia Storer Baran, Naomi Sevilla, Brian Fitzpatrick, and Robert Baker of the Asset Management Unit, with the assistance of Deena Bernstein of the Boston Regional Office.  The SEC acknowledges and appreciates the assistance and cooperation of the CFTC.

SEC Press Release

— Looking for a securities lawyer for litigation, arbitration or an SEC or FINRA Investigation?, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from The Securities Law Home Page – SECLaw.com

SEC Retail Strategy Task Force to Host Roundtable on Combating Elder Investor Fraud

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The Securities and Exchange Commission today announced that its Retail Strategy Task Force will host a roundtable on October 3 on combating elder investor fraud. The roundtable will focus on the types of fraudulent and manipulative schemes currently targeting elder investors. The roundtable also will explore views from a broad range of regulators and industry experts on potential steps regulators, broker-dealers, investment advisers, and others can take to identify and combat elder investor fraud.

The roundtable will be held at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C. and will begin at 9:30 a.m. ET. The roundtable will be open to the public and webcast live on the SEC’s website. Information on the agenda and participants will be issued shortly.

Members of the public who wish to provide their views on the topic may submit comments electronically or on paper. Please submit comments using one method only. Information that is submitted will become part of the public record of the roundtable and posted on the SEC’s website. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make publicly available.

Electronic Comments:

Use the SEC’s Internet submission form or send an email to rule-comments@sec.gov.

Paper Comments:

Send paper comments to Vanessa Countryman, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.

All submissions should refer to File Number 4-749 and the file number should be included on the subject line if email is used.

SEC Press Release

— Looking for a securities lawyer for litigation, arbitration or an SEC or FINRA Investigation?, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from The Securities Law Home Page – SECLaw.com

Morgan Stanley Sanctioned THREE MILLION DOLLARS for Discovery Abuse

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Finally, a FINRA Arbitration Panel who enforces their discovery award. In a customer arbitration, Morgan Stanley was ordered to produce documents related to the termination of one of its key employees. It did not do so. During the hearing, the Panel issued the same Order as was previously issued by the Chairperson for production of “all” related documents by midnight.

Morgan Stanley did not send the requested documents to Claimants’ counsel by midnight, nor did Respondent’s counsel provide opposing counsel with the courtesy of an email by midnight explaining why “all” the ordered documents were not being produced. The evidentiary hearing was delayed, for a second time, to permit both parties to provide oral argument on Morgan Stanley’s claim of “settlement privilege” which, to my knowledge, does not exist, and apparently wasn’t claimed prior to the hearing.

Morgan Stanley tried to get the Arbitrators to review the documents “in camera” which would be without the Claimant’s counsel seeing the documents, so they can decide if the privilege applied. The Arbitrators refused, ordered the withheld documents to be handed to Claimants’ counsel,
and not to the Panel for in camera review.

In its award, the Panel took note of the extreme prejudice Morgan Stanley’s failure of compliance caused Claimants’ counsel in preparing their case and asserting their claims without the withheld  documents which the Panel deemed were highly relevant to the dispute in question, the central figure of which was the terminated employee whose related documents were being withheld.

The Claimants alleged damages of  $2,739,792.00, and the Panel awarded $261,420.63, less than 10% of the amount of damages. We all know that a Claimant’s damage claim is the absolute maximum that they can ask for, and probably not the amount they expect to win, but an award of 10%?

But then, The Panel noted that Rule 12506(b)(2) of the FINRA Code of Arbitration Procedure related to parties’ obligation to “act in good faith when complying with subparagraph (1) of this rule. ‘Good faith’ means that a party must use its best efforts to produce all documents required or agreed to be produced. If a document cannot be produced in the required time, a party must establish a reasonable time frame to produce the document.” The Panel also took note of Rule 12212 of the Code related to sanctions: “(a) The panel may sanction a party for failure to comply with any provision in the Code, or any order of the panel or single arbitrator authorized to act on behalf of the panel. Unless prohibited by applicable law, sanctions may include, but are not limited to:

• Assessing monetary penalties payable to one or more parties; . . .”

The Panel continued and said “[i]n accordance with the above, after due deliberation and upon consideration of the negative effect that Respondent’s noncompliance with the Panel’s Orders had on its efforts to achieve a fair arbitration hearing, the Panel hereby orders Respondent to pay monetary sanctions to Claimants in the amount of $3,000,000.00.”

$261,000 in damages, and THREE MILLION in sanctions for discovery violations.

from The Securities Law Home Page

Former REIT Manager and Executives to Settle SEC Charges for more than $60 Million

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The Securities and Exchange Commission today charged AR Capital LLC, its founder Nicholas S. Schorsch, and its former CFO Brian Block with wrongfully obtaining millions of dollars in connection with two separate mergers between real estate investment trusts (REITs) that were sponsored and externally managed by AR Capital. The defendants agreed to settle the matter by, among other things, cumulatively agreeing to over $60 million in disgorgement, prejudgment interest and civil penalties.

According to the SEC’s complaint, between late 2012 and early 2014, AR Capital arranged for American Realty Capital Properties Inc. (ARCP), a publicly-traded REIT, to merge with two publicly-held, non-traded REITs. The SEC alleges that AR Capital, Schorsch, and Block, acting in breach of the relevant proxy disclosures, inflated an incentive fee in both mergers. As alleged, this improper calculation allowed them to obtain approximately 2.92 million additional ARCP operating partnership units as part of their incentive-based compensation. In addition, the complaint alleges that the defendants wrongfully obtained at least $7.27 million in unsupported charges from asset purchase and sale agreements entered into in connection with the mergers.

“REIT managers and their professionals have an obligation to tell the truth when making disclosures to shareholders about their compensation,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “As we allege in our complaint, AR Capital and its partners Schorsch and Block failed to do so and benefitted themselves greatly at the expense of shareholders.”

The SEC’s complaint, filed in federal district court in Manhattan, charges AR Capital and Block with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, and falsifying books and records of ARCP. The complaint charges Schorsch with negligently violating the antifraud provisions of Sections 17(a)(2) and (3) of the Securities Act of 1933, as well as books and records violations.

Without admitting or denying the allegations in the complaint, AR Capital, Schorsch, and Block have consented to entry of a final judgment that imposes permanent injunctions from violations of the charged provisions; orders combined disgorgement and prejudgment interest on a joint-and-several basis of over $39 million, which includes cash and the return of the wrongfully obtained ARCP operating partnership units; and imposes civil penalties of $14 million against AR Capital, $7 million against Schorsch, and $750,000 against Block. The settlements are subject to court approval.

The SEC’s investigation has been conducted by Victor Suthammanont, Janna I. Berke, Hane L. Kim, Karen Willenken, Nancy A. Brown, and Wendy B. Tepperman of the SEC’s New York office, and supervised by Sanjay Wadhwa.

SEC Press Release

— Looking for a securities lawyer for litigation, arbitration or an SEC or FINRA Investigation?, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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SEC and NASAA Explain Application of Securities Laws to Opportunity Zone Investments

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The Securities and Exchange Commission and the North American Securities Administrators Association (NASAA) have issued a summary that explains the application of the federal and state securities laws to opportunity zone investments. The “opportunity zone” program was established by the Tax Cuts and Jobs Act in December 2017 to provide tax incentives for long-term investing in designated economically distressed communities.

The summary is intended to help participants in the opportunity zone program understand the compliance implications for qualified opportunity funds under federal and state securities laws.

“The opportunity zone program has the potential to encourage investment and economic development in many areas across the country that are in need of capital. The staff statement released today will help market participants understand securities laws implications when seeking to raise capital for opportunity zones,” said SEC Chairman Jay Clayton. “In addition, today the SEC is issuing staff guidance regarding the ability of Main Street investors to participate in these offerings.”

“This new program provides an opportunity to strengthen investments in low-income communities and rural areas that traditionally struggled to attract the capital necessary to spur economic growth and job creation,” said Michael Pieciak, NASAA President and Vermont’s Commissioner of Financial Regulation. “This joint summary is a good example of state and federal regulators working collaboratively to address new compliance issues raised by an innovative program and thereby promoting our dual mission of protecting investors and helping facilitate capital formation.”

The summary discusses the opportunity zone program and when interests in qualified opportunity funds would be securities under federal and state securities laws. It also provides an overview of the SEC and state requirements relating to qualified opportunity funds and their securities offerings, broker-dealer registration, and considerations for advisers to a qualified opportunity fund.

The Opportunity Zones summary is available on the SEC’s website and NASAA’s website.

About the SEC:

The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

About NASAA:

Formed in 1919, NASAA is the non-profit association of state, provincial, and territorial securities regulators in the United States, Canada and Mexico. NASAA has 67 members, including the securities regulators in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. NASAA’s U.S. members protect investors through the enforcement of state securities laws, commonly known as “Blue Sky Laws.” For more information, visit: www.nasaa.org.

Contacts:

SEC

Office of Public Affairs

202-551-4120 

news@sec.gov

NASAA

Bob Webster, Director of Communications

202-737-0900

bw@nassa.org

SEC Press Release

— Looking for a securities lawyer for litigation, arbitration or an SEC or FINRA Investigation?, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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Nomura to Pay Misled Bond Customers $25 Million to Settle SEC Charges

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The Securities and Exchange Commission today instituted two related enforcement actions against Nomura Securities International Inc., which has agreed to repay approximately $25 million to customers for its failure to adequately supervise traders in mortgage-backed securities.   

The SEC orders find that Nomura bond traders made false and misleading statements to customers while negotiating sales of commercial and residential mortgage-backed securities (CMBS and RMBS).  According to the SEC’s orders, several Nomura traders misled customers about the prices at which Nomura had bought securities, the amount of profit Nomura would receive on the customers’ potential trades, and who currently owned the securities, with traders often pretending that they were still negotiating with a third-party seller when Nomura had, in fact, already bought a security.  The SEC’s orders further find that Nomura lacked compliance and surveillance procedures that were reasonably designed to prevent and detect this misconduct, which inflated the firm’s profits on CMBS and RMBS transactions at its customers’ expense.  The SEC previously filed charges against two CMBS and three RMBS traders at Nomura, whose misrepresentations are described in the SEC’s orders.

“Firms acting as dealers in opaque markets like those for CMBS and RMBS must take steps to prevent misleading communications with their customers,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. 

“These orders underscore that firms must have adequate supervisory procedures, particularly surrounding the sale of complex instruments,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “Weak procedures, such as those found here, may enable employee misconduct to go undetected.”

To settle the charges that it failed to reasonably supervise its traders, Nomura agreed in the two orders to be censured and to reimburse customers the full amount of firm profits earned on any RMBS or CMBS trades in which a misrepresentation was identified, paying over $20.7 million to RMBS customers and over $4.2 million to CMBS customers.  Nomura also agreed to pay a $1 million penalty in the RMBS-related case and a $500,000 penalty in the CMBS-related case.  Both orders note that the penalty amounts reflect substantial cooperation by Nomura during the SEC’s investigation, including remedial efforts by the firm to improve its surveillance procedures and other internal controls.

The SEC’s CMBS investigation and ensuing litigation was conducted by staff in the New York Regional Office, including Ladan Stewart, Chevon Walker, Richard Hong, and George Stepaniuk.  The case is being supervised by Mr. Wadhwa.  The RMBS investigation and ensuing litigation was conducted by staff in the Complex Financial Instruments Unit and the Boston Regional Office, including Susan Curtin, Kerry Dakin, Rua Kelly, Al Day and Celia Moore. The case is being supervised by Mr. Michael.

SEC Press Release

— Looking for a securities lawyer for litigation, arbitration or an SEC or FINRA Investigation?, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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CEO of BitFunder Exchange Gets 14 Months in Prison for Fraud, Obstruction

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Jon Montrol, the operator of defunct bitcoin-denominated trading platform BitFunder and WeExchange deposit service, was sentenced for securities fraud and obstruction of justice, according to a statement from the Southern District of New York.

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SEC Charges Securities Lawyer and Microcap Agent with Fraud

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The Securities and Exchange Commission today charged an Arizona-based attorney and a Missouri-based agent of microcap shell companies with securities fraud and registration violations.

According to the SEC’s complaint, from February 2015 to April 2017, attorney William Scott Lawler engaged in schemes to fraudulently transfer control over the shares of two publicly-traded shell companies to his client. The SEC alleges that Lawler represented his client on the purchase of Broke Out Inc. (BRKO) and the predecessor to Immage Biotherapeutics Corp. (IMMG). Microcap agent Natalie Bannister participated in the BRKO scheme by arranging the sale of BRKO to the client. Among other deceptive conduct, the complaint alleges that Lawler directed and Bannister engaged in sham transactions. Lawler also drafted false attorney-opinion letters, one of which Bannister submitted to a broker, to falsely represent that the stock of BRKO and IMMG could be immediately sold publicly once his client took control of the companies. Further, Lawler and Bannister ensured a market for the BRKO stock when Bannister placed phony bids and offers for the stock at Lawler’s direction. After Lawler’s client gained control of the shares of BRKO and IMMG, the stocks were subject to promotional campaigns with drastic increases in volume and price.  Brokerage accounts associated with Lawler’s client profited over $3 million before the Commission suspended trading.

“We allege that through deception and fraud Lawler and Bannister prevented broker-dealers from performing critical gatekeeping functions, which here resulted in public stock sales that never should have occurred,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “Attorneys must not misuse their specialized skills and knowledge of the securities laws to engage in fraud at the expense of unwitting investors.” 

The SEC has charged Lawler and Bannister with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and the registration provisions of Section 5(a) and 5(c) of the Securities Act; and, as to Lawler, market manipulation provision of Section 9(a) of the Exchange Act.

The SEC’s investigation has been conducted by Hane L. Kim, Jennifer K. Vakiener, Joseph Darragh, and Steven G. Rawlings in the New York Office. The litigation will be led by Kevin McGrath, Ms. Kim, and Ms. Vakiener. The case is being supervised by Lara S. Mehraban. The SEC appreciates the assistance of the Financial Industry Regulatory Authority, the Alberta Securities Commission, the Cyprus Securities and Exchange Commission, the Financial Conduct Authority of the United Kingdom, the Monetary Authority of Singapore, the Ontario Securities Commission, the Securities and Commodities Authority of the United Arab Emirates, the Securities and Futures Commission of Hong Kong, and the Securities Commission of Malaysia.

SEC Press Release

— Looking for a securities lawyer for litigation, arbitration or an SEC or FINRA Investigation?, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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