Securities Law, NYSE, NASDAQ & OTC Markets Listings & Compliance

The Securities and Exchange Commission filed charges against a Buffalo, New York, investment advisory firm and its owner for misleading firm clients about its association with a barred investment adviser, who is also being charged for violating the bar. The SEC’s complaint alleges that in 2014, Walter Grenda sold his investment advisory assets, including his longstanding client base, to Grenda Group LLC and his son, Gregory Grenda, in anticipation of a negative outcome in an SEC fraud investigation.

In 2015, the SEC barred Walter Grenda from association with an investment adviser, but the SEC alleges that Walter Grenda continued to associate with Grenda Group by meeting with a prospective client and current clients in the firm’s offices, as well as making discretionary changes to clients’ investment accounts. The complaint alleges that Grenda Group and Gregory Grenda permitted Walter Grenda’s association with the firm, failed to disclose his bar to their clients, and made misleading statements to clients who inquired about Walter Grenda’s bar. The SEC further alleges that Walter Grenda impersonated a Grenda Group client on a call to the firm’s broker-dealer and, while subject to the associational bar, Walter Grenda repeatedly impersonated his son on calls to the firm’s broker-dealer, after which the broker-dealer terminated its relationship with Grenda Group. The complaint alleges that Grenda Group later made misleading statements to clients and failed to disclose material facts about the termination. Read More

The Securities and Exchange Commission announced that Paris-based pharmaceutical company Sanofi has agreed to pay more than $25 million to resolve charges that its Kazakhstan and the Middle East subsidiaries made corrupt payments to win business.

According to the SEC’s order, the schemes spanned multiple countries and involved bribe payments to government procurement officials and healthcare providers in order to be awarded tenders and to increase prescriptions of its products. In Kazakhstan, distributors were used as part of a kickback scheme to generate funds from which bribes were paid to officials to ensure that Sanofi was awarded tenders at public institutions. The kickbacks were tracked in internal spreadsheets where they were coded as “marzipans.” In the Middle East, various pay-to-prescribe schemes were used to induce healthcare providers to increase their prescriptions of Sanofi products. Read More

The Securities and Exchange Commission charged a professional football player and a former investment banker with insider trading in advance of corporate acquisitions facilitated through coded text messages and FaceTime conversations. The SEC alleges that after meeting at a party, Mychal Kendricks began receiving illegal tips from Damilare Sonoiki, an analyst at an investment bank who had access to confidential, nonpublic information about upcoming corporate mergers. Mychal Kendricks allegedly made $1.2 million in illegal profits by purchasing securities in companies that were soon to be acquired and then selling his positions after the deals were publicly announced, in one instance generating a nearly 400 percent return on his investment in just two weeks.

According to the SEC’s complaint, Mychal Kendricks rewarded Sonoiki for his tips and other assistance, which included setting up an online brokerage account that both men could access, by providing cash kickbacks, free NFL tickets, and an evening on the set of a pop star’s music video in which Mychal Kendricks made a cameo appearance. Read More

The Securities and Exchange Commission announced that Moody’s Investors Service Inc., one of the nation’s largest credit ratings agencies, has agreed to pay a total of $16.25 million in penalties to settle charges involving internal control failures and failing to clearly define and consistently apply credit rating symbols. This marks the first time the SEC has filed an enforcement action involving rating symbol deficiencies.

Moody’s agreed to pay $15 million to settle charges of internal controls failures involving models it used in rating U.S. Residential Mortgage-Backed Securities (RMBS) and will retain an independent consultant to assess and improve its internal controls. Moody’s separately agreed to pay $1.25 million and to review its policies, procedures, and internal controls regarding rating symbols. Moody’s did not admit or deny the SEC’s charges.

According to the SEC’s order in the internal controls proceeding, Moody’s failed to establish and document an effective internal control structure as to models that Moody’s had outsourced from a corporate affiliate and used in rating RMBS from 2010 through 2013. Moreover, Moody’s failed to maintain and enforce existing internal controls that should have been applied to the models. Ultimately, Moody’s corrected more than 650 RMBS ratings with a notional value exceeding $49 billion, due, in part, to errors in the models. Also, in 54 instances, Moody’s failed to document its rationale for issuing final RMBS ratings that deviated materially from model-implied ratings. Read More

The Securities and Exchange Commission announced that Legg Mason Inc. will pay over $34 million to resolve an SEC charge that the company violated the Foreign Corrupt Practices Act (FCPA) in a scheme to bribe Libyan government officials.  

According to the SEC’s order, between 2004 and 2010, a former Legg Mason asset management subsidiary, Permal Group Inc., partnered with a French financial services company to solicit investment business from Libyan state-owned financial institutions. These entities engaged in a scheme to pay bribes to Libyan government officials through a Libyan middleman in order to secure investments. As a result of the corrupt scheme, Legg Mason, through its Permal subsidiary, was awarded business tied to $1 billion of investments for the Libyan financial institutions, earning net revenues of approximately $31.6 million. According to the SEC’s order, the middleman used the term “cooking” to describe his ability to cause Libyan government officials to invest by any means necessary, including bribes.

“Companies must take adequate steps to identify and mitigate the risks of bribery and corruption present in their global business. Those risks are particularly acute when, as here, agents and middlemen are used as part of a company’s efforts to obtain business with government clients,” said Charles Cain, Chief of the Enforcement Division’s FCPA Unit.

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The Securities and Exchange Commission announced that in fiscal year 2019 the fees that public companies and other issuers pay to register their securities with the Commission will be set at $121.20 per million dollars.

The securities laws require the Commission to make annual adjustments to the rates for fees paid under Section 6(b) of the Securities Act of 1933 and Sections 13(e) and 14(g) of the Securities Exchange Act of 1934. The Commission must set rates for the fees paid under Section 6(b) to levels that the Commission projects will generate collections equal to annual statutory target amounts. The Commission’s projections are calculated using a methodology developed in consultation with the Congressional Budget Office and the Office of Management and Budget. The statutory target amount for fiscal year 2019 is $660 million.  The annual adjustment to the fee rate under Section 6(b) also sets the annual adjustment to the fee rates under Sections 13(e) and 14(g). Read More

The Securities and Exchange Commission obtained permanent officer-and-director and penny stock bars against the founder of a company who perpetrated a fraudulent initial coin offering (ICO) to fund oil exploration and drilling in California.

According to the SEC’s order, David T. Laurance and Tomahawk Exploration LLC attempted to raise money through the sale of blockchain-based digital tokens called “Tomahawkcoins.” The SEC’s order finds that the defendants’ promotional materials used inflated projections of oil production that were contradicted by the company’s own internal analysis and misleadingly suggested that Tomahawk possessed leases for drilling sites when it did not.  According to the order, the materials described Laurance as having a “flawless background” without disclosing his prior criminal conviction for his role in fraudulent securities offerings. The order also finds that Tomahawk claimed that token owners would be able to convert the Tomahawkcoins into equity and potentially profit from the anticipated oil production and secondary trading of the tokens.  Although the ICO failed to raise money, Tomahawk issued tokens through a “Bounty Program” in exchange for online promotional services.   Read More

On July 16, 2018 The Securities and Exchange Commission charged the former CEO of Energy XXI Ltd. John Schiller with hiding more than $10 million in personal loans that he obtained from company vendors and a candidate for Energy XXI’s board.  At the time of the alleged misconduct, Energy XXI was NASDAQ-listed and one of the largest oil and gas producers on the Gulf of Mexico shelf.

According to the SEC’s complaint, CEO John D. Schiller Jr. maintained an extravagant lifestyle by using a highly leveraged margin account secured by his Energy XXI stock.  The complaint alleges that in 2014, when faced with significant margin calls, Schiller extracted more than $7.5 million in undisclosed personal loans from company vendors in exchange for business contracts with Energy XXI.

Schiller also is alleged to have obtained a $3 million loan from Norman Louie, a portfolio manager at Energy XXI’s largest shareholder Mount Kellett Capital Management LP.  Louie was appointed to Energy XXI’s board just weeks later.  The SEC alleges that Schiller did not disclose the vendor loans or the Louie loan to Energy XXI.

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The Securities and Exchange Commission announced on Aug. 6, 2018 that it has updated its list of unregistered firms that use misleading information to primarily solicit non-U.S. investors, adding 16 soliciting entities, four impersonators of genuine firms, and nine bogus regulators.

The updates by the SEC Division of Enforcement’s Office of Market Intelligence, in coordination with the SEC’s Office of Investor Education and Advocacy and the Office of International Affairs, are part of the agency’s continuing effort to protect retail investors.

The SEC’s list of soliciting entities that have been the subject of investor complaints, known as the Public Alert: Unregistered Soliciting Entities (PAUSE) list, enables investors to better inform themselves and avoid being a victim of fraud. The latest additions are firms that the SEC staff found were providing inaccurate information about their affiliation, location, or registration. Under U.S. securities laws, firms that solicit investors generally are required to register with the SEC and meet minimum financial standards and disclosure, reporting, and record keeping requirements. Read More

The Securities and Exchange Commission announced on July 20, 2018 that two U.S.-based subsidiaries of Deutsche Bank AG will pay nearly $75 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).

The case stems from a continuing SEC investigation into abuses involving pre-released ADRs. In proceedings against Deutsche Bank Trust Co. Americas, a depositary bank, and Deutsche Bank Securities Inc. (DBSI), a registered broker-dealer, the SEC found that their misconduct allowed pre-released ADRs to be used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.

ADRs – U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank. The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. Information about ADRs is available in an SEC Investor Bulletin.

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On July 23, 2018 The Securities and Exchange Commission charged Mizuho Securities USA LLC for its failure to safeguard information pertaining to stock buybacks by its issuer customers.  Mizuho failed to maintain and enforce policies and procedures aimed at preventing the misuse of material nonpublic information, including maintaining effective information barriers between different trading desks and requiring employees to keep client information confidential.  Mizuho agreed to settle the charges and will pay a $1.25 million penalty.

According to the SEC’s order, during a two-year period, Mizuho traders regularly disclosed material nonpublic customer buyback information to other traders and Mizuho’s hedge fund clients.  That information included the identity of the party placing the order, the order size, limit price, and indications that the orders were buyback orders. Such information was routinely communicated across trading desks, notwithstanding that during the relevant period Mizuho executed over 99.8 percent of all buyback orders by using algorithms, rather than through trader-negotiated open market trades.

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The Securities and Exchange Commission announced that Citigroup has agreed to pay $10.5 million in penalties to settle two enforcement actions involving its books and records, internal accounting controls, and trader supervision. The charges stem from $81 million of losses due to trader mismarking and unauthorized proprietary trading and $475 million of losses due to fraudulently-induced loans made by a Mexican subsidiary.  

In the first action, Citigroup Inc. and its U.S. broker-dealer subsidiary Citigroup Global Markets Inc. (CGMI) agreed to pay a $5.75 million penalty to settle charges of inaccurate books and records and CGMI’s failure reasonably to supervise traders. Citigroup and CGMI settled without admitting or denying the SEC’s findings and agreed to cease and desist from future violations.  

The SEC found that from 2013 to 2016, three CGMI traders mismarked illiquid positions in certain proprietary accounts they managed, in two cases covering losses from widespread unauthorized trading. The discovery of the mismarking led to the termination of the traders and the recognition of $81 million in losses not previously reflected in CGMI’s or Citigroup’s books and records. The SEC’s order finds that CGMI failed to detect the traders’ misconduct earlier because it had inadequate supervisory procedures and systems and did not independently verify the valuations of the mismarked positions.  Read More

The Securities and Exchange Commission announced that Ameriprise Financial Services Inc. will pay $4.5 million to settle charges that it failed to safeguard retail investor assets from theft by its representatives. 

According to the SEC’s order, five Ameriprise representatives committed numerous fraudulent acts, including forging client documents, and stole more than $1 million in retail client funds over a four-year period. The SEC found that Ameriprise, a registered investment adviser and broker-dealer, failed to adopt and implement policies and procedures reasonably designed to safeguard investor assets against misappropriation by its representatives. 

The five representatives were based in Minnesota, Ohio, and Virginia, and three previously pled guilty to criminal charges. Each of the representatives was terminated by Ameriprise for misappropriating client funds. The SEC’s order found that Ameriprise has implemented a new system to safeguard clients’ money and that Ameriprise reimbursed all impacted clients for the losses they incurred due to the misconduct of the five representatives. Read More

The Securities and Exchange Commission announced that Merrill Lynch, Pierce, Fenner & Smith has agreed to pay approximately $8.9 million to settle charges that it failed to disclose a conflict of interest arising out of its own business interests in deciding whether to continue to offer clients products managed by an outside third-party advisory firm.  

The SEC’s order finds that the conflict of interest arose in Merrill Lynch’s handling of third-party products managed by a U.S. subsidiary of a foreign multinational bank, in which more than 1,500 of Merrill’s retail advisory accounts had invested approximately $575 million. According to the order, Merrill put new investments into these products on hold due to pending management changes at the third party, and Merrill’s governance committee planned to vote on a recommendation to terminate the products and offer alternatives to investors. According to the order, the third-party manager sought to prevent termination and contacted senior Merrill executives, including making an appeal to consider the companies’ broader business relationship. Following those communications, and in a break from ordinary practices, the governance committee did not vote and chose to defer action on termination. The governance committee later lifted the hold and opened the third-party products to new Merrill accounts. The SEC’s order found that Merrill failed to disclose to its clients the conflicts of interest in Merrill’s decision-making process.  Read More

The Securities and Exchange Commission charged the founder of San Francisco-based venture capital funds and his investment advisory firm with overcharging investors to fund personal projects, including sending millions of dollars to his own virtual reality production company.

The SEC’s complaint alleges that Michael B. Rothenberg, 34, marketed his advisory firm, Rothenberg Ventures LLC, as uniquely positioned to identify millennial entrepreneurs and invest in “frontier technology” companies. According to SEC filings, Rothenberg’s funds had nearly 200 investors and more than $64 million in assets. The SEC’s complaint alleges that over a three-year period, Rothenberg and his firm misappropriated millions of dollars from the funds, including an estimated $7 million of excess fees, which Rothenberg used to support personal business ventures he claimed were self-funded and to pay for private parties and events at high-end resorts and Bay Area sporting arenas. Read More

Have you ever played a penny stock?  Or invested in one you believed or hoped was real, perhaps even the Next Big Thing?  If so, you probably know the roads in Pennyland are full of potholes.  Many of the locals are promoters, and they’re aided, wittingly or not, by amateur pumpers who spread the word about hot new “picks” across the social media.  Both stress the potential for short term gains far greater than those achievable on the national exchanges.  They aren’t entirely wrong.  Penny stocks can be extremely volatile; they can run hundreds of percentage points for little reason, or for no reason at all.  

No stock quadruples or quintuples in price over a few days and continues to rise.  What goes up really does come down, usually as quickly as it went up.  When touts say a stock is about to “go parabolic,” that’s often literally the case.  It may well return to the range it traded in before it was pumped.  That process, repeated countless times every year in the OTC market, is called a “pump and dump.”  Pumps and dumps are considered by the SEC to be illegal securities manipulation.  Unfortunately, only the most blatant are investigated by the agency, and their ringleaders eventually sanctioned.  Taken by surprise, the inexperienced and unwary find themselves trapped, stuck with stock they’ll only be able to sell if another pump and dump is launched at some future date.  Even seasoned traders can miscalculate.  If they jump on board too late, and the play peaks too early, they may end up with unexpected losses. Read More

Securities and Exchange Commission Chairman Jay Clayton announced that an additional investor roundtable to discuss the Commission’s recently proposed rules regarding the obligations of financial professionals to investors will be held in Baltimore on the evening of Sept. 20, 2018.  Commissioners Kara Stein and Robert Jackson are expected to join Chairman Clayton and senior SEC staff at this event.

Six roundtable discussions already have taken place in Houston, Atlanta, Miami, Washington, D.C., Philadelphia, and Denver.  In these roundtables, Main Street investors have had the opportunity to speak directly with Chairman Clayton and senior staff about the SEC’s efforts to enhance retail investor protection and promote choice and access to a variety of investment services and products.  

“These investor roundtables have been incredibly valuable, and I have enjoyed engaging directly with our Main Street investors.  It is important to me that we hear retail investors’ perspectives on how our proposed rules can better align standards of conduct with what they expect of their investment professionals,” said Chairman Clayton.  “We have had many insightful discussions and received some great ideas.  I look forward to speaking with more investors in Baltimore about their experiences.” Read More

The Securities and Exchange Commission announced settled charges with two former top officers of Endurance International Group Holdings Inc. for overstating the company’s subscriber base, and charged a former executive of Constant Contact Inc. for making similar misrepresentations. 

The SEC’s orders find that Endurance’s former chief executive Hari Ravichandran and former chief financial officer Waruna Ellawala knowingly provided inflated subscriber figures for the Massachusetts-based online marketing company.  The SEC also filed a complaint in U.S. District Court in Massachusetts alleging that former Constant Contact CFO Harpreet Grewal hid its slowing customer growth from investors and inflated its publicly reported subscriber numbers.  Constant Contact became a subsidiary of Endurance after it was acquired by it in 2016.

The SEC filed a settled enforcement action in June against Endurance and Constant Contact in which Endurance agreed to pay an $8 million penalty.  In the latest action, Ravichandran and Ellawala agreed to settle the charges without admitting or denying them and pay $1.38 million and $34,000 respectively in disgorgement, interest, and penalties.  They also agreed to cease and desist from further violations of various antifraud, reporting, books and records, and internal controls provisions of the federal securities laws.  Read More

The Securities and Exchange Commission announced that Barry D. Miller, Associate Director of Disclosure Review and Accounting in the Division of Investment Management, will retire from the SEC at the end of this month after more than 40 years of public service, including more than 30 years of service at the SEC.

As an associate director overseeing the division’s disclosure and accounting review programs, Mr. Miller has been primarily responsible for the implementation of disclosure and accounting policy that impacts nearly 16,000 investment companies, including open-end, closed-end, exchange-traded funds, unit investment trusts, and business development companies. His work included overseeing the review of many novel funds involving new and unique structures and strategies, including some of the first exchange-traded funds. Mr. Miller also provided key counsel on all rules that impact or include disclosure and accounting requirements, from managing the overhaul of mutual fund disclosures following the 2009 “summary prospectus” reforms to building a new review system for fund annual reports as required by the Sarbanes-Oxley Act. Mr. Miller also has overseen the modernization of how the Division reviews fund disclosures, including incorporating the use of data to target key issues and increase the efficiency of the review process. Read More

On July 13, 2018 The Securities and Exchange Commission charged a stock promoter and four others involved in an alleged series of microcap fraud schemes that were foiled by FBI undercover work and an SEC trading suspension.

According to the SEC’s complaint filed in federal court in southern California on July 6, stock promoter Gannon Giguiere took control of a purported medical device company. Giguiere, together with a Cayman Islands-based broker, then allegedly engaged in a matched trading scheme that caused the company’s share price to rise from zero to $1.20 per share.

Giguiere and the brokerage owner, Oliver-Barret Lindsay, allegedly coordinated their matched trading through an individual who turned out to be an FBI cooperating witness. According to the complaint, despite extensive encrypted communications, the defendants were caught by an undercover FBI operation that recorded their communications, with Lindsay going so far as to tell an individual cooperating with the FBI, “I’m a little hesitant about typing all of these details into this app. … You can just imagine if it finds its way somewhere it’s fairly incriminating.” According to the complaint, the pair’s plan to dump millions of shares in the purported medical device company was thwarted when, this past March, the SEC suspended trading in the securities of the purported medical device company.

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Former CEO Kevin Modany and former CFO Daniel Fitzpatrick are barred from holding senior positions at public companies and ordered to pay penalties in the settlements filed in federal court in Indiana. “Holding individuals accountable – particularly senior executives – is a critical focus of our enforcement program,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “These settlements, entered into on the eve of trial after years of litigation, reflect our commitment to this accountability.”

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