Prudential Regime For UK Investment Firms | Compliance Consulting

The Compliance and Regulatory Consulting practice highlights various enforcement matters from the second quarter of 2020.

SEC Charged Husband and Wife in Insider Trading Scheme

On May 4, 2020, the SEC charged a husband and wife in a multi-million-dollar insider trading scheme involving the securities of a pharmaceutical company.

According to the SEC's complaint, filed in federal district court in California, a husband and wife generated profits of approximately $8.5 million by trading in the securities of a pharmaceutical company in advance of an announcement about the company's acquisition. The complaint alleged that the couple obtained confidential information about the acquisition directly or indirectly from a friend and neighbor whose company competed in the bidding process to acquire the pharmaceutical company. According to the complaint, the couple, who are now in China but resided in California at the time of the trading, attempted to evade detection by trading through accounts held in the names of relatives living in China. Between November 2015 and June 2016, these newly opened trading accounts amassed more than 1 million shares of the pharmaceutical company’s stock. On multiple occasions, the defendants' purchases were greater than 20% of the total trading volume in the company’s stock on that trading day, which they sold immediately following the acquisition announcement.

The SEC's complaint charged the couple with violating the antifraud provisions of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder, seeking disgorgement of ill-gotten gains plus interest, penalties and injunctive relief.

Read the SEC complaint here.

SEC Charged Multinational Financial Corporation with Providing Misleading Information to Retail Clients

On May 12, 2020, a multinational financial services corporation (multinational) agreed to settle charges that it provided misleading information to clients in its retail wrap fee programs. The multinational agreed to pay a $5 million penalty that will be distributed to harmed investors.

A wrap fee program generally involves an investment account where you are charged a single, bundled, or “wrap” fee for investment advice, brokerage services, administrative expenses, and other fees and expenses. According to the SEC’s order, while the multinational promised its wrap fee accounts as having a “transparent” fee structure, some managers sent client trades to third-party brokers causing clients to pay hidden fees. As a result of the multinational’s conduct, the order finds that certain clients were unable to assess the value of the services received in exchange for the wrap fee paid to the multinational.

Without admitting or denying the findings, the multinational consented to the SEC’s order, which found that the multinational violated provisions of the Investment Advisers Act of 1940. The SEC also imposed a $5 million penalty, a censure and a cease-and-desist order. The order creates a fair fund to distribute the penalty paid to harmed investors.

Read more here.

CFTC Files Charges in $20 Million International Binary Options and Digital Asset Fraud Scheme

On May 7, 2020, The CFTC announced the filing of a multi-million dollar fraud action in the U.S. district court for the Southern District of Florida, charging three individuals and three companies with fraudulently soliciting tens of millions of customers and prospective customers to open and fund off-exchange binary options and digital asset trading accounts.

The CFTC claims that for at least five years, the defendants defrauded customers by creating false marketing materials, which promised unrealistic profits with no risk of loss and circulated them via email spam and by making videos available online. According to the CFTC, over 59,000 customers opened and funded trading accounts as a result of these fraudulent marketing campaigns, which generated payments of over $20 million in commissions to the defendants.

“In its continuing litigation against the defendants, the CFTC seeks full restitution to defrauded individuals, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and permanent injunctions against further violations of the Commodity Exchange Act and CFTC regulations, as charged.” 1

Read more here.

SEC Charged Former Registered Representative with Defrauding Investors

The SEC charged a West Virginia-based former registered representative with conducting a $5.2 million fraudulent securities offering on April 16, 2020.

The SEC's complaint alleges that, between January 2014 and September 2018, the registered representative induced investors to purchase securities by making a series of materially false and misleading statements and omissions concerning the legitimacy of the investments and the use of investor proceeds. The registered representative allegedly failed to invest those proceeds as promised and instead comingled investor funds in bank accounts that he controlled. The registered representative allegedly used most of the funds for his benefit, including, among other things, private jet rentals, luxury purchases, dining and entertainment, while using the remainder to make Ponzi-like payments to earlier investors.

The SEC's complaint, filed in the federal district court in the Northern District of West Virginia, charged the registered representative with violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The complaint seeks a permanent injunction, disgorgement of ill-gotten gains, prejudgment interest and civil monetary penalties.

Read the SEC complaint here.

SEC Charged Investment Adviser Representative for Conducting Fraudulent “Cherry-Picking” Scheme

On April 28, 2020, the SEC announced charges against an investment adviser representative based in Palos Verdes Estates, California, for conducting a multi-year cherry-picking scheme that defrauded clients.

For five years, the investment adviser representative profited at his clients’ expense by cherry-picking profitable trades using an omnibus account, which was intended to facilitate purchases of securities for multiple client accounts. The representative allegedly delayed allocating the securities from the omnibus account to individual client accounts, until after he had observed the securities' price movement over the trading day. The representative allegedly disproportionately allocated profitable trades to his personal accounts and unprofitable trades to his clients' accounts. According to the complaint, this alleged misuse of his omnibus account enabled him to engage in riskless day-trading.

The SEC's complaint filed in federal court in Los Angeles charged the adviser with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933.

Read the SEC complaint here.

SEC Charged Private Equity Firm with Compliance Failures

The SEC announced on May 26, 2020, that a Los Angeles-based private equity firm and registered investment adviser agreed to pay $1 million to settle charges for failing to implement and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information.

The SEC’s order finds that, in 2016, the private equity firm invested several hundred million dollars in a public company through a loan and equity investment that allowed the firm to appoint a senior employee to the company’s board. The order finds that the private equity firm’s compliance policies failed to account for the special circumstances presented by having an employee serve on the portfolio company’s board, while that employee continued to participate in trading decisions regarding the portfolio company. According to the order, the private equity firm obtained potential material nonpublic information about the company, including through the firm’s representative on the company’s board, relating to changes in senior management, adjustments to the company’s hedging strategy, and decisions relating to the company’s assets, debt and interest payments. After receiving this information, the private equity firm purchased over 1 million shares of the company’s common stock, which was 17% of the publicly available shares. The order finds that the private equity firm did not require its compliance staff, before approving the trades, to sufficiently inquire and document, whether the board representative and members of his team possessed material nonpublic information relating to the portfolio company.

The SEC’s order finds that the private equity firm violated the compliance policies and procedures of Sections 204A and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the findings, the private equity firm consented to the entry of a cease-and-desist order and a censure, and to pay a civil penalty of $1 million .

Read the SEC order here.

SEC Awards Almost $2 Million to Whistleblower

On May 4, 2020, the SEC announced an award of nearly $2 million to a whistleblower whose information and assistance helped the agency bring a successful enforcement action and allowed investors to recover much of their money.

The SEC awarded approximately $450 million to 82 individuals since issuing its first award in 2012. All payments are made from an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. Whistleblower awards can range from 10% to 30% of the money collected when the monetary sanctions exceed $1 million.

Read whistleblower program statistics here.


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