Articles Posted in SEC whistleblower

The Securities and Exchange Commission today announced that it has filed an emergency action and obtained temporary restraining order against two offshore entities conducting an alleged unregistered, ongoing digital token offering in the U.S. and overseas that has raised more than $1.7 billion of investor funds.Telegram and its subsidiary sold approximately 2.9 billion digital tokens called “Grams” at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 U.S. purchasers.

According to the SEC’s complaint, Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc. began raising capital in January 2018 to finance the companies’ business, including the development of their own blockchain, the “Telegram Open Network” or “TON Blockchain,” as well as the mobile messaging application Telegram Messenger.  Telegram promised to deliver the Grams to the initial purchasers upon the launch of its blockchain by no later than October 31, 2019, at which time the purchasers and Telegram will be able to sell billions of Grams into U.S. markets. The complaint alleges that defendants failed to register their offers and sales of Grams, which are securities, in violation of the registration provisions of the Securities Act of 1933.

“Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “We allege that the defendants have failed to provide investors with information regarding Grams and Telegram’s business operations, financial condition, risk factors, and management that the securities laws require.”

Federal court judge entered final judgments against New York-based brokerage firm Lek Securities Corp. and Chief Executive Officer Sam Lek, who were charged by the Securities and Exchange Commission with facilitating manipulative U.S. trading by a Ukraine-based firm over a three-year period.

The SEC’s complaint, filed in March 2017, alleged that Lek Securities and Sam Lek helped facilitate manipulative trading schemes by its customer, Avalon FA Ltd., headquartered in Kiev. According to the complaint, Avalon illegally profited from layering, which involved placing and canceling orders to trick others into buying or selling stocks at artificial prices, and cross-market manipulation, which involved buying or selling stocks to artificially impact options prices. The SEC’s complaint alleged that Lek Securities and Sam Lek made the schemes possible by giving Avalon access to the U.S. markets, relaxing the brokerage firm’s layering controls after Avalon complained, allowing Avalon to conduct the trading activity, and improving Lek Securities’ technology to assist Avalon’s trading.

“The final judgments provide important remedies, including admissions, a conduct-based injunction and a compliance monitor, designed to protect U.S. markets and address the significant failings at Lek Securities,” said Melissa R. Hodgman, Associate Director of the Division of Enforcement.

The Securities and Exchange Commission today announced that two BMO advisers have agreed to pay over $37 million to settle charges regarding their failure to tell clients about certain aspects of how the advisers selected investments in their retail investment advisory program, known as the Managed Asset Allocation Program (MAAP), which included the selection of more expensive investments from which BMO advisers profited.

According to the SEC’s order, when selecting investments for clients, BMO Harris Financial Advisors Inc. (BMO Harris) and BMO Asset Management Corp. (BMO Asset Mgmt) preferred mutual funds managed by BMO Asset Mgmt (proprietary funds) and invested approximately 50% of MAAP client assets in proprietary funds. This practice resulted in payment of additional management fees to BMO Asset Mgmt, however, the SEC’s order found that neither BMO adviser disclosed this practice or the associated conflict of interest to clients. Moreover, the SEC’s order found that, when considering mutual funds for MAAP, BMO Asset Mgmt evaluated the lower-cost institutional share class for both proprietary and non-proprietary funds, but the higher-cost, non-institutional share class for proprietary mutual funds always was selected for MAAP.

In addition, the SEC found that BMO Harris failed to disclose its conflicts of interest arising from investing MAAP client assets in higher-cost share classes of certain mutual funds, including funds managed by BMO Asset Mgmt, when lower-cost share classes were available. By selecting the higher-cost share classes, BMO Harris received revenue sharing payments and avoided paying certain transaction costs, while clients received lower returns on these investments.

The  Global information and media analytics firm, Comscore, Inc., and its former CEO Serge Matta has been charged by the Securities and Exchange Commission with engaging in a fraudulent scheme to overstate revenue by approximately $50 million and making false and misleading statements about key performance metrics.

The SEC’s orders find, among other things, that Comscore, at the direction of its former CEO Serge Matta improperly increased its reported revenue by exchanging sets of data without any cash consideration. Comscore recognized revenue on these transactions based on the fair value of the data it delivered, which had been improperly increased in order to inflate revenue. The SEC’also found nd that Comscore made false and misleading public disclosures regarding the company’s customer base and flagship product and that Matta lied to Comscore’s internal accountants and external audit firm. This scheme enabled Comscore to artificially exceed its analysts’ consensus revenue target in seven consecutive quarters and create the illusion of smooth and steady growth in Comscore’s business.

“As the SEC orders find, Comscore and its former CEO manipulated the accounting for non-monetary and other transactions in an effort to chase revenue targets and deceive investors about the performance of Comscore’s business,” said Melissa R. Hodgman, Associate Director in the SEC’s Enforcement Division. “We will continue to hold issuers and executives accountable for such serious breaches of their fundamental duty to make accurate disclosures to the investing public while giving appropriate credit for a company’s prompt remedial acts and cooperation.”

The U.S. Securities and Exchange Commission (SEC) is investigating several major investment advisor companies for failure to reveal conflicts of interest including revenue-sharing arrangements resulting in millions in income. In one recent lawsuit filed against Commonwealth Financial Network, The SEC says the firm has failed to disclose material conflicts of interest related to revenue sharing received for certain client investments. The Complaint says that since at least 2007, Commonwealth had a revenue-sharing agreement with the broker-dealer, National Financial Services through which, it required most of its clients use for trades in their accounts. Under that agreement, the SEC alleges, Commonwealth received a portion of the money that certain mutual fund companies paid to the broker to be able to sell their funds through the broker if Commonwealth invested client assets in certain share classes of those funds.

Between July 2014 and December 2018, Commonwealth received over $100 million in revenue sharing from the broker related to client investments in certain share classes of “no transaction fee” and “transaction fee” mutual funds, the complaint states. The arrangement between Commonwealth and NFS was also interesting as it was structured. According to the SEC Complaint, Commonwealth purchased or sold no transaction fee mutual funds share and clients did not pay a transaction fee. HOWEVER, clients did pay fees to the mutual fund for their share of fund expenses for as long as they held the fund and in turn the mutual fund paid a portion of these fees to NFS. NFS then shared a portion of those fees it received with Commonwealth.

The SEC’s complaint explains that Commonwealth’s receipt of the revenue sharing from NFS created significant conflicts of interest between Commonwealth and its clients.  These conflicts included financial incentives for Commonwealth to invest clients in mutual funds which would lead to greater revenue for Commonwealth.  The Complaint says that Commonwealth breached its fiduciary duty to its clients by failing to disclose the conflicts of interest created by its receipt of compensation through the revenue sharing agreement. Specifically, the SEC’s complaint alleges that Commonwealth “failed to tell its clients that (i) there were mutual fund share class investments that were less expensive to clients than some of the mutual fund share class investments that resulted in revenue sharing payments to Commonwealth, (ii) there were mutual fund investments that did not result in any revenue sharing payments to Commonwealth, and (iii) there were revenue sharing payments to Commonwealth under the broker’s ‘transaction fee’ program.”

The Securities and Exchange Commission has charged Reginald Middleton and Veritasuem Inc. and Vertaseum, LLC ,wo entities under his control, for a fraudulent scheme to sell digital securities to investors and to manipulate the market for those securities.  On Aug. 12, 2019, the court entered an emergency freeze to preserve at least $8 million of the $14.8 million the defendants raised in 2017 and 2018 in an offering of digital securities.

The complaint, filed in federal court in Brooklyn, New York, alleges that the Defendants marketed and sold securities called “VERI” tokens on the internet, inducing retail investors to invest based on multiple material misrepresentations and omissions.  Among other things, Defendants allegedly knowingly misled investors about their prior business venture and the use of offering proceeds, touted oversized – but fictitious – investor demand for VERI, and claimed to have a product ready to generate revenue when no such product existed.  The complaint further alleges that Middleton manipulated the price of the VERI tokens trading on an unregistered digital asset platform.  The complaint also alleges that Middleton recently moved a significant amount of investor assets and then dissipated a portion of those assets, transferring them to Middleton’s personal account.

“After learning about Middleton’s transfer of funds, we took quick action to prevent the further dissipation of investor assets,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Whether in digital currency or plain cash, we will act to protect investor assets and to pursue fraud and manipulation in our securities markets.”

IMG_0201-300x200The Regulation Best Interest is a new rule proposed by the SEC which requires stockbrokers to disclose any conflicts of interest via a “new relationship summary” form. This regulation also bans any contests between brokers and dealers that offer sales-based rewards.

This rule was proposed by the SEC over a year ago and was finally approved in a 3 to 1 vote earlier this month. Initially, this regulation was opposed by investor advocates who stated that broker innovation and drive may be stifled by the confinement. However, supporters from the broker and dealer side expect the regulation to improve the current process and standards of the industry.

SEC Chairman, Jay Clayton, stated that previous regulations for this industry were not strict enough to protect investors. He also noted that the new rule should not affect innovation in this space. “You do a good job managing money, you should get paid,”, he explained.

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The United States Securities and Exchange Commission (SEC) awarded more than $4.5 million to a former orthopedic surgeon in Brazil who alerted it to an alleged kickback scheme operated by a subsidiary of Zimmer Biomet Holdings Inc.

The Brazilian whistleblower, who remains anonymous, sent a tip to the company that alleged significant wrongdoing. The whistleblower submitted the same information to the SEC within 120 days of reporting it to the company.

The company reviewed the whistleblower’s allegations of misconduct and reported the allegations to the SEC and another agency. The SEC opened its own investigation. The company completed its internal investigation, the results were reported to the SEC and the other agency.

The U.S. Securities and Exchange Commission has issued a $4.5 million whistleblower award, the first given under a provision incentivizing employees to submit allegations to the agency within 120 days of internal reporting. “In this case, the whistleblower was credited with the results of the company’s internal investigation, which were reported to the SEC by the company and led to the Commission’s resulting enforcement action and the related action,” said Jane Norberg, chief of the SEC’s Office of the Whistleblower, in a statement Friday.

The  award goes to an unnamed company and employee who, according to the SEC, sent an anonymous tip to the employer alleging “significant wrongdoing.” The whistleblower also notified the SEC within 120 days, making the employee eligible for an award under 2011 rules adopted by the agency to promote internal reporting.

After receiving the tip, the company launched an internal investigation into the ”allegations of misconduct” and self-reported to the SEC, which began its own probe. Upon completing the internal investigation, the company shared its findings with the SEC.

AdobeStock_64352337-300x200In an emergency court order, the Securities and Exchange Commission (SEC) announced that they will be freezing all assets in relation to an alleged insider trading case. This case involved the oil-and-gas conglomerate Chevron Corporation and their intentions to acquire Anadarko Petroleum Corporation, which was reported to yield roughly $2.5 million in profits.

Chevron is a multinational energy corporation based in the United States. They announced that they intended to invest in outstanding shares of Anadarko, which is also based in the U.S. and sells petroleum. While the buying of shares warrants no action on its own, Chevron intended to acquire them for $65 per share in cash and stock. This type of investment would represent a 38 percent premium over Anadarko’s closing price pre-announcement.

The SEC complaint filed in the U.S. District Court for the Southern District of New York identified a series of transitions that could be considered suspicious. Days before the announcement, unknown traders allegedly used foreign brokerage accounts in the United Kingdom and Cyprus to purchase out-of-the-money call options through U.S. based brokerage firms and on U.S. based exchanges. After the announcement, Anadarko shares rose in price significantly. Brokerage account customers benefited greatly by either utilizing their right to gain large positions of Anadarko stock at a discount or selling many of the option contracts for profit.