Articles Posted in Securities and Exchange Commission Investigation

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 Clearing Corporation will pay $20 million to the US as penalties, following a Securities and Exchange Commission investigation finding the company failed to implement policies to manage certain risks as required by U.S. laws and SEC and CFTC rules.  According to the SEC’s and CFTC’s  orders, Chicago-based OCC failed to establish and enforce policies and procedures involving financial risk management, operational requirements, and information-systems security.  The SEC’s order also found that OCC changed policies on core risk management issues without obtaining required SEC approval.

As the U.S.’s sole registered clearing agency for exchange-listed option contracts on equities, OCC was designated in 2012 as a systemically important financial market utility, or SIFMU.  That designation makes OCC subject to enhanced regulation and transparency regarding its risk management systems because disruption to OCC’s operations might be costly not only for itself and its members, but other market participants or the broader financial system.  Today’s enforcement action is the SEC’s first charging violations of SEC clearing agency standards adopted in 2012 and in 2016, and the CFTC’s first charging violations of Core Principles applicable to Derivatives Clearing Organizations.

“As a clearing agency, OCC performs a range of services that are critical to the effective operation of the securities markets,” said SEC Chairman Jay Clayton.  “Today’s resolution is intended to ensure that OCC will have appropriate policies and procedures in place to meet its obligations to our financial system.”

A former Walt Disney Co. accountant says she has filed a series of whistleblower tips with the Securities and Exchange Commission alleging the company has materially overstated revenue for years. Sandra Kuba,  a senior financial accountant analyst in Disney’s evenue-operations department who worked for the company for 18 years and says employees working in the parks-and-resorts business segment systematically overstated revenue by billions of dollars by exploiting weaknesses in the company’s accounting software. Ms Kuba says she has met with officials from the SEC on several occasions to discuss the allegations.

The whistleblower filings were reviewed by MarketWatch which reported that they state several ways employees allegedly boosted revenue, including recording fictitious revenue for complimentary golf rounds or for free guest promotions. Another alleged action Kuba described in her SEC filing involved recording revenue for $500 gift cards at their face value even when guests paid a discounted rate of $395.

The Securities and Exchange Commission charged TherapeuticsMD Inc., a pharmaceutical company, with violations for sharing of material, nonpublic information with sell-side research analysts without also disclosing the same information to the public. The SEC’s order says that on two separate occasions in 2017, TherapeuticsMD selectively shared material information with analysts about the company’s interactions with the U.S. Food and Drug Administration (FDA).  As detailed in the SEC’s order, on June 15, 2017, one day after a publicly-announced meeting with the FDA about a new drug approval, TherapeuticsMD sent private messages to sell-side analysts describing the meeting as “very positive and productive.”  TherapeuticsMD’s stock price closed up 19.4 percent on heavy trading volume the next day.  At that time, the company had not issued a press release or made any other market-wide disclosure about the meeting. The whistleblower is represented by Edward Scarvalone of Willens & Scarvalone in New York.

According to the SEC’s order, early in the morning of July 17, 2017, TherapeuticsMD issued a press release announcing that it had submitted additional information to the FDA, but did not yet have a clear path forward regarding its New Drug Application.  TherapeuticsMD’s stock price declined approximately 16 percent in pre-market trading following the issuance of the press release.  The SEC’s order finds that in a call and email to sell-side analysts after the press release was issued but before the market opened, the company selectively shared previously undisclosed details about the June FDA meeting and the information it had subsequently submitted to the FDA.  According to the SEC’s order, all of the analysts published research notes containing these details, and the stock rebounded to close down only 6.6 percent for the day.  The SEC’s order found that at the time of these selective disclosures, TherapeuticsMD did not have policies or procedures regarding compliance with Regulation FD.

“Information about a pharmaceutical company’s interactions with the FDA can be critical to investors.  It is essential that when companies disseminate material, nonpublic information, they do so fairly and appropriately to all investors and not just a select few analysts,” said Carolyn M. Welshhans, Associate Director of the SEC’s Division of Enforcement.

The Securities and Exchange Commission today announced that broker Cantor Fitzgerald & Co. will pay more than $647,000 and broker BMO Capital Markets Corporation will pay over $3.9 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs). With today’s actions, the SEC has charged 13 financial institutions in its ongoing investigation into abusive ADR pre-release practices, which, thus far, has included monetary settlements exceeding $427 million.

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 the ADRs 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 ADRs represent.

According to the SEC’s orders, both Cantor Fitzgerald and BMO Capital obtained pre-released ADRs when they should have known that the pre-release transactions were not backed by foreign shares. The SEC orders find that both brokers improperly obtained pre-released ADRs indirectly from other broker-dealers, and the order as to Cantor Fitzgerald finds that the firm also improperly obtained pre-released ADRs directly from depositary banks.

 The Securities and Exchange Commission settled charges against a Brighton Massachusetts based blockchain company SimplyVital Health, Inc. for offering and selling approximately $6.3 million of securities to the public in unregistered transactions.

According to the SEC Cease and Desist Order Simply Vital in late 2017, SimplyVital Health, Inc. publicly announced its plan to conduct a token sale-an “Initial Coin Offering” or “ICO”-to raise money to further its development of Health Nexus, a “healthcare-related blockchain ecosystem.” SimplyVital offered a new token called Health Cash, or HLTH, which, it stated, would be used as currency in the Health Nexus. SimplyVital concurrently announced that it would conduct a “pre-sale” of its HLTH tokens, in which it offered investors Simple Agreements for Future Tokens, or SAFTs, under which it sold HLTH tokens that would not be delivered to investors unless and until created by SimplyVital. The order finds that SimplyVital did not file a registration statement with the Commission or qualify for an exemption from registration before offering and selling HLTH to the public through the SAFTs.

According to the SEC’s order, SimplyVital raised approximately $6.3 million from its unregistered sale of securities in between September 2017 and April 2018. After concluding its pre-sale in April 2018, SimplyVital ultimately decided not to offer and sell HLTH during its scheduled ICO. In 2019, SimplyVital voluntarily returned to investors substantially all of the funds raised during its pre-sale. Simply Vital is a new kind of healthcare company which seeks to enhance patient well being through better communication of patient information. Its platform is a bit complicated, so for more information read the following White Paper: Health-Nexus-White-Paper-232x300

The Securities and Exchange Commission today charged 1 Global Capital LLC’s former chief financial officer, Alan G. Heide, with defrauding retail investors. The now bankrupt Florida-based cash advance company allegedly fraudulently raised more than $322 million from 3,600 investors between 2014 and last year. The SEC previously charged 1 Global and former CEO Carl Ruderman with fraud and charged Henry J. “Trae” Wieniewitz, III for his allegedly unlawful sales of 1 Global securities. Ruderman and Wieniewitz have consented to final judgments.

The SEC  complaint said that although 1 Global promised investors profits from its short-term cash advances to businesses, the company used substantial investor funds for other purposes, including paying operating expenses and funding Ruderman’s lavish lifestyle. The SEC alleges that Heide, a certified public accountant, regularly signed investors’ monthly account statements that he knew overstated the value of their accounts and falsely represented that 1 Global had an independent auditor that had endorsed the company’s method of calculating investor returns.

“Heide’s misrepresentations gave false comfort to investors, allowing them to be duped to invest in 1 Global’s securities,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “We allege that as 1 Global’s CFO, Heide played a significant role in 1 Global’s fraud by overstating the value of investors’ accounts and their rates of return and falsely representing the role of an auditor.”

The Securities and Exchange Commission’s latest reward of  $50 million to two whistleblowers is an indicator that the program is successfully unveiling major frauds and more are anticipated. The $50 million awards relate to an SEC investigation stemming from whistleblower info which resulted in J.P. Morgan wealth management subsidiaries paying $267 million and admitting wrongdoing to settle charges that they failed to disclose conflicts of interest to clients.

An SEC investigation found that the firm’s investment advisory business J.P. Morgan Securities LLC (JPMS) and nationally chartered bank JPMorgan Chase Bank N.A. (JPMCB) preferred to invest clients in the firm’s own proprietary investment products without properly disclosing this preference.  This preference impacted two fundamental aspects of money management – asset allocation and the selection of fund managers – and deprived JPMorgan’s clients of information they needed to make fully informed investment decisions.

One whistleblower received an award of $37 million and the other received an award of $13 million.  The $37 million award is the Commission’s third-highest award to date after the $50 million award made in March 2018 to joint whistleblowers and more than $39 million award announced in September 2018.  One of the whistleblowers was represented by Attorney Jordan Thomas of the firm Labaton Sucharow

The Securities and Exchange Commission sued Kik Interactive Inc. for conducting an illegal $100 million securities offering of digital tokens.  The SEC charges that Kik sold the tokens to U.S. investors without registering their offer and sale as required by the U.S. securities laws.

As alleged in the SEC’s complaint, Kik had lost money for years on its sole product, an online messaging application, and the company’s management predicted internally that it would run out of money in 2017.  In early 2017, the company sought to pivot to a new type of business, which it financed through the sale of one trillion digital tokens.  Kik sold its “Kin” tokens to the public, and at a discounted price to wealthy purchasers, raising more than $55 million from U.S. investors.  The complaint alleges that Kin tokens traded recently at about half of the value that public investors paid in the offering.

The complaint also says that Kik marketed the Kin tokens as an investment opportunity.  Kik allegedly told investors that rising demand would drive up the value of Kin, and that Kik would undertake crucial work to spur that demand, including by incorporating the tokens into its messaging app, creating a new Kin transaction service, and building a system to reward other companies that adopt Kin.  At the time Kik offered and sold the tokens, the SEC alleges these services and systems did not exist and there was nothing to purchase using Kin.  Kik also allegedly claimed that it would keep three trillion Kin tokens, Kin tokens would immediately trade on secondary markets, and Kik would profit alongside investors from the increased demand that it would foster.  The Kin offering involved securities transactions, and Kik was required to comply with the registration requirements of the U.S. securities laws.

Jay-Z-to-testify-300x225A federal judge has ordered Jay-Z to testify as part of an SEC investigation. The rapper, whose real name is Shawn Carter, must testify next week relating to the decade old sale of his clothing brand.

Unanswered Subpoenas

Apparently, Jay-Z has failed to respond to two SEC subpoenas. The judge noted the SEC investigation has been delayed for 5 months because of his inaction. The ruling came just days after the SEC filed a request for an order seeking to enforce the subpoenas.