Throughout rulemaking conferences and proposals, the Commission kept highlighting important market issues. The organisation revealed a conference devoted to the municipal securities markets this week. Despite the Commission’s limited power in this regard, the organisation can help these crucial markets improve.
The argument over disgorgement and whether the Securities and Exchange Commission is authorized to use that remedy is still raging. This week, several Congressmen submitted an amicus brief in which they essentially argued that disgorgement is an important Securities and Exchange Commission enforcement tool. The obvious response to Congress is to amend the statute in an era where statutory interpretation is constrained by the “read the statute” and “look up the words in the dictionary” approaches.
Retail investors are still the focus of enforcement. That entails continuing the cases of offering fraud that seem to never end. However, the Commission did succeed last week, obtaining a ruling ordering the return of more than $60 million to investors who had been duped.
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Securities and Exchange Commission
Securities and Exchange Commission v. Morgan, Civil Action No. 19 Civ 661 (W.D. N.Y.), a previously filed action, named Robert Morgan, a residential and commercial estate developer, as a defendant. Also named as defendants were Morgan Mezzanine Fund Manager LLC, the manager of three Note Funds, and Morgan Acquisition LLC, a business used to put properties Mr. Morgan intended to acquire under contract. Beginning in 2013, Mr. Morgan sold securities to raise more than $110 million from investors over a five-year period.
Of that sum, about $80 million came from investors in four Note Funds. One of those funds was managed by Morgan Acquisitions, while the other three were overseen by Fund Manager. The Note Funds’ investors were informed that the money they contributed would be used to fund unsecured subordinated loans to related businesses.
Additionally, investors were informed that the note funds managed by Fund Manager had a target return of 11%, while those managed by Morgan Acquisitions were purportedly backed by Mr. Morgan himself. 17 states and more than 200 investors and organisations participated.
Contrary to claims made, investor funds were actually used to facilitate Ponzi-style loan repayments. In addition, to controlling person liability, the complaint asserted violations of Sections 10(b) and 17(a) of the Exchange Act and the Securities Act.
When the complaint was filed, the Commission was able to secure immediate relief by freezing assets and appointing a receiver who was in charge of managing the assets for the benefit of investors. Morgan made a voluntary sale of some assets to raise money for the receiver to collect. The receiver’s plan to distribute more than $63 million to injured investors was approved by the court earlier this week.
In the Matter of Benjamin L. Bunker, Esq., Adm. Proc. File No. 3-19668 (Jan. 23, 2020), a solicitor named Benjamin Bunker is named as a respondent. Manipulation – false opinion. Attorney Bunker provided false legal opinions over a two-year period in order to promote the distribution of Greenway Design Group, Inc. shares into an unregistered market.
Despite the fact that the shares were unregistered, the respondent’s letters implied that they qualified for an exemption. No, they weren’t. The transfer and deposit of the shares into brokerage accounts were made easier by the opinions. Securities were sold after the manipulation of the share price.
The Order alleges violations of Sections 5(a) and 17(a) of the Securities Act and Section 10 of the Exchange Act (b). Respondent agreed to the entry of a cease-and-desist order based on the sections cited in the Order in order to resolve the issue. Additionally, he won’t be allowed to represent clients or appear in front of the Commission. The respondent will also pay prejudgment interest of $249.84 and disgorgement of $1,800. The restitution order made in the related criminal case cancels out those obligations.
Cryptocurrency offering fraud: SEC v. Grybniak, Civil Action No. 1:20-cv-327 (E.D.N.Y. Filed Jan. 21, 2020) Serghii Grybnialm and the company he founded, Opporty International, Inc., which is essentially his alter ego, are named as defendants in this action. Defendants ran an ICO involving OPP Tokens over a one-year period beginning in September 2017. About 200 investors contributed about $600,000 in total.
The tokens, which are securities, were not registered. A number of false statements were also made in relation to the sales. These included assertions that thousands of investors were involved, erroneous claims about small businesses purportedly using its platform, a claim that a significant software company was a partner, and claims that the tokens were registered with and in compliance with the SEC.
The Securities Act’s Sections 5(a), 5(c), and 17(a), as well as Section 10 of the Exchange Act, are allegedly violated (b). The case is still open. Check out Lit. Rel. No. 24723 (Jan. 21, 2020).
Securities and Exchange Commission v. Griffith, Civil Action No. 8:20-cv-00124, offers fraud (C.D. Cal. Filed Jan. 21, 2020). Guy S. Griffith, a purported executive in the motion picture industry who holds positions with defendants Renewable Technologies Solution, Inc. and Green Acres Pharms, LLC, and Robert Russell, an owner and executive with defendant SMRB LLC, were named as defendants in the complaint, along with three other entities. In order to conduct marijuana-related business, Defendant Russell and his wife established SMRB in Washington State in November 2013.
The defendants Griffiths and RTSI paid $1.5 million for a stake in SMRB after Washington State granted a licence. According to the terms of the deal, a stake in the licence holder was transferred along with the right to a share of SMRB’s net income. However, according to the applicable state law, a licensee entity’s equity interest could not be transferred without the Washington State Board’s prior approval, which was lacking.
However, beginning in the month the Board issued the licence, Defendants offered and sold equity interests in SMRB to at least 25 investors in a number of states over a two-year period. These investors handed over more than $4.8 million to the defendants.
Defendants misrepresented the nature of the interests and the intended use of the offering proceeds when they sought out those investments. The Securities Act’s Sections 5(a), 5(c), and 17(a), as well as Section 10 of the Exchange Act, are allegedly violated (b). The case is still open. Check out Lit. Rel. No. 24722 (Jan. 21, 2020).
Criminal Offense Cases
Misappropriation: John Geraci, a principal and the company’s founder, was named as a defendant in the case U.S. v. Geraci, No. 1:18-cr-00715 (S.D.N.Y. Sentencing Jan. 23, 2020). Defendant first met Nicholas Mitsakos, the alleged manager of the hedge fund, in February 2015. Defendant Geraci was informed by Mr. Mitsakos of the significant returns made at the hedge fund. The two men later came to an agreement in which Mr. Geraci consented to raise capital for Hedge Fund.
Later that year, Mr Geraci discovered that Hedge Fund was a scam and that Mr Mitsakos had stolen a sizable sum of money from the company. Nevertheless, he persisted in approaching potential investors and secured sizeable sums from two of them. He also took part in a cover-up that sent false information to investors. Previously, Mr Mtsakos entered a guilty plea. This week, Mr Geraci received a 24-month prison term for planning to commit securities fraud.
FCPA—Anticorruption
In the case, U.S. v. Cevallos, No. 1:19-cr-20284 (S.D. Fla. Plea Jan. 23, 2020), an Ecuadorian businessman living in Miami, Florida, Armengol Alfonso Cevallos Diaz, was named as a defendant. Beginning in 2012, Mr Cevallos ran a three-year scheme to bribe PetroEcuador officials with about $4.4 million. PetroEcuador is the country’s state-owned oil company. He also bought Florida real estate for government officials and used a number of shell companies to try to hide the bribes. Mr. Cevallos entered a plea of guilty to one count of conspiring to break the FCPA as well as one count of conspiring to launder money. April 2, 2020, is the scheduled date for sentencing.
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