The retail investor focus of SEC Enforcement has spawned a series of actions involving investment advisers. Many of those cases centered on undisclosed conflicts such as the series of actions filed in the run up to the end of the Government fiscal year. Moving forward in the new fiscal year brokers, as well as other market professionals may find themselves the targets of the “retail investor” focus of enforcement. Two recent cases center on brokers involved in a bribery scheme. In the end however, the cases differ little from the advisor actions failed last year – they center on undisclosed conflicts such as payments to a broker to purchase a certain stock for unsuspecting retail investors who are the losers. SEC v. Aurbach, Civil Action No. 1:19-cv-05631 (E.D.N.Y. Filed Oct. 4, 2019).
Named as defendants are: Jeffrey Auerbach, a former registered representative temporarily barred from the securities business by FINR A who acted as an IR consultant to Nxt.IDd or NXTD whose shares were listed on Nasdaq Capital Markets; Jared Mitchell, also supposedly was an IR consultant to NXTD, who was recently sentenced to prison in connection with another matter; and Richard Brown, a registered representative who has been subject to a number of customer complaints, named as a defendant in another Commission action and indicted in a criminal case. Each of the Defendants in this action was named in a 2016 Commission action centered on a broker bribery scheme.
The bribery scheme, which took place in 2014 and 2015, centered on paying bribes under the guise of payments for investor relations services, to secure the purchase of NXTD shares. Initially, in July 2014 Defendant Mitchell introduced Gino Pereira, CEO of NXTD, to Mr. Brown, a registered representative, who supposedly was interested in acquiring shares of NXTD. Subsequently, over a period of several months, beginning in July 2014, Defendant Pereira paid Mr. Mitchell about $74,000 through a consulting firm for investor relations advice. At least $15,000 was then paid by to broker Brown to purchase NXTD stock. The broker acquired 231,253 shares of the firm’s stock for his retail clients at a cost of over $566,079. Mr. Brown failed to disclose to his customers that he was paid to purchase the shares in their accounts.
In January 2015 Mr. Pereira caused NXTD to enter into a “Consulting Agreement” with his firm. The consulting agreement was for investor relations services. Ultimately, over a ten-month period Mr. Pereira had the company wire his consulting firm over $62,000. Messrs. Auerbach and Mitchell paid broker Brown at least $5,000 in cash. An additional 107,640 shares of NXTD were purchased for his customers at a cost of $235,584. Mr. Brown again failed to inform his customers that he was paid to purchase the shares. The complaint alleges violations of Exchange Act Section 10(b). The action is pending. See also SEC v. Pereira, Civil Action No. 2:19-cv-05527 (E.D.N.Y. Filed Sept. 30, 2019)(same as above; settled with entry of an injunction and agreement to consider other remedies at a later date).
The U.S. Attorney’s Office for the Eastern District of New York filed a parallel criminal action.