The Commission appointed a new director for its New York Regional Office last week. At the same time litigation results dominated the Enforcement calendar. The Division prevailed on summary judgment motions in two different actions.
Be safe and health this week
CAT – Amendments: The Commission proposed amendments to the national market system plan regarding the Consolidated Audit Trail or CAT on August 21, 2020. The amendments focused on data security (here).
CAT – Effectiveness: The Commission rescinded a rule exception that would have permitted proposed amendments to the national market system plan fee amendment to become effective on filing, prior to review and comment, on August 19, 2020 (here).
SEC Enforcement – Litigated Actions
Unregistered broker: SEC v. Almagarby, Civil Action No. 17-62255-civ S.D. Fla. Decision August 17, 2020) is an action which named as defendants Ibrahim Almagarby and his firm, Microcap Equity Group, LLC. The complaint alleges that defendants violated Exchange Act Section 15(a) by acting as an unregistered broker or dealer and that Mr. Almagarby is a control person of MEG within the meaning Exchange Act Section 20(a). Both sides moved for summary judgment.
The Court granted summary judgment in favor of the Commission. MEG’s business was buying convertible instruments from microcap firms and selling the shares. Specifically, the firm purchased notes and bonds that could be converted into shares of the issuer. Acquiring the shares in this manner permitted Defendants to secure discounted prices. During the period Defendants made 57 purchased of aged debt from debt holders of at least 38 issuers. Shares were subsequently deposited into its account from these transactions on 167 occasions. Those transactions ultimately resulted in 962 sales of shares. Over the period MEG received about 8.5 billion shares and sold a total of about 7.6 billion shares. As a result the firm generated over $2.8 million in proceeds.
Based on this record the Court concluded that Defendants violated Exchange Act Section 15(a). Here it is undisputed that the business model used by Defendants was “’predicated on the purchase and sale of securities. [The defendants]depended on acquiring client stock to support operations and earn a profit . . .’” according to the Court, quoting SEC v. Big Apple Consulting USA, Inc., 783 F. 3d. 786, 809 (11th Cir. 2015)(grant of summary judgment on question of dealer in context of 15(a) claim). The number of transactions and the proceeds make it clear that Defendants, who were not resisted with the Commission, violated Exchange Act Section 15(a). Indeed, they even retained finders to assist with the solicitations. Accordingly, summary judgment was granted on the claim in favor of the Commission. Equally clear is the point on control person liability. Accordingly, the Commission’s motion was granted; Defendants’ motion was denied.
Muni bonds: SEC v. RMR Asset Management Company, Civil Action No. 18-CV-1895 (S.D. CA. Ruling Aug. 17, 2020). The firm, its founder, Ralph Riccardi, and Jocelyn Murphy, Michael Murphy and Richard Gounaud, each of whom worked with the firm, are named defendants. Each was paid a percentage of the profits from the firm’s muni bond transactions.
Many muni offerings are oversubscribed. As a result, certain checks and balances are often built into the offering process by the issuer. The safeguards tend to thwart dealers who attempt to use multiple accounts to purchase a larger part of the offering than allocated and then immediately mark-up the bonds and “flip” them. One method used to thwart flipping is requiring a local zip code be provided. Only those with such a zip code get an allocation from the offering.
RMR and its crew sought to obtain a portion of an offering. The goal was to immediately markup the bonds and flip them. Each named defendant would help sell the bonds. Ms. Murphy supplied a zip code that could be furnished to the underwriters, ensuring allocations. The Commission filed suit alleging violations of Exchange Act Section 15(a), since those selling the bonds were not registered brokers. The complaint also alleged violations of Exchange Act Section 10(b), based on the misrepresentations used to secure the bonds.
The Court, on a motion for summary judgment by the Commission, found in favor of the agency. Section 15(a) makes it unlawful for an unregistered broker or dealer to use the mails to buy or sell a security. In assessing if there is a violation of the Section, the Ninth Circuit applies a conduct-based test tied to the totality of the circumstances. Under this test, the Commission argued that Defendants effected transactions in securities in return for transaction-based compensation. Specifically, Defendants admitted that Mr. Riccardi and RMR directed the other Defendants to link their brokerage accounts to that of the firm so that its capital could be used to buy new mini bonds and other securities. Defendants controlled their accounts, however, and conducted the trading. In return they were paid transaction-based compensation. While Defendants offered alternative explanations for their conduct, none were supported by the facts.
Finally, the Court found that Ms. Murphy violated Exchange Act Section 10(b). MSRB Rules G-11 and G-17 permit the issuer to set the rules for the offering. Here the zip code was a key requirement. Ms. Murphy admitted that she received allocations in the offering. She also admitted that without the fraudulent zip code she would not have obtained the allocations. And, it is undisputed that she did not live within the zip code. Based on this record, the Court concluded that the facts were not in dispute and that Ms. Murphy violated the antifraud provision. Remedies will be considered in the future. This was one of a series of similar cases filed at the time. See, e.g. SEC v. Core Performance Management, LLC, Civil Action No. 18-cv-8181 (S.D. Fla. Filed August 14, 2018).
SEC Enforcement – Filed and Settled Actions
The Commission filed one civil injunctive action and no administrative proceedings last week, excluding 12j and tag-along-proceedings.
Pyramid scheme—unregistered broker: SEC v. Millan, Civil Action No. 1:20-cv-06575 (S.D. Fla. Filed August 18,, 2020). The action centers on a nationwide offering of investments in AirBit Club that rewarded those who recruited others with profits supposedly paid from high returns tied to an algorithmic digital asset day-trading program. Promoters targeted LatinX and Spanish-speaking communities. Named as defendants are Cicilia Millan and Margritra Cabrea. Each Defendant is an AirBit promoter and a member of its Master Council. AirBit is an investment club controlled by Pablo Rodrigues and Gutemberg Santos. It has no formal legal existence. The firm operates as an international multi-level marketing operation and a cryptocurrency trading platform. Messrs. Rodrigues and Santos settled Commission charges of fraud and selling unregistered securities in connection with a pyramid scheme approximately 3 years ago. SEC v. Rodriguez, Civil Action No. 8:17-cv-00375 (C.D. Cal.). AirBit was then created. AirBit offeres seven investment options to investors based on the amount invested. The minimum was a $1,000 investment with $126,000 being the top tear. Investors were promised daily returns of $7 to $13 for every $1,000 invested. Those returns could be paid in crypto currency or U.S. dollars. The returns supposedly came in part from investing 52% of investor funds in a digital asset trading program and 48% the multi-level marketing compensation program. The AirBit compensation plan actually paid investors bonuses for recruiting others, according to the complaint. The payments came from a variety of bonuses tied to the cost of the package sold. Defendants Millan and Cabrea were each members of the AirBit Master Counsel, essentially a group of the top promoters. Defendants regularly promoted AirBit, took investment orders and were paid with investor cash. Since the interests sold were securities and neither Defendant is registered with the Commission, each was acting as an unregistered broker. The complaint alleges violations of Exchange Act Section 15(a). The case is pending. See Lit. Rel. No. 24870 (August 18, 2020). A parallel criminal case was filed by the U.S. Attorney for the Southern District of New York.
Opinion: The Department of Justice issued its first FCPA opinion in six year. Foreign Corrupt Practices Act Review, Opinion Procedure Release, No: 20-01 (Aug. 14, 2020). The opinion process provides a mechanism by which a question regarding FCPA enforcement can be submitted to the Department requesting a no-action letter. While the mechanism has long been available and is mentioned in the Guide that was recently updated, the process has seldom been used. The opinion conclude that the Department would not at this time recommend an enforcement action based on a situation where a U.S. based investment bank paid an a fee to the subsidiary of a foreign investment bank ultimately owned by a foreign government for services rendered in connection with the purchase by the U.S. firm of assets owned by another subsidiary of the same foreign government owned investment bank since the funds went to an instrumentality rather than a foreign official and were for legitimate services.
Address: Commissioner Sean Hughes, Australian Securities and Investment Commission, delivered remarks titled Responsible Lending at the Regtech Responsible Lending Demonstration Webinar, August 20, 2020 (here). His remarks focused in part on stream-lining compliance in the future in an efficient, customer-oriented manner (here).
Report: The Securities and Futures Commission issued its quarterly report for the period April to June 2020. The report summarizes key developments during the period (https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=20PR76).
Report: The Monetary Authority of Singapore issued its semi-annual brief on the Singapore economy. The report also discussed pertinent external developments (here).