Examining SEC Enforcement Trends Can Boost Your Compliance Efforts – Securities

In recent remarks at the Securities Enforcement Forum, SEC Chair
Gary Gensler highlighted the pivotal role that enforcement plays in
achieving the SEC’s overall mission. Using a football analogy,
Gensler noted that without referees, teams (without fear of
penalties), start to break the rules and the game would no longer
be fair.

Continuing, Gensler stated: “Without examination against
and enforcement of our rules and laws, we can’t instill the
trust necessary for our markets to thrive. Stamping out fraud,
manipulation, and abuse lowers risk in the system. It protects
investors and reduces the cost of capital. The whole economy
benefits from that.”

Gensler shared his views on several areas of SEC enforcement
that are worth reviewing. With regard to accountability, he stated
that while the agency will use all of the tools in its toolkit to
investigate wrongdoing and hold bad actors accountable, “few
acts rival admissions of misconduct by wrongdoers.”
Accordingly, the SEC may increasingly seek admissions in certain
cases where heightened accountability and acceptance of
responsibility are in the public interest. Additionally, Gurbir
Grewal, Director of the Division of Enforcement has indicated the
importance of pursuing sanctions against “gatekeepers”
based on an assessment of factors including the extent of
involvement in misconduct and violation of professional conduct
standards. In responding to recent criticism by the defense bar
about “regulating by enforcement” in the cryptocurrency
space, Director Grewal indicated that the enforcement staff
undertakes a careful analysis of the facts to assure a sufficient
basis for enforcement and that the issued notifications eliminate
claims of being “surprised” by enforcement activities.
Importantly, SEC enforcement is based on accountability for
disclosure inaccuracies and economic realities.

Gensler also addressed the value of bringing high-impact cases
stating “A cop on the beat has to balance both the high-impact
cases and the everyday fraudsters. A high-impact case pulls many
other actors back from the line.” “This prompts legal
alerts, client letters, and bulletins to go out. Compliance
departments, lawyers, and accountants change internal procedures as
well.” Gensler went on to note that while the SEC seeks to
pursue all misconduct, high-impact cases are important because they
change behavior and “send a message to the rest of the market,
to participants of various sizes, that certain misconduct will not
be permitted.”

In addition to SEC guidance and public statements, regulated
entities can also learn a great deal from recent cases that the
Enforcement Division pursued. Below are several notable cases
brought or resolved recently.

Insider Trading

Insider trading remains a top enforcement priority. On November
10, 2021, the SEC announced charges against Puneet Dikshit, a
partner at a global management consulting firm, who is alleged to
have illegally traded in advance of a corporate acquisition by one
of the firm’s clients in September 2021. According to the SEC,
it used its trading analysis tool to quickly detect insider trading
and bring charges.

The SEC’s complaint charged Dikshit with
violating Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5. According to the SEC, in the course of providing
consulting services, Dikshit learned highly confidential
information concerning Goldman Sachs Group Inc.’s impending
acquisition of the consumer loan fintech platform GreenSky Inc. The
SEC’s complaint alleged that, prior to the acquisition
announcement, Dikshit used this information to purchase
out-of-the-money GreenSky call options that were set to expire just
days after the announcement. The SEC’s complaint further
alleged that Dikshit violated his firm’s policies by failing to
pre-clear these options purchases. Dikshit sold all of the call
options referencing GSKY on September 15, 2021, realizing profits
of over $450,000, a return on investment of approximately 1,829%.
It is seeking a permanent injunction and a civil penalty.

Ponzi Schemes

Because Ponzi schemes remain one of the most common types of
securities fraud, they remain prominently on the SEC’s radar.
In October, the agency announced that it charged California-based
BNZ, along with its co-founders and co-managers Brett Barber and
Louis Zimmerle, for fraudulently raising $13.5 million from more
than 100 retail investors.

According to the SEC’s complaint, BNZ, Barber, and Zimmerle
raised $13.5 million from retail investors by telling them BNZ was
in the business of making investments in real estate and
alternative investments and promising to pay investors significant
returns, generally 10% per year. The complaint maintained that the
defendants invested less than half of the funds raised from
investors, with those investments generating just $300,000 in
profits. Despite generating minimal profits, the defendants paid
investors returns of at least $1.7 million using funds raised from
other investors in Ponzi-like fashion, and transferred over $1.6
million to Barber through his company, Guaranteed Income Solutions
Inc., and over $700,000 to Zimmerle.

The SEC also alleged that the defendants made false and
misleading statements to investors regarding, among other things,
the source of the payment of the investor returns. In addition,
Barber allegedly misled investors by touting his education in
finance and his investment experience without also disclosing that
he had been barred by the Financial Industry Regulatory Authority
(FINRA) from affiliating with any member firm. The SEC is seeking
permanent injunctions, disgorgement with prejudgment interest, and
civil penalties from BNZ, Barber, and Zimmerle, and disgorgement
with prejudgment interest from Relief Defendant Guaranteed Income
Solutions.

Settlement Fund Fraud

The SEC recently obtained an asset freeze and temporary
restraining order in an enforcement action against a New Jersey
“claims aggregator” and its three principals. Defendants
also face separate criminal charges in connection with the alleged
securities fraud. According to the SEC, the defendants defrauded
approximately 400 distribution funds established to return money to
securities fraud victims in a multi-year scheme that yielded
millions of dollars. The SEC’s complaint charged Joseph Cammarata,
Erik Cohen, and David Punturieri, and two entities that they
control, AlphaPlus Portfolio Recovery Corp. and Alpha Plus Recovery
LLC (collectively AlphaPlus) with violating the anti-fraud
provisions of the Securities Exchange Act of 1934. The SEC
explained, AlphaPlus purports to be a “claims
aggregator,” which, for a fee, submits claims to distribution
fund administrators on behalf of clients, such as hedge funds and
family offices, which are alleged victims in securities class
actions or SEC enforcement actions by nature of their purchases and
sales of the underlying securities. The defendants allegedly
defrauded these distribution funds (and their rightful
beneficiaries) by submitting false claims and falsified supporting
documents to the distribution fund administrators in the names of
at least three entities that did not trade in the underlying
securities, and thus were ineligible to recover.

The SEC alleged that the defendants committed numerous deceptive
acts in furtherance of their scheme, which included: claiming
losses for securities trades that were never made; fabricating
brokerage records, trading records, and other securities reports to
submit in support of their fraudulent claims; creating false
personas to communicate with distribution fund administrators;
lying to distribution fund administrators who questioned the claims
and documentation; and masking their affiliation with, at times,
AlphaPlus and/or the entities in whose name defendants submitted
claims. According to the complaint, the defendants funneled the
money they received from filing fraudulent claims through a web of
accounts they controlled. The stolen assets were then used to pay
for numerous personal expenses, such as jewelry, home renovations,
watercraft, vacation homes and other real estate, including upkeep
on Cammarata’s personal Caribbean island.

Hedge Fund Fraud

The SEC remains focused on investment advisers, policing the
industry for misconduct related to disclosures, conflicts of
interests, and sales practices. The SEC recently obtained a verdict
against a hedge fund adviser and his investment advisory firm for
making fraudulent misrepresentations.

“Investment professionals play a crucial role in our
markets and when they break the law they undermine investors’
trust,” Gurbir S. Grewal, Director of the SEC’s Division
of Enforcement, said in a press statement. “We’ll continue to
use all of the tools in our toolkit to hold wrongdoers accountable,
including litigating whenever necessary. This verdict underscores
that commitment as well as our staff’s ability, tenacity, and
experience to win those trials.”

According to the SEC’s complaint, Gregory Lemelson and
Massachusetts-based Lemelson Capital Management LLC generated more
than $1.3 million in illegal profits by making false statements to
drive down the price of San Diego-based Ligand Pharmaceuticals Inc.
(“Ligand”). At trial, the SEC presented evidence that
Lemelson purchased “short positions” in Ligand stock and
then sought to manipulate the stock price to make a profit. The
false statements made by Lemelson included assertions that
Ligand’s investor relations firm had agreed that Ligand’s
most profitable drug was on the brink of obsolescence and that
Ligand had entered into a sham transaction with an unaudited shell
company in order to pad its balance sheet. The SEC also presented
evidence showing that Lemelson had boasted about bringing down
Ligand’s stock price through his “multi-month battle”
against the company.

The jury found Lemelson and Lemelson Capital Management liable
for fraudulent misrepresentations. The court will determine
remedies at a later date, according to the SEC.

Key Takeaways

The SEC continues to prioritize enforcement in a wide range of
areas. While the agency has focused on emerging concerns like
special purpose acquisition companies (SPACs) and digital currency,
it also remains committed to pursuing more traditional forms of
securities fraud, including Ponzi schemes and insider trading even
where investor losses are moderately small. We encourage regulated
entities to regularly review their compliance policies/procedures
in light of the types of enforcement actions the SEC is bringing
and use that information to help ensure your firm and its
gatekeepers don’t end up in the SEC Enforcement Division’s
crosshairs.

Originally published November 30, 2021

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