Examining SEC Enforcement Trends Can Boost Your Compliance Efforts

SEC Chair Gary Gensler recently highlighted the pivotal role that enforcement plays in achieving the SEC’s overall mission...

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. For further compliance assistance, we also advise consulting with a member of Scarinci Hollenbeck’s Financial Services and Regulatory Practice Group.

If you have questions, please contact us

If you have any questions or if you would like to discuss these issues further,
please contact Paul A. Lieberman or the Scarinci Hollenbeck attorney with whom you work, at (201) 896-4100.