SEC Charges Three Individuals with Deceiving Main Street Investors Through the Sale of Binary Options (SEC Release)Federal Courts Troubled by Punitive SEC Injunction. Securities and Exchange Commission, Appellant, v. Guy Gentile (Opinion, United States Court of Appeals for the Third Circuit ("3Cir"), No. 18-1242)District Court Issues Order Directing OneCoin-Related Parties To Show Cause Regarding Any Claimed Attorney-Client Privilege (DOJ Release)Former CEO Pleads Guilty In Scheme To Defraud Elderly Victims In The Sale Of Worthless Stock (DOJ Release)FINRA Sanctions Member Firm Non-Traditional ETFs, Private Placements, and Escrow Issues. In the Matter of Newbridge Securities Corporation and Bruce H. Jordan, Respondents (FINRA AWC )Tampa Man Sentenced To Nearly Four Years And Ordered To Pay Over $1.2 Million To Victims Of Dialing-For-Dollars Fraud Scheme (DOJ Release)
[T]he defendants conned U.S. and foreign investors out of tens of millions of dollars through three online binary options brokers, Bloombex Options, Morton Finance and Starling Capital, by the allure and promise of quick profits. The SEC alleges that defendants utilized call centers in Germany and Israel which operated as "boiler rooms," in which salespersons used high pressure sales tactics to offer and sell speculative binary options to vulnerable investors. Employees at these call centers allegedly persuaded investors to open binary option trading accounts and deposit large sums into those accounts. According to the complaint, call center employees lied to investors about their names, location and expertise in trading securities and they falsely told investors that the brokers only earned money if investors made money. In reality, the brokers earned money only from investor losses and thus had no incentive to advise investors on how to trade binary options profitably. The complaint alleges that most investors who traded binary options through the three brokers lost money, and some individual retirees lost their entire savings amounting to hundreds of thousands of dollars. The SEC also alleges that the brokers largely refused to honor investor requests to withdraw money from their trading accounts.
A five-year statute of limitations applies to any "action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise." 28 U.S.C. § 2462. In Kokesh v. SEC, 137 S. Ct. 1635 (2017), the Supreme Court held that "[d]isgorgement in the securities-enforcement context" is a "penalty" subject to that five-year limitations period. Id. at 1639. At issue in this appeal are two different remedies sought by the SEC: an injunction against further violations of certain securities laws and an injunction barring participation in the penny stock industry. The District Court held that those remedies-like the disgorgement remedy at issue in Kokesh-were penalties. We see these questions of first impression differently and hold that because 15 U.S.C. § 78u(d) does not permit the issuance of punitive injunctions, the injunctions at issue do not fall within the reach of § 2462. We will vacate the District Court's order dismissing the Commission's enforcement action and remand the case for the District Court to decide whether the injunctions sought are permitted under § 78u(d).
[I]njunctions may not be supported by the desire to punish the defendant or deter others, so courts abuse their discretion when they issue or broaden injunctions for those reasons. We therefore hold SEC injunctions that are properly issued and valid in scope are not penalties and thus are not governed by § 2462. If an injunction cannot be supported by a meaningful showing of actual risk of harm, it must be denied as a matter of equitable discretion-not held time barred by § 2462.
The SEC itself agrees with this approach in principle. In Saad, Exchange Act Release No. 86751, 2019 WL 3995968 (Aug. 23, 2019), the Commission was asked to evaluate a disciplinary sanction barring an individual from associating with any FINRA member firm. Id. at *1. The Commission observed at the outset that "if a sanction is imposed for punitive purposes as opposed to remedial purposes, the sanction is excessive or oppressive and therefore impermissible." Id. at *3. The Commission went on to explain that a reasonable, well-grounded finding that the sanctioned party "posed a clear risk of future misconduct" such that "the bar was . . . necessary to protect investors" was what distinguished an "appropriately issued FINRA bar" from an impermissibly punitive bar. Id. at *4 (internal quotation marks and citation omitted). Conversely, "[a] sanction based solely on past misconduct . . . would be impermissibly punitive and thus excessive or oppressive." Id. at *5.That an injunction is permissible only where necessary "to prevent . . . misconduct from occurring in the future," and not merely "to punish past transgressions," Saad, 2019 WL 3995968, at *12, is a standard to which the SEC must also hold itself. When it does not, the buck stops here: Lest we return to those days when only a modest showing was considered sufficient, Commonwealth Chem., 574 F.2d at 99, federal courts may not grant SEC injunctions except "upon a proper showing" of the likelihood of future harm.
[I]f the District Court, after weighing the facts and circumstances of this case as alleged or otherwise, concludes that the obey-the-law injunction sought here serves no preventive purpose, or is not carefully tailored to enjoin only that conduct necessary to prevent a future harm, then it should, and must, reject the Commission's request. We note that the District Court has already addressed some of the relevant concerns involved in its opinion. We are also troubled by the fact that the Commission appears to seek two injunctions that attempt to achieve the same result.
SEC injunctions come with serious collateral consequences. Commonwealth Chem., 574 F.2d at 99; Am. Bd. of Trade, 751 F.2d at 535. They can lead to administrative sanctions and disabilities, see Thomas J. Andre, Jr., The Collateral Consequences of SEC Injunctive Relief: Mild Prophylactic or Perpetual Hazard?, 1981 U. Ill. L. Rev. 625, 643-68, and collaterally estop defendants in subsequent private litigation, see Parklane Hosiery Co. v. Shore, 439 U.S. 322, 331-33 (1979). Enjoined defendants suffer harm to their personal and business reputations. See Sec. Inv'r Prot. Corp. v. Barbour, 421 U.S. 412, 423 n.5 (1975) ("The moment you bring a public proceeding against a broker-dealer who depends upon public confidence in his reputation, he is to all intents and purposes out of business." (quoting Milton V. Freeman, Administrative Procedures, 22 Bus. Law 891, 897 (1967))); Warren, 583 F.2d at 122; ABA Committee on Federal Regulation of Securities, Report of the Task Force on SEC Settlements, 47 Bus. Law. 1083, 1091, 1149-50 (1992). And when a court bans a defendant from his industry, it imposes what in the administrative context has been called the "securities industry equivalent of capital punishment." Saad v. SEC, 718 F.3d 904, 906 (D.C. Cir. 2013) (quoting PAZ Sec., Inc. v. SEC, 494 F.3d 1059, 1065 (D.C. Cir. 2007)).So we conclude by repeating Judge Friendly's warning: an SEC injunction "often is much more than [a] 'mild prophylactic.' " Commonwealth Chem., 574 F.2d at 99. When the Commission seeks an injunction, "the famous admonitions in [Hecht] must never be forgotten." Am. Bd. of Trade, 751 F.2d at 535-36.
For Details about the above rulemakings, READ:Modernizing the Approval Framework for ETFs. We adopted a new rule that (1) sets forth a clear and consistent framework that will allow exchange-traded funds ("ETFs") meeting certain standardized conditions to come to market without obtaining an individualized exemptive order, and (2) amends certain forms to enhance disclosures for investors.
Expanding "Testing-the-Waters" Communications to All Issuers. We adopted a new rule that will extend to all issuers the flexibility provided by the JOBS Act to communicate with institutional investors about potential IPOs and other registered offerings to better gauge market interest.
Enhancing Regulation in the OTC Markets. We proposed amendments to rules governing the publication of quotations for over-the-counter ("OTC") securities designed to better protect investors from fraud and manipulation, while at the same time facilitating more efficient OTC trading in certain well-capitalized issuers.
>ETF (Final Rule) https://www.sec.gov/rules/final/2019/33-10695.pdf
>ETF (Exemptive Order) https://www.sec.gov/rules/exorders/2019/34-87110.pdf
>Expanding "Testing-the-Waters" Communications (Final Rule)
>Enhancing Regulation in the OTC Markets (Proposed Rule)https://www.sec.gov/rules/proposed/2019/34-87115.pdf
For several years, ORLEAN and his co-defendants operated a fraudulent scheme in which a salesman named "Mike Palmer" would call elderly persons on the phone and offer them what he claimed was a time-sensitive opportunity to buy stock in certain companies. In fact, there was no "Mike Palmer," and the salesman was actually one or the other of ORLEAN's two co-defendants, who were taking turns using the fake alias. The purported time-sensitive investment opportunity was also fabricated by the defendants, as the companies in which they solicited investments were actually companies under their control. In one intercepted phone conversation, Co-defendant-1 described to ORLEAN his strategy for a successful investor sales pitch as: "You ram it down their fucking throat." In another intercepted call between Co-defendant-1 and ORLEAN, upon learning that a particular victim investor died, Co-defendant-1 remarked: "I knew I should have pulled the last $10,000 out of him."
The most recent version of the defendants' phony sales pitch included false representations about an impending initial public offering, or "IPO," for their company, Digital Donations Technologies, Inc. For example, in April 2018, one of the defendants assured a victim investor that "our company is doing great," that the company had an offer for an IPO valued at approximately $300 million, and that defendant KEITH ORLEAN was considering a private sale of the company for more than $1.5 billion. In truth, however, the defendants knew that the company had little or no actual commercial value and that no such IPO or sale was taking place.The Federal Bureau of Investigation ("FBI") estimates that since April 2014, the defendants have convinced more than approximately 50 elderly persons to purchase stock in companies controlled by one or more of the defendants based on false representations. The defendants appear to have solicited more than $2 million in stock purchases from victims.
At various times between July 2013 and July 2016, Newbridge failed to establish and maintain a supervisory system, and failed to establish, maintain, and enforce written supervisory procedures (WSPs), concerning the sale of complex securities such as structured notes and leveraged, inverse and inverse-leveraged exchange-traded funds ("Non-Traditional ETFs") that were reasonably designed to achieve compliance with FINRA's suitability rule.In addition, from November 2015 through March 2016, Newbridge failed to have a reasonable basis to recommend the sale of a private placement offering because it failed to conduct reasonable due diligence on the offering. In addition, Newbridge and Newbridge's Director of Investment Banking, Jordan, failed to reasonably supervise the offering because they allowed the firm to rely primarily on due diligence conducted by the issuer of the offering.Also, at various times between November 2015 and March 2016, Newbridge failed to comply with Section 15(c) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 15c2-4 thereunder in that it deposited investor funds into a law firm trust account for a private offering instead of requiring that an independent bank be established as the escrow agent.
[F]rom at least January 2013 through August 29, 2018, Buffington defrauded approximately 28 investors, from Florida and across the United States, out of more than $1.2 million by selling unregistered, non-exempt securities in the form of preferred shares. He made false and fraudulent representations to victim-investors about the need for funding for Green Street Equities ("GSE"). Buffington, GSE's listed Chairman and President, pitched GSE as a company focused on investing in "green companies" (i.e., environmentally friendly projects). Buffington's misrepresentations to investors included that: (1) GSE would go public soon after the investors' stock purchase, and (2) that GSE would use investor money to acquire ownership interests in various companies in the "green energy" sector. Based on Buffington's misrepresentations, victim-investors sent funds believing that that Buffington would use such money to fund GSE and its investments or acquisitions. Investors accepted Buffington's misrepresentations about GSE because prior to 2013, he had successfully raised funds for a company that had gone public and from which investors had profited.Buffington also made fraudulent representations to "green sector" companies, which he included on GSE's website and in its Private Placement Memoranda. Some of those companies appear to have been paper companies; others were legitimate companies towards which Buffington had promised any GSE-raised investor funding would be directed to fund their respective "green sector" projects.In the end, although Buffington marketed GSE as a company making meaningful investments or acquisitions in "green companies," neither GSE nor Buffington ever made any such investments or acquisitions. Instead, Buffington used any monies that he raised, including money wired by an undercover agent, for his personal benefit, which included drinking, gambling, and drug use.
[S]tewart illegally tipped his father, Robert K. Stewart, about future mergers and acquisitions involving clients of two investment banks for which Stewart worked. The complaint alleges that Stewart's father, a certified public accountant, cashed in on the tips by placing trades himself and by recruiting a partner to place trades ahead of the public announcement of these corporate transactions, generating approximately $1.1 million in illicit proceeds. In a related complaint, the SEC also charged Robert Stewart's trading partner, Richard Cunniffe, who cooperated in the investigation. Both Robert Stewart and Cunniffe pled guilty to criminal charges and agreed to settle the SEC's civil charges against them.
[F]rom at least 2011 to January 2016, Quad/Graphics' Peruvian subsidiary, Quad/Graphics Peru S.A., in violation of the FCPA, repeatedly paid or promised bribes to Peruvian government officials to win sales contracts and avoid penalties, and improperly attempted to influence the judicial outcome of a dispute with the Peruvian tax authority. Quad/Graphics Peru S.A. also created false records to conceal transactions with a state-controlled Cuban telecommunications company, which were subject to U.S. sanctions and export controls laws. In addition, the order finds that from 2010 to 2015, Quad/Graphics' China-based subsidiary, Quad/Tech Shanghai Trading Company, Ltd., used sham sales agents to make and promise improper payments to employees of private and governmental customers to secure business.