The Wall Street Legal & Regulatory Feed
Securities Industry Commentator by Bill Singer Esq
December 4, 2018
Investment Adviser Settles Charges Related to Expense Misallocation and Valuation Review Failures (SEC Release)
https://www.sec.gov/enforce/33-10581-s
Without admitting or denying the findings, and in anticipation of the institution of SEC proceedings, former SEC-registered investment adviser Fifth Street management submitted Offers of Settlement, which the SEC accepted. In the Matter of Fifth Street Management, LLC, Respondent. (Order Instituting Administrative and Cease-And-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-And-Desist Order; '34 Act Rel. No. 84713; '33 Act Rel. No. 10581; Invest. Adv. Act Rel No. 5070; Invest. Comp.. Act Rel No. 33312; Admin. Proc. File No. 3-18909 / December 3, 2018) (the "OIP"). The OIP alleged that Fifth Street Management LLC had improperly allocated to its clients $1,327,405 in rent, other overheard, and compensation expenses that the company should have paid. Also, the company failed to reasonably review its clients' quarterly valuation models, resulting in one client overvaluing two portfolio companies, thus causing three of the client's monthly financial statements to materially misstate net income and earnings per share; and during two such months, the client issued overvalued shares to the public. The OIP found that Fifth Street Management LLC violated the antifraud and policies and procedures provisions of Sections 204A, 206(2), 206(4), and 207 of the Advisers Act and Rules 206(4)-7(a) and 206(4)-8(a)(2), thereunder. Further, the OIP finds that Fifth Street Management caused a client's violation of the antifraud provision Section 17(a)(2) of the Securities Act of 1933, and caused its clients' violations of the reporting, books and records, and internal controls provisions of Securities and Exchange Act of 1934 and the Investment Company Act of 1940. The SEC ordered Fifth Street Management LLC to cease-and-desist from committing or causing any violations of the aforementioned provisions; and Censured the company and ordered it to pay $1,999,115 disgorgement,$334, 545 prejudgment interest, and a $1,650,000 civil money penalty -- a Fair Fund has been created for the disgorgement, prejudgment interest, and penalty. READ the SEC Order
https://www.sec.gov/litigation/admin/2018/33-10581.pdf
https://www.sec.gov/litigation/admin/2018/33-10581.pdf
https://www.sec.gov/litigation/litreleases/2018/lr24364.htm
In a Complaint filed in the United States District Court for the Eastern District of New York, the SEC alleges that Mark Suleymanov violated the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as the registration provisions of Section 5 of the Securities Act. In response to the Complaint, Suleymanov agreed to a bifurcated settlement, which will permanently enjoined from these provisions, and the issues of disgorgement, prejudgment interest and a civil penalty are reserved for further determination by the court upon motion of the SEC. The Complaint alleged that from at least 2012 to 2016, Suleymanov engaged in the unregistered offer and sale of binary options, which he promoted and sold on the SpotFN website and other related websites he controlled. The Complaint alleges that Suleymanov misrepresented the profitability of investing in the binary options, as well as investors' ability to access their funds. Allegedly, Suleymanov used software to manipulate investors' trading results to increase investor losses, and prevented many investors from withdrawing their funds. The SpotFN website also allegedly falsely stated that an investor's funds would be held in a separate account and used only for trading options, not for SpotFN's business expenses. The Complain alleges that Suleymanov commingled investor funds in his bank accounts and misused certain of the funds for business and personal expenses. Investors purportedly sustained about $4 million in losses as a result of Sulyemanov's fraud. READ the Complaint
https://www.sec.gov/litigation/complaints/2018/comp24364.pdf
https://www.sec.gov/litigation/complaints/2018/comp24364.pdf
Former First Republic Securities Employee Wins $1.1 Million FINRA Arbitration Award (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/4314/FINRA-Arbitration-First-Republic/
On Wall Street, the majority of employment disputes tend to get resolved in favor of employers. Some of that may be prompted by the Terminable-at-Will doctrine, which seems an attempt to balance employees' right to quit at their discretion by imbuing employers with the discretion to fire at will. Although the doctrine is short-circuited by the express terms of an employment contract or the rules of a union shop, the courts frequently sanction at-will discharges involving violations of constitutionally protected rights or tortious misconduct. In a recent industry employment dispute, the former employee has a laundry list of complaints against his former employer. Simply going by the averages for such cases, you sort of anticipate that the Claimant is going to go down in flames. Then you come upon the stunning finding by three independent arbitrators that the former employee's discharge was "unwarranted." You don't see that conclusion every day in a Wall Street employment dispute. In the end, it's an unmitigated victory for a former employee.
SEC Charges Three Florida Residents with Orchestrating a Fraudulent Public Shell Company Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2018/lr24365.htm
In a Complaint filed in the United States District Court for the Middle District of Florida the SEC alleged that David Dreslin and Michael Toups created shell company, Anglesea Enterprises, Inc.,and appointed nominal officers and directors in order to conceal their control over the company. Additionally, the Complaint names The SEC Leslie Toups, Anglesea's majority shareholder and director, for signing filings and other documents that contained materially false and misleading statements and omissions..The purported goal of the alleged scheme was to sell Anglesea in a reverse merger for profit. READ the Complaint https://www.sec.gov/litigation/complaints/2018/comp24365.pdf
The Complaint charges:
- Dreslin, Michael Toups, and Leslie Toups with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aiding and abetting Anglesea's filing of false SEC reports, in violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-11
- In the alternative, that Dreslin and Michael Toups violated the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 through or by means of others, in violation of Section 20(b) of the Exchange Act
- Dreslin with aiding and abetting false statements to Anglesea's auditor in violation of Exchange Act Rule 13b2-2, and aiding and abetting Anglesea's violation of Rule 13a-13 under the Exchange Act
- Leslie Toups with failing to file required reports in violation of Section 16(a) of the Exchange Act and Rule 16a-3 thereunder.
Without admitting or denying the SEC's allegations, Leslie Toups agreed to settle the charges and agreed to be barred, for five years, from serving as an officer or director of a public company or participating in a penny stock offering, to pay a $25,000 penalty, and to permanent injunctions against violating the charged provisions of the federal securities laws.
Simsbury Man Sentenced to Prison for Multimillion Dollar Stranger-Originated Life Insurance Scheme (DOJ Release)
Daniel Carpenter was found guilty after a bench trial in the United States District Court for the District of Connecticut on 57 counts of conspiracy, mail and wire fraud, money laundering and illegal monetary transaction offenses stemming from a stranger-originated life insurance scheme that prompted insurance companies to issue policies on the lives of elderly individuals for the benefit of Carpenter and other investors. Previously, Carpenter was convicted on unrelated mail fraud and wire fraud charges stemming from an unrelated business scheme, and was sentenced in 2014 to 36 months in prison. Some folks learn their lesson. Some don't. Apparently Carpenter falls into that latter category. Given the somewhat intricate nature of the stranger-originated-life-insurance fraud, let me provide you with an extensive quote from the DOJ Release. We start with the background that Carpenter ahd controlled a series of companies that developed the Charter Oak Trust, which was an employee welfare benefit plan and trust designed to secure and, thereafter, invest in (or resell), insurance policies on the lives of elderly individuals. In furtherance of the fraud, so-called "Straw Insureds" eldery were promised with two years of free life insurance and in most cases, a portion of any subsequent proceeds from the sales of their policies. Carpenter worked with insurance agents in order to submit to insurance providers:
numerous insurance applications that contained several material misrepresentations, including falsely denying that third-parties were paying the premiums for the insurance, falsely denying discussions about the resale of the policies, falsely inflating the net worth and/or income of the insured, and falsely claiming that the insurance was being purchased for legitimate estate planning-related needs. All applications were signed by Carpenter's brother-in-law, who acted as trustee of the Charter Oak Trust, which was to be the "owner" of all policies in the trust. Moreover, the applications purported that the Charter Oak Trust was a bona fide welfare benefit trust under Internal Revenue Code Section 419(e), wherein employers would be making contributions to the Charter Oak Trust in order to fund the life insurance policies for the benefit of certain select employees.
The evidence further established that, in truth, no "employer" or Straw Insured ever paid a premium into the Charter Oak Trust. Rather, the premiums were funded by loans primarily from another company headquartered in Simsbury and controlled by Carpenter. In many cases, those loans were, in turn, financed by another third-party financing company based in Stamford. The loan arrangements were withheld from the insurance providers, who would not have issued policies had they known the true nature of the Charter Oak Trust, and had the insurance applications been filled out truthfully.Based on the false applications that were submitted to the insurance providers, the Charter Oak Trust procured 84 insurance policies that had a total aggregate death benefit of more than $459 million on the lives of 76 different Straw Insureds. In addition, another company controlled by Carpenter received more than $12 million in commissions from the insurance providers, who would not have paid the commissions had they known about the false representations on the insurance applications and the true nature of the Charter Oak Trust.Finally, the trial evidence showed that one Straw Insured died within the first two years of the issuance of the two insurance policies on his life. Those policies had been issued in late 2006 and early 2007 based on misrepresentations similar to those described above, specifically that his policies were not being funded by a third party and were not intended for resale. The two insurance policies had a combined death benefit of $30 million, which the insurer paid to the Charter Oak Trust in May 2009. At Carpenter's direction, the Charter Oak Trust failed to pay the $30 million to the Straw Insured's beneficiary, and instead used the funds to pay for various expenses, including other insurance premiums that were related to the underlying fraud, as well as to purchase a home in Rhode Island.