SEC Charges Ault Alliance, Inc. and former CEO Milton Charles (“Todd”) Ault III with Making Misleading Disclosures and Other Violations, and Charges Current CEO for Record-keeping and Internal Control Violations (SEC Release)
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FINRA Board of Governors Confronted with Troubling Jeffrey Epstein Developments (BrokeAndBroker.com Blog)
In January 2021, the FINRA Board of Governors appointed Kathryn Ruemmler to fill the Floor Member Governor's seat. There was no election. Ruemmler was hand picked, and her appointment was approved by the full Board. The Governors who voted to approve Ruemmler's nomination knew or should have known of the troubling allegations set out in the then pending 2010 Class Action against Goldman Sachs; and, as such, should have made a full inquiry of Ruemmler as to her likely role, going forward, on behalf of her employer. A larger question now arises as to whether the Board knew or should have known of Ruemmler's alleged Epstein connection (tenuous or non-existent as it may have been). Moreover, in light of the developments since Ruemmler's 2021 appointment, was the Board presented with any basis to reconsider her appointment as a Governor, or, to request her resignation? In asking and answering such questions, we must always emphasize that FINRA is not a mere company but, in fact, a self-regulatory-organization.
SEC Dismisses Attempt to Do Something About a FINRA AWC (BrokeAndBroker.com Blog)
Over five years ago in "FINRA Sanctions Charitable Remainder Trust Pitch" (BrokeAndBroker.com Blog / January 22, 2018), our publisher Bill Singer, Esq., applauded a well-written FINRA AWC settlement concerning the respondent registered representative's promotion of a charitable remainder trust. Further, Bill found that the self-regulatory-organization imposed a fine and suspension that seem balanced and fair. Despite all of that, the Respondent had a belated bit of buyer's remorse about the AWC.
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In re: January 2021 Short Squeeze Trading Litigation / Juncadella, et al, Plaintiffs/Appellants, v. Robinhood et al. (Opinion, United States Court of Appeals for the Eleventh Circuit, No, 22-10669 / August 10, 2023)
As set forth in the 11Cir's Syllabus:
Like so many other industries, retail investing has been transformed by the internet. Once upon a time, a person who wanted to trade stocks needed a flesh-and-blood stockbroker. Now, most anyone with a smartphone and a bank account can trade stocks from the comfort of their own home.
Sometimes that goes well; other times not. In January 2021, many customers of the online financial services company Robinhood were aggressively buying specific stocks known as “meme stocks” in a frenzy that generated widespread attention. This phenomenon brought Robinhood additional revenue and a huge number of new customers, but it also exposed the company to unprecedented regulatory compliance risk. Robinhood then made a high-profile and controversial decision: it suddenly restricted its customers’ ability to buy these meme stocks (but not their ability to sell them). Some Robinhood customers who could not buy the restricted stocks brought this putative class action, seeking to represent both Robinhood customers and all other holders of the restricted meme stocks nationwide who sold the stocks during a certain period. As Robinhood customers, they allege that they lost money because Robinhood stopped them from acquiring an asset that would have continued to increase in value. And as stockholders, they allege that Robinhood’s restriction on purchasing the meme stocks caused the price of their stocks to fall.
The plaintiffs fail to state a claim—their contract with Robinhood gives the company the specific right to restrict its customers’ ability to trade securities and to refuse to accept any of their transactions. Because Robinhood had the right to do exactly what it did, the plaintiffs’ claims in agency and contract cannot stand. And under basic principles of tort law, Robinhood had no tort duty to avoid causing purely economic loss. We thus affirm the district court’s dismissal of the claims.
The 11Cir's 32-page Opinion is likely to cause anger and consternation among many retail investors who feel victimized by some of the conduct at issue. Be that as it may, the Court notes that:
When Robinhood restricted its customers’ ability to buy meme stocks, it took a sizable—and perhaps justifiable—hit in the court of public opinion. But in this Court, Robinhood is only accountable for specific legal duties. Whether in agency, contract, or tort, the plaintiffs’ amended master complaint did not adequately allege that Robinhood breached a state common-law duty. . . .
at page 32 of the 11Cir Opinion
Leader Of “Pump And Dump” Securities Fraud Scheme Pleads Guilty (DOJ Release)
In the United States District Court for the Southern District of New York, Earl Ingarfield pled guilty to one count of conspiracy to commit securities fraud in connection with an alleged "pump and dump" scheme involving penny stock shares of Suburban Minerals Corporation (“SUBB”). As alleged in part in the DOJ Release:
From at least in or about 2013 through at least in or about March 2014, EARL INGARFIELD engaged in a scheme to manipulate the stock price of SUBB, a public company traded on the over-the-counter market. In or about 2013, the defendant obtained control of SUBB, installing management at the company that acted at his direction and financing SUBB’s operations. INGARFIELD also obtained convertible promissory notes issued by SUBB, which he then converted into tens of millions of SUBB shares that were nominally held by offshore shell entities. INGARFIELD used these shell entities to conceal his involvement and the fact that he owned and controlled the vast majority of the shares of SUBB.
In early 2014, at INGARFIELD’s direction, SUBB announced that it was purportedly acquiring a producing African diamond mine worth $5 billion. But in reality, no such mine existed. Between January 2014 and March 2014, SUBB issued a series of press releases making false representations regarding that purported mine acquisition and SUBB’s operations. During the same time period, INGARFIELD orchestrated a marketing campaign through which promotional materials echoing the same false claims were distributed to the investing public by email. The false and misleading press releases and email marketing campaign caused SUBB’s share price and trading volume to become artificially inflated.
While SUBB’s price was artificially inflated, INGARFIELD profited by selling millions of his secretly amassed shares, all at the expense of the investing public. Between January and March 2014, he made more than $1.4 million from the sale of SUBB shares.
On March 7, 2014, the Securities and Exchange Commission halted trading in SUBB, after which the share price dropped precipitously and never recovered.
South Florida Resident Sentenced to Eight Years in Federal Prison for Nationwide Interstate Moving Fraud Scheme (DOJ Release)
In the United States District Court for the Southern District of Florida, Arvaham Zano, 36, pled guilty to wire fraud, interstate transportation of stolen property, and failure to give up possession of household goods; and he was sentenced to eight years in prison plus three years of supervised release, and ordered to forfeit $334,499.73 and pay $2,877,497.35 in restitution, joint and several with co-defendant Sofein Mlayah, 28 (who was previously sentenced to 30 months in prison)..As alleged in part in the DOJ Release:
Zano operated two companies, including Zano Moving and Storage, LLC, and acquired jobs through various moving brokers. These brokers would negotiate a moving service fee with a client, then subcontract the moving job to one of Zano’s companies. With the subcontracts in hand, Zano and his drivers, including Mlayah, traveled to the job locations – often on dates different from the ones originally scheduled and sometimes late at night – and loaded the household items to be moved into a truck. Zano or Mlayah would tell clients that they had more household items than the moving broker had originally estimated. Then, with the items already in the truck, they demanded more money to begin the move – sometimes two to three times more than the original estimate. If the clients refused, they risked losing their deposits and belongings. Zano and Mlayah often argued with the victims and coerced them into paying more for their moves, and on other occasions, Zano and Mlayah would not start loading the trucks until they received the higher fees; loaded the trucks but never delivered the items; or charged the victims bogus storage fees. Most of the victim’s household items have never been recovered.
New York Investment Firm CEO Guilty of Defrauding 50+ Investors in Multi-Million Dollar Pre-IPO Scam (DOJ Release)
In the United States District Court for the Middle District of Georgia, George Iakovou pled guilty to one count of conspiracy to commit wire fraud. As alleged in part in the DOJ Release:
[I]n July 2021, the U.S. Secret Service (USSS) began investigating a pre-IPO (initial public offering) scheme orchestrated by Iakovou, the CEO of Vika Ventures LLC, a boutique venture capital firm headquartered in New York which purported to specialize in pre-IPO investments in various early and late-stage private companies.
Iakovou advertised that Vika had access to buy pre-IPO shares in private companies such as Palantir, Airbnb, SpaceX and Stripe. He claimed that once these private companies went public and the mandatory six-month lockout period expired, Vika would distribute the purchased shares to the investors. In fact, Iakovou had neither access to pre-IPO shares in the advertised companies nor owned the shares at the time of the solicitations. While Iakovou did take the victim-investors’ money, he did not purchase or acquire any of the promised shares. Iakovou established fake email domains, posed as representatives from private equity brokerage firms and created fake bank statements among other tricks to carry out his fraud scheme.
USSS identified more than 50 victim-investors from across the country who provided capital to Vika between Jan. 2020 and Dec. 2021, including two victims in the Middle District of Georgia. A review of bank records for Vika’s investor account showed that identified victim-investors paid Vika approximately $5,958,505 for the purchase of pre-IPO shares of select private companies, but none received their promised shares. Iakovou rerouted the money to several accounts, including personal bank accounts, and used the money for private jet charters, cars, home furnishings, artwork, luxury clothing and accessories. For example, Iakovou spent $135,528 on a 2021 Corvette Stingray and more than $500,000 on luxury watches, including $231,799 on a single Patek Philippe timepiece.
UBS Agrees to Pay $1.435 Billion to Resolve Claims That It Made Misrepresentations in the Sale of Residential Mortgage-Backed Securities (DOJ Release)
In the United States District Court for the Eastern District of New York, UBS AG and several of its U.S.-based affiliates (together, “UBS”) have agreed to pay $1.435 billion in penalties related to UBS’ underwriting and issuance of residential mortgage-backed securities ("RMBS") issued in 2006 and 2007. The Complaint alleged that UBS defrauded investors in connection with the sale of 40 RMBS issued in 2006 and 2007; and that UBS knowingly made false and misleading statements to buyers of these securities relating to the characteristics of the mortgage loans underlying the RMBS in violation of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. § 1833a ("FIRREA"). As alleged in part in the DOJ Release:
[C]ontrary to UBS’ representations in publicly filed offering documents, UBS knew that significant numbers of the loans backing the RMBS did not comply with loan underwriting guidelines that were designed to assess borrowers’ ability to repay. The complaint further asserted that UBS knew that the property values associated with a significant number of the securitized loans were unsupported, and that significant numbers of the loans had not been originated in accordance with consumer protection laws. UBS was allegedly aware of these significant problems because it had conducted extensive due diligence on the underlying loans prior to the RMBS being issued to determine whether the loans were consistent with representations that would be made to investors. Ultimately, the 40 RMBS sustained substantial losses.
With the UBS settlement announced today, the Department of Justice has collected more than $36 billion in civil penalties from 18 major domestic and foreign banks, originators, and rating agencies for their alleged conduct in connection with mortgages securitized in failed RMBS leading up to the 2008 financial crisis. These resolutions include settlements with eighteen banks, mortgage originators, and rating agencies: Ally Financial; Aurora Loan Services; Bank of America; Barclays; Citigroup; Credit Suisse; Deutsche Bank; General Electric; Goldman Sachs; HSBC; JPMorgan; Moody’s; Morgan Stanley; Nomura; Royal Bank of Scotland; S&P; Société Générale; and Wells Fargo.
SEC Obtains Emergency Relief, Charges Recidivist in Offering Fraud (SEC Release)
In the United States District Court for the Southern District of Florida, the SEC filed a Complaint https://www.sec.gov/files/litigation/complaints/2023/comp25810_0.pdf charging PreIPO Corp, John A. Mattera, and West David P. Grzan with violating Sections 5(a), 5(c), and 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5; and, additionally, charging that Mattera was liable as a control person for PreIPO's violations of Section 10(b) and Rule 10b-5.The Court issued a Temporary Restraining Order https://www.sec.gov/files/litigation/litreleases/2023/order25810.pdf and asset freezes. As alleged in part in the SEC Release:
[F]rom at least March 2022 and continuing through the present, PreIPO, through Mattera and Grzan, raised at least $4.2 million from investors. PreIPO, Mattera, and Grzan told investors in the offering that their money would be used to develop an online platform that offers access to shares in private companies before their initial public offerings. Contrary to the defendants' statements to investors, the complaint alleges that only a small portion of the offering proceeds was used to fund PreIPO's online platform. Instead, PreIPO made undisclosed payments totaling about $1.7 million to Mattera, Grzan, and other officers of the company out of investor funds. In addition, according to the complaint, PreIPO, Mattera, and Grzan made material misrepresentations and omissions to investors regarding PreIPO's management in order to conceal Mattera's involvement in and control over the company.
UnRulemaking: Statement Regarding DST Asset Manager Solutions, Inc. by SEC Commissioner Hester M. Peirce and SEC Commissioner Mark T. Uyeda
The Commission once again uses an enforcement action as a substitute for notice and comment rulemaking. It does so today in a case that finds a registered transfer agent, DST Asset Manager Solutions, Inc. (“DST”), failed to act reasonably in its efforts to locate lost securityholders. Specifically, the Order finds that DST “failed to take reasonable steps to find lost securityholders as prescribed by [Rule 17Ad-17 under the Securities Exchange Act of 1934], putting those securityholders’ assets at risk of being handed over to state governments – escheated – as unclaimed assets.” Tucked into the Commission’s Order is an undertaking that effectively imposes a substantive new disclosure requirement on mutual funds. Accordingly, we dissent.
The Order includes an undertaking requiring DST to “[r]equest that its mutual fund clients periodically send out notifications to their client shareholder base informing them of the risk of escheatment and educating them on steps to take to avoid dormancy, including updating their addresses and otherwise establishing contact with the funds or DST.” The Order also requires DST to certify, in writing, compliance with the undertaking. That certification must include “written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance,” which the Commission staff can demand be supplemented with “further evidence of compliance.”
In other words, although disguised as a “request” from the transfer agent to its mutual fund clients, the additional disclosures referenced in the undertaking are effectively a requirement imposed by the Commission. If a mutual fund receives a request from its transfer agent that the Commission required the transfer agent to make, fund counsel reasonably will view it as tantamount to a Commission requirement. While the Order addresses only one transfer agent, its reach is broader. The undertaking implies that all mutual funds, with prompting from their transfer agents, should be sending periodic escheatment notices and conducting escheatment education for their shareholders.
Many mutual funds already include voluntary registration statement disclosure regarding escheatment. Thus, the Order creates the implication that mutual funds’ existing disclosures regarding escheatment are inadequate, but offers no guidance about what would be adequate. Is an annual disclosure enough to satisfy the Order’s undertaking to send out notifications periodically? How detailed should the disclosure be to appropriately educate fund shareholders? What documents should include the disclosure? Can such disclosure be satisfied using the layered disclosure approach currently used for prospectuses and annual and semi-annual reports? The Order offers no answers.
Commission rules already subject mutual funds to robust disclosure requirements. The Commission may, consistent with the Administrative Procedure Act, engage in rulemaking to supplement or amend these existing requirements. But the Commission is a victim of its own misguided overambition. What is a regulator to do when it cannot fit one more rulemaking on the calendar? The answer appears to be “send enforcement to do the rulemaking.” We dissent.
 In the matter of DST Asset Manager Solutions, Inc., Release No. 34-98153 (Aug. 17, 2023) (“Order”), at paragraph 1, available at https://www.sec.gov/files/litigation/admin/2023/ap-34-98153.pdf.
 Id. ¶ 10.b.
 We also take issue with the Order’s strained reading of Rule 17Ad-17. Rules 17Ad-17(a)(1) requires transfer agents to “exercise reasonable care to ascertain the correct addresses” of lost securityholders. The rule further specifies that “[i]n exercising reasonable care to ascertain . . . such lost securityholders’ current addresses,” the transfer agent must “search by taxpayer identification number or by name if the search based on taxpayer identification number is not reasonably likely to locate the securityholder.” The Commission reads this language to prohibit transfer agents, after identifying a potential better address for a lost securityholder through a search using the securityholder’s taxpayer identification number, from systematically checking the likely accuracy of that address by trying to match it with the securityholder’s name. This reading misconstrues the rule’s language. The requirement that a transfer agent search by taxpayer identification number states the minimum to meet the “reasonable care” threshold. Nothing in the rule’s text prohibits a transfer agent from taking additional steps in the “exercise of reasonable care to ascertain the correct address.” Indeed, a reasonable transfer agent might believe that matching the address to the securityholder’s first or last name is a reasonable precaution to protect securityholders’ funds from being sent to someone who has stolen the securityholder’s social security number. Presumably, it would be even harder to retrieve funds stolen in this manner than to retrieve funds escheated to the state. At all events, this case is a reminder that our transfer agent rules need refreshing. See, e.g., Commissioners Luis A. Aguilar and Daniel M. Gallagher, Statement Regarding the Need to Modernize the Commission’s Transfer Agent Rules (June 11, 2015), https://www.sec.gov/news/statement/modernize-sec-transfer-agent-rules (“The Commission has not significantly revised its transfer agent rules in almost 30 years, a period that has witnessed sweeping changes in the securities industry, particularly in transfer agents’ activities. As a result, the Commission’s anachronistic transfer agent rules and the services that the nation’s roughly 450 transfer agents provide today are out of sync.”) and Commissioners Michael S. Piwowar and Kara M. Stein, Statement of Support for the Need to Modernize the Commission’s Transfer Agent Rules (June 11, 2015), https://www.sec.gov/news/statement/statement-support-modernize-sec-transfer-agent-rules (“the issue of transfer agent regulation is pressing and timely”). Eight years later, the need for change is even more “pressing and timely,” but (as with the main issue we write about today) we cannot use enforcement actions to supplement or revise the rules on the books. We would do well to set other less pressing rulemaking projects aside in favor of working on modernizing the transfer agent rules.
 Order ¶ 10.
 Order ¶ 10.
 These requirements include registering their shares on Form N-1A, which sets forth disclosure requirements for a fund’s prospectus and statement of additional information (Form N-1A, 17 CFR §§ 239.15A and 274.11A, available at https://www.sec.gov/files/formn-1a.pdf); transmitting annual and semi-annual reports to shareholders in accordance with the disclosure requirements set forth in Form N-CSR (Form N-CSR, 17 CFR §§ 249.331 and 274.128, available at https://www.sec.gov/files/formn-csr.pdf); disclosing portfolio holdings on Form N-PORT (Form N-PORT, 17 CFR § 274.150, available at https://www.sec.gov/files/formn-port.pdf); and disclosing proxy voting records on Form N-PX (Form N-PX, 17 CFR § 274.129, available at https://www.sec.gov/files/formn-px.pdf).
SEC Charges Malvern and Former CFO for Materially Misstating Financial Statements in Connection with Certain Commercial Real Estate Loans (SEC Release)
Without admitting or denying findings in an SEC Order https://www.sec.gov/files/litigation/admin/2023/33-11223.pdf that Malvern Bancorp, Inc. violated Section 17(a)(2) and (3) of the Securities Act, Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and Section 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; and that the firm's former Chief Financial Officer, Joseph D. Gangemi (“Gangemi”) caused Malvern's violations, Malvern agreed to pay a penalty of $350,000, and Gangemi agreed to pay a penalty of $40,000; and both consented to a cease-and-desist order. As alleged in part in the SEC Release:
[B]etween December 2017 through February 2021, Malvern failed to properly account for certain troubled debt restructurings, loan impairments and charge-offs, and impairment of other real estate owned. According to the SEC’s order, due to the size of the loans, the effects of these misstatements were significant and materially impacted the Bank’s reported income for the periods ended December 31, 2017, March 31, 2018, June 30, 2018, September 30, 2018, December 31, 2019, September 30, 2020, and December 31, 2020. he order further finds that for the quarter-ended December 31, 2019 and for the fiscal year-ended September 30, 2020, Malvern restated its financial statements in its amended Form 10-Q and in its amended Form 10-K, respectively. According to the order, throughout the Relevant Period, Malvern’s books and records with respect to these loans were inaccurate, and it failed to devise and maintain a system of internal accounting controls to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”).
On July 17, 2023, after the conducted alleged in the Order, Malvern merged with and into First Bank, Hamilton, New Jersey. First Bank is the successor to Malvern.
SEC Charges Ault Alliance, Inc. and former CEO Milton Charles (“Todd”) Ault III with Making Misleading Disclosures and Other Violations, and Charges Current CEO for Record-keeping and Internal Control Violations (SEC Release)
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/files/litigation/admin/2023/33-11222.pdf, Ault Alliance, Inc. (f/k/a BitNile Holdings, Inc., Ault Global Holdings, Inc., DPW Holdings, Inc., and Digital Power Corporation) (“AAI”) and its Executive Chairman and then-Chief Executive Officer Milton Charles (“Todd”) Ault III and AAI’s former Chief Financial Officer and current CEO, William Horne, CPA consented to an order finding that:
a) the firm violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (“Securities Act”), and Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Exchange Act Rules 12b-20, 13a-1, 13a-11, 13a-13, 13a-15(a), 14a-3, and 14a-9;
b) Ault violated Exchange Act Rule 13b2-1; violated, and caused violations of, Securities Act Sections 17(a)(2) and 17(a)(3) and 14(a) and Exchange Act Rules 14a-3, and 14a-9; and was a cause of AAI’s violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, and 13a-13; and
c) Horne violated Exchange Act Rule 13b2-1 and was a cause of AAI’s violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).
AAI agreed to pay a $700,000 penalty and to hire an Independent Consultant to review its internal control over financial reporting and disclosure controls and procedures.
Ault agreed to pay a $150,000 civil penalty and to pay disgorgement of $75,000 with prejudgment interest of $10,504.
Horne agreed to pay a civil penalty of $20,720.
As alleged in part in the SEC Release:
[I]n 2018 and 2019, AAI and Ault made materially false and misleading statements and omissions concerning the performance of a) a $50 million purchase order that AAI received from a related party that Ault controlled, Avalanche International, Inc, and b) AAI’s new crypto asset mining business. Separately, in 2019, through Ault and Horne, AAI improperly recorded a $75,000 payment to an individual as being for consulting services when, in fact, the payment was to extinguish a personal debt owed by Ault. In addition, AAI failed to make related-person disclosures in 2016-2021, has had long-running internal control weaknesses beginning in June 2017, and engaged in improper accounting related to its investments in warrants of Avalanche during its fiscal years ended 2018 through 2021. AAI restated its financial statements to correct for its erroneous warrant accounting in amended filings on April 14, 2023.
SEC Charges UK Audit Firm, CEO, and Senior Auditor for Failures in Connection with De-SPAC Transaction (SEC Release)
Without admitting or denying the findings in an SEC Order,
https://www.sec.gov/files/litigation/admin/2023/34-98118.pdf, Crowe U.K., LLP, its Chief Executive Officer Nigel Bostock, and Senior Auditor Matthew Stallabrass Bostock settled the charges and will pay penalties of $750,000, $25,000, and $10,000, respectively, and will cease and desist from committing or causing violations of the proxy and reporting provisions of the Exchange Act and Regulation S-X. Further, Crowe U.K. agreed to be censured, pay disgorgement and prejudgment interest (the payment of which is deemed satisfied by Crowe U.K.’s payments in related private litigation), voluntarily withdraw its PCAOB registration, and implement undertakings related to the firm’s acceptance of new clients. Finally, Bostock and Stallabrass agreed to be suspended from appearing or practicing before the SEC as accountants, with the right to apply for reinstatement after five years and two years, respectively. As alleged in part in the SEC Release:
[C]rowe U.K. issued a clean audit report of Akazoo’s 2018 financial statements. However, as the order finds, after Akazoo went public in September 2019 via merger with a special purpose acquisition company, also known as a De-SPAC transaction, it was revealed that the company’s 2018 financial statements falsely claimed $120 million in revenue when Akazoo had only negligible amounts of revenue. The order finds that Crowe U.K. claimed that it conducted its 2018 audit in accordance with Public Company Accounting Oversight Board (PCAOB) standards when, in fact, its Akazoo audit team had almost no experience or training in PCAOB standards. Further, the order finds that the audit team overlooked red flags when, for instance, they failed to exercise an appropriate level of due professional care or professional skepticism when Akazoo presented fabricated agreements and inauthentic confirmation letters to the audit team. The order also finds that Crowe U.K. made false statements in its audit report when it claimed that Akazoo fairly presented its financial statements in all material respects for 2018. The order finds that, by violating PCAOB standards in connection with the 2018 Akazoo audit, Crowe U.K., Bostock, and Stallabrass engaged in improper professional conduct.
Additionally, the SEC order finds that Bostock, as the engagement partner for the Akazoo audit, among other things, failed to appropriately supervise the engagement, maintain adequate documentation, and exercise due professional care. The SEC order also finds that Stallabrass, the engagement quality reviewer for the audit, failed to conduct a sufficient engagement quality review.
CFTC Orders Texas Trading Advisor and His Company to Pay Approximately $250,000 for Fraudulent Solicitation and Failure to Register (CFTC Release)
A CFTC Order https://www.cftc.gov/media/9146/enfbryantorder081523/download settled charges against Peter L. Bryant and his company, Bryant Capital Trade Management Corporation for committing fraud while acting as an unregistered commodity trading advisor (CTA) and for failing to register as a CTA. The CFTC Order requires Bryant and Bryant Capital to pay, jointly and severally, $55,655.90 in restitution and a $195,000 civil monetary penalty, and to cease and desist from any further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged; and further, imposes four-year trading and registration bans on Bryant and Bryant Capital. As alleged in part in the CFTC Release:
[B]eginning approximately February 2014 and continuing through approximately December 2022, Bryant and Bryant Capital acted as unregistered CTAs through direct outreach, electronic communications, newsletters, and web-based advertisements. Such solicitations offered advice regarding the value and advisability of trading in commodity options, futures, and/or swaps in energy markets and promoted respondents’ paid trading advisory services.
According to the order, these solicitations included numerous false and misleading statements regarding their business and performance, their expertise and experience in the energy derivatives markets, client base, past performance, as well as the applicability of the CFTC’s registration requirements to their business. For example, in one newsletter, respondents falsely represented that in 2021, they provided services to 47 clients with “proprietary - detailed analyses and made countless recommendations,” and that in 44 of these 47 analyses, their work had “identified performance markers resulting in a 27%-39% reduction in 2021 energy costs (the proper term here is ‘avoidance of increased costs’) in addition to showing a minimum 5% immediate reduction in current energy costs within the first 90 days of engagement.”
To the contrary, as found in the order, these representations were entirely fabricated. The respondents also falsely represented their business was operating as an “exempt swap intermediary” that did not require CFTC registration.
The order finds the respondents’ misrepresentations regarding their business and services resulted in at least $55,655.90 in client losses.
Between July 2018 and September 2021, Goldman failed to report, or inaccurately reported, OTC options positions to the LOPR in approximately 1,035,000 instances, in violation of FINRA Rule 2360(b)(5). During the same period, the firm also failed to maintain and enforce a supervisory system reasonably designed to achieve compliance with FINRA Rule 2360(b)(5), in violation of FINRA Rules 3110 and 2010.
In 2019, FINRA advised CoreCap that it had exceeded the number of offices in its membership agreement in violation of NASD Rule 1017. In response, CoreCap filed a continuing membership application with FINRA requesting approval for a business expansion from 20 offices to 100 offices. CoreCap thereafter amended its application to request approval for a business expansion to 55 offices. On May 8, 2020, CoreCap executed a membership agreement permitting it to “[o]perate 55 [offices] (registered and unregistered), which includes the Main Office.” CoreCap subsequently executed another membership agreement on July 29, 2020, that also permitted it to operate 55 offices.
Despite the firm’s representation in its membership agreement, CoreCap operated 82 offices by April 26, 2021, and had thereby expanded its permitted business operations by 27 offices. Through this expansion, the firm also exceeded the safe harbor by 11 offices. Although CoreCap recognized that it had expanded its business beyond its membership agreement and the safe harbor, it failed to reduce its number of offices to the permitted number of offices until a year after it discovered the violation and approximately five months after FINRA advised the firm that it had exceeded the number of offices allowed by its membership agreement and the safe harbor.
Therefore, Respondent violated FINRA Rules 1017 and 2010.