Articles Posted in Investment

In today’s ever-interconnected society, protecting the stability and security of cyber infrastructure and the personal information stored therein has never been of greater importance. Recognizing this need, the United States Securities and Exchange Commission (“SEC”) has taken marked steps to protect the security of investor records and information that broker-dealer firms possess.

In fact, the SEC has recently begun sanctioning the very victims of cyberattacks – investment firms that have fallen prey to such attacks – citing their deficient cybersecurity procedures as partly to blame for the unauthorized third-party access to investor’s private information. [1]

On August 30, 2021, the SEC released three orders sanctioning eight firms for their failures in protecting their customers’ personally identifiable information due to inadequate cybersecurity policies and procedures. These orders each proceeded as violations of Rule 30(a) of Regulation S-P, colloquially known as the “Safeguards Rule.” [2]

On September 27th, 2021, the Securities and Exchange Commission (“SEC”) announced affinity fraud charges against a Miami payday lender, Sky Group USA LLC (“Sky Group”), and its CEO, Efrain Betancourt. [1] The SEC’s complaint lists eight violations of federal securities law centering on allegations of material misrepresentations and omissions regarding Sky Group’s use of investor funds, its profitability, and the safety and security of the promissory notes it sold. [2]

According to the SEC’s complaint, Sky Group ran its fraudulent scheme from at least January 2016 through March 2020. During this time, Sky Group raised approximately $66 million through the sale of promissory notes while representing itself as a payday lender soliciting investors to fund its business. [2]

In particular, Sky Group targeted Venezuelan-American investors in South Florida, who in turn often spread information about the investment opportunity by word-of-mouth. Betancourt specifically pitched Sky Group investments as “a great opportunity for members of the Venezuelan immigrant community to generate investment income,” touting its supposed $70 million loan portfolio as evidence of the investment’s safety.

In an order issued on September 24th, 2021, the Securities and Exchange Commission (“SEC”) settled with Thomas Powell, Stefan Toth, and two entities they owned, Homebound Resources LLC (“Homebound”) and Resolute Capital Partners LTD LLC (“RCP”) on several charges of investment and securities fraud relating to oil and gas securities offerings. [1]

The SEC’s order concerns a period of time from 2016 through 2019, during which the SEC alleged that respondents made material misrepresentations and omissions about their oil and gas securities offerings. [1] The order states that neither Powell nor Toth were registered nor even associated with a registered broker-dealer during the relevant time period as they sold unregistered securities to investors. [2]

RCP is described as a private equity firm that “gives smart investors access to beyond-Wall Street assets, such as oil and gas wells” by creating, and then offering, oil and gas debt and equity investment vehicles for oil and gas wells. [2] In so doing, RCP relies on Homebound to identify and purchase these oil and gas wells. [2] During the relevant time period, Thomas Powell owned RCP while Stefan Toth owned and managed Homebound. [2]

On Tuesday, September 14th, the Securities and Exchange Commission (“SEC”) announced its first enforcement action against an alternative data provider, charging the company App Annie Inc. with securities fraud. App Annie and Bertrand Schmitt, its co-founder and former CEO and Chairman, have agreed to pay more than $10 million in a settlement with the SEC on these charges. [1]

While this marks the SEC’s first enforcement action against an alternative data provider, it likely will not be its last, as the use of alternative data in the financial and investment sphere continues to rise. [2] Alternative data (“alt-data”) is data which goes beyond that of traditional corporate financial statements and helps guide investment strategies. [3] Examples of alt-data include mobile device data, credit card transactions, satellite imagery data, product reviews, and even social media activity. [4]

This type of data can be instrumental in making sound investment decisions when it is paired with traditional data from corporate sources, because it provides a broader view of a company’s financial viability. [4] However, it is notoriously difficult to aggregate and analyze given its vast breadth – it’s estimated that the world produces at least 2.5 quintillion bytes of such data daily. [4] This is where companies like App Annie come in.

In the midst of the COVID-19 pandemic, Ponzi schemes have continued to pose a serious threat to unsuspecting investors here in Florida and around the world. On August 9, 2021, the Securities and Exchange Commission (SEC) filed a complaint in federal court against Johanna Garcia, of Broward County, and two companies she owns, MJ Capital Funding, LLC and MJ Taxes and More, for an alleged Ponzi scheme. [1]

The complaint alleges that Garcia has been operating a Ponzi scheme in which she has taken upwards of $70 million from over 2,000 investors under the guise that the investments funded Merchant Cash Advances (MCAs) for small businesses in need. Instead, the complaint alleges, the investments are being used in a “classic Ponzi scheme fashion” not to fund MCAs, but to pay the “returns” of investors before them. [2]

While MJ Taxes has been in existence since 2016, MJ Capital Funding was formed in June 2020, after the COVID-19 pandemic had already taken hold. From June until October 2020, MJ Taxes solicited six-month investments which typically promised a 10% monthly return, extrapolated out to substantial 120% annual returns. MJ Capital took over in October 2020, continuing to advertise as a source for MCAs while promising investors large and consistent returns.

Should a Special Purpose Acquisition Company (“SPAC”) be classified as an investment company? This is the question currently plaguing the SPAC industry, creating a divisive split between a long list of America’s biggest law firms on one side, and two preeminent securities law professors interested in investor protection on the other.

Robert Jackson, a professor at NYU School of Law and former SEC Commissioner, and John Morley, a Yale Law School professor, recently filed three suits against high-profiles SPACs in New York federal court. The suits argue that each SPAC is operating as an unregistered investment company, and under the Investment Company Act of 1940 (the “Act”), compensation paid to the SPAC’s sponsors and directors was illegal and void under the Act. However, in the decades-long history of SPACs, these entities have never been classified as investment companies under the Act, nor has the SEC purported that they should.

At the center of this debate lie two secondary, though potentially even more important, questions: what is a SPAC, and what is a SPAC’s primary purpose? The answer to these questions determines whether SPACs should indeed be classified as investment companies under the Act, as Jackson and Morley contend, or whether SPACs may continue to operate independently of the Act, as the SPAC industry and a wide coalition of law firms believe.

Instances of fraudsters disguising themselves as investment advisers and brokers are on the rise, prompting the U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy (OIEA), the FBI Criminal Investigative Division, and FINRA, each to release investor alerts and warnings.

While these regulatory agencies have identified multiple concerning fraudulent schemes, each type is centered around impersonation of investment advisers – a particularly worrisome and dangerous trend. A recent example was reported by the Texas State Securities Board, which announced that a Texas fraudster created a website for Prestige Assets Mgnt LLC, a name which is almost identical to that of the registered investment adviser Prestige Asset Management LLC. [1]

The regulator alleges that while the website is phony and does not represent a licensed dealer or investment adviser, it was built to look authentic, and actually directed users to the registered firm’s office location and CRD number. [1]

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The recent announcement of securities fraud charges against Trevor Milton, the former CEO of Nikola Corporation, may prove to be the first in a line of similar cases involving electric vehicle (“EV”) companies, and more broadly, companies that go public via SPACs. This situation highlights the importance of careful investment decision making, particularly in the EV and other rapidly growing, highly complex industries.

At the heart of the civil and criminal complaints against Nikola are allegations that as its CEO, Trevor Milton, regularly spread false and misleading information about the progress of Nikola’s EV products and technologies. Nikola’s focus is on manufacturing low- and zero-emissions trucks, and the complaints allege in part that under Milton, Nikola published a promotional video of a prototype truck which did not actually work, but appeared to only because the truck was set in neutral and rolled down a hill.  [1]

Promotional videos like that one, along with Milton’s enthusiastic social media posts and numerous podcast and television appearances, all painted a picture of exciting and impressive forward progress at Nikola, which Federal prosecutors and SEC regulators allege was nothing more than an illusion. [2]

On June 30, 2021, FINRA ordered an approximately $70 Million financial penalty against Robinhood Financial LLC, the highest such penalty ever levied by the regulatory organization.[1] Through its investigation of the firm, FINRA charged Robinhood with numerous violations which had resulted in significant losses to their customers. While Robinhood neither confirmed nor denied the validity of FINRA’s charges, they ultimately agreed to settle with these massive sanctions. [1]

FINRA noted three major violations from its investigation into Robinhood’s conduct and operations as a stock-trading app, each of which merited its own penalties.

First, FINRA found that Robinhood has pervasively and negligently provided false or misleading information to its customers. [1] This false information was circulated in spite of Robinhood’s core mission to “de-mystify finance for all” and “democratize finance,” and ranged from misrepresenting customer account balances and buying power, to erroneous communication about customers facing margin calls. [2]

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