On January 2, 2019, a federal district court entered final consent judgments against an Australia-based investment adviser, Goldsky Asset Management, LLC, and its owner, Kenneth Grace, for making false and misleading statements about its business in filings with the Commission and on its website.
The SEC’s complaint, filed on September 27, 2018 in the Southern District of New York, alleged that Goldsky Asset Management’s Forms ADV for 2016 and 2017, which Grace signed, falsely stated that Goldsky Asset Management’s hedge fund, Goldsky Global Alpha Fund, LP, had an auditor, a prime broker and custodian, and an administrator. The complaint further alleged that, in its Forms ADV and ADV Part 2A, Goldsky Asset Management stated that it managed over $100 million in discretionary assets under management, when it in fact had no assets. According to the complaint, Goldsky Asset Management’s website falsely claimed that Goldsky Global Alpha Fund earned 19.45% compounded annual returns since inception, 70.33% compounded monthly returns since inception, and 25.30% returns for the year ended September 30, 2017. Read More
The SEC announced on March 12, 2019 that it has charged Texas resident William Neil “Doc” Gallagher-the self-styled “Money Doctor” featured on three Dallas-area radio stations-in an emergency action to shut down a $19.6 million Ponzi scheme targeting elderly investors’ retirement funds. The SEC also charged Gallagher Financial Group, Inc. and W. Neil Gallagher, Ph.D. Agency, Inc., companies that Gallagher used to carry out the scheme.
The SEC’s complaint, which was filed under seal on March 7, 2019, alleged that Gallagher made frequent religious references on his radio shows to establish his standing among a target audience of retired Christian investors. From December 2014 through January 2019, he raised at least $19.6 million from approximately 60 senior citizens. Falsely claiming to be a licensed investment adviser, he offered an investment that he called a Diversified Growth and Income Strategy Account, in which he promised to acquire income-generating assets for his clients in five specified categories. He promised investors that they would receive guaranteed, risk-free returns in their accounts ranging from 5% to 8% per year. In reality, except for one $75,000 annuity purchase, Gallagher purchased no assets in any of the five categories and no other assets to back the promised returns. Instead, he exhausted virtually all investor funds on spending unrelated to the accounts, including misappropriating significant portions for personal and company expenses and to make Ponzi payments to investors. To lull investors and conceal the scheme, Gallagher provided investors phony account statements showing false account balances. Read More
A sometimes overlooked aspect of Regulation A+ is the impact of state blue sky laws on liquidity and resales also known as secondary sales. State blue sky laws are applicable to resales by purchasers in Regulation A Offerings and vary from state to state. From a practical perspective, a company raising capital should consider liquidity for investors and the rules that apply to secondary trading.
The trading of securities of issuers listed on National Securities Exchanges like the NASDAQ Stock Market and the New York Stock Exchange (“NYSE”) are exempt from State blue sky laws that govern secondary trading; however, companies on the OTC Markets must comply with state blue sky laws for both their Regulation A+ offering and resales by the purchasers in the offering. Read More
The SEC charged on February 21, 2019, Joseph Frank Vacante, a former employee of a biotech company with insider trading on confidential information regarding the company’s withdrawal of certain products from consideration by the U.S. FDA.
Joseph Frank Vacante agreed to pay more than $140,000 to settle the SEC’s charges. Read More
On March 1, 2019, a federal district court entered a final consent judgment against broker, William Gennity who was charged with defrauding customers by making unsuitable and unauthorized trades and churning customers’ accounts that enriched the broker at the customers’ expense.
The SEC’s complaint, filed in the Southern District of New York, alleges that from July 2012 to August 2014, William Gennity recommended to four customers a pattern of high-cost, in-and-out trading without any reasonable basis to believe that his customers could make a profit. William Gennity’s recommendations resulted in losses for the customers and gains for William Gennity. He allegedly also lied to his customers about the potential for the accounts to profit. The complaint also alleges that William Gennity engaged in unauthorized trading and churning. Read More
Regulation A+ provides smaller companies with a flexible alternative to raising capital and going public in connection with direct public offering (DPO) and/or traditional initial public offering (IPO). Recent amendments allow companies that are subject to SEC reporting requirements to use Regulation A. + for their securities offerings. Going public is not mandatory, Regulation A+ can be used by both private companies and companies seeking public company status.
For companies going public on the OTC Markets, Regulation A+ streamlines the process of obtaining the stockholders necessary to establish an active trading market as required by the Financial Industry Regulatory Authority (“FINRA”) for the assignment of a stock trading symbol. Read More
On February 22,2019 the SEC announced the entry of a final judgment against James Polese, a former investment adviser at a large financial institution who was charged with misappropriating client funds.
On January 31, 2018, the Commission filed a complaint in the United States District Court for the District of Massachusetts charging James Polese and his former colleague, Cornelius Peterson, with securities fraud for engaging in various schemes to defraud their clients, including fraudulently misappropriating $350,000 of one client’s money, using $100,000 of those funds to make investments in their own names, and directing the remaining $250,000 to James Polese’s personal bank account. The Commission’s complaint also alleged that James Polese and Cornelius Peterson invested $100,000 of another client’s funds into an investment in which Cornelius Peterson and James Polese held a financial interest, without informing the client or disclosing their conflict of interest. Read More
On February 20, 2019, the U.S. District Court for the Southern District of Florida entered final judgments on consent against Mathias Francisco Sandoval Herrera and Maria D. Cidre, the former Chief Executive Officer and former Chief Financial Officer, respectively, of the Rest of World operating segment of General Cable Corp.
The SEC’s complaint, filed on January 24, 2017, alleged that Mathias Francisco Sandoval and Maria Cidre learned in January 2012 of an inventory overstatement and related accounting errors at General Cable’s subsidiary in Brazil. The complaint alleged that, over the course of 2012, the estimated overstatement grew to tens of millions of dollars. Instead of disclosing the overstatement pursuant to General Cable’s policies and system of internal controls, the complaint alleges that Mathias Francisco Sandoval and Maria Cidre concealed the errors by omitting them from required reports and making false certifications to executive management. Read More
On February 19, 2019, the SEC posted a new proposed rule intended to make it possible for all issuers to “test the waters” when contemplating a public offering of securities. Until now, only issuers considered emerging growth companies (EGCs) under the JOBS Act of 2012 qualified to solicit investor interest prior to a registered public offering. An EGC is defined as an issuer with “total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement”. A company continues to be an emerging growth company for the first five years after it completes an Initial Public Offering (“IPO”). Its status will change only if its gross revenues exceed the $1.07 billion threshold, if it has issued more than $1 billion in non-convertible debt, or it becomes a large accelerated filer.
In addition being allowed to test the waters—with the object of gauging investor interest in an initial public offering (IPO)—the JOBS Act conferred other advantages on EGCs, most of them having to do with less stringent SEC Reporting Requirements in quarterly and annual reports. Another benefit enjoyed by these fledgling companies was the ability to file draft registration statements with the SEC confidentially. When an EGC files a confidential initial registration statement, the filing itself is not made available to the public, and the review process is between the company and the SEC’s Division of Corporation Finance. The original submission and subsequent amendments need not be made public until 15 days prior to the start of the company’s road show. Read More
On February 15, 2019 the SEC announced charges against four individuals and related businesses for their roles in two microcap frauds and unlawful securities offerings. In sum, the alleged illegal transactions resulted in proceeds of more than $25 million.
According to the SEC’s complaint, from approximately December 2012 to June 2013, microcap stock financier Magna Group, which was founded and owned by Joshua Sason, engaged in a scheme to acquire fake convertible promissory notes supposedly issued by penny stock issuer Lustros Inc. and then to convert those notes into shares of Lustros common stock. The defendants then sold the shares to unsuspecting retail investors, who did not know that the shares were fraudulently acquired and were being sold illegally. The defendants’ sales of the Lustros shares also had the effect of destroying the value of the Lustros shares held by the public. The complaint alleges that Marc Manuel, Magna Group’s former head of research and due diligence, personally negotiated and executed the sham transactions. Read More