Among recent enforcement actions by the Securities and Exchange Commission were charges against an RIA for misuse of backtested performance data; against a former Goldman Sachs compliance employee for insider trading; charges against two bitcoin mining companies in a Ponzi scheme; and charges against three traders for spoofing and order mismarking.
RIA Fined Over Misuse of Backtested Data
The SEC has charged Alpha Fiduciary Inc., a $737 million registered investment advisor, and its majority owner, president and former chief compliance officer Arthur Doglione, with failing to properly disclose its use of backtested, hypothetical results in marketing materials.
According to the agency, from at least August 2010 to March 2013, AFI, Doglione and the firm’s former business development director created and distributed to clients and prospective clients advertising that did not sufficiently disclose that performance data for the firm’s Global Tactical Multi Asset Class Strategies (GTMACS) was not actual, but instead was backtested and hypothetical.
Although Alpha provided several pieces of performance advertising generally disclosing the use of “certain hypothetical performance and portfolio information,” those disclosures were not direct, were often not on the same page as the hypothetical data and were contrary to other statements that said that GTMACS’ performance data was actual, not hypothetical.
In addition, advertising included examples of favorable investment decisions but failed to mention decisions that didn’t work out so well. The firm also failed to implement adequate written compliance policies and procedures.
AFI and Doglione were censured and subjected to a penalty of $250,000. In addition, the firm was required to hire an independent compliance consultant.
Ex-Goldman Compliance Employee Used Trader Emails to Make Illicit Trades: SEC
Yue Han, a former Goldman Sachs employee, was charged by the SEC with insider trading after the agency said he stole nonpublic information in the firm’s email system so he could trade illegally in advance of client mergers and make more than $450,000 in illicit profits. The SEC also got an emergency freeze order for his assets and the accounts he used to place the trades.
According to the agency, Han, who also goes by the name John Han, worked as an associate in Goldman’s compliance department. He gained access to investment banker emails as part of his work developing surveillance software designed to monitor other employees for potential misconduct, such as insider trading, and then used confidential information he found in emails sent and received by Goldman investment bankers responsible for advising clients on impending merger and acquisition transactions.
Han began working at Goldman in late 2014, and was assigned to a group enhancing the firm’s ability to conduct electronic surveillance of its employees to identify insider trading and other misconduct. As part of his job, Han was given access to the emails of investment banking employees.
Taking advantage of the information he found in these emails, Han bought securities, including out-of-the-money call options, of at least four companies that were on the brink of being acquired: Yodlee Inc., Zulily Inc., Rentrak Corp., and KLA-Tencor Corp. He traded not only in his own account, but also in an account belonging to his father, Wei Han, who lives in China. The elder Han is named as a relief defendant.
The investigation is continuing.
SEC Charges Bitcoin Mining Companies on Ponzi Scheme
The SEC has charged two bitcoin mining companies and their founder with running a Ponzi scheme.
According to the agency, Homero Joshua Garza conducted the fraud through his Connecticut-based companies GAW Miners and ZenMiner by purporting to offer shares of a digital bitcoin mining operation. (“Mining” for bitcoin or other virtual currencies means applying computer power to try to solve complex equations that verify a group of transactions in that virtual currency. The first computer or collection of computers to solve an equation is awarded new units of that virtual currency.)