The Securities and Exchange Commission and the Justice Department have instituted civil and criminal proceedings against a U.K.-based broker-dealer and its investment manager alleged to have engaged in stock manipulation with an undercover FBI agent.
The SEC announced securities fraud charges against Beaufort Securities Ltd. and Peter Kyriacou, an investment manager at Beaufort, in connection with manipulative trading in the securities of HD View 360 Inc., a U.S.-based microcap issuer.
The SEC also announced charges against HD View’s CEO, another individual and three entities they control for manipulating HD View’s securities as well as the securities of another microcap issuer, West Coast Ventures Group Corp.
These charges arise in part from an undercover operation by the FBI, which also resulted in related criminal prosecutions against these defendants by the Office of the United States Attorney for the Eastern District of New York.
The scheme involved an undercover FBI agent who described his business as manipulating U.S. stocks through pump-and-dump schemes. The SEC alleges that the defendants helped the FBI agent pursue his scheme because they would receive kickbacks.
Kyriacou and the agent discussed depositing large blocks of microcap stock in Beaufort accounts, driving up the price of the stock through promotions, manipulating the stock’s price and volume through matched trades, and then selling the shares for a large profit.
The SEC’s complaint against Beaufort and Kyriacou alleges that they opened brokerage accounts for the undercover agent in the names of nominees in order to conceal his identity and his connection to the anticipated trading activity in the accounts.
According to the SEC, Beaufort and Kyriacou executed multiple purchase orders of HD View shares with the understanding that Beaufort’s client had arranged for an associate to simultaneously offer an equivalent number of shares at the same price.
A second complaint alleges that in a series of recorded telephone conversations with the undercover agent, HD View CEO Dennis Mancino and William Hirschy agreed to manipulate HD View’s common stock by using the agent’s network of brokers to generate fraudulent retail demand for the stock in exchange for a kickback from the trading proceeds.
“This action demonstrates that we will continue to be vigilant in policing microcap markets and will continue to take action as appropriate against those that undermine the integrity of the market with manipulative practices, like matched trading, as alleged in our complaint,” said Antonia Chion, associate director of the SEC’s Enforcement Division, in a statement.
The SEC is seeking injunctions, disgorgement, prejudgment interest, penalties, and penny stock bars from Beaufort and Kyriacou. With respect to Hirschy, Mancino, and their corporate entities, the SEC is seeking injunctions, disgorgement, prejudgment interest, penalties, penny stock bars, and an officer-and-director bar against Mancino.
Voya Advisors to Pay $3.6M for Failing to Disclose Conflicts of Interest
The SEC charged two investment advisor subsidiaries of Voya Holdings Inc. with failing to disclose conflicts of interest and making misleading disclosures in connection with their practice of recalling securities on loan so their affiliates could receive tax benefits.
The advisors agreed to pay approximately $3.6 million to settle the charges, including more than $2 million directly to the affected mutual funds for the benefit of their investors.
That settlement amount is “a fairly large sum for this type of case,” said Tod Cipperman of Cipperman Compliance Services in an email to ThinkAdvisor. “Voya did disclose that it would engage in securities lending in its discretion and disclosed to the Board that affiliates could benefit from the tax deduction. The SEC asserts that the disclosure didn’t go quite far enough.”
According to the SEC’s order, Voya Investments and Directed Services served as investment advisors to certain insurance-dedicated mutual funds offered to annuity and life insurance customers through insurance companies affiliated with the advisors.
In order to generate additional income for the mutual funds and their investors, the Voya advisors lent securities held by the funds to parties looking to borrow the securities. The Voya advisors recalled loaned securities before their dividend record dates so that the advisors’ insurance company affiliates, who were the record shareholders of the funds’ shares, could receive a tax benefit based on the dividends received. But, as the order explains, the recall practice caused the funds and their investors to lose securities lending income without receiving any offsetting tax benefit.
The order found that the Voya advisors failed to disclose the conflict of interest to the funds’ board of directors or in the funds’ prospectuses.
“Generally, in disclosure cases, courts ask whether investors relied on the disclosure or would have made a different investment decision with full disclosure,” Cipperman continued. “[In this case,] the SEC applies a strict liability standard, arguing that the lack of disclosure and conflict of interest is a per se violation of the Advisers Act. This looks like the kind of ‘broken windows’ case that the [former chair] Mary Jo White SEC used to bring.”
The Voya advisor affiliates agreed to be censured and consented to the entry of the SEC’s order. The Voya advisors agreed to cease and desist from committing any further violations, and neither admitted nor denied the findings.
Investment Advisor Barred, Fined for Cheating Clients in Cherry-Picking Scheme
The SEC announced settled charges against an Austin, Texas-based investment advisor for defrauding his clients through a “cherry-picking” scheme.
The advisor, Robert Mark Magee, who is the principal, sole owner and sole employee of Valor Capital Asset Management, agreed to be banned from the securities industry and pay more than $715,000 to resolve the charges.
According to the SEC’s order, for almost three years, Magee traded securities in Valor’s omnibus account but waited to allocate the trades to client accounts until after the securities’ performance changed over the course of the day.
Magee then “cherry-picked” the trades, disproportionately allocating profitable trades to his accounts and unprofitable trades to his clients’ accounts, reaping substantial profits for himself at his clients’ expense. The SEC’s order found that for most of the three-year period there was less than a one-in-a-trillion chance that the outsize performance of Magee’s personal account, compared to that of his clients’ accounts, was due to chance.
The SEC’s order found that Magee and Valor each violated antifraud provisions of the federal securities laws. Without admitting or denying the SEC’s findings, Magee and Valor agreed to the entry of a cease-and-desist order and to pay disgorgement, prejudgment interest and civil penalties, totaling nearly $716,000. Magee also agreed to be barred from the securities industry.
SEC Charges Unregistered Broker for Illegally Brokering Sales of EB-5 Securities
The SEC charged a New York-based company with illegally brokering dozens of investments by foreign nationals seeking U.S. residency.
Between April 2014 and March 2017, Edwin Shaw LLC solicited foreign nationals to invest in securities issued by a taxi and limousine company based in Queens, New York.
The investments were marketed to investors interested in applying for legal residency through the federal government’s EB-5 Immigrant Investor Program, which provides a path to legal residency for foreigners who invest directly in a U.S. business or private “regional centers” that promote economic development in specific areas and industries.
According to the SEC’s order, Edwin Shaw was not registered with the SEC as a broker or dealer when it engaged in the solicitations and otherwise effectuated these securities transactions.
For each successful investment, Edwin Shaw received a fee ranging from $5,000 to $50,000. More than 30 foreigners invested in the program after solicitations by Edwin Shaw, which improperly used approximately $400,000 of the investor fees on its own expenses and personal expenses of Edwin Shaw’s principal.
Without admitting or denying the allegations in the order, Edwin Shaw agreed to a cease-and-desist order and agreed to pay disgorgement of $400,000 plus prejudgment interest of $54,000 and a penalty of $90,500.
SEC Bars Hedge Fund Manager Charged In Asset Management Mismarking Scheme
According to the SEC’s complaint, Stefan Lumiere and fellow hedge fund manager Christopher Plaford engaged in a fraudulent scheme to falsely inflate the value of securities held by a hedge fund advised by their firm. For an 18-month period, Lumiere and Plaford used sham broker quotes to mismark as many as 28 securities per month, surreptitiously passing their desired prices along to brokers via his personal cell phone or a flash drive delivered by a courier.
The fund consequently reported artificially inflated returns and monthly net asset values, and paid out millions of dollars in inflated management and performance fees to its investment advisor.
Lumiere and Plaford were also charged criminally for their alleged conduct. Lumiere was convicted after a trial and was sentenced to eighteen months imprisonment followed by three years’ supervised release and a $1 million fine. Plaford pleaded guilty but has not yet been sentenced. The SEC’s action against Plaford has been stayed, pending the completion of the criminal case.
SEC Charges Company, Individuals in ‘Soil Remediation’ Scam
The SEC announced charges against a Utah-based company, its principal and several solicitors of the company’s securities in an ongoing offering fraud that has already targeted more than 80 individual investors.
The SEC’s complaint alleges that, since September 2014, Marc Andrew Tager of Utah and his company, Jersey Consulting, have engaged in the fraudulent offering of unregistered Jersey securities. According to the SEC, Tager and his company employed paid telemarketers to raise at least $6 million from investors located across the U.S.
None of the telemarketers — Suzanne Aileen Gagnier, Kenneth Stephen Gross, Jeffrey Rowland Lebarton, and Jonathan Edward Shoucair — are registered to sell securities.
According to the complaint, Jersey investors were promised extraordinary returns of 100% or more within 12 months from the application and licensing of Jersey’s “soil remediation” technology, and were misled about the commercial viability of Jersey’s technology and Jersey’s purported rights to a “mineral-rich” claim in Arizona.
Jersey in fact had no rights to the claim and its technology was not commercially viable. Jersey also failed to disclose Tager’s prior felony conviction and that investor funds were diverted to pay for Tager’s personal expenses, including the purchase of a Harley-Davidson motorcycle.
The U.S. Attorney’s Office for the District of Utah, which conducted a parallel investigation of the matter, announced that Tager and others were indicted on securities fraud, among other criminal charges. Additionally, the Utah Department of Commerce‒Division of Securities, which also conducted a parallel investigation of the matter, announced that it had filed a civil action against Jersey, Tager and others for violating antifraud and licensing and registration provisions in Utah.
The SEC seeks, among other relief, an asset freeze, permanent injunctions, conduct-based injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties.
– Melanie Waddell contributed reporting.
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