The Securities and Exchange Commission recently settled four enforcement actions that involved utilizing the internet to disseminate unlawful client testimonials, more specifically a testimonial program sold by a third-party marketing firm that solicited client testimonials for publication on social media websites.
According to Cipperman Compliance Services, the testimonial rule prohibits advertisements that refer to any testimonial about advice, analysis,or services.
“It’s hard to believe that advisors could violate the testimonial rule, a clear prohibition that has been in effect for decades,” the regulatory compliance firm said in a blog post.
According to one of the SEC’s orders, Leonard Schwartz, a marketing consultant based in Richboro, Pennsylvania, owned several companies that offer marketing-related services to investment advisors and other investment professionals.
One service that Schwartz — and one of his companies, Create Your Fate — offered is called Squeaky Clean Reputation. Through this service, Schwartz and Create Your Fate solicit testimonials on behalf of professionals, including investment advisors and broker-dealers, and post the testimonials on a variety of websites, including YouTube, Google, Facebook, Twitter and Yelp.
Squeaky Clean Reputation’s website represented that the program was “100% compliant for investment advisors.”
In 2015, a client sent Schwartz an email informing him that the testimonial rule prohibited RIAs from distributing advertisement containing testimonials.
Despite this, the SEC says Schwartz did not seek any legal advice or other guidance about the testimonial rule’s applicability to investment advisory clients and instead continued marketing their services to other investment advisers and investment professionals.
The next three SEC orders — against HBA Advisors, an investment advisor based in California, and its founding member Jaime Enrique “Ricky” Biel; Brian Eyster, an investment advisor representative and registered representative based in Michigan; and William Greenfield, an investment advisor representative and registered representative based in New Jersey — all used Schwarz’s Squeaky Clean Reputation services.
SEC Charges Convicted Felon, Others in $5M Offering Fraud
The SEC charged Maryland-based Owings Group, three of its related companies and four individuals in an offering fraud that raised more than $5 million from approximately 50 investors.
The SEC’s complaint alleges that Mark Johnson, a convicted felon, orchestrated and operated a fraudulent investment scheme through entities that he controlled — The Owings Group and its related companies. The SEC says he did this with the assistance of three salesmen — Kevin Drost, Brian Koslow and David Waltzer — who were paid substantial sales commissions from the principal invested.
According to the complaint, the defendants deceived investors into believing that Owings was successfully bringing companies public using a quick and efficient streamlined approach, called the Initial Registration Program.
In reality, as the SEC alleges, Owings had only an untested idea for a streamlined approach that it was trying out and an inexperienced team.
When Owings failed to bring any companies public in the first year, Johnson created two investment funds as a stalling tactic to placate concerned investors and to raise new money to “buy out” the Initial Registration Program investments from disgruntled early investors, according to the SEC.
The scheme eventually collapsed.
The SEC seeks civil monetary penalties and disgorgement with prejudgment interest from all defendants, as well as an injunction against future violations. The SEC also seeks disgorgement with prejudgment interest from three entities as relief defendants.
Massachusetts Regulators Charge Man With Defrauding Investors
Secretary of State William Galvin, the state’s top securities regulator, charged Randall Fincke of Lincoln, Massachusetts, with defrauding investors.
According to an administrative complaint filed by Galvin’s Securities Division, Fincke defrauded Massachusetts investors by making fraudulent statements in connection with the sales of unregistered promissory notes in Advent Medical Products Inc., a company which purported to be developing medical devices.
Since 2004, Advent has collected more than $2.9 million from investors, including $1.4 million from Massachusetts investors.
Nearly $1 million of investor money has been diverted to Fincke and his family, who used the money on personal expenses, including a boat and a luxury automobile.
In that time, Fincke and Advent have failed to produce any marketable products or generate a single dollar in revenue.
According to the complaint, Fincke formed a series of unsuccessful medical technology companies over the last two decades. In an attempt to recoup the losses for him and his family from the previous ventures, Fincke founded Advent Medical Products,= Inc. in 2004, days after Massachusetts investors filed a securities fraud suit against him.
Fincke made false and misleading statements about Advent and its future returns and failed to disclose to potential investors his previous misconduct, which resulted in judgments being entered against him for intellectual property misuse and securities fraud, according to the complaint.
Galvin’s office is seeking a cease and desist order, censure of the respondents, an administrative fine, and a requirement that investors who purchased illegally sold securities be offered rescission.
Company Co-Founder Convicted on 21 Counts of Fraud
A Minnesota man previously accused by the SEC of orchestrating an elaborate scheme to siphon millions of dollars from Dakota Plains Holdings Inc. was convicted on 21 counts of wire fraud, securities fraud, and conspiracy to commit securities fraud, the SEC says.
According to the SEC’s complaint, filed in federal court in Minnesota in 2016, Ryan Gilbertson and another company co-founder installed their fathers as figurehead executives in order to secretly wield control of the company and issue millions of shares of stock to themselves, family and friends. They allegedly later hired one of their friends as CEO.
They allegedly caused the company to enter into an agreement to borrow money from them under generous terms that included extra bonus payments to Gilbertson, and other lenders based on the price of Dakota Plains stock after 20 days of trading following a reverse merger into a company with publicly traded shares.
Douglas Hoskins, who was also named in the SEC’s complaint, was convicted on 6 counts of wire fraud, securities fraud, and conspiracy to commit securities fraud.
The charges upon which Gilbertson and Hoskins were convicted arise from the same conduct alleged by the SEC.
SEC Files Additional Charges in Fitbit Stock Manipulation Scheme
The Securities and Exchange Commission filed fraud charges against a second defendant in connection with a scheme to manipulate the price of Fitbit securities through false regulatory filings.
According to the SEC’s complaint, Mark Burns purchased Fitbit call options just minutes before he and his co-conspirator, Robert Murray, filed a fake tender offer on the SEC’s EDGAR system purporting to acquire Fitbit’s shares at a substantial premium. The SEC charged Murray last year and he recently was sentenced to prison in a parallel criminal case.
The false tender offer was made in the name of ABM Capital Ltd. — a nonexistent company for which the defendants created an EDGAR account. Fitbit’s stock price temporarily spiked when the tender offer became publicly available on Nov. 10, 2016, and Burns sold all of his options for a 350% profit of approximately $13,000.
The SEC’s complaint charges Burns with violating antifraud provisions of the federal securities laws. Murray has agreed to settle the SEC’s charges against him. The settlement is subject to court approval.