DJ Khaled. (Photo: Bloomberg) DJ Khaled. (Photo: Bloomberg)

The Securities and Exchange Commission settled charges against the professional boxer Floyd Mayweather Jr. and the music producer Khaled Khaled, known as DJ Khaled, for failing to disclose payments they received for promoting investments in initial coin offerings (ICOs).

These are the SEC’s first cases to charge ICO promotion violations.

The SEC’s order against Mayweather found that the boxer failed to disclose promotional payments from three ICO issuers, including $100,000 from Centra Tech Inc. Meanwhile, Khaled failed to disclose a $50,000 payment from Centra Tech, which he touted on his social media accounts as a “Game changer,” according to the SEC’s order against Khaled.

“These cases highlight the importance of full disclosure to investors,” Stephanie Avakian, enforcement division co-director, said in a statement. “With no disclosure about the payments, Mayweather and Khaled’s ICO promotions may have appeared to be unbiased, rather than paid endorsements.”

Mayweather’s promotions included a message to his Twitter followers that Centra’s ICO “starts in a few hours. Get yours before they sell out, I got mine …” In addition, a post on Mayweather’s Instagram account predicted he would make a large amount of money on another ICO and a post to Twitter said: “You can call me Floyd Crypto Mayweather from now on.” The SEC order also found that Mayweather failed to disclose that he was paid $200,000 to promote the other two ICOs.

According to Steven Peikin, the enforcement division co-director, investors should be skeptical of investment advice posted to social media platforms, and should not make decisions based on celebrity endorsements.

“Social media influencers are often paid promoters, not investment professionals, and the securities they’re touting, regardless of whether they are issued using traditional certificates or on the blockchain, could be frauds,” Peikin said in a statement.

Mayweather and Khaled’s promotions came after the SEC issued its DAO Report in 2017 warning that coins sold in ICOs may be securities and that those who offer and sell securities in the U.S. must comply with federal securities laws.

Without admitting or denying the findings, Mayweather and Khaled agreed to pay disgorgement, penalties and interest. Mayweather agreed to pay $300,000 in disgorgement, a $300,000 penalty and $14,775 in prejudgment interest. Khaled agreed to pay $50,000 in disgorgement, a $100,000 penalty and $2,725 in prejudgment interest. In addition, Mayweather agreed not to promote any securities, digital or otherwise, for three years, and Khaled agreed to a similar ban for two years. Mayweather also agreed to continue to cooperate with the investigation.

In April, the commission filed a civil action against Centra’s founders, alleging that the ICO was fraudulent, and the U.S. Attorney’s Office for the Southern District of New York filed parallel criminal charges.

Broker Barred for Unsuitable Trades in Accounts of 2 Biggest Clients

FINRA barred a broker who engaged in unsuitable short-term trading of Class A mutual fund shares in the accounts of his two largest customers, one of whom was the 101-year-old mother of the other.

David Jonathan Bolton, who was last employed by Kentucky-based Thurston, Springer, Miller, Herd & Titak Inc., also unsuitably split one of the customers’ mutual fund investments into 42 different funds across 11 fund families.

Bolton’s actions caused the customers to pay $24,747 in unnecessary sales charges, according to FINRA.

According to FINRA, Bolton’s mutual fund trading was unsuitable because the short-term nature of the trades conflicted with the customers’ longer-term investment horizon and made the trades presumptively unsuitable. Moreover, the $24,747 in sales charges outweighed any marginal benefit from the new mutual funds, and the new mutual funds’ objectives and risks were similar to the funds sold.

In addition, splitting one of the customer’s investment funds into 42 different mutual funds in 11 fund families generated higher sales charges because the customer was unable to take advantage of savings from breakpoints available for larger investments.

FINRA Bars, Fines Broker Who Misled Clients to Invest in Friend’s Company

The Financial Industry Regulatory Authority barred Matthew Evan Eckstein from association with any FINRA member in all capacities and ordered him to pay $961,781, plus interest, in restitution to customers.

According to FINRA, Eckstein made false and misleading statements in connection with purchases and sales of securities.

While relying on Eckstein’s recommendations, four customers invested a total of $1.36 million in a company run by one of Eckstein’s close friends. Eckstein gave the customers no written materials describing the investment or any note or other agreement memorializing the customers’ purchases.

Rather, the undocumented transactions appear to have been part of a spurious investment scheme run by Eckstein’s friend.

Eckstein also persuaded one of his customers to liquidate close to $300,000 in mutual fund holdings in order to invest in his friend’s company, representing that the investment would be sufficient to fund her retirement while the mutual fund investments would not.

Eckstein had no basis, however, for urging the customer to replace her mutual funds with an investment in the Issuer. Eckstein had conducted no due diligence on the investment.

Moreover, Eckstein never disclosed to his customers his lack of a basis for his representations and recommendations, and his lack of due diligence.

Eckstein also failed to disclose financial connections to his friend that would have caused  reasonable investors to question Eckstein’s objectivity and the safety of their money.

For the last two years, Eckstein was the CEO and a registered broker for Sisk Investment Services. Sisk was expelled from the securities industry by FINRA in June, according to BrokerCheck. Prior to that, Eckstein was a registered broker at Gould, Ambroson & Associates for 17 years.

Silver Investment Scheme Ensnared Hundreds of Investors, SEC Says

The SEC announced charges against a Utah-based company and its principal in an ongoing investment scheme that has defrauded hundreds of investors in several states.

The SEC alleges that Gaylen Rust and his company Rust Rare Coin Inc. (RRC) are engaged in an ongoing investment scheme involving a purported silver trading program. Through this scheme, Rust and RRC have allegedly raised over $85 million since January 2017.

According to the SEC’s complaint, Rust told investors that he has access to a trading algorithm that enables him to capitalize on fluctuations in the price of silver bullion and thereby make profitable trades, regardless of the actual price of silver.

He also told investors that he stores millions of tons of physical silver on behalf of investors at Brink’s Global Services U.S.A. Inc.

Rust claimed that his silver trading program results in average annual returns of 20% to 25%, with some years experiencing significantly higher returns. Rust also told investors that his silver trading program had almost no risk.

The SEC alleges that, contrary to these representations, Rust has been using new investor funds to make payments to earlier investors and to pay for his personal expenses and the business expenses of other entities he controls.

SEC Charges Promoter With Microcap Market Manipulation Scheme

The SEC charged a self-described penny stock promoter and an entity he controlled with orchestrating a scheme to manipulate trading in at least 97 microcap stocks.

According to the SEC’s complaint, Eric Landis of Charlottesville, Virginia, falsely claimed to third-party media buyers for microcap companies that he would distribute promotional materials for the stocks via email lists with tens of thousands of subscribers. In reality, his distribution lists were a sham.

To generate trading volume and create the false impression that he was drumming up investor interest, the SEC alleges that Landis traded thousands of microcap shares himself using brokerage accounts in his own name, in the name of an entity he controlled, Ridgeview Capital Partners LLC, and in the names of several third parties. Altogether, the SEC alleges that Landis placed thousands of manipulative trades over three years, including approximately 1,300 “matched trades,” which involved simultaneously selling and buying stocks in the microcap companies he was paid to promote.

The SEC seeks a permanent injunction against future violations, disgorgement of ill-gotten gains plus prejudgment interest, monetary penalties and a penny stock bar.

Landis was previously found liable in a lawsuit brought by the SEC and convicted of related criminal charges based on his role in a prior market manipulation scheme.

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