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Court Grants Fraud Judgment Against Co-Owner of Defunct Investment Advisor: Enforcement

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A federal court in New York entered a judgment against Andrew Scherr, the co-owner of Southport Lane Management, a now defunct New York-based private equity firm, according to the Securities and Exchange Commission.

The SEC charged Scherr in October 2018 with aiding and abetting a fraud perpetrated by Southport Lane’s majority owner, Alexander Burns.

According to the SEC’s complaint, from March 2013 to February 2014, Scherr acquired assets for Southport Lane that were worthless or overvalued. The complaint alleges that Scherr knew or should have known that Burns intended to and did sell the overvalued assets to the clients of his affiliated registered investment adviser, Southport Lane Advisors.

Without admitting or denying the allegations in the SEC’s complaint, Scherr consented to the entry of a judgment enjoining him from violating the antifraud provisions of the Investment Advisers Act of 1940.

The judgment provides that the amount of any disgorgement and civil monetary penalties to be imposed will be determined by the court at a later date.

SEC Obtains Judgment Against Penny Stock Promoter

The SEC obtained a judgment against a penny stock promoter in connection with multiple pump-and-dump schemes.

In 2014, the SEC charged Jay Fung and two others with orchestrating schemes to manipulate five penny stocks between November 2009 and September 2010.

The complaint alleged that, as part of the manipulative scheme, Fung and the other defendants, through entities they controlled, acquired a significant amount of the publicly traded shares of the companies, distributed misleading newsletters to prospective investors touting the companies, and created demand for the stocks.

The complaint further alleged that the newsletters controlled by Fung, among other things, stated that they “may” or “might” sell the shares owned in the companies that were being touted when, in fact, they intended to sell, and in some cases were selling, the shares owned.

Fung consented to the entry of a judgment, which provides that the amount of any disgorgement and civil monetary penalties to be imposed will be determined by the court at a later date.

Fung previously settled charges in March 2016 relating to trading on inside information in advance of a pharmaceutical company merger. Fung also settled charges in February 2014 relating to his role in a scheme in which he promoted a penny stock without adequately disclosing he was selling his shares in the same stock and receiving compensation for his promotional efforts.

Court Grants Partial Judgment in Fraud Case Against Advisor, 2 Firms

A federal court in Georgia granted in part and denied in part the SEC’s motion for partial summary judgment against Thomas Conrad Jr. and two unregistered advisory firms he controlled, Financial Management Corp. (FMC) and Financial Management Corp. S.R.L. (FMC Uruguay).

The SEC charged Conrad and the firms in July 2016.

The SEC’s complaint alleges that, from 2010 to 2014, Conrad directed preferential redemptions and other disbursements from funds advised by FMC and FMC Uruguay for himself, his extended family, and certain favored investors, while representing to other investors that redemptions were suspended.

The complaint also alleges that Conrad failed to disclose conflicts of interest arising from loans made to Conrad’s family members and Conrad’s appointment of himself as a sub-manager for a fee. The complaint further alleges that, in offering materials given to prospective investors, defendants touted Conrad’s significant experience in the securities industry, but failed to disclose his disciplinary history.

The court ruled that the SEC was entitled to summary judgment on its fraud claims based on the fraudulent redemption practices and failure to disclose Conrad’s disciplinary history. The court found that Conrad, FMC, and FMC Uruguay repeatedly made material misrepresentations about the funds’ redemption practices and that the failure to disclose Conrad’s disciplinary history was material because Conrad, FMC, and FMC Uruguay touted Conrad’s experience and expertise when soliciting investments in the funds.

The court will determine the remedies at a later time.

The court denied the SEC’s motion for summary judgment on its claims that Conrad failed to disclose conflicts of interest, finding that there were disputed issues of facts.

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