Anthony J. Mastroianni, Jr. and Global Business Development and Consulting Corp. Civil

Source: Securities and Exchange Commission

On August 17, 2022, the Securities and Exchange Commission charged Global Business Development and Consulting Corp. (Global) and its owner, Anthony J. Mastroianni, Jr., in connection with a $1.2 million fraudulent promissory note scheme targeting older Americans.

According to the SEC’s complaint, Mastroianni, a New Jersey resident, sold approximately 11 investors promissory notes issued by his company, Global, beginning as early as 2017. The complaint alleges that Mastroianni induced investors, ranging in age from 64 to 82, to purchase the notes by promising exorbitant interest rates ranging from 50% to 175%. In 2016, Mastroianni was barred by the Financial Industry Regulatory Authority (FINRA) from associating with any registered broker-dealer after refusing to appear for testimony to answer allegations of, among other things, excessive trading in an elderly customer’s account.

The SEC’s complaint further alleges that Mastroianni gave investors conflicting explanations of the nature of Global’s business, and often convinced them to roll-over their notes into new notes combining unpaid amounts with new investments by the investors. In reality, Global did not use investor monies to generate income and the SEC investigation determined that Mastroianni withdrew over $486,000 of investors’ money from Global’s bank account and also used ill-gotten funds for personal expenses on luxury items.

The SEC’s complaint, filed in federal district court in New Jersey, charges Mastroianni and Global with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and seeks disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and permanent injunctive relief.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Mastroianni.

The SEC’s Office of Investor Education and Advocacy has information and investor alerts to help seniors protect themselves against investment fraud. Additional resources and more can be found at investor.gov.

The SEC’s investigation, which is ongoing, is being conducted by Peter A. Pizzani, Debbie Chan and Adam S. Grace, and the litigation will be led by Christopher Dunnigan and Mr. Pizzani of the New York Regional Office. The case is being supervised by Sheldon Pollock. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey.

Sergei Polevikov, et al.

Source: Securities and Exchange Commission

The Securities and Exchange Commission has obtained a final judgment against Sergei Polevikov, who worked as a quantitative analyst at two asset management firms, for perpetrating a front-running scheme that generated profits of approximately $8.5 million. The SEC also barred him from the securities industry.

According to the SEC’s complaint, filed in federal court in Manhattan, from at least January 2014 through October 2019, Polevikov had access to real-time, non-public information about the size and timing of his employers’ securities orders and trades, and used that information to secretly trade on, and ahead of, his employers’ trades. As alleged, Polevikov, on nearly 3,000 occasions, bought or sold a stock on the same side of the market as his employers before his employers executed trades in the same stock for their fund clients. Polevikov typically would close his positions the same day as he opened them, capitalizing on the price movement caused by his employers’ large trades. The SEC alleges that Polevikov concealed his fraudulent scheme by executing the trades in the account of his wife, who uses a different last name.

Polevikov was also charged criminally for his alleged conduct, and pled guilty on December 15, 2021. He was sentenced to a prison term of 33 months followed by two years of supervised release and ordered to pay a fine of $10,000 and forfeiture of $8,564,977.

The final judgment against Polevikov, entered on July 29, 2022 by the U.S. District Court for the Southern District of New York, enjoins Polevikov from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, Section 17(j) of the Investment Company Act of 1940 and Rules 17j-1(b)(1) and (3) and 17j-1(d) thereunder. The final judgment also holds Polevikov liable for disgorgement of his ill-gotten gains, which is deemed satisfied by the forfeiture order in the criminal case. Based on the entry of the judgment and Polevikov’s criminal conviction, the SEC barred Polevikov from the securities industry. On the same day the judgment was entered, the court, with the SEC’s consent, dismissed claims against Polevikov’s wife, Maryna Arystava, who had been named as a relief defendant for the purpose of recovering the proceeds of the fraud.

The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

Nicholas Daniel

Source: Securities and Exchange Commission

The Securities and Exchange Commission today announced insider trading charges against Nicholas Daniel, a close relative of a senior employee at San Jose-based Cypress Semiconductor Corporation, for placing trades in advance of the announcement that Cypress would be acquired by another company. Daniel agreed to pay more than $738,000 to settle the charges.

The SEC’s complaint alleges that Daniel of South Miami, Florida misappropriated material nonpublic information regarding the acquisition during a telephone call with his mother that occurred while his mother was at the home of Daniel’s close relative, a senior employee at Cypress. Daniel, the SEC alleges, learned during this phone call that his family member was working on urgent issues related to Cypress’s acquisition and that the acquisition would likely occur soon. After the phone call, Daniel immediately sought to purchase Cypress call options and, under false pretenses, borrowed $50,000 from his mother to fund the Cypress trades, just days before Cypress’s acquisition announcement.

Before market open on June 3, 2019, Cypress announced that it would be acquired by Infineon Technologies AG. That same day, Cypress’s stock price increased by 27.9%. Daniel sold all of his Cypress call options on June 3 and June 4, 2019 for a profit of $349,588-a nearly 700% return.

The SEC’s complaint, filed in federal court in San Jose, charges Daniel with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Daniel, without admitting or denying the charges, has agreed to entry of a judgment, subject to court approval, imposing a permanent injunction and ordering him to pay $738,005, consisting of $349,588 in disgorgement, prejudgment interest of $38,829, and a civil penalty of $349,588.

The SEC’s investigation was conducted by John P. Mogg of the Division of Enforcement’s Market Abuse Unit in the San Francisco Regional Office with assistance from John S. Rymas of the Market Abuse Unit’s Analysis and Detection Center. The matter was supervised by Assistant Director Steven D. Buchholz and Unit Chief Joseph G. Sansone. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

Christopher R. Bentley and Bellatorum Resources, LLC

Source: Securities and Exchange Commission

The Securities and Exchange Commission charged Christopher R. Bentley of Tomball, Texas and his company, Bellatorum Resources, LLC (“Bellatorum”), for engaging in myriad fraudulent acts that resulted in an almost complete loss of over $30 million invested in three private funds: Bellatorum Land & Minerals, LP; Bellatorum Phalanx Investments, LP; and Sentinel Energy Investments, LP.

According to the SEC’s complaint, Bentley raised $31.5 million from investors to purchase and sell mineral rights through the funds, but Bentley used his control over Bellatorum, the funds’ investment adviser, to secretly siphon money from the funds while concealing their poor results. The complaint alleges that between approximately February 2019 and April 2021, Bentley perpetrated his scheme by repeatedly manipulating the funds’ transactions, including: (1) purchasing inflated mineral rights from an affiliated entity that he secretly controlled; (2) purchasing mineral rights from third parties at inflated prices and then misappropriating the extra proceeds for himself and Bellatorum; (3) manipulating sales transactions to generate fake profits and trigger distributions to Bellatorum; and (4) altering documents to deceive two of the funds’ auditors. Bentley allegedly kept his scheme afloat by secretly pledging most of the funds’ mineral rights as collateral for an improper loan. When Bentley allegedly failed to repay the loan, the lender took most of the funds’ investments, which triggered massive losses for the funds and their investors.

The SEC’s complaint, filed in U.S. District Court for the Southern District of Texas, charges Bentley and Bellatorum with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.

To resolve the SEC’s charges, Bentley and Bellatorum agreed to the entry of a judgment that permanently enjoins them from future violations of these provisions of the federal securities laws, bars Bentley from serving as an officer or director of a public company, and orders them to pay disgorgement, prejudgment interest, and civil penalties in amounts that will be determined by the court upon future motion of the SEC. The partial settlements with Bentley and Bellatorum are subject to court approval.

In a parallel action, the U.S. Attorney’s Office for the Southern District of Texas filed related criminal charges against Bentley.

The SEC’s continuing investigation is being conducted by Christopher W. Ahart and Ayesha Ahmed, and supervised by Jim Etri and Eric Werner, of the SEC’s Fort Worth Regional Office. The SEC’s litigation will be led by Jennifer Reece and supervised by B. David Fraser. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Texas and the Federal Bureau of Investigation.

SEC Charges Barred Broker and His Company with Defrauding Older Americans

Source: Securities and Exchange Commission

Defendant Promised Hefty Returns while Spending Investors’ Money on Luxury Goods

Washington D.C., Aug. 17, 2022 —

The Securities and Exchange Commission today charged Global Business Development and Consulting Corp. (Global) and its owner, Anthony J. Mastroianni, Jr., in connection with a $1.2 million fraudulent promissory note scheme targeting older Americans.

According to the SEC’s complaint, Mastroianni, a New Jersey resident, sold at least 11 investors promissory notes issued by his company, Global, beginning as early as 2017. The complaint alleges that Mastroianni induced investors, ranging in age from 64 to 82, to purchase the notes by promising exorbitant interest rates ranging from 50% to 175%. In 2016, Mastroianni  was barred by the Financial Industry Regulatory Authority (FINRA) from associating with any registered broker-dealer after refusing to appear for testimony to answer allegations of, among other things, excessive trading in an elderly customer’s account.

The SEC’s complaint further alleges that Mastroianni gave investors conflicting explanations of the nature of Global’s business, and often convinced them to roll-over their notes into new notes combining unpaid amounts with new investments by the investors. In reality, Global did not use investor monies to generate income and the SEC investigation determined that Mastroianni withdrew over $486,000 of investors’ money from Global’s bank account and also used ill-gotten funds for personal expenses on luxury items.

“We allege that Mastroianni preyed on older Americans with an all too familiar promise of massively high returns when in reality their money was being withdrawn in cash and spent on purchases at Disney resorts, Tiffany & Co., and Gucci,” said Sheldon L. Pollock, Associate Director of the SEC’s New York Regional Office. “We will continue to hold accountable those who target investors for their own financial gain.”

The SEC’s complaint, filed in federal district court in New Jersey, charges Mastroianni and Global with violating the antifraud provisions of the federal securities laws, and seeks disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and permanent injunctive relief.  

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Mastroianni.

The SEC’s Office of Investor Education and Advocacy has information and investor alerts to help seniors protect themselves against investment fraud. Additional resources and more can be found at investor.gov.

 The SEC’s investigation, which is ongoing, is being conducted by Peter A. Pizzani, Debbie Chan and Adam S. Grace, and the litigation will be led by Christopher Dunnigan and Mr. Pizzani of the New York Regional Office. The case is being supervised by Mr. Pollock.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey.

Private Placements under Regulation D – Investor Bulletin

Source: Securities and Exchange Commission

Aug. 17, 2022

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about investing in unregistered securities offerings, sometimes called private placements, under Regulation D of the Securities Act. 

What is a private placement?                                                  

Under the federal securities laws, a company may not offer or sell securities unless the offering has been registered with the SEC or an exemption from registration is available.  Offerings exempt from the SEC’s registration requirements pursuant to Securities Act Section 4(a)(2) or its safe harbor under Regulation D of the Securities Act are often referred to as private placements.

Red flags.  Fraudsters may use unregistered offerings to conduct investment scams.  See our Investor Alert about red flags to watch out for in an unregistered offering.  It may be difficult or impossible to recover the money you invest in an offering that turns out to be fraudulent.

Private and public companies, including everything from small start-ups to large, well-established companies, engage in private placements to raise funds from investors.  Hedge funds and other private funds also engage in private placements.  Private placements are an important way in which companies raise capital to grow, fund and expand their business.  Accordingly, these offerings play an important role in capital formation.

Important risk considerations.  As further detailed below, these are some important considerations to take into account when considering an investment in a private placement:

  • Ability to weather a total loss.  Companies engaging in private placements may be early stage and high risk.  You should be able to afford the increased risk of loss with such investments, including the potential of a total loss.
  • Illiquid investment. Unlike an investment purchased on a stock exchange, an investment in a private placement is highly illiquid.  You will mostly likely be investing in restricted securities, may have difficulty finding a buyer for the securities when you can resell and, as a result, may need to hold the securities indefinitely.
  • Limited disclosure.  Companies engaging in private placements are not required to provide the disclosure that would be required in a registered offering.  You may have less information to make an informed investment decision than, for example, stock purchased on a stock exchange, including information that may help you determine whether the price asked for the investment is a fair price.

What is Regulation D?

Regulation D includes two SEC rules—Rules 504 and 506—that issuers often rely on to sell securities in unregistered offerings.  Most private placements are conducted pursuant to Rule 506.   

Rule 506

Issuers may raise an unlimited amount of money in offerings relying on one of two possible Rule 506 exemptions—Rules 506(b) and 506(c).  An issuer relying on Rule 506(b) may sell to an unlimited number of accredited investors, but to no more than 35 non-accredited investors. 

Accredited investor.  One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering less necessary the protections that come from a registered offering.  An individual is an accredited investor if they:

  • earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year, OR
  • has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence)), OR
  • are a broker or other financial professional holding certain certifications, designations or credentials in good standing, including a Series 7, 65 or 82 license.

A spousal equivalent means a cohabitant occupying a relationship generally equivalent to that of a spouse.

Any non-accredited investors in the offering must be financially sophisticated or, in other words, have sufficient knowledge and experience in financial and business matters to evaluate the investment.  This financial sophistication requirement may be satisfied by having a purchaser representative for the investor who satisfies the criteria.  An investor engaging a purchaser representative should pay particular attention to any conflicts of interest the representative may have, such as having a financial interest in the offering or separately being compensated by the issuer.

If the issuer offers securities to non-accredited investors, the issuer must disclose certain information about itself, including its financial statements.  If selling only to accredited investors, the issuer has discretion as to what to disclose to investors.  Any information provided to accredited investors also must be provided to non-accredited investors.

Issuers relying on the Rule 506(b) exemption may not generally solicit their offerings.  However, the Rule 506(c) exemption permits the issuer to generally solicit or advertise for potential investors.  As a result, you may see an investment opportunity advertised through the Internet, social media, seminars, print, or radio or television broadcast.  Only accredited investors, however, are allowed to purchase in generally solicited offerings under Rule 506(c), and the issuer will have to take reasonable steps to verify your accredited investor status.

Rule 504

Rule 504 permits certain issuers to offer and sell up to $10 million of securities in any 12-month period.  These securities may be sold to any number and type of investor, and the issuer is not subject to specific disclosure requirements.  Generally, securities issued under Rule 504 will be restricted securities (as further explained below), unless the offering meets certain additional requirements.  As a prospective investor, you should confirm with the issuer whether the securities being offered under this rule will be restricted, which will affect your ability to resell the securities. 

How can you tell whether you are being offered a private placement?

As an individual investor, you may be offered an opportunity to invest in a private placement.  You may be told that you are being given an exclusive opportunity.  The opportunity may come from a broker, acquaintance, friend, or relative.  You may have seen an advertisement regarding the opportunity.  The securities involved may be, among other things, common or preferred stock, limited partnerships interests, a membership interest in a limited liability company, or an investment product such as a note or bond.  As mentioned, private placements can be very risky and any investment may be difficult to resell in the future.    

You can identify private placements relying on Regulation D by the prominent legends that are required to be placed on any offering documents and on the certificates or other instruments that represent the securities.  The legends should state that the offering has not been registered with the SEC and the securities have restrictions on their transfer.  Consider it a red flag if documents relating to a private placement are missing these required legends.   

Other Exempt Offerings.  You may also come across offerings that rely on exemptions from registration other than Regulation D.  These may include crowdfunding and Regulation A offerings

Each exemption is governed by one or more rules setting forth specific requirements that the company offering the securities—called the issuer—must meet in order to qualify for the exemption.  Most exempt offering materials will indicate that the issuer is relying on an exemption.  If you have reason to believe that an unregistered offering claiming to rely on an exemption does not satisfy the applicable requirements, consider this to be a red flag about the investment. 

What should you do before investing?

Private placements may be pitched as a unique opportunity being offered to only a handful of investors, including you.  Be careful.  Don’t be fooled by this high-pressure sales tactic.  Even if the deal is “unique,” it may not be a good investment.  It is important for you to obtain all the information that you need to make an informed investment decision.  In fact, issuers relying on the Rule 506(b) exemption must provide non-accredited investors an opportunity to ask questions and receive answers regarding the investment.  If an issuer fails to adequately answer your questions, consider this a warning against making the investment.

Private placements, however, are not subject to some of the laws and rules designed to protect investors, such as the comprehensive disclosure requirements that apply to registered offerings.  Issuers offering securities in private placements are required to provide only limited disclosure to non-accredited investors, or may face no disclosure requirements at all.  Therefore, investors in private placements are generally on their own in obtaining the information they need to make an informed investment decision.  Investors need to fully understand what they are investing in and fully appreciate what risks are involved. 

Some things to consider. 

  • Did the issuer provide financial statements and, if so, what do they tell you about the business? 
  • Are the financial statements independently audited?
  • Are the claims and expectations reasonable?
  • How reasonable is the issuer’s reliance on a particular technology, customer, product or natural resources claim?
  • Who are the issuer’s competitors?
  • What is the experience and background of management?
  • How long has the issuer been in business and has the issuer conducted prior offerings?
  • How does the issuer plan to use the money raised?
  • If the securities you are considering purchasing have transfer restrictions, when will and how may the restrictions be lifted? 
  • Because you may not be able to resell your investment easily, are you comfortable holding it indefinitely?
  • If the company were to fail, could you afford to lose most or all of your investment?

Issuers may provide a document called a private placement memorandum or offering memorandum that introduces the investment and discloses information about the securities offering and the issuer.  This document is not required.  However, if the issuer does not provide information about itself and the securities offering, either through this type of document or otherwise, it may be a red flag to consider before investing.  Moreover, private placement memoranda and other offering documents typically are not reviewed by any regulator and may not present the investment and related risks in a balanced light.

All issuers relying on a Regulation D exemption are required to file a document called a Form D no later than 15 days after they first sell the securities in the offering.  The Form D will include brief information about the issuer, its management and promoters, and the offering itself.  If the offering you are considering has prior sales, you can search for the Form D filing on the SEC’s EDGAR system.  Some issuers may not comply with this requirement to file a Form D, which may be a red flag.         

Form D does not represent SEC approval or registration.  Beware of any claims of SEC approval.  The SEC does not approve any offering.  Further, fraudsters may try to lure you into investing with them by falsely claiming to be registered, or that the offering is registered, with the SEC.  In one case, the defendants allegedly recruited investors by falsely claiming that their firm was “registered” or “duly registered” with the SEC and pointing to the firm’s Form D filings to support this misrepresentation.

What if my investment professional recommends the investment?

The opportunity to invest in a private placement may come from your investment professional.  Your investment professional can assist and enable you to better understand the opportunity and risks, as well as investigate and gather additional information, but it is your money, your risk and your decision whether to invest.  You should also ask about the compensation your investment professional is receiving for the transaction and any relationships, business ties or other conflicts of interest that could create an incentive for your investment professional to recommend the investment, regardless of whether it is in your best interest

Background check.  It is always a good idea to check on the background of an investment professional.  It is easy and free.  If you have any questions on checking the background of an investment professional, call the SEC’s toll-free investor assistance line at (800) 732-0330.  You can also check with your state securities regulator regarding the person soliciting your investment.
Broker misconduct.  In In the Matter of Advanced Equities, Inc., the SEC charged a broker with allegedly making exaggerated misstatements to investors when pitching an unregistered offering of securities in a non-public alternative energy company.  The SEC alleged, for example, that the broker said the company had more than $2 billion in order backlogs when the backlog never exceeded $42 million.

What should I know about restricted securities?

Generally, most securities acquired in a private placement will be restricted securities.  You should not expect to be able to easily and quickly resell your restricted securities.  In fact, you should be prepared to hold the securities indefinitely.

There are two principal things to think about before buying restricted securities.  The first is that unless you have made arrangements with the issuer to resell your restricted securities as part of a registered offering, you will need to comply with an exemption from registration to resell.  One rule investors commonly rely on to resell restricted securities requires you to hold the restricted securities for at least a year if the company does not file periodic reports (such as annual and quarterly reports) with the SEC and six months if the company does file periodic reports with the SEC.  Most private companies that issue private placements do not file these periodic reports.  You may wish to hire an attorney to help you comply with the legal requirements to resell restricted securities.  Issuers may require a legal opinion that you satisfy an exemption to resell your restricted securities. 

The second thing to think about is whether the securities are easy to sell when you wish to do so.  When attempting to resell securities in private companies, keep in mind that these securities will not be as liquid as securities that trade on a stock exchange.  Unlike with a publicly traded company, information about a private company is not typically available to the public, and a private company may not provide information to you or your buyer.  Any restricted status of your securities may also transfer to your buyer.  For these reasons, it will generally be more difficult to find buyers compared to selling stock of a public company on a stock exchange.

In addition to these considerations, you may be required to enter into one or more contracts or agreements when investing that may contain provisions that restrict or prevent you from freely transferring the securities. 

What else should I know?

Despite not being subject to the same disclosure obligations as registered offerings, private placements are subject to the antifraud provisions of the federal securities laws.  Any information provided must not have any material misstatements and must not omit any material facts necessary to prevent the statements made from being misleading.  You should be aware that it may be difficult or impossible to recover the money you invest in an offering that turns out to be fraudulent.  In addition, even though the offering may be exempt from SEC registration, the offering may have to comply separately with state securities laws, including state registration requirements or a state exemption from registration.

Private placements may offer investment returns.  However, the attractive potential rewards often come with high risks of loss.   

Additional Information

To learn more about private placements, see this website.

For additional investor educational information, see the SEC’s website for individual investors, Investor.gov.

Ronald D. Paul

Source: Securities and Exchange Commission

The Securities and Exchange Commission charged Eagle Bancorp, Inc., based in Bethesda, Maryland, and its former Chief Executive Officer and Chairman of the Board, Ronald D. Paul, with negligently making false and misleading statements about related party loans extended by the bank to Paul’s family trusts. Eagle and Paul have agreed to settle the SEC’s charges.

The SEC’s complaint against Paul, which was filed in the United States District Court for the Southern District of New York, alleges that from March 2015 through April 2018, Eagle failed to include loans to Paul’s family trusts totaling at times nearly $90 million in the related party loan balances included in its annual reports and proxy statements. Both SEC regulations and Generally Accepted Accounting Principles (GAAP) required Eagle to disclose these material related party transactions. The SEC’s complaint also alleges that, following a December 2017 short seller’s report asserting Eagle had made significant undisclosed loans to Paul’s family trusts, Eagle falsely stated in press releases and meetings with investors that the trust loans were not related party loans and that Eagle was in compliance with all related party loan requirements, and Eagle again failed to disclose the trust loans as related party loans in its 2017 annual report.

The SEC’s complaint charges Paul with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 14(a) of the Securities Exchange Act of 1934, and Rule 13a-14 and 14a-9 thereunder. Without admitting or denying the SEC’s allegations, Paul has agreed to a permanent injunction, to a two-year officer and director bar, and to pay disgorgement of $109,000, prejudgment interest of $22,216, and a penalty of $300,000. The settlement is subject to court approval.

The SEC’s settled order as to Eagle finds that the company violated the negligence-based anti-fraud, proxy, reporting, books and records, and internal accounting controls provisions of the federal securities laws. Without admitting or denying the SEC’s findings, Eagle agreed to cease and desist from future violations and to pay disgorgement of $2.6 million, prejudgment interest of $750,493, and a civil penalty of $10 million.

In a parallel action, the Federal Reserve Board today announced settled enforcement actions against EagleBank and Paul.

The SEC’s investigation was led by Emily Shea, with assistance from Avron Elbaum, Peter Rosario, James Carlson, and Fred Block. It was supervised by Kevin Guerrero. The SEC appreciates the assistance of the Federal Reserve Board and the Federal Reserve Bank of Richmond.

SEC Charges Eagle Bancorp and Former CEO with Failing to Disclose Related Party Loans

Source: Securities and Exchange Commission

Washington D.C., Aug. 16, 2022 —

The Securities and Exchange Commission today charged Eagle Bancorp, Inc., based in Bethesda, Maryland, and its former Chief Executive Officer and Chairman of the Board, Ronald D. Paul, with negligently making false and misleading statements about related party loans extended by the bank to Paul’s family trusts. Eagle and Paul have agreed to settle the SEC’s charges.

The SEC’s order against Eagle finds that, from March 2015 through April 2018, Eagle failed to include loans to Paul’s family trusts totaling at times nearly $90 million in the related party loan balances included in its annual reports and proxy statements. The SEC’s order also finds that Eagle improperly omitted tens of millions of dollars of loans to Eagle directors and their family members from these related party loan balances. Both SEC regulations and Generally Accepted Accounting Principles (GAAP) required Eagle to disclose these material related party transactions.

The SEC’s order also finds that, following a December 2017 short seller’s report asserting Eagle had made significant undisclosed loans to Paul’s family trusts, Eagle and Paul falsely stated in press releases, news articles, and meetings with investors that the trust loans were not related party loans and that Eagle was in compliance with all related party loan requirements. The SEC’s order finds that even though Eagle’s independent auditor and primary regulator concluded that the trusts were related parties under GAAP and banking regulations, respectively, Eagle again failed to disclose the trust loans as related party loans in its 2017 annual report.

“Adequate disclosures of related party transactions are essential to enable investors to evaluate an issuer’s corporate governance,” said Sanjay Wadhwa, Deputy Director of the SEC’s Enforcement Division. “Here, faced with a short seller’s report alleging undisclosed related party loans by the bank, both Eagle and Paul failed to respond truthfully and accurately.”

The SEC’s order finds that Eagle violated the negligence-based anti-fraud, proxy, reporting, books and records, and internal accounting controls provisions of the federal securities laws. Without admitting or denying the SEC’s findings, Eagle agreed to cease and desist from future violations and to pay disgorgement of $2.6 million, prejudgment interest of $750,493, and a civil penalty of $10 million.

The SEC’s complaint against Paul, filed in the Southern District of New York, charges him with violating the negligence-based antifraud and proxy provisions and making false certifications. Without admitting or denying the SEC’s allegations, Paul has agreed to a permanent injunction, to a two-year officer and director bar, and to pay disgorgement of $109,000, prejudgment interest of $22,216, and a penalty of $300,000. The settlement is subject to court approval.

In a parallel action, the Federal Reserve Board today announced settled enforcement actions against EagleBank and Paul.

The SEC’s investigation was led by Emily Shea, with assistance from Avron Elbaum, Peter Rosario, James Carlson, and Fred Block. It was supervised by Kevin Guerrero. The SEC appreciates the assistance of the Federal Reserve Board and the Federal Reserve Bank of Richmond.

Ann M. Dishinger, Jerrold I. Palmer, and Lawrence M. Palmer

Source: Securities and Exchange Commission

The Securities and Exchange Commission announced charges against three individuals for illegally tipping and trading in the securities of Equifax, Inc. in advance of the company’s public announcement on September 7, 2017 that it had experienced a massive cyber intrusion and data breach.

The SEC’s complaint, filed in the Northern District of Georgia, states that Equifax engaged a Chicago-based public relations firm in August 2017 to assist with handling the inquiries expected to be generated by the announcement of the intrusion and breach. According to the complaint, Ann M. Dishinger, who worked as a finance manager at the public relations firm, learned about the Equifax breach through her position and tipped her significant other, Lawrence M. Palmer (L. Palmer), with the nonpublic news. The SEC alleges that L. Palmer then contacted a former business client and arranged for the client to purchase out-of-the-money Equifax put options in the client’s brokerage account with the understanding that the client and L. Palmer would split any trading profits obtained. The complaint also alleges that L. Palmer later reimbursed the client by check for the purchase cost of the options, scribbling in the check’s memo line the words, “Blue Horseshoe,” an apparent reference to the coded language used to convey inside information in the 1987 movie Wall Street. The SEC also alleges that L. Palmer tipped his brother and business partner, Jerrold I. Palmer (J. Palmer), with the nonpublic news about Equifax disclosed to him by Dishinger. The complaint states that J. Palmer then contacted a friend whom he had known since high school and arranged for the friend to purchase the same series of out-of-the-money Equifax put options in the friend’s brokerage account with the understanding that they too would split any trading profits obtained. The SEC claims that the illegal trading by L. Palmer’s former client and J. Palmer’s friend netted approximately $35,000 and $73,000 in profits, respectively, portions of which were shared with L. Palmer and J. Palmer according to their arrangements.

The SEC’s complaint charges Dishinger, L. Palmer, and J. Palmer with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and seeks injunctive relief and civil penalties against each defendant. The SEC also seeks disgorgement of ill-gotten gains plus prejudgment interest from L. Palmer and J. Palmer.

L. Palmer and J. Palmer, without admitting or denying the allegations in the SEC’s complaint, each consented to the entry of a final judgment, subject to court approval, which would permanently enjoin them from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Additionally, the final judgment against L. Palmer would order him to disgorge $9,000 plus prejudgment interest of $2,026, and pay a civil penalty of $88,698. The final judgment against J. Palmer would order him to disgorge $28,000 plus prejudgment interest of $6,303, and pay a civil penalty of $73,399. The litigation as to Dishinger remains pending.

This is the third set of insider trading charges filed by the SEC relating to Equifax’s September 7, 2017 announcement. In separate enforcement actions in 2018, the SEC also charged two former Equifax employees-a chief information officer and a software engineering manager-with insider trading.

The SEC’s investigation was conducted by Elizabeth Skola, Stephen E. Donahue, and Justin C. Jeffries. The litigation is being led by Shawn Murnahan and Graham Loomis. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Georgia, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

Rahim Mohamed, Davies (“Dave”) Wong, Glenn B. Laken, Richard C.S. Tang, Zoltan Nagy, Jeffrey D. Cox, Phillip G. Sewell, Breanne M. Wong, Christophe Merani, Anna Tang, Robert W. Seeley, Richard B. Smith, Christopher R. Smith, H.E. Capital SA, POP Holdings Ltd., Maximum Ventures Holdings LLC, Harmony Ridge Corp., and Avatele Group LLC, Defendants, and 9224-3708 Quebec, Inc., a/k/a Distributions Bano, and Jason Black, Relief Defendants

Source: Securities and Exchange Commission

The Securities and Exchange Commission today charged 18 individuals and entities for their roles in a fraudulent scheme in which dozens of online retail brokerage accounts were hacked and improperly used to purchase microcap stocks to manipulate the price and trading volume of those stocks. Those charged include Rahim Mohamed of Alberta, Canada, who is alleged to have coordinated the hacking attacks, and several others in and outside the U.S. who allegedly benefited from or participated in the scheme.

According to the SEC’s complaint, in late 2017 and early 2018, hackers accessed at least 31 U.S. retail brokerage accounts and used them to purchase the securities of Lotus Bio-Technology Development Corp. and Good Gaming, Inc. The unauthorized purchases allegedly enabled fraudsters, who already controlled large blocks of Lotus Bio-Tech and Good Gaming stock, to sell their holdings at artificially high prices and reap more than $1 million in illicit proceeds. According to the complaint, Davies Wong of British Columbia, Canada, and Glenn B. Laken of Illinois, respectively, controlled the majority of the Lotus Bio-Tech and Good Gaming stock that was sold while the hacking attacks were being carried out, and Mohamed coordinated with Davies Wong, Laken, and others to orchestrate the attacks. The complaint also alleges that Richard Tang of British Columbia, Canada, was involved with both the Lotus Bio-Tech and Good Gaming schemes.

The SEC’s complaint charges violations of the antifraud and beneficial ownership reporting provisions of the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”), and names two relief defendants who received proceeds from the hacks. More specifically, the complaint charges the following defendants with the following violations:

  • Rahim Mohamed of Alberta, Canada, with directly violating, and aiding and abetting violations of, Section 17(a) of the Securities Act, and Sections 9(a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder;
     
  • Davies Wong of British Columbia, Canada, Richard Tang of British Columbia, Canada, Zoltan Nagy of British Columbia, Canada, Anna Tang of British Columbia, Canada, and Breanne Wong of British Columbia, Canada and Panama, with directly violating, and aiding and abetting violations of, Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and directly violating Sections 13(d) and 16(a) of the Exchange Act, and Rules 13d-1 and 16a-3 thereunder;
     
  • Glenn B. Laken of Illinois, Jeffrey Cox of Alberta, Canada, Christophe Merani of Illinois, and Phillip Sewell of British Columbia, Canada, with directly violating, and aiding and abetting violations of, Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder;
     
  • Robert Seeley of the Dominican Republic, Christopher R. Smith of the Dominican Republic, Richard B. Smith of the Dominican Republic, Wyoming entity Harmony Ridge Corp., and Nevis entities H.E. Capital SA and POP Holdings Ltd., with aiding and abetting violations of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder;
     
  • Wyoming entity Maximum Ventures Holdings LLC, with aiding and abetting violations of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and directly violating Sections 13(d) and 16(a) of the Exchange Act, and Rules 13d-1 and 16a-3 thereunder; and
     
  • Wyoming entity Avatele Group LLC, with directly violating Sections 13(d) and 16(a) of the Exchange Act, and Rules 13d-1 and 16a-3 thereunder.

The SEC’s complaint also names Quebec, Canada entity 9224-3708 Quebec Inc., a/k/a Distributions Bano, and Jason Black of California and/or Georgia, as relief defendants. The SEC seeks the return of ill-gotten gains plus interest, penalties, bars, and other equitable relief. The SEC’s investigation is continuing.

The SEC’s investigation has been conducted by Joshua Dickman and Lucy Graetz of the Atlanta Regional Office, Andrew McFall of the Washington, D.C. Office, and Patrick McCluskey of the Philadelphia Regional Office, with the assistance of Marlee Miller and Owen Granke of the SEC’s Office of International Affairs. The case is being supervised by Acting Chief of the Crypto Assets and Cyber Unit Carolyn Welshhans, Market Abuse Unit Chief Joseph Sansone, Justin Jeffries and Natalie Brunson of the Atlanta Regional Office, and Amy Flaherty Hartman of the Chicago Regional Office. Robert Gordon and William Hicks of the Atlanta Regional Office will lead the SEC’s litigation, supervised by M. Graham Loomis.

The SEC appreciates the assistance of the Financial Industry Regulatory Authority, the Alberta Securities Commission, the Australia Securities and Investments Commission, the British Columbia Securities Commission, the Calgary Police Service, the Cayman Islands Monetary Authority, the Dubai Financial Services Authority, the French Autorité des Marchés Financiers, the Hong Kong Securities and Futures Commission, the Mauritius Financial Services Commission, the Ontario Securities Commission, the Quebec Autorité des Marchés Financiers, the Royal Canadian Mounted Police, the Securities Commission of the Bahamas, the Sûreté du Québec, the Superintendencia del Mercado de Valores de la República Dominicana, the Swiss Financial Market Supervisory Authority, and the United Kingdom Financial Conduct Authority.

To learn more about how to protect your online investment accounts from fraud, please visit the SEC’s Office of Investor Education and Advocacy investor alerts webpage.