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Sec Enforcement News: Protecting Investors From Breaches Of Fiduciary, Disclosure Violations, And Illegal Distributions And Sales Of Restricted Stock

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  • Posted on: Apr 11 2018

The Securities and Exchange Commission (“SEC”) has been busy so far this spring. In the latest roundup, this Blog looks at enforcement actions taken by the SEC against investment advisors, a medical device company and a purported cryptocurrency company.

SEC Charges Medical Device Company and Founder with Fraud for Failing to Make Disclosures and Misappropriating Investor Funds

On April 5, 2018, the SEC announced (here) that it had charged convicted felon and former NHL team owner Peter H. Pocklington (“Pocklington”), his medical device company, and others with defrauding investors by hiding Pocklington’s recidivist history and by misappropriating investor funds.

In its complaint (here), the SEC alleged that in 2010, Pocklington pleaded guilty to a federal felony perjury charge and was later ordered to pay over $5 million as part of a settlement for unrelated state securities fraud and registration charges.  Thereafter, Pocklington founded The Eye Machine LLC (now known as Nova Oculus Partners LLC), a California-based medical device company that raised over $14 million between 2014 and 2017 from more than 260 investors in unregistered offerings.

According to the SEC, Pocklington and his attorney, Lantson E. Eldred (“Eldred”), structured the ownership of The Eye Machine to conceal Pocklington’s role with the company and held Eldred out as the company’s “visual front.”  In the offerings, Pocklington, Eldred, and The Eye Machine allegedly failed to disclose Pocklington’s criminal history and involvement in the company, and misrepresented how investor funds would be spent.  Pocklington allegedly misappropriated over $600,000 of investor funds for personal use, including funding his gold mining companies and paying personal legal and credit card bills.  The SEC also alleged that The Eye Machine paid millions of dollars in undisclosed and excessive sales commissions to defendants Yolanda C. Velazquez, Vanessa Puleo, and Robert A. Vanetten, who acted as unregistered brokers for the company.  According to the complaint, Velazquez – whom the SEC previously barred from acting as a broker-dealer (here) – and Puleo used “boiler room” operations in Florida to “cold call” investors.

“Investors should know when a recidivist plays a central role in a company’s operations and offerings,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office.  “Investors should research the background of anyone offering an investment, but they can only do this if the offering accurately and adequately discloses the individuals involved.”

The SEC filed its complaint in federal court in California. In the complaint, the SEC charged: 1) The Eye Machine, Pocklington, and Eldred with violating the antifraud and securities registration provisions of the federal securities laws; 2) The Eye Machine’s majority shareholder, AMC Holdings, LLC, and Terrence J. Walton, The Eye Machine’s in-house accountant, with securities fraud violations; 3) Velazquez, Puleo, and Vanetten with broker-dealer registration and securities registration violations; and 4) Velazquez with violating a prior SEC order barring her from associating with a broker-dealer.  The SEC seeks injunctive relief, disgorgement and interest, and penalties.

SEC v. Pocklington, Case No. 5:18-cv-00701 (C.D. Cal. Apr. 5, 2018).

Investment Advisers Settle Charges for Breaching Fiduciary Duties; Agree to Pay $12 Million to Injured Clients

On April 6, 2018, the SEC announced that three investment advisers had settled charges for breaching their fiduciary duties to clients, which generated millions of dollars in improper fees. (Here.)

In three separate orders (here, here and here), the SEC claimed that PNC Investments LLC (“PNCI”), Securities America Advisors Inc. (“SAA”), and Geneos Wealth Management Inc. (“Geneos”) failed to disclose conflicts of interest and violated their duty to seek best execution by investing advisory clients in higher-cost mutual fund shares when lower-cost shares of the same funds were available. The SEC also charged Geneos for failing to identify its revised mutual fund selection disclosures as a “material change” in its 2017 disclosure brochure.  Collectively, the firms agreed to pay almost $15 million, with more than $12 million going to harmed clients.

“These disclosure failures cause real harm to clients,” said C. Dabney O’Riordan, Co-Chief of the Asset Management Unit.  “We strongly encourage eligible firms to participate in the recently announced Share Class Selection Disclosure Initiative as part of an effort to stop these violations and return money to harmed investors as quickly as possible.”

The Share Class Selection Disclosure Initiative (discussed by this Blog here) gives eligible advisers until June 12, 2018, to self-report share selection misconduct and take advantage of the SEC’s willingness to recommend more favorable settlement terms, including no civil penalties against the adviser. (The SEC announcement of the SCSDI can be found here.)

The SEC also found that PNCI and Geneos failed to disclose the conflict of interest associated with compensation they received from third parties for investing clients in particular mutual funds, and that PNCI improperly charged advisory fees to client accounts for periods when there was no assigned investment advisory representative.

In the orders, the SEC concluded that PNCI, SAA, and Geneos each violated the Investment Advisers Act of 1940.  Without admitting or denying the findings, the advisers each consented to a cease-and-desist order and a censure.  The orders require PNCI to pay $6,407,770 in disgorgement and prejudgment interest along with a $900,000 penalty. SAA agreed to pay $5,053,448 in disgorgement and prejudgment interest along with a $775,000 penalty. Geneos agreed to pay $1,558,121 in disgorgement and prejudgment interest along with a $250,000 penalty.

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