GUEST BLOG: [In]Securities: Watching You: The SEC Walks the Beat by Aegis Frumento Esq

July 15, 2022

a Guest Blog by

Watching You: The SEC Walks the Beat

Back when Rudy Giuliani was real -- as a mayor, at least -- he instituted "broken windows" policing in New York City. Grungier sections of town were cleaned up, and vandals were prosecuted well beyond their true harm. The police seemed to be everywhere. But it had an effect: the City felt safer when all the broken windows were replaced and weren't immediately rebroken, even if no underlying problems were really solved. It was a psychological thing, and like all psychological things, it was important.

My past few columns have been hard on my friends at the SEC, so let's give them a lift. Last week saw the staff engaging in what can only be called "broken windows" securities policing, and it's a good thing even if it does little to solve any of the underlying issues of the markets. It is heartening to see public servants doing a good job. There's also something comforting in the recurring proof that crookedness is highly correlated with stupidity and hubris. There's hope for the future.

Last week, the Commission's staff brought a bevy of enforcement actions against securities law violators who, if brought together into a gang, couldn't shoot straight if packed against the dead end of an alley. The full panoply of securities violations was on display.

Offering frauds took pride of place. Start with William Glen Baker, Michael Brown (labelled a recidivist), Chol Kim and their companies, who raised $2.2 million from 140 investors in 4 Oklahoma oil wells. The SEC alleged that they

made numerous material misstatements and omissions . . . Specifically . . .that they misrepresented the performance of . . .earlier wells, failed to disclose prior criminal and regulatory actions, misled investors about the prospects for well production, and failed to disclose the use of investor funds to pay sales commissions. [I]nstead of drilling and operating the wells, [they] spent investor funds on shopping sprees, entertainment, and personal travel.

See Now that's good old-fashion fraud.

Similarly, attorney Matthew Beasley and his "cohorts," were charged with making "false statements to induce investors to buy interests in purported tort settlement agreements, when in fact investors' money was used to finance the perpetrators' luxurious lifestyles and to pay fictitious Ponzi-like returns to investors to keep the scheme going."

And then there's Eric Hollifield, charged by the Commission with "misappropriating at least $1.7 million from two advisory clients and one brokerage customer and using the funds to pay for personal expenses, including the purchase of a home."

And Justin Kimbrough, Terry Nikopoulos and their companies, who allegedly "told potential investors that investors' funds would finance a real estate wholesale business and the purchase of medical products for resale by a company in India . . .[but instead] . . . retained at least $1.75 million for themselves and paid approximately $1.05 million to existing investors as purported 'dividend' or 'interest' payments in furtherance of the Ponzi scheme."

Or how about the simple misappropriation alleged of Shimon Rosenfeld, who the SEC claims raised $7 million to invest in real estate but instead used the money to trade in the market for his own account, losing all but $1 million of it.

If insider trading is your securities fraud of choice, there's the final judgment entered against the tippees of Sung Mo Jun, who allegedly, "while employed at Netflix in 2016 and 2017, tipped his brother . . . and his close friend . . . about Netflix's subscriber growth, a key metric Netflix reported in its quarterly earnings announcements, [who then] used the information to trade in advance of multiple Netflix earnings announcements."  

Or the case against Doron Tavlin, the former Vice President, Business Development of Mazor Robotics Ltd., who with two friends allegedly "made more than $500,000 in profits from trading in advance of Mazor's announcement that it would be acquired by Medtronic plc."

Or that against George Haywood, who was given access to non-public information about Neurotrope, Inc. on his promise not to use it to trade, and traded anyway.

Market manipulation was also represented, as in the pump-and-dump scheme orchestrated by Jamie Wilson and Justin Wall, who allegedly "used false documents to get [a microcap] company's shares deposited for sale in brokerage accounts . . . as a result of [which], what appeared to be ordinary trading . . . was actually a massive dump of shares."

Compared to all that, the SEC latest case looks almost benign. Jerry Li was charged with violating the Foreign Corrupt Practices Act for bribing Chinese government officials to obtain favorable treatment of his businesses there. Allegedly, Li "directed that the bribes be made through payments of cash, gifts, travel, meals and entertainment, and . . . falsified company expense reports to conceal the bribes." At least he was actually trying to do business.

But really, what can one say about all these guys, other than thanks for showing us once again that "criminal mastermind" is an oxymoron. They all must have known they were breaking the law. Maybe some of the insider traders didn't fully appreciate what they were doing -- though I seriously doubt that -- and I do empathize with Jerry Li for doing only what has been done in China for millennia, but those who misused client investment money surely knew what they were up to. The only explanation that makes any sense is that they all bet that they'd never be caught.

When you are dealing with securities that's a bad bet. Those who play in regulated sandboxes, where every trade you make, every buck you take, every word you fake is watchable, need to feel at risk of the SEC doing its job. Cases like these are exactly what the SEC should be bringing in its role as cop on the beat. None of these folks were plying the sophisticated scams often cooked up by hot-shot traders and other deep bulge bracket actors, but busting them is still important. Securities "broken window" policing, if it does nothing else, gives the rest of us comfort that norms can't be flouted with impunity. There's already too much of that going on.


Aegis J. Frumento

380 Lexington Avenue
New York, NY 10168

Aegis Frumento co-heads the Financial Markets Practice of Stern Tannenbaum & Bell, New York City.  He represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations).  He has decades of experience representing SEC, CFTC and FINRA regulated firms and persons in regulatory enforcement investigations, hearings and lawsuits.  Drawing on his five years managing the Executive Financial Services Department of Morgan Stanley Smith Barney, Aegis has rare depth of experience in the securities and corporate governance laws affecting senior executives of public corporations.  When not litigating, Aegis enjoys working with new and existing broker-dealers, registered investment advisers, and private equity funds, covering all legal aspects from formation to capital raising. Those clients now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises, including the use of cryptosecurities to represent equity and debt interests. 

Aegis's long and distinguished career includes having been a Managing Director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.  He graduated from Harvard College in 1976 and New York University School of Law in 1979.  Aegis is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.  He is the current Chairman of the New York City Bar Association's standing Committee on Professional Responsibility.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.