Hedge Fund Adviser Charged for Inadequate Controls to Prevent Insider Trading

The Securities and Exchange Commission today announced that hedge fund advisory firm Deerfield Management Company L.P. has agreed to pay more than $4.6 million to settle charges that it failed to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of inside information, including information about confidential government decisions.

The case relates to insider trading charges that the SEC recently filed against current and former Deerfield analysts, a political intelligence analyst who passed them information, and an employee at the Centers for Medicare and Medicaid Services (CMS). 

According to the SEC’s order, Deerfield conducted extensive research in the health care sector to help inform its investment decisions, and engaged research firms specializing in political intelligence about upcoming regulatory and legislative decisions.  But Deerfield’s policies and procedures required only an initial review of the research firms’ own policies and procedures, and Deerfield otherwise placed the burden on its own employees to police themselves by identifying issues and informing supervisors.

The SEC’s order finds that Deerfield was on notice that the political intelligence analyst might be conveying material, nonpublic information.  An email from the analyst said that he “heard from a reliable cms source” that CMS was about to issue a regulation, and an internal Deerfield email noted that the analyst “has a guy” at a “closed-door” government meeting.  From at least May 2012 to November 2013, Deerfield generated more than $3.9 million in trading profits based on material, nonpublic information from the political intelligence analyst.  Through its management agreements with the hedge funds, including performance-based compensation, Deerfield received approximately $714,110 due to these trades. 

“An investment adviser’s policies and procedures must be tailored to address the specific risks presented by its business.  Deerfield relied on political intelligence firms, creating a risk that it would receive and trade on illegal inside information.  As it turns out, that is exactly what happened,” said Robert A. Cohen, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit. 

Without admitting or denying the findings, Deerfield consented to the SEC’s order finding that it violated Section 204A of the Investment Advisers Act of 1940 by failing to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information.  Deerfield is censured and required to pay disgorgement of $714,110 plus interest of $97,585 and pay a penalty of $3,946,267. 

The SEC’s investigation was conducted by Ann Rosenfield, Patrick McCluskey, and Carolyn Welshhans in the Market Abuse Unit.  The SEC’s ongoing litigation in the insider trading matter is being led by Gregory Bockin and Cheryl Crumpton.  The case has been supervised by Mr. Cohen.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Department of Health and Human Services Office of Inspector General.  

Commission and Commission Staff Issue Updates to Interpretive Guidance on Revenue Recognition

The Securities and Exchange Commission today issued two releases and the SEC staff released a Staff Accounting Bulletin to update interpretive guidance regarding revenue recognition.

Consistent with developments in private-sector accounting standard setting, the SEC issued a release to update its guidance for bill-and-hold arrangements by stating that registrants should no longer refer to the criteria in Accounting and Auditing Enforcement Release No. 108, In the Matter of Stewart Parness (AAER 108), to recognize revenue for such arrangements upon the registrants’ adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. The release states that until a registrant adopts ASC Topic 606, it should continue referring to the guidance included in AAER 108.

In addition, the SEC issued a release to update its 2005 Commission Guidance Regarding Accounting for Sales of Vaccines and Bioterror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile. The release states that consistent with ASC Topic 606, manufacturers should recognize revenue for vaccines that are placed into the Vaccines for Children Program and the Strategic National Stockpile.  The release states that until a registrant adopts ASC Topic 606, it should continue referring to the guidance included in the 2005 Release.

Separately, the SEC’s Office of the Chief Accountant and Division of Corporation Finance released Staff Accounting Bulletin (SAB) No. 116 that brings existing SEC staff guidance into conformity with the Financial Accounting Standard Board’s adoption of and amendments to ASC Topic 606. The SAB modifies SAB Topic 13, Revenue Recognition, SAB Topic 8, Retail Companies, and Section A, Operating-Differential Subsidies of SAB Topic 11, Miscellaneous Disclosure. The guidance in SAB 116 applies upon a registrant’s adoption of ASC Topic 606. Until such time, the SAB states that registrants should continue referring to prior staff guidance on revenue recognition.

The statements in Staff Accounting Bulletins are not Commission rules or interpretations nor are they published as bearing the Commission’s official approval.  They represent interpretations and practices followed by the SEC’s Office of the Chief Accountant and the Division of Corporation Finance in administering the federal securities laws.

Banca IMI Securities to Pay $35 Million for Improper Handling of ADRs in Continuing SEC Crackdown

The Securities and Exchange Commission today announced that broker Banca IMI Securities Corp. (BISC), an indirect, wholly-owned U.S. subsidiary of Italian bank Intesa Sanpaolo SpA, has agreed to pay more than $35 million to settle charges that it violated federal securities laws when it requested the issuance of and received American Depositary Receipts (ADRs) without possessing the underlying foreign shares.

ADRs are U.S. securities that represent shares of a foreign company, and for all issued ADRs there must be a corresponding number of foreign shares held in custody at a depositary bank.  Under “pre-release agreements,” brokers such as BISC may obtain ADRs without depositing corresponding foreign shares provided the broker owns or takes reasonable steps to determine that the customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.

The SEC’s order finds that BISC obtained pre-released ADRs and lent them to counterparties without satisfying the proper requirements.  BISC’s improper handling of ADRs, which lasted from at least January 2011 to August 2015, made it possible for such ADRs to be used for inappropriate short selling or inappropriate profiting around dividend record dates.  In certain countries, demand for ADR borrowing increased around dividend record dates so that certain tax-advantaged borrowers could, through a series of transactions, collect dividends without any tax withholding.  Pre-released ADRs that were improperly issued were used to satisfy that demand. 

Earlier this year, broker ITG settled charges for similar misconduct.

“U.S. investors who invest in foreign companies through ADRs have a right to expect market professionals to create new ADRs only when they are backed by foreign shares so that the new ADRs are not used to game the system,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “As our order finds, BISC’s actions left the ADR markets ripe for potential abuse.”

The SEC’s order finds that BISC violated Section 17(a)(3) of the Securities Act of 1933 and failed reasonably to supervise its securities lending desk personnel.  Without admitting or denying the SEC’s findings, BISC agreed to be censured and pay more than $18 million in disgorgement plus more than $2.3 million in interest and a $15 million penalty.  The SEC’s order acknowledges BISC’s cooperation in the investigation and its remedial actions.

The SEC’s continuing investigation is being conducted by William Martin, Andrew Dean, Elzbieta Wraga, and Adam Grace of the New York office and supervised by Mr. Wadhwa.  

SEC Uncovers Wide-Reaching Insider Trading Scheme

The Securities and Exchange Commission today announced insider trading charges against seven individuals who generated millions in profits by trading on confidential information about dozens of impending mergers and acquisitions.  Data analysis allowed the SEC’s enforcement staff to uncover the illicit trading despite the traders’ alleged use of shell companies, code words, and an encrypted, self-destructing messaging application to evade detection.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today unsealed criminal charges against the same seven individuals.

According to the SEC’s complaint, Daniel Rivas, a former IT employee of a large bank, was at the center of the alleged scheme, misusing his access to a bank computer system to tip four individuals who traded on the information.  He allegedly tipped others who also traded and passed along the tips.  According to the complaint, the traders profited on market-moving news related to 30 impending corporate deals from October 2014 to April 2017.

The SEC’s complaint alleges that Rivas frequently tipped his girlfriend’s father, James Moodhe, who traded on the information and used coded conversations and in-person meetings to relay the tips to his friend, Michael Siva, a financial advisor at a brokerage firm.  Siva allegedly used the confidential information to make profitable trades for his brokerage firm clients, earning commissions for himself in the process, and he passed numerous tips along to a client who traded on them.  The complaint alleges that Siva also traded on behalf of himself and his wife based on two of the tips he got from Moodhe, a former financial services company treasurer.

A separate trading ring allegedly involved two of Rivas’s friends in Florida, Roberto Rodriguez and Rodolfo Sablon, who discussed tips on an encrypted, self-destructing smartphone messaging application and used shell companies to carry out their insider trading.  Although Rodriguez and Sablon were inexperienced traders, in just over a year they turned less than $100,000 into more than $2 million in profits by making aggressive options trades based on the confidential information.  Rodriguez also is alleged to have passed several tips to one of his friends who also traded.

According to the SEC’s complaint, a third trading ring involved Jhonatan Zoquier, another inexperienced trader who profited by trading on inside information communicated through the encrypted messaging application.  The complaint further alleges that New Jersey-based Zoquier repeatedly passed the confidential information along to Jeffrey Rogiers of Oakland, California, who placed several illegal trades for himself and tipped others to trade.

The case stems from the SEC Market Abuse Unit’s Analysis and Detection Center, which uses data analysis tools to detect suspicious patterns such as improbably successful trading across different securities over time.  Enhanced detection capabilities enabled SEC enforcement staff to spot the unusual trading activities.

“The tippers and traders in this case are alleged to have used various methods to try to cover their tracks, but their efforts failed,” said Steven Peikin, Co-Director of the SEC Enforcement Division.  “These charges reflect our continued use of sophisticated tools to detect and root out secretive and wide-reaching insider trading schemes.”

“We allege that this case involves repeated insider trading based on tips about dozens of confidential mergers and acquisitions stolen by an IT employee at a bank,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “IT employees are often entrusted with broad access to incredibly valuable, nonpublic information and have a duty to safeguard that information.”

The SEC’s complaint, which was filed in the Southern District of New York, charges Rivas, Moodhe, Rodriguez, Sablon, Zoquier, Siva, and Rogiers with fraud and seeks permanent injunctions along with the return of allegedly ill-gotten gains plus interest and penalties.

The SEC’s investigation, which is continuing, has been conducted by Walker Newell and David Makol with assistance from John Rymas.  The case has been supervised by Joseph G. Sansone, Erin E. Schneider, Steven Buchholz, and Jennifer J. Lee.  The SEC’s litigation will be led by Susan F. LaMarca and Mr. Newell.  The investigation has been conducted jointly by the San Francisco office and the Market Abuse Unit.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.

SEC Charges KPMG with Audit Failures

The Securities and Exchange Commission today announced that KPMG has agreed to pay more than $6.2 million to settle charges that it failed to properly audit the financial statements of an oil and gas company, resulting in investors being misinformed about the energy company’s value.  KPMG’s engagement partner in charge of the audit also agreed to settle charges against him.

According to the SEC’s order, KPMG was hired as the outside auditor for Miller Energy Resources in 2011 and issued an unqualified audit report despite grossly overstated values for key oil and gas assets.  KPMG and the engagement partner John Riordan failed to properly assess the risks associated with accepting Miller Energy as a client and did not properly staff the audit, which overlooked the overvaluation of certain oil and gas interests that the company had purchased in Alaska the previous year.  Among other audit failures, KPMG and Riordan did not adequately consider and address facts known to them that should have raised serious doubts about the company’s valuation, and they failed to detect that certain fixed assets were double-counted in the company’s valuation. 

“Auditing firms must fully comprehend the industries of their clients.  KPMG retained a new client and failed to grasp how it valued oil and gas properties, resulting in investors being misinformed that properties purchased for less than $5 million were worth a half-billion dollars,” said Walter E. Jospin, Director of the SEC’s Atlanta Regional Office.

The SEC’s order finds that KPMG and Riordan engaged in improper professional conduct and caused Miller Energy’s violation of Section 13(a) of the Securities Exchange Act and Rules 13a-1 and 13a-13.  Without admitting or denying the findings, KPMG agreed to be censured and pay $4,675,680 in disgorgement of all the audit fees received from Miller Energy plus $558,319 in interest and a $1 million penalty.  KPMG also agreed to significant undertakings designed to improve its system of quality control.  Riordan agreed, without admitting or denying the findings, to pay a $25,000 penalty and be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Riordan to apply for reinstatement after two years.

Miller Energy was charged with accounting fraud in 2015 and later settled the charges.

The SEC’s investigation was conducted by William M. Uptegrove and John Nemeth, and the case was supervised by Peter J. Diskin and Aaron W. Lipson of the Atlanta office.

SEC Files Charges in Oil Drilling Investment Scheme

The Securities and Exchange Commission today charged two Tennessee men and an accomplice in Fort Lauderdale with allegedly defrauding investors they lured by false promises of high returns from an oil drilling investment opportunity.

According to the SEC’s complaint filed in federal court in Savannah, Georgia, David R. Greenlee and David A. Stewart Jr. orchestrated the $15 million scheme by recruiting and controlling a network of salesmen who offered and sold investors a stake in various companies purportedly using enhanced oil recovery techniques like fracking to extract and sell oil from wells in Kansas, Oklahoma, and Texas.  Investors were allegedly promised profits of 15 to 55 percent per year for decades. 

The SEC alleges that Greenlee and Stewart weren’t registered to sell investments and used fake names like “Dave Johnson” when speaking to investors in order to hide their past criminal records, and they diverted nearly two-thirds of the money raised from investors to pay themselves and their salesmen as well as advertise for new investors.  According to the SEC’s complaint, minimal funds were used for oil production at just a few of the wells in order to create the appearance of oil production and dupe investors who wanted to see activity in-person.

The SEC’s complaint further alleges that Richard “Ric” P. Underwood helped Greenlee and Stewart draft false offering brochures, and he oversaw a boiler room sales team of telemarketers in Florida as they solicited investors nationwide.

“As alleged in our complaint, misleading brochures and radio advertisements lured investors into believing they could strike it rich by investing in these oil drilling opportunities.  Unbeknownst to the investors, most of their money was being used for other purposes,” said Walter Jospin, Director of the SEC’s Atlanta Regional Office. 

The SEC has previously alerted investors about the risks and possible fraudulent activity involved in private offerings of securities for oil-and-gas ventures.  The SEC also encourages investors to check the backgrounds of people selling investments by using the SEC’s investor.gov website to quickly identify whether they are registered professionals and confirm their identity.

In a parallel action, the U.S. Attorney’s Office for the Southern District of Georgia today announced criminal charges against Greenlee, Stewart, and Underwood.

The SEC’s complaint charges Greenlee, Stewart, and Underwood with violations of the antifraud provisions of the federal securities laws.  The SEC seeks the disgorgement of ill-gotten gains plus interest and penalties as well as injunctions.

The SEC’s continuing investigation has been conducted by Brian M. Basinger with assistance from Lauren B. Poper, and the case is being supervised by Aaron W. Lipson and Stephen E. Donahue.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Georgia and the U.S. Secret Service.

SEC Announces $2.5 Million Whistleblower Award

The Securities and Exchange Commission today announced an award of nearly $2.5 million to an employee of a domestic government agency whose whistleblower tip helped launch an SEC investigation and whose continued assistance enabled the SEC to address a company’s misconduct.

”Whistleblowers can provide a wealth of information and ongoing assistance that helps our agency bring enforcement actions quicker and more efficiently,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  ”This whistleblower not only helped us open the case, but also provided timely ongoing assistance along with critical documents and testimony that accelerated the pace of our enforcement action.”

Approximately $156 million has now been awarded to 45 whistleblowers who voluntarily provided the SEC with original and useful information that led to a successful enforcement action.  No money has been taken or withheld from harmed investors to pay whistleblower awards.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.  Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action.  Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.

For more information about the whistleblower program and how to report a tip, visit www.sec.gov/whistleblower.

SEC Names Bryan Wood as Director of the Office of Legislative and Intergovernmental Affairs

The Securities and Exchange Commission today announced that Bryan Wood has been named Director of the agency’s Office of Legislative and Intergovernmental Affairs. Mr. Wood will advise the Chairman, Commissioners, and SEC staff on legislative matters, provide technical assistance on securities-related legislation to congressional committees and staff, assist in preparing SEC testimony for congressional hearings, and coordinate with other government entities.

“It is important that the SEC work in cooperation with Congress and other government entities in a way that is responsive, efficient, and effective to best serve the American people,” said SEC Chairman Jay Clayton. “The SEC will benefit from Bryan’s experience in Congress, his knowledge of our federal securities laws, and his commitment to public service.”

Mr. Wood added, “I am honored to have the opportunity to work with the Chairman, Commissioners, and dedicated staff here at the SEC. I look forward to helping the agency continue to fulfill its critical mission.”

Mr. Wood spent 10 years on Capitol Hill, most recently as Senior Advisor and Counsel at the House Financial Services Committee. Previously, he served as Counsel for the Subcommittee on Capital Markets, Securities, and Investment, and as Legislative Director to Rep. Robert Hurt, former vice chairman of the Capital Markets and Government-Sponsored Enterprises Subcommittee.

Mr. Wood received his J.D. from Georgetown University, magna cum laude. He received his B.A. from the University of Virginia.

Federal Regulatory Agencies Announce Coordination of Reviews for Certain Foreign Funds Under Volcker Rule

Five federal financial regulatory agencies today announced that they are coordinating their respective reviews of the treatment of certain foreign funds under section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, and the agencies’ implementing regulations.

These foreign funds are investment funds organized and offered outside of the United States that are excluded from the definition of “covered fund” under the agencies’ implementing regulations (foreign excluded funds).  Section 619, and the implementing regulations, generally do not apply to investments in, or sponsorship of, these foreign excluded funds by a foreign banking entity.

However, complexities in the statute and the implementing regulations may result in certain foreign excluded funds becoming subject to regulation under section 619 because of governance arrangements with or investments by a foreign bank. As a result, a number of foreign banking entities, foreign government officials, and other market participants have expressed concern about possible unintended consequences and extraterritorial impact.

The staff of the agencies are considering ways in which the implementing regulations may be amended, or other appropriate action may be taken. It may also be the case that congressional action is necessary to fully address the issue. To aid full consideration, the federal banking regulators, which generally oversee foreign banks, announced that they would not take action under section 619 for qualifying foreign excluded funds, subject to certain conditions, for a period of one year.

Section 619 generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a covered fund. These prohibitions are subject to a number of statutory exemptions, restrictions, and definitions.

Final regulations implementing section 619 were previously issued by five agencies – the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission. 

Today’s announcement does not otherwise modify the rules implementing section 619 and is limited to certain foreign excluded funds that may be subject to the Volcker Rule and implementing regulations due to their relationships with or investments by foreign banking entities. 

Media Contacts:

Federal Reserve                     Eric Kollig                                202-452-2955

CFTC                                      Erica Elliott Richardson           202-418-5382

FDIC                                       David Barr                               202-898-6992

OCC                                        Stephanie Collins                    202-649-6870

SEC                                        Office of Public Affairs             202-551-4120

SEC Bars Lawyer Who Committed Fraud

The Securities and Exchange Commission today barred a New York-based attorney from appearing or practicing before it and acting as an officer or director of a public company after finding that he made false and misleading statements in corporate filings.

The SEC’s order finds that David Lubin committed fraud while serving as a director and corporate counsel of Entertainment Art, a public company in which Lubin also was a large shareholder.  Lubin negotiated the sale of all of the outstanding stock of Entertainment Art, including both restricted and previously registered shares that were purportedly “free trading,” to an acquaintance interested in purchasing shell companies.  Absent a valid exemption, common ownership of all of the shares of a public company would require the owner to register the shares for resale to the public.  According to the SEC’s order, Lubin fraudulently misrepresented in Entertainment Art’s corporate filings that the purportedly free-trading shares had not been purchased by the acquaintance.  This left the false impression that those shares remained immediately available for public resale.  During the next two years and until he left the company, Lubin drafted and signed SEC filings that continued to lie about the true ownership of the company’s stock.

According to the SEC’s order, soon after the company was renamed Biozoom, more than 14 million shares were resold to the public in an illegal unregistered distribution for illicit proceeds of $34 million.  The SEC froze assets from the unregistered sales in 2013.

“As the SEC’s order notes, Lubin drafted and signed misleading public filings and masked the true ownership and restricted nature of a significant portion of the company’s stock,” said Antonia Chion, Associate Director in the SEC’s Enforcement Division.  “Lubin’s deception led to many of these same shares being illegally resold to the general public by others a few years later.”

The U.S. Attorney’s Office for the Southern District of Florida today announced criminal charges against Lubin.

The SEC’s order finds that Lubin willfully violated Section 10(b) of the Securities Exchange Act and Rule 10b-5, imposes a cease-and-desist order and an officer-and-director bar.  The SEC’s order also prohibits Lubin from representing clients in SEC matters, including investigations, litigation, or examinations, and from advising clients about SEC filing obligations or content.  The SEC ordered a public hearing before an administrative law judge to prepare an initial decision determining what, if any, disgorgement or monetary penalties are in the public interest.

The SEC’s investigation, which is continuing, is being conducted by Marc E. Johnson, Jennie B.  Krasner, and Deborah A. Tarasevich, and the case is being supervised by Ms. Chion.  The SEC appreciates the assistance of the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Southern District of Florida.

SEC Announces Christopher Hetner as Senior Advisor to the Chairman for Cybersecurity Policy

The Securities and Exchange Commission today announced that Christopher R. Hetner will continue to serve as Senior Advisor to Chairman Jay Clayton for Cybersecurity Policy, having previously served in this role under Chair Mary Jo White and Acting Chairman Michael Piwowar. Mr. Hetner will continue to coordinate efforts across the agency to address cybersecurity policy, engage with external stakeholders, and help enhance the SEC’s mechanisms for assessing cyber-related market risk.

“Technology has become commonplace in our lives, including in our financial transactions, and cybersecurity should be a major concern for all Americans,” said SEC Chairman Jay Clayton.  “It is critical that we regularly assess the cybersecurity landscape and adapt accordingly as we strive to fulfill our mission. Chris’ experience will help our agency evaluate risk, coordinate with others, and communicate with companies and investors.”

Mr. Hetner has more than 20 years of experience in information security and technology. He joined the SEC in January 2015 as the Cybersecurity Leader for the Technology Control Program in the SEC’s Office of Compliance Inspections and Examinations, where he coordinated cybersecurity efforts and advised on enforcement matters. 

Prior to joining the SEC, Mr. Hetner led Ernst and Young’s Wealth and Asset Management Sector Cybersecurity practice and was the Chief Information Security Officer at GE Capital. Mr. Hetner also implemented information security and regulatory compliance programs for Citigroup’s Institutional Client Group global business and technology units. 

Mr. Hetner holds industry-leading certifications including the CISSP (Certified Information Systems Security Professional), NSA INFOSEC (National Security Agency Information Security) Assessment Certification, and CISM (Certified Information Security Manager).  He earned an M.S. in Information Assurance from Norwich University and a B.S in Security Management from The City University of New York’s John Jay College of Criminal Justice.

SEC Files Fraud Charges in Bitcoin and Office Space Investment Schemes

The Securities and Exchange Commission today filed fraud charges against the clandestine founder of a purported Bitcoin platform and a chain of co-working spaces located in former bars and restaurants, alleging that he bilked investors in both companies while hiding his connection given his checkered past with regulators in the U.K. 

The SEC alleges that Renwick Haddow, a U.K. citizen living in New York, created a broker-dealer and did not register the firm with the SEC as required under the federal securities laws.  Haddow allegedly used sales representatives to cold call potential investors and sell securities in Bitcoin Store Inc. and Bar Works Inc.

According to the SEC’s complaint, offering materials presented to investors in both companies touted the backgrounds of senior executives who do not appear to exist.  The materials also misrepresented other key facts about both companies’ operations.  Haddow allegedly diverted more than 80 percent of the in funds raised by the broker-dealer for the Bitcoin Store, and sent more than $4 million from the Bar Works bank accounts to one or more accounts in Mauritius and $1 million to one or more accounts in Morocco.

“As alleged in our complaint, Haddow created two trendy companies and misled investors into believing that highly-qualified executives were leading them to quick profitability.  In reality, Haddow controlled the companies from behind the scenes and they were far from profitable,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC alleges that materials provided to Bitcoin Store investors claimed it was “an easy-to-use and secure way of holding and trading Bitcoin” and had generated several million dollars in gross sales.  In fact, the SEC alleges that Bitcoin Store has never had any operations nor generated the gross sales it touted.  In 2015, for example, Bitcoin Store’s bank accounts allegedly received less than $250,000 in incoming transfers, none of which appear to reflect revenue from customers.  According to the SEC’s complaint, the corporate address used for Bitcoin Store was Haddow’s residential address minus the apartment number.

According to the SEC’s complaint, Bar Works claimed to bring “real vibrancy to the flexible working scene by adding full-service workspaces to former bar and restaurant premises in central city locations.”  Bar Works primarily sold leases coupled with sub-leases that together functioned like investment notes.  The company also allegedly sold leases for more workspaces than actually existed in at least two locations.  Among false claims made to investors, who invested more than $37 million in the Bar Works scheme, were that a location was profitable within months of opening and that Bar Works had engaged an auditor. 

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

The SEC’s complaint filed in federal district court in Manhattan charges Haddow, Bitcoin Store, Bar Works, and another Haddow-controlled company called Bar Works 7th Avenue, Inc. with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint further alleges that Haddow is liable for aiding and abetting Bitcoin Store, Bar Works, and Bar Works 7th Avenue’s violations and as a control person for the registration violations of his brokerage firm InCrowd Equity Inc. 

The SEC has obtained an emergency asset freeze against all defendants and relief defendants in the case.

The SEC’s investigation is being conducted by Maureen P. King, Preethi Krishnamurthy, Neil Hendelman, and Sandeep Satwalekar.  The case is being supervised by Lara Shalov Mehraban.  The litigation will be handled by Ms. Krishnamurthy, Ms. King, and Christopher J. Dunnigan.  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.