SEC roundup: Fraud schemes, misleading non-GAAP disclosure, and compliance failures

An $850m fraud scheme that funded a businessman’s lavish lifestyle features among the SEC’s charges this week.

A cannabis company, its CEO, and others fabricated business statements, and siphoned off millions of funds – March 16

The SEC has charged American Patriot Brands Inc. (APB), its CEO, and five other entities and individuals for their participation in a long-running scheme that raised over $30m from more than one hundred investors, and funneled millions of those funds to enrich themselves.

APB, Robert Y Lee, Brian L Pallas, J Bernard Rice, and APB subsidiaries DJ&S Property #1 LLC, TSL Distribution LLC, and Urban Pharms LLC have all been charged with violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties. Including officer and director bars against Lee, Pallas, and Rice. It also names as relief defendants, and seeks disgorgement with prejudgment interest from, the three affiliated entities Legion Accounting Services, Inc., Puerto Rico One Corp., and Castro Business Enterprises LLC, that allegedly received millions in investor proceeds.

“As the SEC complaint alleges, American Patriot Brands Inc. and some of its senior executives fabricated business profits and prospects to entice investors with falsehoods that in the end left investors with essentially worthless securities.”

Carolyn M Welshhans, Associate Director, SEC’s Division of Enforcement

Exiled Chinese businessman and his financial advisor tricked investors in $850m fraud scheme – March 14

Miles Guo and William Je have been charged for unregistered and fraudulent offerings that raised more than $850m. Guo allegedly used tome of the funds to fuel his lavish lifestyle, including $40m on a house in New Jersey, $3.5m for a Ferrari, and $37m for a luxury yacht.  

The complaint seeks permanent injunctions against Guo and Je, disgorgement of ill-gotten gains, civil penalties, and officer and director bars. It also seeks a conduct-based injunction that prohibits Guo from participating in the issuance, purchase, offer, or sale of any securities, including crypto asset securities, other than for personal use.

The SEC is also charging Guo, New York-based G Club Operations LLC and New York-based Mountains of Spices LLC with violations of the registration provisions of the securities laws in connection with these offerings.

The US Attorney’s Office for the Southern District of New York has also brought charges against Guo and Je, for orchestrating an over-$1bn fraud conspiracy. They face both multiple charges, including securities fraud and wire fraud, which can bring many years in prison if a conviction is secured.

“We allege that Guo was a serial fraudster, who raised more than $850m. Guo took advantage of the hype and allure surrounding crypto and other investments to victimize thousands and fund his and his family’s lavish lifestyle.”

Gurbir S Grewal, Director, SEC Division of Enforcement

IT services provider charged for misleading non-GAAP disclosures – March 14

DXC Technology Company has been charged with making misleading disclosures about its non-GAAP financial performance in multiple reporting periods from 2018 until early 2020. By misclassifying tens of millions of dollars of expenses as non-GAAP adjustments, DXC increased its reported non-GAAP net income.

The order finds that DXC negligently violated the anti-fraud provisions of the Securities Act, and reporting provisions of the federal securities laws. DXC has, without admitting or denying, consented to a cease-and-desist order, to pay an $8m penalty, and to undertake to develop and implement appropriate non-GAAP policies and disclosure controls and procedures.

“As the order finds, DXC’s informal procedures and controls were not up to the task, and, as a result, investors were repeatedly misled about its non-GAAP financial performance.”

Mark Cave, Associate Director, SEC Division of Enforcement

Investment adviser failed to adopt compliance policies – March 13

The Manhattan-based E. Magnus Oppenheim & Co. Inc. (EMO) has agreed to settle charges over failing to adopt and implement proper compliance policies and procedures, and to conduct best execution reviews for its advisory clients despite prior notice of deviancies.

The order finds that EMO violated Sections 206(2) and 206(4), and Rule 206(4)-7 of the Investment Advisers Act of 1940. EMO has, without admitting or denying, agreed to a censure, a cease-and-desist order from further violations of these provisions, a $50,000 penalty, and the imposition of an independent compliance consultant.