In the last week of 2024, and specifically on one day, the SEC announced charges against private companies, broker-dealers and registered investment advisers for a variety of alleged violations. A short overview of each follows, with some interesting quotes.

Untimely filing of Form D

The SEC announced charges against two private companies and one registered investment adviser for failing to timely file Forms D for several unregistered securities offerings in violation of Rule 503 of Regulation D. Regulation D contains certain offering exemptions and a safe harbor from the Securities Act’s registration requirements. To protect investors and safeguard markets, an issuer offering or selling securities in reliance on one of those exemptions or the safe harbor is required to file a Form D within 15 days after the first sale of securities in the offering.

The parties charged were:

• GRID 202 LLC, a registered investment adviser which does business as Re-Envision Wealth ($60,000 penalty);
• Pipe Technologies Inc., a privately held financial technology company ($195,000 penalty); and
• Underdog Sports Holdings, Inc., a privately held corporation that operates an online fantasy sports website and mobile app ($175,000 penalty).

Policy failures with MNPI

The SEC filed a complaint in a US district court in Connecticut charging registered investment adviser Silver Point Capital LP with failing to establish, implement, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI) relating to its participation on creditors’ committees.

According to the SEC’s complaint, one of Silver Point’s core strategies was to invest in distressed companies. As part of this strategy, and because of the nature of its business, a long-time Silver Point consultant (now deceased) participated on creditors’ committees of those distressed companies on Silver Point’s behalf.

However, the SEC alleges, the firm failed to enforce policies and procedures that were reasonably designed to address the specific risks associated with the consultant’s receipt of MNPI as a result of his participation on creditors’ committees.

“Allowing individuals who possess MNPI to have unfettered access to those making trading decisions presents an enhanced risk of misuse of MNPI, and the resulting risks to market integrity and investors are compounded when investment advisers fail to enforce their compliance policies and procedures to prevent the misuse of MNPI,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement.

Untimely filing of SARs

The SEC has charged registered broker-dealer Deutsche Bank Securities Inc., a subsidiary of Deutsche Bank AG, for failing to file certain Suspicious Activity Reports (SARs) in a timely manner. Deutsche Bank Securities agreed to pay a $4m civil penalty to settle the charges.

Broker-dealers are required by the Bank Secrecy Act and regulations promulgated by the US Department of the Treasury’s Financial Crimes Enforcement Network to file SARs for transactions they have reason to suspect involve funds derived from illegal activity, lack a business or apparent lawful purpose, or are intended to facilitate criminal activity.

According to the SEC’s order, Deutsche Bank Securities received requests in connection with law enforcement or regulatory investigations or litigation that prompted it to conduct SARs investigations. But the SEC’s order finds that, in certain instances over about five years, Deutsche Bank Securities failed to conduct or complete the investigations within a reasonable period of time, including at least two instances where Deutsche Bank Securities took more than two years to file the SARs.

Submitting deficient trading data

Wells Fargo Advisors’ broker-dealer unit and LPL Financial have agreed to pay $900,000 each to settle allegations that they filed deficient trade reports (also called blue sheet data) with regulators, according to the SEC and FINRA.

The SEC announced settled charges against the businesses, alleging that both firms sometimes blue sheets that contained inaccurate or missing information about securities transactions and the firms or customers involved in the transaction.

The SEC said both companies engaged in remedial efforts to correct and improve their blue sheet reporting systems and controls, including retaining outside consultants to conduct reviews of their respective blue sheet reporting programs.

The orders noted that Wells Fargo self-identified and self-reported all but one of the errors affecting its blue sheet submissions, which enabled it to get a penalty amount equal to LPL’s, despite its almost four times higher number of deficient blue sheet submissions.

With these oversights, the firms both violated FINRA Rules 8211 and 8213 which require that member firms submit trade data to FINRA upon request.

“These orders underscore the importance of the obligation to provide accurate and complete blue sheet data to the SEC. Additionally, these resolutions highlight the benefits of self-reporting, remediation and cooperation when firms detect violations,” said Thomas P Smith, Jr., associate regional director in the New York regional office.

Poor internal accounting controls

The SEC said that Entergy Corporation, a Louisiana-based utility company, has agreed to pay a $12m civil penalty to settle charges that it failed to maintain internal accounting controls to ensure that its surplus materials and supplies were accurately recorded in its books and financial statements in accordance with generally accepted accounting principles.

“Internal accounting controls serve as a front-line defense in ensuring the accuracy and reliability of financial statements,” said Wadhwa, about his agency’s resolution in this case.

Bribing foreign officials

The securities watchdog announced that Illinois-based AAR CORP, a global provider of aviation services and products, agreed to resolve Foreign Corrupt Practices Act (FCPA) charges in connection with two bribery schemes. AAR agreed to pay approximately $30m to settle the SEC’s charges. Deepak Sharma, a former executive of a wholly owned AAR subsidiary, also settled SEC charges related to the same bribery schemes.

In a parallel action, the Justice Department announced it has entered into a non-prosecution agreement with AAR in which AAR agreed to pay a $26,363,029 criminal penalty.

According to the SEC’s order, from 2015 through 2018, Deepak Sharma, who at the time was President of International Supply Chain of an AAR subsidiary, orchestrated and implemented a bribery scheme (involving a third-party agent) to win a contract for the sale of two Airbus A330 aircraft, valued at approximately $210m, to Nepal Airlines, a government-owned airline.

“This matter serves as another reminder that companies must have robust compliance and accounting controls that are commensurate with the FCPA risks they face, including with respect to their work with third parties across their business operations,” said Charles Cain, Chief of the SEC’s FCPA Unit.