One case out of a bunch of SEC enforcement actions closing out Chair Gary Gensler's tenure could test the extent to which the new administration will adopt cases filed by the previous one.
Defendants charged in the Securities and Exchange Commission's
"This situation exemplifies the exact type of concerns that prompted the issuance of an executive order on Monday directing federal agencies, including the SEC, to end the weaponization of government enforcement authority," the attorney, Gavin Meyers of Pierson Ferdinand, wrote in the letter. "Our clients have been directly impacted by actions of the SEC staff's controversial efforts, and your urgent attention is requested to address ongoing and new violations of their rights caused by misconduct of individual staff members within the SEC's New York Regional Office."
Representatives for the SEC declined to comment on the case beyond its public court filings.
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A deluge of cases
The timing of the SEC's charges against Arete, filed on the last weekday of President Joe Biden's administration, may have obscured the allegations from larger notice
In addition to high-profile, multimillion-dollar settlements with
"It looks like this second term will be focused on changing the priorities of the SEC in both drastic and more nuanced ways," Adrienne Gurley, a former SEC senior counsel who's now a partner in the Los Angeles office of
Advisors and other industry professionals can look to Trump's previous time in the White House for indications of how this or future SEC enforcement actions may play out, according to Leila Shaver, the founder of compliance firm
"During Trump's first term, enforcement focused on protecting retail investors, targeting cases involving accounting fraud, excessive fees and Ponzi schemes," Shaver said in an email. "I would expect this to continue, though we will likely see a move away from ESG and crypto-related actions. Also, Trump's nominee, Paul Atkins, has a preference for less stringent regulatory oversight and will likely shift focus away from firms and more toward individual bad actors. So, in the case of Arete, we would have likely seen a similar outcome under an Atkins SEC, and should expect to see similar results, especially when it relates to very well-established and long held rules and regulations."
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The allegations
The SEC lodged the charges against Arete's brokerage and registered investment advisory firm and Chief Compliance Officer UnBo "Bob" Chung, as well as three advisors (
SEC investigators accuse Miller and the Larson brothers of violating registration, recordkeeping and antifraud laws in connection with the sale of more than $8.5 million worth of shares between 2018 and 2020 in Zona, which presented itself as an oil and gas firm operating in the Permian Basin of West Texas. Richard D. Sterritt Jr., who apparently used the name "Richard Richman" to conceal his prior securities fraud conviction, and five other co-conspirators have since
Arete's corporate office found out about the alleged conduct at least as early as September 2019, when a FINRA examiner showed Chung a hard copy of an email from Jeff Larson soliciting a major investment in Zona, the document showed. The firm placed the three advisors on heightened supervision, the complaint said. The firm's response to the Zona sales ramped up further after an anonymous tipster reached out to the advisors and Chung in January 2020, the firm received a subsequent information request from FINRA in April 2021 and
"'You came into my living room and took a giant [expletive] on my rug,'" Arete CEO Joshua D. Rogers said to the advisors in a conference call with them, Chung, company management and several attorneys, according to the complaint. The complaint continued: "Arete's CEO demanded that the Arete representatives hire and pay for an outside law firm to draft settlement agreements releasing Arete from liability and that the Arete representatives ask their Arete customers and clients who had invested in Zona to sign those releases."
Over the next five months, the Arete reps paid 103 clients of the firm about $650,000 — far less than the clients' investment — in exchange for signing the settlement documents, the complaint stated. The SEC claims that the documents breached Arete's fiduciary duty by releasing the firm from "any and all" claims and "any past, present or future duties." The regulator accused the brokerage firm of violating recordkeeping laws, the RIA of running afoul of antifraud and compliance rules and Chung of aiding and abetting the RIA's conduct.
"As alleged in this case, after Arete's personnel defrauded investors, Arete, as aided by Chung, compounded the harm to these investors by having them sign releases that were false and misleading," Sam Waldon, the acting deputy director of the SEC's Division of Enforcement, said in a statement. "Today's action is a reminder to gatekeepers that if you find potential evidence of misconduct and take steps to cover it up, you may expose yourself to liability."
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Refutations of the charges and claims of government 'weaponization'
An attorney for Miller, who is now registered on BrokerCheck with DAI Securities in New Braunfels, Texas, didn't respond to a request for comment on the allegations. However, those representing the Larsons, who are
"The allegations are baseless, and if you read the complaint, the SEC is really alleging that investors lied on release agreements the investors signed," Jeff Larson's attorney, Jim Kopecky, said in an email. "The SEC also ignores that Jeff lost more than $600,000 and is himself a victim. It is nonsensical. Jeff did nothing wrong and intends to defend and defeat these claims."
Randy Larson's lawyer, Richard Greenberg, echoed those arguments while referring to the shift in administrations at the White House.
"These are fake charges without merit and will be completely answered and rebutted in court," Greenberg said in an email. "Randy Larson was misled and lost over $175,000 of his own money in this investment, and was not compensated in any way, shape or form. The SEC complaint demonstrates that the SEC has no evidence of Randy Larson's knowledge of or involvement in, receiving 'discounted shares' as compensation. Filing of the Complaint just before the Trump Administration takes office and can fix the SEC speaks for itself and is telling as to the lack of merit of the charges."
Arete issued a
"In light of the tainted nature and irregularities of the [New York Regional Office] staff's investigation of our clients, its sudden urgency to move to litigation in anticipation of a change in leadership, and the subsequent rushed recommendation process that led to the SEC Complaint, we ask that the Commission reconsider the NYRO staff's enforcement action recommendation and direct the staff to withdraw the filed civil complaint," the letter said. "In the meantime, we request that you, as acting chair, direct the staff to immediately withdraw its materially misleading press release and state on the SEC website that it has been retracted in order to stop the unwarranted reputational harm against our clients that it has caused and continues to cause. We are aware of news publications running with the misleading statements in the staff's press release which are compounding the unfair harm."
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The outlook
The defendants can seek to get the case tossed in court through at least five different kinds of filings, but they face a low likelihood of success "in asserting that there is a lack of sufficient evidence or that the timing of the charges somehow were inappropriate or somehow prejudiced them," according to Shaver of My RIA Lawyer.
Regardless of the outcome of this particular case, it offers only the latest example of the need for careful due diligence of alternative investments, she said.
"First and foremost, if you don't have the resources to do something, remember that is risk that you are taking on," Shaver said. "Nonetheless, if RIAs are smart about how they deploy the resources they DO have, they can still meet the minimum regulatory requirements for due diligence of alternatives. Documentation comes first. If you don't document it, it didn't happen. RIAs should have a formal written process for evaluating alternative products. They should outline the type of alts the firm will consider (and this is where they can be smart about approving products for which they would have the resources to do adequate due diligence). If the firm does not have enough people to create a due diligence committee, then they should have a point person that is responsible for the due diligence. Otherwise, this can be outsourced to a qualified consultant."
Even under a new administration seeking to remove regulatory burdens, wealth management firms "should continue to focus on creating a culture of compliance" because investor harm "will likely remain a priority for the SEC," according to Gurley of Venable. She declined to weigh in specifically on the merits of the SEC case and the question of whether the arguments of retaliation and government overreach will be successful in court.
"SEC investigations are confidential and nonpublic, so until they are further along in the litigation, the defendants will not know how much evidence the SEC really has," Gurley said. "Also, the SEC does not want to create bad case law by bringing cases that it's not confident in, so that suggests that there is more evidence that will be unveiled over time."
