Securities Industry Commentator by Bill Singer Esq

two-day conference of diversity experts in the securities industry in New York in late May, not one of the seven panels addressed the challenge of sexual harassment in the workplace. Nor was there interest in addressing concerns about sexual harassment from participants. When one moderator invited written questions, I filled out a card asking the panel of financial regulators about harassment at their agencies and at the companies they regulated. The moderator read out the other audience questions but ignored mine.

Batio owned and controlled two computer businesses, Armada Systems LLC and Idealfuture Inc.  The companies claimed to produce a portable computer that would combine a laptop, tablet and smart phone into one device.  The 3-in-1 apparatus was known at various times by the names Stealth, IF Convertible, and Dragonfly Futurefon.  The companies also claimed to produce a device called the Radian, which was billed as a multi-screen laptop computer.

Evidence at trial revealed that for more than a decade Batio made material misrepresentations about his companies and products.  For example, Batio falsely claimed that Armada and Idealfuture had completed the engineering on the 3-in-1 computer and the multi-screen system, and that the products were close to being brought to market.  In reality, Batio knew the products were not complete and that production would not start within the promised timeframe.  Batio also claimed to be involved in discussions with large technology companies concerning partnership deals, licensing arrangements and marketing agreements, when, in fact, Batio's contacts with those companies typically consisted of nothing more than his opening sales pitch.

The fraud scheme began in 2003 and continued until 2016.  Batio originally sold membership shares in his companies and offered his products for advance sales that were never fulfilled.  From 2003 to 2014, Batio defrauded victims out of $5 million.  As the years passed and he failed to produce or license any products, Batio in 2014 began to solicit funds on the crowdfunding website Indiegogo.com.  From 2014 to 2016, Batio raised more than $700,000 on Indiegogo from investors all over the world by fraudulently promoting and selling the 3-in-1 device.

The SEC is continuing its fact-finding investigation and, to date, has not concluded that anyone has violated the securities laws.

[K]ik had lost money for years on its sole product, an online messaging application, and the company's management predicted internally that it would run out of money in 2017.  In early 2017, the company sought to pivot to a new type of business, which it financed through the sale of one trillion digital tokens.  Kik sold its "Kin" tokens to the public, and at a discounted price to wealthy purchasers, raising more than $55 million from U.S. investors.  The complaint alleges that Kin tokens traded recently at about half of the value that public investors paid in the offering.

The complaint further alleges that Kik marketed the Kin tokens as an investment opportunity.  Kik allegedly told investors that rising demand would drive up the value of Kin, and that Kik would undertake crucial work to spur that demand, including by incorporating the tokens into its messaging app, creating a new Kin transaction service, and building a system to reward other companies that adopt Kin.  At the time Kik offered and sold the tokens, the SEC alleges these services and systems did not exist and there was nothing to purchase using Kin.  Kik also allegedly claimed that it would keep three trillion Kin tokens, Kin tokens would immediately trade on secondary markets, and Kik would profit alongside investors from the increased demand that it would foster.  The Kin offering involved securities transactions, and Kik was required to comply with the registration requirements of the U.S. securities laws.

1. Valuation of client assets is a critically important area for investment advisers. Failure to properly value assets can impact key areas of fund operations and also potentially lead to over or under payment of withdrawal proceeds, incorrect calculation of fees and inaccurate performance reporting, among other things. Accordingly, pursuant to Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder (the "Compliance Rule"), registered investment advisers are required to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the federal securities laws stemming from inaccurate valuations. 

2. This matter arises from violations of the Compliance Rule by Deer Park for failing to adopt and implement reasonably designed compliance policies and procedures relating to valuation of fund assets. Deer Park is a prominent private fund manager in the mortgage-backed securities space that manages over $2.5 billion in assets. 

3. From at least October 2012 through December 2015 (the "Relevant Period"), Deer Park's policies failed to address sufficiently how to conform the firm's valuations with Generally Accepted Accounting Principles ("GAAP"). Further, Deer Park's policies were not reasonably designed for its business practices, given its use of valuation models and pricing vendors, and the potential conflict of interest arising from traders' ability to determine the fair value assessment of a portion of the positions they manage. 

4. Moreover, Deer Park failed to implement its existing policy. In accordance with GAAP, Deer Park's valuation policy included a requirement to maximize the use of relevant observable inputs. During the Relevant Period, however, Deer Park, at times failed to ensure that certain residential mortgage-backed securities ("RMBS") were valued in accordance with GAAP. Specifically, Deer Park may have undervalued certain client assets by failing to maximize relevant observable inputs, such as trade prices. For example, contemporaneous explanations for certain valuations include references to market activity at a higher price than the valuation and "sell[ing] for a profit when needed." Burg was a cause of the firm's failure to implement the valuation policy that required maximizing observable inputs. 

• Securities Industry Commentator
• Bill Singer