Whistleblower Alert: SEC Orders Payment of $4.4 Million in Civil Penalties Following Firm Client’s Report of Securities Fraud
The U.S. Securities and Exchange Commission recently announced civil charges against ETF Managers Group, LLC (“ETFMG”) and its founder Samuel Masucci. The charges arise from ETFMG and Masucci’s mismanagement of an exchange-traded fund (“ETF”) and misleading the fund’s trustees in order to obtain rescue financing. Rabin Kammerer Johnson represents a whistleblower who reported the conduct of ETFMG and Masucci to the SEC and assisted with the SEC’s investigation.
ETFMG serves as the investment adviser to a variety of ETFs, including the ETFMG Alternative Harvest ETF, which tracks an index of cannabis-industry companies and trades under the symbol “MJ.” This group of ETFs are all part of a trust for which Masucci is the sole interested trustee, together with two independent trustees.
At the start of the MJ fund in 2017, banks were hesitant to service any cannabis-related funds due to issues of legality and broader social acceptance. As a result, ETFMG moved MJ’s assets to a broker-dealer (“Broker-Dealer”) that agreed to serve as the custodian and securities-lending-agent for the fund. ETFMG agreed that Broker-Dealer could keep 40% of revenues generated from MJ’s securities lending business, which is a practice of loaning securities held in a fund to traders for a fee.
As the legality and social approval of companies in the cannabis industry grew over time, the number of banks willing to service cannabis-related funds increased. In 2019, the increase in bank accessibility led Masucci and ETFMG to search for alternatives other than Broker-Dealer to serve as custodian for MJ’s assets and the securities lending agent. Masucci and ETFMG received multiple competing proposals with more favorable terms than the 40% securities lending revenue share it was paying Broker-Dealer, which could have resulted in tens of millions of dollars in additional annual revenues for the MJ fund.
Around the same time in 2019, ETFMG needed to secure financing to pay a large monetary judgment obtained against ETFMG and its parent company. Without such financing, ETFMG would be facing insolvency and a potential loss of its ETF advisory contracts. Broker-Dealer offered ETFMG and Masucci financing to pay a settlement of ETFMG’s prior litigation. In exchange, however, Broker-Dealer asked that ETFMG maintain the MJ fund’s assets and securities lending business with Broker-Dealer pursuant to the current 60/40 securities lending split.
To the detriment of the MJ fund and its investors, Masucci accepted Broker-Dealer’s offer with ETFMG receiving $20 million of rescue financing and continuing ETFMG’s unfavorable lending arrangement with Broker-Dealer. Further, Masucci failed to disclose to ETFMG’s independent trustees the more favorable securities lending proposals that ETFMG had received.
Rabin Kammerer Johnson, on behalf of its whistleblower client, reported this information to the SEC. After an investigation, the SEC found that ETFMG and Masucci breached their fiduciary duties of care and loyalty to the MJ fund. The SEC followed with civil claims against ETFMG and Masucci for violations of the Investment Advisers Act of 1940 and the Investment Company Act of 1940.
To settle the SEC’s claims, ETFMG, its parent company, and Masucci agreed to a combined payment of $4.4 million. Masucci agreed to pay a civil penalty of $400,000 to the SEC and agreed to an associational suspension for at least three years, while ETFMG and its parent company were ordered to pay a civil penalty of $4 million to the SEC and to cease and desist from continuing violations under federal securities laws.
Under the SEC’s whistleblower program, whistleblowers can help protect investors by reporting fraud and other breaches of fiduciary duties to the SEC, which may lead to an investigation and the recovery of losses or protect against future losses. When a whistleblower provides original information to the SEC that leads to a monetary recovery, the whistleblower may be entitled to receive an award equal to a percentage of the recovery. See the SEC’s full Press Release on this case here: SEC Charges New Jersey-Based ETF Manager for Fraudulent Conduct and Bars Founder.
If you believe you have knowledge of violations of securities laws, contact our team of whistleblower attorneys at Rabin Kammerer Johnson at 561-659-7878.