The U.S. Securities and Exchange Commission (“SEC”) Office of Investor Education and Advocacy (“OIEA”), which dates from last century, is concerned with explaining aspects of the capital markets for “Main Street” investors and warning them against potential risks and fraud schemes. On Sept. 25, 2017, the Commission announced the formation of the Retail Strategy Task Force (“RSTF”) in its Division of Enforcement. Its purpose is to consider and implement “strategies to address misconduct that victimizes retail investors,” according to the SEC Press Release issued that day. A primary focus area of the OIEA and RSTF is so-called “affinity investments,” i.e., investment offerings aimed at groups such as churches, ethnic communities, college alumni groups, etc.

On Wednesday, July 27, 2022, the SEC filed suit in the Federal Court for the Northern District of Ohio, Eastern Division, against Robert F. Murray, 42, a retired U.S. Navy Chief Petty Officer residing in North Canton, Ohio, for conducting an unregistered offering of securities in Deep Dive Strategies, LLC, an Ohio private pooled investment fund (the “Fund”). Murray controlled the Fund and acted as investment adviser, telling investors the fund would invest in publicly traded securities. Murray marketed the offering through a Facebook group “with over 3500 active duty, reservists and veterans of the U.S. Navy who shared an interest in investing,” according to the Complaint. Most certainly an “affinity” group. Murray also created “a channel on the Discord social media platform where he live-streamed his trading activity and posted trading advice with a focus on options.”

The Fund was organized in September 2020 and solicited investors through February 2021. Although Murray told investors they could change their minds within 15 days and get their money back, in fact he “almost immediately began spending Fund money on personal expenses.” He transferred monies to his personal checking account and even withdrew cash from the Fund, so by February 2021, $148,000, or approximately 42% of the $355,000 invested by the unsuspecting “Goats” (a nickname for the Navy affinity group), had been “misappropriated” (i.e., stolen) by Murray. By March 2021 he had ceased regular communication with the Goats and failed to respond to requests to redeem “invested” dollars. Some of that misappropriated money was lost gambling at casinos in Cleveland and elsewhere in the Midwest.

Murray provided potential investors with both a Disclosure Statement and a copy of the Fund’s Operating Agreement, and the Complaint identifies several material misstatements and omissions in the two documents. In addition, Murray made oral material misstatements and omitted material information when speaking with potential and actual investors. In fact, Murray lost most of the Fund’s brokerage account on Jan. 13, 2021, when GameStop options purchased in the account saw their value plummet. In that connection see my Feb. 2, 2021, Blog “Rupture Rapture: Should the GameStop?” When the SEC began investigating Murray and the Fund, he asserted his Fifth Amendment rights and declined to answer questions.

In the Complaint, the Commission charges Murray with seven different securities law violations, each set out in a separate Count as follows:

1. Violation of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder by using devices, making untrue statements, and misleading omissions, and engaging in a business which operate as a fraud on securities purchasers.

2. Violation of Section 17(a)(1) of the Securities Act of 1933, as amended (the “33 Act”), by offering and selling securities by means of interstate commerce using devices to defraud.  Violations of the 33 Act can be proven without the need to prove scienter (broadly, intent).

3. Violation of Section 17(a)(2) of the 33 Act by obtaining money or property in connection with the sale of securities by means of untrue statements of material facts and making misleading omissions, engaging in transactions which operate as a fraud on the purchaser, where Murray was at least negligent in engaging in these activities.

4. Violation of Sections 5(a) and 5(c) of the 33 Act by selling securities without the offering being registered (or exempt from registration), and with the use of a prospectus where the offering was not registered.

5. Violation of Section 206(1) of the Investment Advisers Act of 1940, as amended (the “40 Act”) by acting as an investment adviser using devices to defraud clients and prospective clients.

6. Violation of Section 206(2) of the 40 Act by acting as an investment adviser engaging in transactions which operate as a fraud on clients and prospective clients.

7. Violation of Section 206(4) of the 40 Act and Rule 206(4)-8 thereunder by acting as an investment adviser to a pooled investment vehicle, making untrue statements of material fact and making misleading omissions and engaging in acts that are fraudulent with respect to investors in the pooled investment vehicle.

The SEC seeks entry of findings by the Court of the facts cited in the Complaint and of conclusions of law that concur with the Commission’s assertions of violations. In addition, the SEC seeks entry of a permanent injunction against future violations of the cited securities laws; an order requiring disgorgement of all Murray’s ill-gotten gains plus prejudgment interest; an order imposing a civil penalty of $1,065,000; and an order barring Murray from serving as an officer or director of any public company.

Murray preyed on his fellow Naval servicemen in violation of the unspoken understandings of the “Goats,” that a fellow Navy NCO would not seek to take financial advantage of them. That is why the SEC’s July 28, 2022, Press Release reporting this matter includes an express warning from the OIEA and the RSTF not to make “investment decisions based solely on common ties with someone recommending or selling the investment.” One wonders whether, if the Goats were to catch up with Murray, he would be keelhauled.