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  • SEC Division of Enforcement says firms should take proactive compliance measures

    Securities

    On October 6, the SEC Director of the Division of Enforcement, Gurbir Grewal, discussed the agency’s mission to maintain market integrity and improve public confidence in the securities market. While Grewal noted that enforcement actions taken over the past few years have helped to significantly animate the idea that the SEC “will pursue potential violations by any market participant,” he stressed the need for joint coordination to promote better conduct among market participants. According to Grewal, this includes firms examining ways their specific business models and products interact with both emerging risks and enforcement priorities and tailoring compliance practices and policies accordingly. He stressed that market participants should take “proactive” compliance measures, including enhancing recordkeeping requirements, and anticipate emerging challenges instead of waiting for an enforcement action to implement the appropriate policies and procedures. Grewal also discussed the key role market participants play in identifying and addressing emerging risks. This could include ensuring proactive compliance efforts continue even after violative conduct has occurred, cooperating with SEC investigations, and voluntarily self-reporting potential violations “before the violation is about to be publicly announced." Grewal also noted that the SEC is currently evaluating its approach to enforcement action penalties to better assess whether past penalties have sufficiently deterred misconduct. 

    Securities SEC Enforcement Compliance Agency Rule-Making & Guidance

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  • SEC charges hemp company with misrepresentations

    Securities

    On October 5, the SEC filed a civil fraud complaint against a Canadian-based hemp company and its two co-founders (collectively, “defendants”), alleging that they fraudulently raised over $15 million from investors, and that they misappropriated a significant portion of the funds for personal and other unrelated uses. The SEC claims that the defendants made misrepresentations, including that the company was a fully integrated company that was processing hemp from its own farm. However, the SEC alleges that the company did not process any of its hemp, instead using products supplied by third parties. The complaint further contends that the financial information given to investors “misstated historical revenue numbers and included baseless projections about future revenue that were unsupported by the [c]ompany’s own internal forecasts.”

    The SEC’s complaint, which was filed in U.S. District Court for the Southern District of New York, charges the defendants with violating antifraud provisions of federal securities laws. The complaint seeks a permanent injunction against the defendants, disgorgement with prejudgment interest, civil penalties, and an officer and director and penny stock ban against the co-founders. In addition, the U.S. Attorney’s Office for the Southern District of New York filed criminal charges against the co-founders in a parallel action.

    Securities SEC Enforcement Fraud

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  • SEC bans two individuals from whistleblower program

    Securities

    On September 28, the SEC announced that it permanently barred two individuals, pursuant to the 2020 amendments to the Whistleblower Program Rules, from the SEC's whistleblower award program due to filing hundreds of frivolous award applications. According to both orders (see here and here), the individuals submitted award applications to the Commission that had no relation to the enforcement action for which they were applying, and refused to stop submitting the filings after repeatedly warned to do so. According to the SEC, the filing of the applications took considerable time and resources from Commission staff, hindered the effective operation of the program, and did not lead to any enforcement action. The permanent bars imposed in these matters pertain to pending award applications from the individuals, and to all future award applications submitted by the individuals.

    Securities SEC Whistleblower

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  • SEC charges Florida payday lender with making fraudulent misrepresentations in offering

    Securities

    On September 27, the SEC filed charges against a Florida-based payday lender and its CEO (collectively, “defendants”) for fraudulently raising more than $66 million through the sale of promissory notes to hundreds of retail investors, including members of the South Florida Venezuelan-American community. The SEC charges the defendants with falsely promising investors that their money would be used solely to make small-dollar, short-term loans and for associated costs. However, the defendants allegedly misappropriated roughly $2.9 million for personal use, transferred approximately $3.6 million to family and friends without an apparent legitimate business purpose, and used at least $19.2 million of investor funds to make Ponzi-like payments to other investors. The complaint further contends that the defendants mislead investors by promising high annual returns and representing that the business was profitable, and made misrepresentations about the safety and security of the promissory notes. The SEC’s complaint alleges violations of the registration and antifraud provisions of the federal securities laws, and charges the CEO with acting as an unregistered broker. The complaint seeks a permanent injunction against the defendants, disgorgement with prejudgment interest, civil penalties, and an officer and director ban against the CEO.

    Securities Enforcement SEC Payday Lending Small Dollar Lending Fraud

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  • CFTC announces more than $2.5 million in fines for swap data reporting violations

    Securities

    On September 29, the CFTC announced a $1.5 million settlement with a non-U.S. provisionally registered swap dealer headquartered in France to resolve claims that it failed to comply with certain swap dealer reporting requirements. Among other things, the swap dealer allegedly failed to meet mid-market mark disclosure requirements for numerous swaps, failed to accurately report certain swap valuation data to a swaps data repository, and did not diligently perform its supervisory obligations related to these disclosures. In addition to the civil monetary penalty, the swap dealer must cease and desist from further violations of the Commodity Exchange Act and CFTC regulations and must continue its remediation efforts.

    Earlier, on September 27, the CFTC announced a $1 million civil monetary penalty to resolve allegations that a global financial institution violated swap data legal entity identifier (LEI) reporting requirements as well as related supervision responsibilities. According to the CFTC, the alleged failures violated the cease and desist provision of a 2017 CFTC order, in which the CFTC found that the financial institution, among other things, failed to report LEI swap transaction data or establish systems and procedures to do so, did not correct errors in previously reported LEI data, and failed to diligently perform its supervisory duties when reporting LEI swap data. The 2017 order imposed a $550,000 civil monetary penalty and required the financial institution to cease and desist violating CFTC regulations. The CFTC’s September 27 order further found that the financial institution’s alleged continued reporting failures occurred, in part, from a failure to diligently supervise its swap dealer activities with respect to LEI swap data reporting.

    Securities CFTC Enforcement Swaps Of Interest to Non-US Persons Commodity Exchange Act

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  • SEC claims principals misled investors about subprime auto loans

    Securities

    On September 23, the SEC filed a complaint against two former principals of a subprime automobile finance company for allegedly misleading investors about certain subprime auto loans. According to the SEC, the defendants made false and misleading statements and engaged in deceptive conduct concerning the company’s servicing practices in connection with a $100 million offering backed by a pool of subprime auto loans. The SEC alleged that the defendants took measures to artificially inflate the value of the collateral underlying the offering, such as by (i) including poorly-performing and delinquent loans that were disguised to appear to be performing better than they really were; (ii) applying “fake borrower payments” to delinquent loans; and (iii) extending terms on delinquent loans without contacting the borrower to disguise how far behind the borrowers were on payments. Because of these improper practices, the SEC claimed that servicing and performance information provided by the company to investors at the time of the offering and later on was false. The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, and seeks permanent injunctions, officer and director bars, disgorgement with prejudgment interest, and civil penalties.

    Securities Enforcement Auto Finance Subprime Fraud Securities Act Securities Exchange Act

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  • SEC awards $36 million to whistleblower

    Securities

    On September 24, the SEC announced that it awarded a whistleblower approximately $36 million for providing information and assistance leading to a successful SEC enforcement action, as well as actions by another federal agency. According to the redacted order, the whistleblower voluntarily provided information regarding an illegal scheme to staff at both agencies and met with SEC enforcement staff on multiple occasions. According to the SEC, the SEC's whistleblower program allows individuals who provide critical information to other agencies to be eligible for a related action award if they are also eligible for an award in the underlying SEC action.

    The SEC has awarded approximately $1.1 billion to 214 individuals since issuing its first award in 2012.

    Securities SEC Enforcement Whistleblower Investigations

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  • Massachusetts securities division settles with broker dealer

    Securities

    On September 15, the Massachusetts Office of the Secretary of the Commonwealth, Securities Division (Division) entered into two consent orders with a broker-dealer firm for alleged failure of supervisory and compliance procedures in violation of the Massachusetts Uniform Securities Act. According to one consent order, the firm failed to, among other things: (i) ensure that its agents with Massachusetts customers were registered in Massachusetts; (ii) have adequate policies and procedures in place regarding state-based requirements for supervisors; and (iii) supervise its agents in Massachusetts. The terms of the order require the company, among other things, to cease and desist from future violations of Massachusetts General Laws and Regulations, register its employees, enhance policy and procedures, and pay a $750,000 fine. The second consent order alleged that the firm failed to, among other things: (i) have reasonable policies in place to detect and monitor a broker-dealer agent’s social media accounts; (ii) “reasonably monitor internal communications between and among its registered persons”; and (iii) adequately discipline an employee after gaining knowledge of his personal use of social media in violation of state laws. The order requires the firm to permanently cease and desist from future violations of Massachusetts General Laws and Regulations, employ a third-party consultant to supervise the firm’s practices regarding employee trading and social media usage, conduct an annual compliance review, and pay an administrative fine of $4 million.

    Securities Massachusetts State Issues Enforcement Broker-Dealer

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  • SEC sues company for misleading investors

    Securities

    On September 21, the SEC filed a complaint against a Puerto-Rico based company and its two managing members (collectively, “defendants”) in the U.S. District Court for the District of Puerto Rico alleging that they offered and sold to retail investors the opportunity to share the profits of a purported Colombian gold mining operation. According to the SEC, the offering, which was unregistered with the Commission, was part of a fraudulent scheme that raised approximately $2.7 million. The complaint also alleges that one of the members and the company authorized advertisements that promised “exorbitant returns on the investment, and provided investors with false and misleading [decks] that misrepresented the status of the mining operations,” while the other member allegedly signed contracts with investors when he had knowledge that the company’s statements to investors were misleading. The SEC’s complaint alleges violations of the registration and anti-fraud provisions of the federal securities laws, specifically, the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint seeks a permanent injunction against the defendants, a permanent ban prohibiting the defendants’ participation in the issuance, purchase, offer, or sale of securities in an unregistered offering, disgorgement of ill-gotten gains, and civil penalties.

    Securities SEC Enforcement Securities Act Securities Exchange Act

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  • SEC announces first crowdfunding enforcement action

    Securities

    On September 20, the SEC brought its first regulation crowdfunding enforcement action against several entities and related individuals allegedly involved in a fraudulent scheme to sell nearly $2 million of unregistered securities through two crowdfunding offerings. According to the SEC’s complaint, two of the entities issued securities without registering with the SEC, while their principals diverted investor funds for personal use rather than using the funds for the disclosed purposes. These actions, the SEC claimed, violated the antifraud and registration provisions of the Securities Act of 1933 and Securities Exchange Act of 1934. Among other things, the SEC claimed that one of the individuals—“a driving force behind both offerings”—also allegedly concealed his participation in the offerings from the public to hide a past criminal conviction arising from a mortgage fraud scheme out of concern that it could deter prospective investors. The SEC also charged the crowdfunding platform that hosted the offering, and its founder and CEO, with violations of the Securities Act and Regulation Crowdfunding for ignoring red flags about the other defendants. The complaint seeks disgorgement plus pre-judgment interest, penalties, permanent injunctions, and officer and director bars. Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, stressed the importance of full and honest disclosures in these types of offerings: “As companies continue to raise funds through crowdfunding offerings, we will hold issuers, gatekeepers and individuals accountable and enforce the protections in place for all investors.”

    Securities Enforcement SEC Crowdfunding Securities Act Securities Exchange Act

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