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  • New York Attorney General reaches $230 million settlement for international company’s RMBS misconduct

    Securities

    On March 21, the New York Attorney General announced a $230 million settlement with two divisions of an international financial services company to resolve allegations that the company made misrepresentations in the sale of residential mortgage-backed securities (RMBS) in violation of New York’s Martin Act and Section 63(12) of New York’s Executive Law. According to the settlement agreement, the investigation focused on 15 securitizations sold by the company between 2006 and 2007. In addition to the alleged misrepresentations in each of the securitizations’ prospectus and prospectus supplements, the company also included loans in the sales portfolio that diligence reports flagged for underwriting and valuation issues. The $230 million settlement includes $41 million to New York State and $189 million to consumer relief programs.

    Securities RMBS State Attorney General State Issues Mortgages

  • SEC awards highest-ever payout to whistleblowers

    Securities

    On March 19, the SEC announced its largest-ever payouts for three whistleblowers, totaling around $83 million. According to the announcement, two whistleblowers will share a nearly $50 million award, while a third was awarded more than $33 million. The highest award the SEC had previously given was $30 million in 2014, and since the program’s inception in 2012, the SEC has awarded more than $262 million to 53 whistleblowers. While the SEC did not provide any substantive details on the whistleblowers’ tips or the resulting enforcement action due to confidentiality, media reports the whistleblower tips resulted in a $415 million settlement in 2016 with the large wealth management division of a national bank.

    Securities Whistleblower Dodd-Frank SEC

  • International bank settles with New York Attorney General for $500 million for RMBS misconduct

    Securities

    On March 6, the New York Attorney General announced a $500 million settlement with an international bank to resolve allegations of misrepresentations in the sale of residential mortgage-backed securities (RMBS), in violation of New York’s Martin Act and Section 63(12) of New York’s Executive Law. According to the settlement agreement, the investigation focused on 44 securitizations sold by the bank between 2006 and 2007. In addition to the alleged misrepresentations in the offering documents, the bank also included loans in the sales portfolio that due diligence vendors warned did not comply with underwriting guidelines. The $500 million settlement includes $100 million in damages to New York State and $400 million to consumer relief programs.

    As previously covered by InfoBytes, the bank recently settled with the California Attorney General for misrepresentations while selling RMBS to California’s public employee and teacher pension fund.

    Securities State Attorney General State Issues RMBS Settlement Mortgages

  • Texas State Securities Board issues order halting unregistered cryptocurrency trading operation

    Securities

    On February 26, the Texas State Securities Board (Board) issued an emergency cease and desist order (order) to an unregistered cryptocurrency trading operation for allegedly targeting investors through fraudulent and materially misleading online advertisements and offering unregistered securities for sale. According to the order, the company purportedly—in addition to intentionally seeking to mislead the public by promoting high-return investment opportunities—failed to disclose risks associated with cryptocurrency mining, promised investors it would comply with “all relevant laws and regulations,” and claimed that its fund directors were regulated by the Cayman Islands. The Board further asserted the company failed to disclose the true identities of its Code of Ethics Association members responsible for “contract law, due diligence and corporate law,” and instead, created the impression it was associated with attorneys and judges, including U.S. Supreme Court Justice Ruth Bader Ginsburg. Under the terms of the order, the company, among other things, is prohibited from engaging in the sale of securities in the state until the security is registered with the SEC or exempt from registration under the Texas Securities Act, and cannot act as a securities dealer until it complies with the same.

    Securities Digital Assets State Issues Cryptocurrency Enforcement SEC Fintech

  • International bank and head trader settle with SEC for CMBS fraud

    Securities

    On February 12, the Securities Exchange Commission (SEC) announced that it reached an agreement with an international bank and its former head trader for allegedly selling commercial mortgage-backed securities (CMBS) to customers by using false and misleading statements. The bank has agreed to repay more than $3.7 million to the affected customers According to the order, the bank misled customers about the original purchase price of the CMBS and failed to institute proper compliance and surveillance procedures in order to detect and prevent the misconduct. Additionally, the order states that the bank’s former head trader failed to properly supervise the traders making the allegedly false statements and failed to take appropriate action when he became aware of the statements.

    In addition to the customer repayment, the bank has agreed to pay a $750,000 civil money penalty to the SEC, while the former head trader has agreed to a $165,000 civil money penalty and a 12-month suspension from the securities industry. According to the SEC, the settlement amounts reflect substantial cooperation by both parties during the investigation and remedial efforts taken by the bank to improve surveillance and compliance controls. Both parties consented to the order without admitting or denying the findings.

    Securities SEC Mortgages Settlement Fraud

  • SEC exams to focus on ICOs, cybersecurity, and AML programs

    Securities

    On February 7, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its 2018 Examination Priorities, which includes cryptocurrency and Initial Coin Offerings (ICOs) for the first time. According to the document, the OCIE’s 2018 priorities reflect “certain practices, products, and services that OCIE believes may present potentially heightened risk to investors and/or the integrity of the U.S. capital markets.” The document highlights five themes:

    • Retail Investors. Among other retail investor priorities, OCIE states it will focus on high-risk products, including cryptocurrency and ICO markets due to their rapid growth. Exams in this area will review whether there are adequate controls and safeguards to protect against theft and whether appropriate disclosures about the risks associated with the investments are given to investors.
    • Compliance and Risks in Critical Market Infrastructure. OCIE will look at important participants in the market structure, including clearing agencies, national securities exchanges, transfer agents, and entities under Regulation SCI.
    • Review of Other Regulatory Bodies. OCIE intends to review the operations and controls of the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB).
    • Cybersecurity. OCIE notes that the scope and severity of cybersecurity risks have increased dramatically. According to the document, examinations will continue to focus on, among other things, data loss prevention, governance and risk assessment, and vendor management.
    • AML Programs. Anti-money laundering (AML) program examinations will focus on whether the regulated entities are “appropriately adapting their AML programs to address their obligations.” More specifically, OCIE will look at whether entities are filing accurate Suspicious Activity Reports (SARs) and performing appropriate customer due diligence reviews.

    Securities Digital Assets Initial Coin Offerings Privacy/Cyber Risk & Data Security Anti-Money Laundering Fintech SARs Financial Crimes

  • SEC halts allegedly fraudulent ICO

    Securities

    On January 30, the Securities and Exchange Commission (SEC) announced it obtained a court order preventing an allegedly fraudulent initial coin offering (ICO) by a Dallas-based company. According to the complaint filed on January 25, the company pitched its ICO by depicting itself as a “decentralized bank” that could automatically trade in multiple cryptocurrencies and provide a variety of consumer banking products and services based on over 700 different virtual currencies. The SEC alleges that the company failed to properly register the ICO and made materially false statements in its advertisements, such as: (i) the company’s purchase of an FDIC-insured bank; and (ii) the availability of a company-branded VISA card allowing for payment of goods and services using different virtual currencies held in a checking account with the company. The company also purportedly failed to disclose the criminal background of certain executives. According to the SEC, the District Court approved an emergency asset freeze and placed the company in receivership. Among other things, the SEC is seeking a permanent injunction and the release of profits associated with the fraudulent activity, plus interest and penalties.

    Securities Digital Assets Initial Coin Offerings Virtual Currency Fintech

  • CFTC reaches spoofing settlements with banks; joint investigation with DOJ leads to civil and criminal charges against traders

    Securities

    On January 29, three global banks agreed to pay a combined $46.6 million fine to settle civil allegations by the Commodity Futures Trading Commission (CFTC) that their traders engaged in a practice known as spoofing to manipulate futures markets, which involves placing bids or offers with the intent to cancel before execution. While neither admitting nor denying any wrongdoing in connection with the settlements, the banks agreed, among other things, to pay the fines, maintain controls in order to detect and prevent spoofing among traders, and implement new training programs. As part of a larger investigation conducted by the CFTC and the criminal divisions at the DOJ and FBI, the CFTC stated within the same announcement that civil enforcement actions were filed against six individuals for alleged spoofing violations. Additionally, according to a press release issued the same day, the DOJ announced criminal charges against eight individuals who allegedly participated in various deceptive trading practices, including the six traders named in the CFTC’s civil complaints. The DOJ alleged the defendants’ spoofing trades were designed to defraud individuals and entities by artificially depressing or inflating the prices of futures contracts traded on several exchanges.

    Securities DOJ CFTC Enforcement Fraud Settlement

  • FINRA releases 2018 regulatory and examinations priorities letter

    Securities

    On January 8, the Financial Industry Regulatory Authority (FINRA) published its Annual Regulatory and Examination Priorities Letter (2018 Letter), which focused on several broad issues within the securities industry, including improving the examination program to “implement a risk-based framework designed to better align examination resources to the risk profile of [] member firms.” As previously covered in InfoBytes, last July FINRA360 (a comprehensive self-evaluation and organizational improvement initiative) prompted the organization to announce plans currently underway to enhance operations by consolidating its existing enforcement teams into a single unit. In the 2018 Letter, FINRA announced ongoing efforts to work with member firms to understand the risks and benefits of fintech innovation such as blockchain technology, as well as the impact initial coin offerings (ICOs) and digital currencies have on broker-dealers.

    Additional areas of regulatory and examination focus for FINRA in 2018 will include: (i) fraudulent activities and suspicious activity report filing requirements; (ii) business continuity planning; (iii) protection and verification of customer assets, including whether firms have implemented adequate controls and supervision methods along with measuring the effectiveness of cybersecurity programs; (iv) anti-money laundering monitoring and surveillance resources and policies and procedures; and (v) the role firms and other registered representatives play when effecting transactions in cryptocurrencies and ICOs—specifically with regard to the supervisory, compliance and operational infrastructure firms implement to “ensure compliance with relevant federal securities laws and regulations and FINRA rules.”

    Securities Digital Assets Fintech FINRA Examination Fraud Privacy/Cyber Risk & Data Security Anti-Money Laundering Initial Coin Offerings Virtual Currency SARs Blockchain Financial Crimes

  • FINRA Fines Brokerage Firm $2.8 Million for Customer Protection Rule Violations

    Securities

    On December 27, the Financial Industry Regulatory Authority (FINRA) announced that it fined a New York-based brokerage firm $2.8 million based on allegations that the firm violated the SEC’s Customer Protection Rule and due to other related supervisory failures. According to the Letter of Acceptance, Waiver, and Consent (AWC), from March 2008 to June 2016, the firm did not have reasonable processes in place to ensure that its control systems were operating properly.  As a result of these design flaws, the firm failed to properly segregate customers’ foreign and domestic securities in appropriate control locations, leading to deficits in securities valued at hundreds of millions of dollars.” The firm neither admitted nor denied the findings set forth in the AWC agreement.

    Securities FINRA Enforcement SEC

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