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Financial Services Law Insights and Observations


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  • Gensler highlights challenges of AI-based models


    On July 17, SEC Chair Gary Gensler spoke before the National Press Club, where he discussed opportunities and challenges stemming from the use of artificial intelligence (AI)-based models. While Gensler acknowledged that AI has the potential to promote greater financial inclusion and enhance user experience, he warned that there are also challenges associated with AI advancements that need to be considered at both the individual and broader economic levels. At the individual (micro) level, Gensler explained that AI’s predictive capabilities allow for personalized communication, product offerings, and pricing. However, this individualized approach (also known as “narrowcasting”) also raises questions about how individuals will respond to tailored messages and offers, he said, pointing out that when AI models are used to make important decisions such as job selection, loan approvals, credit decisions, and healthcare allocation, issues related to explainability, bias, and robustness become a concern. Gensler elaborated that AI models often produce unexplainable decisions and outcomes due to their nonlinear and hyper-dimensional nature. Furthermore, AI may also make it more difficult to ensure fairness and can inadvertently perpetuate biases present in historical data or use latent features that act as proxies for protected characteristics, Gensler said, adding that “the challenges of explainability may mask underlying systemic racism and bias in AI predictive models.”

    Gensler explained that these data analytics challenges are not new and that in the late 1960s and early 1970s, the Fair Housing Act, FCRA, and ECOA were, in part, driven by similar issues. He warned advisers and brokers that as they incorporate these technologies into their services, they must ensure that when offering advice and recommendations (whether or not based on AI) they consider the best interests of their clients and retail customers and not place their interests ahead of investors’ interests.

    Securities Federal Issues Fintech Consumer Finance Risk Management Artificial Intelligence

  • Agencies charge crypto platform and former executives

    Federal Issues

    On July 13, the FTC announced a proposed settlement to resolve allegations that a crypto platform engaged in unfair and deceptive acts or practices in violation of the FTC Act. The FTC also alleges that the defendants violated the Gramm-Leach-Bliley Act by acquiring customer information from a financial institution regarding someone else by providing false or misleading statements. The New Jersey-based crypto company offers various cryptocurrency products and services to customers, such as interest-bearing accounts, personal loans backed by cryptocurrency deposits, and a cryptocurrency exchange. On the heels of its bankruptcy filing in July 2022, the FTC lodged a complaint in federal court alleging that three former executives falsely promised that deposits would be “safer” than bank deposits and always available for withdrawal, and that the platform posed “no risk” or “minimal risk.”

    The proposed stipulated order imposes a $4.72 million judgment against the corporate defendants, which is suspended based on their financial condition. The order also bans the corporate defendants from, among other things, “advertising, marketing, promoting, offering, or distributing, or assisting in the advertising, marketing, promoting, offering, or distributing of any product or service that can be used to deposit, exchange, invest, or withdraw assets, whether directly or through an intermediary.” 

    Other agencies also took action against the company and its former CEO on the same day, including the SEC, which alleges the company sold unregistered crypto asset securities in one of its program offerings. The SEC’s complaint further alleges the company made false and misleading statements and engaged in market manipulation. Additionally, the DOJ unsealed an indictment charging the former CEO and the company’s former chief revenue officer with conspiracy, securities fraud, market manipulation, and wire fraud for illicitly manipulating the price of the company’s token. Additionally, the CFTC filed a civil complaint charging the company and former CEO with fraud and material misrepresentations in connection with the operation of the company’s digital asset-based finance platform. The CFTC alleges the company operated as an unregistered commodity pool operator (CPO), and its former CEO operated as an unregistered associated person of a CPO. The complaint also accuses the former CEO of violating the Commodity Exchange Act and CFTC regulations, among other things. According to the press release, the company agreed to resolve the complaint, while the former CEO is continuing litigation.

    Federal Issues Digital Assets Securities Fintech Cryptocurrency FTC FTC Act Gramm-Leach-Bliley Enforcement Consumer Protection Deceptive SEC CFTC DOJ

  • SEC awards whistleblower $9 million


    On July 12, the SEC announced a whistleblower award totaling approximately $9 million to a claimant who provided information and assistance that led to a successful enforcement action. According to the redacted order, the claimant “repeatedly raised concerns internally” and “provided highly significant and detailed information that alerted enforcement staff to the underlying conduct, prompting the opening of the investigation.” The claimant then “provided critical and ongoing assistance throughout the investigation, including meeting with [e]nforcement staff multiple times.” As a result of that information and assistance, “millions of dollars have been returned to harmed investors.”

    Securities SEC Enforcement Whistleblower Investigations

  • District Court orders crypto platform and its CEO to disgorge and pay penalty in SEC case


    On July 5, the U.S. District Court for the Southern District of New York ordered a crypto platform and its CEO to each pay a civil money penalty of $141,410, as well as to jointly pay disgorgement in the same amount, in a case brought by the SEC. The SEC filed a complaint in February 2021 alleging that the defendants violated the registration provisions of the Securities Act of 1933 in connection with their offer and sale of digital asset securities. According to the SEC, the defendants sold digital asset securities to hundreds of investors, including investors based in the United States, but failed to file a registration statement for the offering. The complaint further charged the defendants with denying prospective investors the material information required for such an offering to the public. The SEC alleged that the defendants raised at least $141,410 through their offering.

    Neither defendant responded to the complaint, and the court accordingly entered an order of default against the defendants, permanently enjoining the defendants from violating the registration provisions of the Securities Act. The court also referred the case to a magistrate judge to make a recommendation regarding disgorgement and penalties. The magistrate judge concluded—and the court agreed—that there were sufficient facts supporting the SEC’s allegations against the defendants and that disgorgement and civil monetary penalties were appropriate remedies. In addition to the civil monetary penalty of $141,410 per defendant, the court held the defendants jointly and severally liable for disgorgement of $141,410 plus pre-judgment interest.

    Courts Securities Digital Assets Fintech Cryptocurrency SEC Securities Act

  • DFPI orders crypto platform to halt operations

    State Issues

    On June 27, the California Department of Financial Protection and Innovation (DFPI) issued a desist and refrain order against a digital asset trading platform and two of its promoters for allegedly selling unqualified securities and making material misrepresentations and omissions to investors, a violation of California securities laws.

    DFPI alleges that the platform leveraged a “multi-level marketing scheme” to award its promoters who sold unqualified securities to investors in the form of investment contracts and received cash investments ranging from $5,000-$20,000. Allegations also include that the platform “purported” to provide educational classes designed to empower the Latino community with respect to crypto asset trading. The order details that through these efforts to garner more investors, “misrepresentations of material fact [were made] to investors and potential investors, namely that investors would receive a return on their initial investment every three months.” Investors have allegedly not received any return on their initial investment. The commissioner found that the platform “fail[ed] to provide the promised returns on their purported investments” and that “[d]espite multiple requests, investors have not had their funds returned.”

    The order requires the platform to desist and refrain from the offer and sale of securities and stop making misrepresentations about returns in California.

    State Issues Securities Fintech DFPI Cryptocurrency Enforcement Digital Assets California

  • SEC fines tech company $2.5 million to settle FCPA charges


    On May 26, the SEC announced that a Connecticut-headquartered tech research and consulting company (the “settling company”) agreed to pay nearly $2.5 million to settle claims that it violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA. According to the SEC’s order, from roughly December 2014 through August 2015 the settling company allegedly entered into a scheme with several private South African companies through which a South African IT consulting company was paid substantial amounts of money even though the settling company “knew or consciously disregarded the possibility” that all or part of this money would go to South African government officials to influence the award of multi-million-dollar contracts to the settling company. During this time, the SEC found that the settling company’s policy regarding third-party consultants failed to adequately address anti-corruption risks, and the settling company lacked sufficient internal accounting controls to document payments made to third parties. The settling company also failed to implement anti-corruption vendor onboarding procedures and lacked adequate monitoring procedures, the SEC said.

    The settling company consented to the SEC’s order without admitting or denying the allegations and agreed to pay a $1.6 million civil money penalty and $856,764 in disgorgement and prejudgment interest. The SEC recognized the company’s cooperation and remedial efforts.

    Securities Financial Crimes Enforcement FCPA Bribery Of Interest to Non-US Persons

  • Bank to pay $1 billion to settle investors’ compliance claims


    Last month, the U.S. District Court for the Southern District of New York preliminarily approved a securities litigation settlement that would require a national bank to pay $1 billion to resolve class claims that it misrepresented its progress in overhauling its internal controls and compliance processes. The required overhauls relate to consent orders entered between the bank and its regulators in 2018 concerning alleged improper banking practices and corporate oversight deficiencies. The settlement would resolve investors’ claims that the bank’s allegedly misleading statements artificially inflated the price of the bank’s common stock, which declined when additional information was revealed. The bank expressly denies that the lead plaintiffs “have asserted any valid claims,” and denies “any and all allegations of fault, liability, wrongdoing, or damages.” If granted final approval, the bank would be required to pay $1 billion into a fund to be distributed to certain affected investors.

    Courts Securities Compliance Class Action

  • SEC fines Dutch medical supplier $62 million to settle FCPA charges


    The SEC recently announced that a global Dutch manufacturer of health technology products agreed to pay more than $62 million to settle claims that it allegedly violated the FCPA with respect to the sale of medical diagnostic equipment in China. According to the SEC’s order, between 2014 and 2019, the manufacturer’s agents in China “engaged in improper conduct to influence foreign officials in connection with tender specifications in certain public tenders to increase the likelihood that [the manufacturer’s] products were selected.” Certain agents also allegedly engaged in a variety of improper bidding practices that unjustly enriched the manufacturer by $41 million. Special pricing discounts were given to distributors, which created a corruption risk that the increased distributor margins could be used to fund improper payments to government-owned hospital employees, the SEC claimed. During this time, the SEC found that the manufacturer lacked sufficient internal accounting controls to prevent and detect the conduct, and allegedly failed “to provide reasonable assurances” that transactions were accurately recorded in the Chinese agents’ books and records, which were consolidated into the manufacturer’s books and records.

    The SEC stated that the manufacturer was previously charged with similar misconduct in Poland between 1999 and 2007, and that despite taking remedial efforts, the manufacturer failed to implement sufficient internal accounting controls relating to its sales of health technology products in China. The manufacturer consented to the SEC’s order without admitting or denying allegations that it violated the books and records and internal accounting control provisions of the Securities Exchange Act and agreed to pay $15 million in civil penalties and more than $47 million in disgorgement and prejudgment interest. The SEC recognized the company’s cooperation and remedial efforts.

    Securities Financial Crimes Of Interest to Non-US Persons FCPA

  • SEC’s $279 million whistleblower award is largest ever


    On May 5, the SEC announced the Commission’s largest-ever award—nearly $279 million—awarded to a whistleblower for providing information and assistance leading to the successful enforcement of SEC and related actions. The SEC noted that this award is more than double the previous record-holding $114 award issued in October 2020. According to the redacted order, the whistleblower voluntarily provided original information, which caused enforcement staff to expand the scope of the investigation and saved the SEC significant time and resources. The whistleblower also provided substantial ongoing assistance, including providing multiple written submissions, communications, and interviews, the SEC said, finding also that the whistleblower satisfied the requirements under Rules 21-F-3(b)(1) for related actions awards as the related successful enforcement actions were partly based on the same information provided to the Commission. However, in the same order, the SEC affirmed denial of two other claimants’ award claims after determining, among other things, that the individuals did not submit information leading to the successful enforcement of the covered action.

    Securities SEC Enforcement Whistleblower Investigations

  • SEC orders crypto ATM operator to pay $3.9 million for selling unregistered tokens


    On April 28, the SEC settled with a cryptocurrency ATM operator for allegedly selling unregistered tokens in order to raise money to expand its bitcoin ATM network. Described as a “token sale,” the SEC claimed the respondents in total raised crypto assets during an initial coin offering valued at roughly $3.65 million. According to the SEC, the company offered and sold its token as investment contracts, which qualified it as a security since investors would have reasonably expected to obtain future profits from the token’s rise in value based upon the respondents’ efforts. By offering and selling securities without having on file a registration statement with the SEC or qualifying for an exemption, the respondents violated Sections 5(a) and 5(c) of the Securities Act, the SEC said. Additionally, one of the respondents and its CEO were also accused of violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 by making materially false and misleading statements and engaging in other fraudulent conduct connected to the offer and sale of the token. The respondents neither admitted nor denied the SEC’s findings, but agreed to pay a collective $3.92 million civil penalty and said they would cease and desist from committing violations of the Securities Act and the Securities Exchange Act. One of the individual respondents also received a three-year officer and director ban.

    Securities Courts SEC Enforcement Digital Assets Cryptocurrency Securities Act Securities Exchange Act Fintech


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