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  • SEC accuses crypto companies of $37 million scheme

    Courts

    On September 30, the SEC filed a complaint in the U.S. District Court for the Southern District of Florida against two cryptocurrency companies and their principals (collectively, “defendants”) claiming that they falsely promised investors that their cryptocurrency was backed by a $10 billion gold bullion investment. According to the complaint, the SEC alleged that between May 2018 and January 2019, the defendants “made material misrepresentations and omissions to investors while they were offering and selling [a crypto asset that the companies owned and controlled] in a series of news and press releases issued to the public." The releases falsely claimed that one of the cryptocurrency companies had acquired and received title to $10 billion in gold bullion and intended to back each token that was owned and controlled by the companies issued and sold to investors with $1.00 worth of this gold. One of the companies claimed to have acquired the gold through a purchase transaction with one of the principles and his company. The defendants also misrepresented that independent accounting firms had performed an “audit” of the gold and verified its existence. In reality, the gold acquisition transaction was a sham. The SEC’s complaint alleged violations of anti-fraud and securities registration provisions of the federal securities laws. The SEC is seeking permanent injunctive relief, disgorgement plus prejudgment interest, civil penalties and officer-and-director bars against the individual defendants.

    Courts Securities Digital Assets SEC Enforcement Cryptocurrency Fintech

  • SEC files charges against crypto-asset seminar operation

    Securities

    On September 19, the SEC filed a complaint against a two individuals and the companies they controlled (collectively, “defendants”) in the U.S. District Court for the Southern District of Texas for allegedly operating an on-going fraudulent and unregistered crypto-asset offering targeting Latino investors. According to the SEC, the defendants allegedly raised more than $12 million from over 5,000 investors who paid for seminars to learn how to build wealth through crypto-asset trading. However, the SEC claimed that one of the individual defendants—who founded the company and actually had no education or training in investments or crypto assets—used the seminars to solicit investors to give their money to the company and then supposedly used the funds to conduct crypto asset and foreign exchange trading. In total, the SEC alleged the individual defendants made roughly $2.7 million in Ponzi payments, diverting nearly $8 million for their own personal use. The complaint charges the defendants with violating, or aiding and abetting violations of, the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Securities Act. The company’s founder is also charged with violating the Investment Advisers Act of 1940. The complaint seeks a permanent injunction against the defendants, civil penalties, disgorgement of ill-gotten gains with prejudgment interest, and bars. The SEC stated in its announcement that, at the Commission’s request, the court issued a temporary restraining order to stop the offering, in addition to temporary orders freezing assets and granting additional emergency relief.

    Securities Courts Digital Assets SEC Enforcement Cryptocurrency Fraud Securities Act Securities Exchange Act Investment Advisers Act

  • CFTC files charges against operators of unregistered digital asset exchange

    Securities

    On October 3, the CFTC filed a complaint against an individual and the four companies he controlled (collectively, “defendants”) in the U.S. District Court for the Southern District of Florida for allegedly operating a digital asset exchange that offered futures transactions on a platform other than a designated contract market. The defendants are also charged with attempting to manipulate the price of the exchange’s native token. According to the CFTC, the defendants used web-based solicitation to obtain customers even though the individual defendant was aware that such participation subjected the exchange to U.S. regulation. The CFTC also claimed that, in addition to allegedly violating certain registration and regulatory requirements, the defendants attempted to artificially inflate the price of the exchange’s “native currency.” Among other things, the defendants are also accused of failing to implement an effective AML program, know-your-customer procedures, or a customer information program to verify the identifies of the customers who purchased the digital assets. The complaint charges the defendants with violations of the Commodity Exchange Act (CEA), and seeks full restitution, disgorgement of ill-gotten gain, civil penalties, permanent trading and registration bans, and a permanent injunction against further CEA violations.

    Securities CFTC Courts Enforcement Digital Assets Cryptocurrency Commodity Exchange Act Anti-Money Laundering

  • SEC charges celebrity with unlawfully promoting crypto security

    Securities

    On October 1, the SEC announced charges against a celebrity (respondent) who allegedly used her social media accountg to tout a crypto-asset security without disclosing the payment she received for the promotion. According to the SEC’s order, the respondent promoted the crypto-asset security on her social media account in exchange for financial payment from the issuer, receiving approximately $250,000 for the promotion. Specifically, the respondent posted a link to a securities offering conducted by an online company with a public website, in which it offered and sold digital tokens to the public. The tokens were offered and sold as investment contracts and therefore qualified as securities pursuant to Section 2(a)(1) of the Securities Act. The SEC’s order found that the respondent violated the anti-touting provision of the federal securities laws. Without admitting or denying the SEC’s findings, the respondent agreed to pay $1.26 million, including approximately $260,000 in disgorgement, which represents her promotional payment, plus prejudgment interest, and a $1,000,000 penalty. The respondent also agreed to not promote any crypto-asset securities for three years.

    Securities SEC Enforcement Digital Assets Cryptocurrency Securities Act

  • SEC orders global accounting firm’s Chinese affiliate to pay $20 million for auditing failures

    Securities

    On September 29, the SEC issued a cease and desist order against the Chinese affiliate of a global accounting firm for allegedly failing to comply with U.S. professional auditing requirements when conducting component audits of U.S. issuers and auditing foreign companies listed on U.S. exchanges. According to the SEC, during the course of numerous audits, personnel at the Chinese affiliate allegedly, among other things, asked clients to choose their own samples for testing and complete required audit documentation purportedly showing that the Chinese affiliate had obtained and assessed supporting evidence for certain clients’ accounting entries. This was allegedly done in order to create the illusion that the required testing of clients’ financial statements and internal controls had been conducted when there was allegedly no evidence that it had in fact happened. The SEC noted that the alleged misconduct involved both junior and senior audit team members and demonstrated a lack of supervision by audit partners. Moreover, the Chinese affiliate’s alleged failure to follow required Public Company Accounting Oversight Board (PCAOB) auditing standards created a significant threat to U.S. investors.

    “While the SEC’s action today does not implicate a violation of the Holding Foreign Companies Accountable Act, the action does underscore the need for the [PCAOB] to be able to inspect Chinese audit firms,” SEC Chair Gary Gensler said in the announcement. “A fundamental goal of the PCAOB’s inspection regime is to identify weaknesses in the firms’ quality control processes—the very weaknesses at issue in this case.”

    Without admitting or denying the allegations, the Chinese affiliate agreed to settle the charges by paying a $20 million civil money penalty and implementing extensive remedial measures, including completing a review and assessment of its policies and procedures by an independent consultant and implementing a course of action to address identified deficiencies. Audit professionals at the Chinese affiliate who serve U.S. public company audit clients are also required to undertake additional training.

    Securities SEC China Audit Enforcement Of Interest to Non-US Persons PCAOB

  • SEC charges bank holding company with over-issuance of securities

    Securities

    On September 29, the SEC announced a cease and desist order against a London-based bank holding company and its subsidiary (collectively, “respondents”) for engaging in unregistered offers and the sale of securities as a result of a failure to implement internal controls to track such transactions. According to the SEC’s order, after the SEC settled an action against an affiliate of the subsidiary, the subsidiary lost its status as a well-known seasoned issuer. As a result, it had to quantify the total number of securities that it anticipated offering and selling and pay registration fees for those offerings upon the filing of a new registration statement. The SEC further noted that, given this requirement, the subsidiary’s “personnel understood the consequences of this status change, including that they should consider implementing a mechanism to track offers and sales of securities off any shelf, relative to the registered amount of securities available to be offered or sold off that shelf, in order to ensure that no securities in excess of the amount registered were offered or sold.” However, according to the SEC, no internal controls were established. According to the SEC’s order, as a result of this failure, the subsidiary allegedly offered and sold approximately $17.7 billion of securities in unregistered transactions. The SEC noted that the subsidiary self-reported its over-issuances to regulators, voluntarily provided documents during the SEC investigation, and subsequently commenced a rescission offer. The SEC found that the subsidiary violated provisions of the Securities Act of 1933 and that both respondents violated provisions of the Securities Exchange Act of 1934. Without admitting or denying the SEC’s findings, the respondents agreed to cease-and-desist from violating the charged provisions and to comply with certain undertakings designed to effect compliance with Section 5 of the Securities Act, in addition to paying the $200 million civil penalty. The subsidiary also agreed to pay disgorgement of $149 million and prejudgment interest of $11 million deemed satisfied by its offer of rescission.

    Securities Enforcement SEC Bank Holding Companies Securities Act Securities Exchange Act

  • SEC files charges against fintech company for manipulating crypto-asset securities

    Securities

    On September 28, the SEC filed a complaint against a Florida-based fintech company, the company’s former CEO, and the CEO of a “market making” firm (collectively, “defendants”) for allegedly perpetrating a scheme to manipulate the trading volume and prices of crypto-asset securities. According the SEC, the company and the former CEO created and distributed a token using several methods, including paying individuals with tokens in exchange for promotions. They then allegedly hired the “market making” firm “to create the false appearance of robust market activity” for the token through the use of customized trading software, and then engaged in unregistered offers and sales of the token in an artificially inflated market in order to generate profits on the company’s behalf. The SEC claimed this scheme yielded more than $2 million for the company. The complaint charges the defendants with violating numerous provisions of the federal securities laws, including certain registration, antifraud, and market manipulation provisions, and seeks permanent injunctive relief, disgorgement with prejudgment interest, civil penalties, and conduct-based injunctions. The SEC also seeks an officer and director bar against the former CEO. Based on the SEC’s announcement, the market making firm’s CEO has consented to a judgment, subject to court approval and without admitting or denying the allegations, which would permanently ban him from violating these provisions and from participating in future securities offerings. The market making firm’s CEO is also ordered to pay $36,750 in disgorgement as well as prejudgment interest of $5,118, with civil monetary penalties to be determined by the court. 

    “Companies cannot avoid the federal securities laws by structuring the unregistered offers and sales of their securities as bounties, compensation, or other such methods,” Associate Director of the SEC’s Enforcement Division Carolyn M. Welshhans said. “As our enforcement action shows, the SEC will enforce the laws that prohibit such unregistered fund-raising schemes in order to protect investors.”

    Securities Enforcement Digital Assets Cryptocurrency Fintech Courts

  • SEC, CFTC fine Wall Street firms $1.8 billion

    Securities

    On September 27, the SEC and CFTC announced settlements (see here and here) with numerous broker-dealers for alleged recordkeeping failures. According to the SEC, from January 2018 through September 2021, the firms’ employees communicated about business matters using text messaging applications on their personal devices. The SEC further alleged that the firms violated federal securities laws by failing to maintain or preserve the substantial majority of these off-channel communications. The SEC charged each of the firms with violating certain recordkeeping provisions of the Securities Exchange Act of 1934, and with failing to reasonably supervise and detect such violations. Additionally, an investment adviser was charged with violating certain recordkeeping provisions of the Investment Advisers of 1940. In addition to paying a total of $1.1 billion in fines, the firms were ordered to cease and desist from future violations of the relevant recordkeeping provisions and were censured. The firms agreed to retain compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices. The SEC recognized the firms’ cooperation with the investigation.

    Separately, in a related action, the CFTC announced settlements with many of the same firms for related conduct, totaling nearly $710 million. The CFTC noted that each firm acknowledged to CFTC staff that it was aware employees used unapproved methods to engage in business-related communications. The CFTC also said that as a result of each firm’s failure to ensure that its employees complied with communication policies and procedures, the firms failed to maintain business-related communications. The CFTC found that each firm failed to diligently “supervise its business as a CFTC registrant or registrants, in violation of CFTC recordkeeping and supervision provisions.”

    Securities Enforcement SEC CFTC Recordkeeping Securities Exchange Act

  • CFTC orders unregistered respondents to pay $250,000 for CEA violations

    Securities

    On September 22, the CFTC announced a settlement with a cryptocurrency business and its founders (collectively, respondents) for allegedly violating the Commodity Exchange Act (CEA), Commission regulations, and Bank Secrecy Act compliance requirements. According to the CFTC, the respondents allegedly “designed, deployed, marketed, and made solicitations concerning a blockchain-based software protocol that accepted orders for and facilitated margined and leveraged retail commodity transactions.” The protocol allowed users to leverage positions, where the value was determined by the price difference between two digital assets from the time the position was established to the time it was closed. The protocol, according to the CFTC, “purported to offer users the ability to engage in these transactions in a decentralized environment.” The CFTC found that the respondents were not registered with the CFTC and had engaged in unlawful activities that could only be lawfully performed by a registered designated contract market and other activities that could only lawfully be performed by a registered futures commission merchant (FCM). Additionally, the respondents did not comply with the Bank Secrecy Act when they failed to conduct know-your customer diligence on their customers as part of a customer identification program, as required of FCMs. The order requires the respondents to pay a $250,000 civil monetary penalty and to cease and desist from further violations of the CEA and CFTC regulations. Simultaneously, the CFTC filed a complaint in the U.S. District Court for the Northern District of California charging a decentralized autonomous organization and successor to the cryptocurrency business that operated the same software protocol with violating the same laws as the respondents. The CFTC is seeking restitution, disgorgement, civil monetary penalties, trading and registration bans, and injunctions against further violations of the CEA and CFTC regulations.

    The same day, CFTC Commissioner Summer K. Mersinger published a dissenting opinion, stating that though she does “not condone[s] individuals or entities blatantly violating the CEA or our rules,” we “cannot arbitrarily decide who is accountable for those violations based on an unsupported legal theory amounting to regulation by enforcement while federal and state policy is developing.” She further argued that there is no provision in the CEA that holds members of a for-profit unincorporated association personally liable for violations of the CEA or CFTC rules committed by the association based solely on their membership status.

    Securities CFTC Cryptocurrency Digital Assets Bank Secrecy Act Enforcement

  • Final judgment entered in alleged misappropriated funds suit

    Courts

    On September 19, the U.S. District Court for the District of Southern Florida granted final judgment against an individual to resolve SEC allegations regarding her involvement in a company that allegedly fraudulently misappropriated funds from investors. As previously covered by InfoBytes, the SEC’s complaint claimed that the individual was employed by the company and was the wife of a chief executive officer who falsely represented to many Venezuelan-American investors that the company would use their funds to finance payday loans through the offer and sale of “safe and secured or guaranteed” promissory notes. The complaint noted that the defendant “received at least $1.2 million of [the company’s] investor funds for no apparent legitimate business purpose,” in violation of the federal securities laws or any regulation or order issued under such laws, as set forth in the Bankruptcy Code. According to the order, the defendant must pay $994,000 in disgorgement and $83,000 in interest.

    Courts Securities Enforcement Fraud Bankruptcy Code

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