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On September 15, acting Comptroller of the Currency Michael J. Hsu spoke before the Exchequer Club to discuss several agency priorities relating to reducing inequality, adapting to digitization, acting on climate change, and guarding against complacency. In prepared remarks, Hsu stressed the importance of safeguarding trust in banking. While he acknowledged the value of strong rules and regulations, Hsu cautioned that rules “are not adaptive to emerging risks” and “cannot perceive and respond to trends and developments that may erode or threaten trust.” He further emphasized that regulators must coordinate efforts to ensure stability and fairness, and pointed to the growth of cryptocurrency and decentralized finance as areas where it is imperative that regulators work together to ensure activities taking place within the banking system or those that are facilitated by banks are trustworthy. “Innovation is important, but safeguarding trust is paramount,” Hsu stressed. Additionally, Hsu noted that “coordination among all financial regulators will also be needed in the future to ensure a level playing field and limit regulatory arbitrage and to keep shadow banking at a safe distance from the regulated financial system. These goals cannot be achieved if the financial regulatory agencies, including state banking supervisors, do not work together. Public trust in bank regulators will rise or fall depending on our ability to do so.”
On September 13, the New York attorney general announced a judgment against an unregistered virtual currency trading platform and its CEO (collectively, “defendants”) for allegedly defrauding thousands of investors across the country out of millions of dollars by converting investor funds without their consent. According to the AG, in June, the New York Supreme Court granted the AG’s motion for a preliminary injunction and the appointment of a temporary, court-appointed receiver with special powers to safeguard investments already made on the trading platform. The defendants failed to comply with the preliminary injunction by creating, offering, and selling a new virtual currency and failed to respond to the AG’s complaint. The judgment permanently appoints the court receiver to obtain, safeguard, and return all assets invested and traded through the trading platform and imposes a money judgment against the defendants of $3,061,511, both together and separately. In addition, the judgment requires the defendants to permanently cease their illegal and fraudulent operations and puts in place a permanent receiver to protect investors’ funds.
On September 1, the SEC filed a complaint against an online cryptocurrency lending platform, its founder, and an additional executive and his affiliated company (collectively, “defendants”) alleging they fraudulently raised approximately $2 billion from retail investors through a global unregistered offering of investments involving digital assets. According to the SEC, the defendants sold securities in the form of investments tied to the company’s lending program, and falsely promised investors that its purported proprietary “volatility software trading bot” could generate monthly returns as high as 40 percent. However, the SEC alleged that instead of trading investor funds, the defendants used the funds for their own benefit, such as transferring funds to a digital wallet controlled by their top U.S. promoter (one of the defendants here). To hide the fact that they were not trading the funds as promised, the SEC claimed the defendants “conducted a Ponzi-like scheme in which they at times used funds deposited by newer investors in order to satisfy withdrawal demands made by earlier investors.” The SEC charged the defendants with violating antifraud and registration provisions of the federal securities laws, and is seeking injunctive relief, disgorgement plus prejudgment interest, and civil penalties. In a parallel action, the DOJ announced the same day that the top U.S. promoter pleaded guilty to criminal charges for his role in the cryptocurrency scheme.
On August 23, the U.S. District Court for the Southern District of New York preliminarily enjoined defendants “from selling, transferring, assigning, encumbering, or otherwise disposing of cryptocurrency transferred in  transactions” following a July attack on a cryptocurrency exchange network with New York-based operations. According to the cryptocurrency exchange plaintiff’s petition for a temporary restraining order (TRO), the defendants allegedly hacked the network in order to make fraudulent transfers and defraud U.S. users by generating fake bitcoin in violation of the Commodities Exchange Act. The plaintiff contended that the defendants “transferred the cryptocurrency to other exchanges serving New York customers with the intent to sell them,” adding that if the defendants “are permitted to undertake such sales, they will almost certainly transact with New York-based counterparties.” The plaintiff urged the court to issue an injunction, arguing that because the defendants are foreign and it is “impossible to identify hackers intent on fraud, there is almost no likelihood that they would pay a damage award. Short of receiving an injunction of already-identified, fraud-begotten cryptocurrency, there is no way for Petitioner to secure ultimate recovery.” The court’s order also kept in place other third-party exchanges’ existing freezes on accounts thought to hold any of the cryptocurrency at issue. The order is intended to aid the plaintiff in its impending arbitration with the defendants.
On August 6, the SEC announced a settlement with two individuals and their company for the alleged unregistered sale of over $30 million of securities using smart contracts and decentralized finance technology, and for misleading investors regarding the operations and profitability of their business. According to the SEC’s order, the company offered and sold securities in unregistered offerings through a program from February 2020 to February 2021, which used smart contracts to sell two types of digital tokens: one type that could be purchased using specified digital assets and paid 6.25 percent in interest; and the other type that purportedly provided holders certain voting rights, some excess of profits, and the ability to profit from resales in the secondary market. The SEC alleged that the company violated provisions of the Securities Act, such as Section 5(a) and 5(c), by offering and selling securities without having a registration statement filed or in effect. In addition, the company violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, by making materially false statements and engaging in other deceptive acts regarding business operations and profitability. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of $125,000 to each individual and a total of $12,849,354 in disgorgement. The order also provides that the company must cease and desist from committing or causing any future violations of the Exchange Act.
On July 19, the SEC announced that it had obtained a temporary restraining order and asset freeze to halt an ongoing fraud offering by a Las Vegas-based company and two individual defendants, including a recidivist, (collectively, “defendants”) that allegedly raised more than $12 million from nearly 300 retail investors. According to the complaint, the defendants violated several provisions of securities laws by allegedly promising investors that their money would be invested in securities, bitcoin, and other cryptocurrencies based on recommendations made by an “[a]rtificial intelligence supercomputer,” which allegedly “consistently generate[d] enormous returns” and allowed the defendants to guarantee fixed returns of 20-30 percent annually with compounding interest. However, the SEC alleged that over 90 percent of the defendants’ funds came from investors, and that the defendants did not use these funds for the stated purposes. Rather, defendants transferred millions of dollars to one of the individual defendant’s personal bank accounts, paid millions of dollars to promoters who led investors to the defendants, and made “Ponzi-like” payments to other investors. The complaint seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties.
On July 19, the New Jersey Bureau of Securities (Bureau) announced a cease and desist order against a financial services company for allegedly selling unregistered securities in the form of interest-earning cryptocurrency accounts and failing to explain to investors that the accounts were not licensed in New Jersey. According to the order, the company has been funding its lending operations and proprietary trading business since 2019 by selling interest-bearing cryptocurrency accounts that are not protected by or registered with any federal or state securities regulator. The order notes that the company “held the equivalent of $14.7 billion from the sale of these unregistered securities in violation of the Securities Law.” In addition, the order, which become effective July 22, requires the company to stop selling any unregistered security or violating any securities law. According to the Bureau, the recent action “comes amid rising concerns over the proliferation of decentralized finance platforms like [the company] that seek to reinvent traditional financial systems such as banks and brokerages for digital asset investors,” and that “[u]nlike traditional, regulated banks and brokerage firms, however, investors’ losses are not insured against or protected by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation.”
Recently, California’s Department of Financial Protection and Innovation (DFPI) released a new opinion letter covering aspects of the California Money Transmission Act (MTA) related to certain cryptocurrency activities. According to the letter, the requesting company intends to provide an internet-enabled peer-to-peer (P2P) marketplace for the purchase and sale of certain decentralized digital currencies. The P2P marketplace will enable buyers and sellers of the specified cryptocurrency “to connect and arrange for the direct settlement of purchases and sales between such users” through a variety of means, such as bank transfers, gift cards, money transmission, debit card, credit card, among others. Additionally, the company’s P2P marketplace will allow customers to (i) buy goods or services with the specified cryptocurrency from unaffiliated, third-party online retailers who accept that cryptocurrency as a form of payment; (ii) exchange their cryptocurrency for the rights to a US dollar-backed stablecoin; and (iii) remit funds in different currencies, including foreign currency. The company emphasized that it will “not collect, store, or transmit any digital or fiat currency” in any of its four proposed products. DFPI concluded that the Delaware company’s proposed services are not subject to licensing under the MTA, explaining that the sale and purchase of cryptocurrency directly between two parties, in which the company does not facilitate the exchange of the fiat currency or the cryptocurrency, does not meet the definition of money transmission. Likewise, the company’s other proposed products do not constitute money transmission either. DFPI reminded the company, however, that its determination is limited to the facts as presented and that at any time DFPI may determine that the activities are subject to regulatory supervision. Moreover, the letter does not relieve the company from any FinCEN or federal agency obligations.
On July 8, FINRA issued Regulatory Notice 21-25, reminding firms to notify their FINRA risk-monitoring analysts if they currently engage in, or plan to engage in, activities regarding digital assets. The notice discusses the types of activities of interest to FINRA, which include, among other things: (i) transactions in digital assets; (ii) pooled funds investing in digital assets; (iii) derivatives associated with digital assets; (iv) engagement in an initial or secondary offering of digital assets; (v) participation in cryptocurrencies and other virtual coins and tokens; (vi) acceptance or mining of cryptocurrency; and (vii) “recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology.” The notice encourages firms to promptly notify their risk monitoring analyst in writing on an ongoing basis.
On June 24, the Financial Crimes Enforcement Network (FinCEN) honored the recipients of its 2021 Law Enforcement Awards Program, which recognizes agencies that use Bank Secrecy Act (BSA) data provided by financial institutions to successfully pursue and prosecute criminal investigations. The awards were presented in eight different categories related to: (i) Covid-19 fraud; (ii) cyber threats; (iii) transnational organized crime; (iv) transnational security threats; (v) state and local law enforcement; (vi) third-party money launderers; (vii) a suspicious activity review team; and (viii) significant fraud. Awards work included investigation into Paycheck Protection Program fraud that resulted in the seizure of case over $3 million, seizure of over $47 million dollars in narcotics proceeds, and seizure of 300 cryptocurrency accounts, among other work. FinCEN acting Director Michael Mosier stated that “[t]he law enforcement work that we recognize today highlights both the importance of an effective partnership between FinCEN, financial institutions, and our law enforcement agencies, and the value of BSA reporting in protecting the American people from fraud, cybercrime, and the illicit finance threats confronting our nation.”
- Jonice Gray Tucker to discuss “Updates on Artificial Intelligence Regulations - the U.S. and EU” at the American Bar Association Busines Law Section Meeting
- Jonice Gray Tucker to discuss “Government investigations, and compliance 2021 trends” at the Corporate Counsel Women of Color Career Strategies Conference
- APPROVED Webcast: California debt collection license requirement: Overview and analysis
- Max Bonici to discuss “BSA/AML trends: What to expect with the implementation of the AML Act of 2020” at the American Bar Association Banking Law Fall Meeting
- Jeffrey P. Naimon to discuss “Regulators are gearing up: Are you ready?” at HousingWire Annual
- Amanda R. Lawrence and Elizabeth E. McGinn discuss “U.S. state privacy legislation – Are you compliant?” at the Privacy+Security Forum
- H Joshua Kotin to discuss “Modifications and exiting forbearance” at the National Association of Federal Credit Unions Regulatory Compliance Seminar
- Jonice Gray Tucker and Kari K. Hall to discuss “Consumer Protection Priorities in the Biden Administration and Beyond" at the SWABC and TBA 2021 Legal Conference
- Jonice Gray Tucker to discuss “Fintech trends” at the BIHC Network Elevating Black Excellence Regional Summit
- Jeffrey P. Naimon to discuss "Truth in lending” at the American Bar Association National Institute on Consumer Financial Services Basics
- John R. Coleman and Amanda R. Lawrence to discuss “Consumer financial services government enforcement actions – The CFPB and beyond” at the Government Investigations & Civil Litigation Institute Annual Meeting
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek