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Financial Services Law Insights and Observations


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  • District Court grants SEC motion for default judgment


    On November 2, the U.S. District Court for the Middle District of Georgia granted the SEC’s motion for default judgement in its suit accusing a Georgia-based investment firm and three of its officers of defrauding investors out of approximately $3 million. In July, the SEC filed a complaint against the defendants for allegedly defrauding investors through a prime bank scheme by falsely promising that their funds would remain in a purported escrow account and earn lucrative returns without any risk of loss, which violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In its memorandum of law in support of its motion for default judgment, the SEC alleged that none of the defendants filed answers or responsive pleadings with the district court and had “engaged in egregious misconduct, acted with scienter, failed to admit their wrongdoing, were thoroughly dishonest with authorities, and have not demonstrated their financial means.” The district court granted the motion, approved permanent injunctions barring the defendants from committing future violations of securities laws, and required the defendants to return the investors' money with interest, in addition to the profits obtained through the alleged scheme. According to the order, the defendants are required to pay approximately $2.7 million total in disgorgement, exclusive of prejudgment interest, and pay a civil penalty of approximately $192,000.

    Courts Georgia Securities SEC Enforcement Securities Act Securities Exchange Act

  • 5th Circuit affirms SEC’s victim awards


    On October 12, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s nearly $2.4 million disgorgement order in an SEC case involving alleged penny stock fraud, marking the first time an appellate court has been asked to decide the “awarded for victims” question that arose out of the U.S. Supreme Court’s decision in Liu v. SEC. As previously covered by InfoBytes, in 2020, the Court held that the SEC may continue to collect disgorgement in civil proceedings in federal court as long as the award does not exceed a wrongdoer’s net profits, and that such awards for victims of the wrongdoing are equitable relief permissible under the Exchange Act, 15 U.S.C. §78u(d)(5). The Court’s decision discussed three limits: (i) the “profits remedy” must return the defendant’s wrongful gains to those harmed by the defendant’s actions, as opposed to depositing them in the Treasury; (ii) disgorgement under the statute requires a factual determination of whether petitioners can, consistent with equitable principles, be found liable for profits as partners in wrongdoing or whether individual liability is required; and (iii) disgorgement must be limited to “net profits” and therefore “courts must deduct legitimate expenses before ordering disgorgement” under the statute. 

    In the current action, the SEC brought a case against three individuals accused of allegedly selling unregistered securities and misleading investors during their operation of a penny stock company. The district court found the individuals liable on several of the claims and granted summary judgment in favor of the SEC. The district court also ordered (and later amended) disgorgement of the proceeds that the individuals obtained in the alleged fraud. The individuals appealed, challenging both the summary judgment decision (on the premise that “‘numerous’ disputed fact issues exist”) and the amended disgorgement remedy. Upon review, the 5th Circuit determined that that the district court’s disgorgement order satisfied the requirements laid out by the Court in Liu. The appellate court stated that the individuals’ appeal failed “to identify any disputed issues; nor does it sufficiently challenge the court’s analysis finding them liable based on undisputed facts.” Moreover, the 5th Circuit explained that the district court did not impose joint-and several liability, but rather individually assessed disgorgement amounts for each defendant based on the gains they received from the securities fraud, adding that the SEC has identified the victims of the fraud and created a process for the return of the disgorged funds. According to the 5th Circuit, “[u]nder the district court’s supervision, any funds recovered will go to the SEC, acting as a de facto trustee. The SEC will then disburse those funds to victims but only after district court approval.” “The disgorgement thus is being ‘awarded for victims.’”

    Courts SEC Fifth Circuit Appellate Liu v. SEC Disgorgement Securities Exchange Act Enforcement

  • SEC claims principals misled investors about subprime auto loans


    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

  • SEC sues company for misleading investors


    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

  • SEC announces first crowdfunding enforcement action


    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

  • SEC charges alternative data provider with securities fraud


    On September 14, the SEC announced a settlement with an alternative data provider and one of the company’s co-founders (collectively, "respondents") resolving allegations that the company violated antifraud provisions by engaging in deceptive practices and making material misrepresentations regarding alternative data. According to the order, the respondents understood that companies would share their confidential app performance data if they promised not to disclose it to third parties. As a result, the respondents assured companies that their data would be aggregated and anonymized before being used by a statistical model to generate estimates of app performance. However, the respondents, between 2014 and mid-2018, utilized non-aggregated and non-anonymized data to alter its model-generated estimates to make them more valuable to sell to trading firms. The SEC alleged that the respondents violated provisions of the Exchange Act, such as Section 10(b) and Rule 10b-5 thereunder, because their misrepresentations and other deceptive practices misled subscribers regarding how the company’s intelligence estimates were calculated. The order, to which the respondents consented, imposes civil money penalties of $300,000 and $10 million. The order also provides that the company must cease and desist from committing or causing any future violations of the Exchange Act, and prohibits the co-founder from serving as an officer or director of a public company for three years.

    Securities Enforcement Alternative Data Securities Exchange Act Cease and Desist

  • Former officials agree SEC usurped FinCEN’s BSA enforcement authority


    On August 20, former FinCEN officials filed an amicus brief in support of a petition for certiorari filed by penny stock broker-dealer (petitioner) against the SEC claiming the agency usurped FinCEN’s Bank Secrecy Act (BSA) enforcement authority. The petition seeks to reverse a U.S. Court of Appeals for the Second Circuit decision, which upheld a $12 million penalty and concluded the SEC has the authority to bring an action under Section 17(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 17a-8 promulgated thereunder for failure to comply with the Suspicious Activity Report (SAR) provisions of the BSA. As previously covered by InfoBytes, the appellate court rejected the broker-dealer’s argument that the SEC is attempting to enforce the BSA, which only the U.S. Treasury Department has the authority to do. The appellate court noted that the SEC is enforcing the requirements of Rule 17a-8, which requires broker-dealers to adhere to the BSA in order to comply with requirements of the Exchange Act, which does not constitute the agency’s enforcement of the BSA. Moreover, the appellate court concluded that the SEC did not overstep its authority when promulgating Rule 17a-8, as SARs “serve to further the aims of the Exchange Act by protecting investors and helping to guard against market manipulation,” and that the broker-dealer did not meet its “‘heavy burden’ to show that Congress ‘clearly expressed [its] intention’ to preclude the SEC from examining for SAR compliance in conjunction with FinCEN and pursuant to authority delegated under the Exchange Act.”

    The former officials’ brief states that they “have no interest in the facts” of the petitioner’s dispute with the SEC, but rather “are concerned that the Second Circuit’s misunderstanding of FinCEN’s delegated enforcement authority will lead to confusion among the financial institutions that must comply with the BSA; create multiple, conflicting BSA regulatory regimes; decrease American influence over global financial regulators; and hamper U.S. law enforcement and national security efforts by diminishing the value of BSA data.” They further pointed out that the appellate court “erred in conflating delegated compliance examination efforts with the exercise of enforcement authority and let stand SEC and lower court decisions applying materially different legal standards with a lower level of judicial oversight and review than that established by Congress.” The former officials stressed that the appellate court’s decision fails “to appreciate the nature of the AML regime and therefore FinCEN’s unique expertise and central role,” adding that the decision “threatens to undermine the BSA statutory regime and harm U.S. efforts to fight money laundering and terrorist financing” and may affect other regulators and regulated entities.

    Courts U.S. Supreme Court Appellate Second Circuit SEC Financial Crimes Bank Secrecy Act SARs FinCEN Securities Exchange Act Of Interest to Non-US Persons

  • SEC settles with company over data breach


    On August 16, the SEC announced charges against a London-based educational publishing company for its role in allegedly misleading investors regarding a cyber breach that involved millions of student records and had inadequate disclosure controls and procedures in place. According to the SEC’s order, the company made material misstatements and omissions about a 2018 cyber intrusion that affected millions of rows of data across 13,000 school, district, and university customer accounts in the U.S. According to a 2019 report furnished to the Commission, the company’s risk factor disclosure implied that the company faced the hypothetical risk that a “data privacy incident” “could result in a major data privacy or confidentiality breach” but did not disclose that a data breach involving the company had previously taken place. In response to an inquiry by a media outlet, the company sent a breach notification to its affected customers and issued a previously prepared statement that included misstatements regarding the breach and data involved. The order found that the company failed “to maintain disclosure controls and procedures designed to analyze or assess such incidents for potential disclosure in the company’s filings.” The SEC charged the company with violating, among other things, Rule 13a-15(a) of the Securities Act, which requires every issuer to maintain disclosure controls and procedures, and Section 13(a) of the Exchange Act which requires “every foreign issuer of a security registered pursuant to Section 12 of the Exchange Act to furnish the Commission with periodic reports containing information that is accurate and not misleading.” The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of $1 million and provides that the company must cease and desist from committing or causing any future violations of the Securities Act and the Exchange Act.

    Securities Enforcement SEC Investigations Privacy/Cyber Risk & Data Security Data Breach Securities Act Securities Exchange Act

  • SEC takes emergency action against investor fraud scheme


    On August 13, the SEC announced it obtained a temporary restraining order through an emergency action filed against an individual and his two entities, which allegedly induced dozens of consumers to invest by falsely claiming that their funds would be used to acquire real estate and to make commercial loans. According to the SEC, the individual misappropriated the vast majority of the investors' funds to pay for his residences, cover credit cards bills, and make student loan payments. The complaint also alleges that the individual hid the fraud from investors by providing investors with false valuations, among other things. The SEC’s complaint alleges violations of the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and seeks a permanent injunction against the defendants enjoining them from future violations, disgorgement of all ill-gotten gains, and civil penalties, among other things.

    Securities SEC Enforcement Investigations Securities Act Securities Exchange Act Investment Advisers Act

  • SEC says digital asset trading company violated the Exchange Act


    On August 9, the SEC announced charges against a digital asset trading company for operating an unregistered online digital asset exchange in connection with its operation of a trading platform that facilitated buying and selling of digital asset securities. According to the SEC’s order, the company operated a web-based trading platform that facilitated buying and selling digital assets, which included digital assets that were investment contracts and therefore securities. The order finds that, “[n]otwithstanding its operation of the [Company] Trading Platform, [the company] did not register as a national securities exchange nor did it operate pursuant to an exemption from registration at any time, and its failure to do so was a violation of Section 5 of the Exchange Act,” despite operating as a Rule 3b-16(a) system under the Exchange Act. The order, which the company consented to without admitting or denying the findings, imposes a disgorgement fee of $8,484,313, a prejudgment interest fee of $403,995, and a civil penalty of $1.5 million, for a total of $10,388,309. The order also provides that the company must cease and desist from committing or causing any future violations of the Exchange Act and establishes a fair fund for the benefit of victims.

    Securities Federal Issues SEC Enforcement Courts Cease and Desist Securities Exchange Act Digital Assets


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