Skip to main content
Menu Icon

InfoBytes Blog

Financial Services Law Insights and Observations


Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • Judgments reached in SEC’s first crowdfunding regulation enforcement action


    On January 28, the U.S. District Court for the Eastern District of Michigan issued judgments (see here and here) against a real estate company and its CEO in the SEC’s first crowdfunding regulation enforcement action. As previously covered by InfoBytes, the SEC filed a complaint last September alleging that several entities and related individuals participated in a fraudulent scheme to sell nearly $2 million of unregistered securities through two crowdfunding offerings. The complaint alleged that 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. Without admitting or denying the SEC’s allegations, the real estate company and the CEO consented to be permanently enjoined from violating certain securities laws. The CEO also agreed to a prohibition on “acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)].” The judgments decreed that, upon motion of the SEC, the court will decide whether disgorgement and/or civil money penalties are appropriate.

    Securities Enforcement SEC Crowdfunding Courts Securities Act Securities Exchange Act

  • SEC: Taking remedial actions may help companies avoid penalties


    On January 28, the SEC announced a settlement subject to court approval with a private technology company to resolve allegations that the company, through its former CEO, falsely inflated key financial metrics and doctored internal sales records. The complaint, which alleged violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, claimed that the CEO significantly inflated the value of numerous customer deals, and then masked the inflation by creating fake invoices and altering real invoices to make it seem as if customers had been billed higher amounts. The company’s board of directors conducted an internal investigation, which led to the removal of the CEO, a revised company valuation, and remedial efforts including repaying investors. The company also hired new senior management, expanded its board, and implemented processes and procedures to ensure transparency and accuracy of deal reporting and associated revenues. While the company neither admitted nor denied the allegations, it agreed to be permanently enjoined from violations of the antifraud provisions. The SEC highlighted that the lack of a penalty in the settlement is significant, and demonstrates the Commission’s position that a company may receive credit if it makes significant remedial efforts in the wake of an internal investigation. “For companies wondering what types of remedial actions and cooperation might be credited by the Commission after a company uncovers fraud, this case offers an excellent example,” stated Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “[The company’s] remediation and cooperation included not just its internal investigation and revised valuation, but also repaying harmed investors and improving its governance—all of which were factors that counseled against the imposition of a penalty in this case.” 

    Securities Enforcement SEC Settlement Fraud Securities Act Securities Exchange Act

  • FINRA fines securities firm $9 million over customer protection violations


    On January 20, the Financial Industry Regulatory Authority (FINRA) announced it had entered into a Letter of Acceptance, Waiver, and Consent (AWC), which requires a securities firm to pay a $9 million fine for allegedly failing to (i) maintain proper control of excess margin securities it carried on behalf of customers; (ii) store electronic brokerage records in the required non-erasable, “write once, read many” format (known as “WORM”); (iii) disclose potential conflicts of interest when publishing research reports; and (iv) implement and enforce a supervisory system to ensure compliance with federal securities law and FINRA rules. FINRA claimed that among the alleged violations, the firm failed to preserve approximately 18.6 billion records in the required WORM format, which affected applications, “including those related to accounts payable and receivable, fingerprint records, customer account records, general ledger/trial balances, order and trade tickets, trade confirmations, and wire instructions.” According to FINRA, although the firm understood the requirement to store records in WORM format, it allegedly had no supervisory procedures in place to ensure compliance. The firm did not admit nor deny the findings as part of the AWC but has agreed to a censure and will pay the fine. Additionally, the firm is required to certify that it has implemented reasonably designed supervisory systems and procedures to comply with federal securities laws and FINRA rules and requirements.

    Securities FINRA Enforcement Privacy/Cyber Risk & Data Security Securities Exchange Act

  • SEC, CFTC settle with national bank’s subsidiary


    On December 17, the SEC announced charges against a subsidiary limited liability company of a national bank for Securities Exchange Act violations because the firm and its employees allegedly failed to maintain recordkeeping requirements. According to the order, from at least January 2018 through at least November 2020, the company’s employees communicated about securities business matters on their personal devices, using text messaging applications and personal email accounts. These communications were not maintained or preserved by the company, and some were not able to be furnished promptly to a Commission representative when requested, allegedly in violation of Section 17(a) of the Exchange Act and Rules 17a4(b)(4) and 17a-4(j) thereunder. Additionally, the company’s “widespread failure to implement its policies and procedures which forbid such communications led to its failure to reasonably supervise its employees within the meaning of Section 15(b)(4)(E) of the Exchange Act.” The company received subpoenas for documents and records requests in numerous Commission investigations during the time that it failed to maintain required securities records relating to the business. In its response to the subpoena requests, the bank allegedly did not search for relevant records contained on the personal devices of its employees. The order further noted that because the company’s “recordkeeping failures impacted the Commission’s ability to carry out its regulatory functions and investigate potential violations of the federal securities laws across these investigations, the Commission was often deprived of timely access to evidence and potential sources of information for extended periods of time and, in some instances, permanently.” According to the SEC, the company admitted the facts set forth in the SEC’s order and acknowledged that its conduct violated the federal securities laws, and agreed to: (i) pay a $125 million penalty; (ii) implement robust improvements to its compliance policies and procedures, including retaining “a compliance consultant to, among other things, conduct a comprehensive review of its policies and procedures relating to the retention of electronic communications found on personal devices and [the company’s] framework for addressing non-compliance by its employees with those policies and procedures”; and (iii) cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Exchange Act and Rule 17a-4 thereunder.

    The same day, the CFTC announced a $75 million settlement with the company, the national bank, and its public limited company (collectively, “respondents”) for allegedly failing to maintain, preserve, and produce records that were required to be kept under CFTC recordkeeping requirements, and failing to diligently supervise matters associated with its businesses as CFTC registrants. According to the CFTC order, from at least 2015, the respondents’ employees internally and externally communicated on unapproved channels, and had messages related to the respondents’ businesses as CFTC registrants that were required to be maintained under CFTC-mandated recordkeeping requirements. The order also noted that the written communications were not maintained and preserved by the respondents, and they were not able to be furnished promptly to a CFTC representative when requested. The order further alleged that the widespread use of unauthorized communication methods by the respondents’ employees to conduct firm business violated their own policies and procedures. The respondents also did not maintain adequate internal controls with respect to business-related communications on non-approved communication methods. The order requires the respondents to pay a $75 million civil monetary penalty, to cease and desist from further violations of recordkeeping and supervision requirements, and to engage in specified remedial undertakings.

    Securities SEC Enforcement CFTC Securities Exchange Act

  • District Court partially grants SEC’s motion in confidentiality agreements case


    On November 17, the U.S. District Court for the Southern District of New York partially granted the SEC’s (plaintiff) motion for summary judgment in a case questioning the extent to which confidentiality agreements can prevent communication with the SEC regarding potential violations of securities laws. The court found that the Commission did not exceed its authority on a count of impeding SEC rules that is connected to a broader civil suit accusing an online store and its CEO (collectively, “defendants”) of stealing nearly $6 million from investors. The plaintiff alleged that the defendants impeded “individuals’ communication with the SEC regarding potential securities laws violations by enforcing or threatening to enforce confidentiality agreements that would prevent individuals’ communications thereof,” in violation of Rule 21F-17 of the Exchange Act. According to the order, in its stock purchase agreements, the defendants allegedly required investors to reject communication with “governmental or administrative agencies or enforcement bodies for the purpose of commencing or otherwise prompting investigation or other action.” The defendants allegedly used lawsuits to prevent communications that would violate its confidentiality agreements, and advertised these suits “to chill further communication,” which the court ruled were “undoubtedly ‘action[s] to impede’ communications, especially where the Rule explicitly prohibits ‘enforcing, or threatening to enforce’ such agreements.” The district court also denied the defendants' cross-motion for summary judgment stating that “the Court is still not persuaded that Rule 21F-17 exceeds the SEC’s rulemaking nor that it violates the First Amendment,” and concluded that the defendants’ conduct violated Rule 21F-17.

    Securities SEC Courts Securities Exchange Act

  • 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


Upcoming Events