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SEC, ECB sign MOU concerning security-based swap entity oversight
On August 16, the SEC and the European Central Bank (ECB) entered into a Memorandum of Understanding (MOU) intended to facilitate the consultation, cooperation, and exchange of information connected with the supervision, enforcement, oversight, and inspection of certain security-based swap dealers and major security-based swap entities in EU member states registered with the SEC and supervised by the ECB. These include SEC-registered security-based swap entities participating in the Single Supervisory Mechanism (SSM), the EU’s system of banking supervision, which “is composed of the ECB and the relevant national competent authorities of participating EU Member States.” Among other things, the MOU will “support the SEC’s oversight of the operation of substituted compliance orders that the Commission has issued for security-based swap entities in France and Germany, as well as any future substituted compliance orders for such firms in other EU Member States that participate in the SSM,” to enable an entity to comply with certain Dodd-Frank Act requirements by complying with comparable EU and EU Member State laws. The MOU, which is intended to “foster cooperation” and exchange information between the authorities, states that at the date of execution, “no bank secrecy, blocking laws, or other regulations or legal barriers, should prevent an Authority from providing assistance to the other Authority pursuant to this MOU, or otherwise adversely affect or hinder the operation of this MOU.”
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.
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.
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.
CFTC settles AML violations with cryptocurrency derivatives platform
On August 10, the CFTC announced that the U.S. District Court for the Southern District of New York entered a consent order against several companies (defendants) charged with operating an unregistered cryptocurrency derivatives trading platform. As previously covered by InfoBytes, in October 2020, the CFTC announced that it filed a complaint against five entities and three individuals for allegedly owning and operating an unregistered cryptocurrency derivatives platform and failing to implement required anti-money laundering procedures. The complaint alleged that the platform “illegally offer[ed] leveraged retail commodity transactions, futures, options, and swaps” on cryptocurrencies without implementing key safeguards required by the Commodity Exchange Act and several CFTC regulation compliance measures, such as know-your-customer procedures or actions designed to detect and prevent illicit activities. The CFTC also claimed that the exchange operated as an unregistered futures commission merchant and did not have CFTC approval to operate as a designated contract market or swap execution facility. In addition, the defendants are permanently “restrained, enjoined, and prohibited from directly or indirectly offering to enter into retail commodity transactions,” among other things. The order notes that the defendants engaged in remedial measures, such as developing an AML and user verification program. The companies were ordered to pay a $100 million civil monetary penalty, but up to $50 million of the penalty may be offset by payments made by, or amounts credited to, the defendants pursuant to the Assessment of Civil Money Penalty entered by the Financial Crimes Enforcement Network.
SEC settles with company selling securities through DeFi platform
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.
SEC awards $9.5 million to whistleblowers
On August 10, the SEC announced awards totaling nearly $6 million to two whistleblowers whose information and assistance led to separate successful SEC enforcement actions. According to the first redacted order, the SEC awarded a whistleblower nearly $3.5 million for voluntarily providing original information to the Commission, which expanded an existing investigation into a new geographic area and led to a successful enforcement action. The whistleblower also traveled to meet in person with staff, identified an important witness, and provided multiple supplemental submissions that assisted the SEC with the charges in the underlying enforcement action. In the second redacted order, the SEC awarded a whistleblower approximately $2.4 million for alerting the SEC to previously unknown conduct, which initiated the opening of the investigation. The whistleblower also met in person with SEC staff, provided documents, and identified potential witnesses.
Earlier on August 6, the SEC announced awards totaling more than $3.5 million to three whistleblowers whose information and assistance led to two SEC enforcement actions. According to the first redacted order, the SEC awarded a whistleblower nearly $2 million for voluntarily providing original information to the Commission, which led to a successful enforcement action. The whistleblower also provided ongoing assistance, participated in interviews, and provided information that saved staff time and resources. In the second redacted order, the SEC awarded a whistleblower approximately $1 million and a second whistleblower approximately $500,000. The SEC noted that though both whistleblowers provided valuable information, the whistleblower who received the larger award provided information and cooperation that was more impactful in the enforcement action.
The SEC has awarded approximately $956 million to 195 individuals since issuing its first award in 2012.
SEC: Offshore issuers must disclose relationships to China-based operating companies
On July 30, SEC Chair Gary Gensler issued a statement instructing staff to seek certain disclosures from China-based operating companies and offshore issuers associated with such companies before their registration statements can be declared effective. Gensler explained that the Chinese government recently provided “new guidance to and placed restrictions on China-based companies raising capital offshore, including through associated offshore shell companies.” This is relevant to U.S. investors, Gensler stated, because a number of Chinese sectors restrict companies from having foreign ownership and prohibit them from listing on exchanges outside of China.
In order to bypass these restrictions, many China-based operating companies are structured as Variable Interest Entities (VIEs), where they establish an offshore shell company in another jurisdiction, such as the Cayman Islands, to issue stock to public shareholders, Gensler said. He expressed concerns that the average U.S. investor “may not realize that they hold stock in a shell company rather than a China-based operating company,” where the investors’ “exposure” to the Chinese company is derived only through a series of contracts between the shell and the operating company, with neither the investor nor the shell company holding any equity in the Chinese company itself.
In light of the overall risks associated with the China-based VIE structure, Gensler asked staff to ensure that offshore issuers associated with China-based operating companies prominently and clearly disclose (i) that investors are buying shares of a shell company issuer; (ii) that “investors face uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance and the enforceability of the contractual arrangements”; and (iii) the financial relationship between the VIE and the issuer. In addition, for all China-based operating companies seeking to register securities with the SEC (either directly or through a shell company), Gensler asked staff to ensure these companies disclose, among other things, whether the company and the issuer received permission from Chinese authorities to be listed on U.S. exchanges, as well as the risk that an approval could be denied or rescinded. Gensler further noted that China-based operating companies may be delisted in the future if the Public Company Accounting Oversight Board is unable to inspect an issuer’s public accounting firm within three years, as required by the Holding Foreign Companies Accountable Act.
SEC considers revision of two amendments
On August 2, the SEC announced it will review two recent amendments to its whistleblower rules adopted in September 2020 in response to concerns that they would discourage whistleblowers from coming forward. According to SEC Chair Gary Gensler, “one amendment would preclude the Commission in some instances from making an award in related enforcement actions brought by other law-enforcement and regulatory authorities if a second, alternative whistleblower award program might also apply to the action.” The second amendment, on the other hand, may be utilized by a future Commission to decrease an award due to the size of the award in absolute terms. As previously covered by InfoBytes, these amendments were designed to “provide greater transparency, efficiency and clarity, and to strengthen and bolster the program.”
SEC issues whistleblower awards totaling nearly $4 million
On August 2, the SEC announced whistleblower awards to four individuals totaling nearly $4 million for information provided in two separate enforcement actions. According to the first redacted order, the SEC awarded a whistleblower nearly $2 million for voluntarily providing original information to the Commission, which initiated an investigation. The whistleblower also provided ongoing assistance, participated in interviews, and identified key witnesses, which led to a successful enforcement action. In the same enforcement action, the SEC awarded over $150,000 to another whistleblower, whose information helped SEC staff expand its investigation. In the second redacted order, the SEC awarded approximately $1.1 million to an individual for reporting misconduct internally and notifying the SEC of the violations, in addition to more than $500,000 to another whistleblower for providing important, but not sufficiently timely, information.
The SEC has awarded approximately $946 million to 190 individuals since issuing its first award in 2012.