InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
SEC issues two separate whistleblower awards totaling over $2.65 million
On September 21, the SEC announced a $2.4 million award to a whistleblower in connection with a successful agency enforcement action. The SEC’s press release states that the whistleblower’s “timely submission of information” led to the initiation of an investigation and enforcement action that stopped the ongoing misconduct. The redacted order determining the whistleblower award claim states that the whistleblower’s information helped SEC staff “identify key witnesses and parties and draft targeted subpoenas, which saved the staff time and resources in conducting the investigation.”
Earlier on September 17, the SEC announced a nearly $250,000 joint whistleblower award in connection with a successful agency enforcement action. According to the SEC’s press release, the whistleblowers raised their concerns internally before reporting the potential securities violations to the SEC. According to the redacted order, the claimants’ concerns prompted enforcement staff to open an investigation. The order notes, however, that while the claimants’ information identified certain parties and transactions that were ultimately subjects of the covered action, “many of their allegations did not directly relate to the Commission’s charges” in covered action, which played a role in the SEC’s determination of the appropriate award percentage.
The SEC has now paid a total of $523 million to 97 individuals since the inception of the program.
LIBOR-based loans will not be eligible for Ginnie Mae pooling
On September 21, Ginnie Mae issued All Participant Memorandum 20-12, which states that Ginnie Mae will stop accepting the delivery of single-family forward adjustable rate mortgage (ARM) loans, dated on or after January 1, 2021, with any interest term based on LIBOR, for securitization in any pool. Additionally, any adjustable rate reverse mortgages (HECMs) will be ineligible for securitization into any HMBS pool that relies on LIBOR if not securitized as of January 1, 2021, “without regard to their date of origination or the date in which the corresponding FHA case number was assigned.” Participations associated with HECM loans backing HMBS will continue to be eligible without restriction, so long as the issuance date is on or before December 1.
CFTC charges multi-level cryptocurrency marketing scheme
On September 11, the CFTC filed a complaint in the U.S. District Court for the Southern District of Texas against four individuals accused of operating a purported multi-level marketing scheme involving the solicitation of nearly $100,000 in customer funds that were to be used to speculate in cryptocurrency. The CFTC alleged that the defendants violated the Commodity Exchange Act by, among other things, creating the false illusion that their business employed “master traders” with years of cryptocurrency trading experience, that customers’ earnings would increase based on the amount of their deposits, and that customers who made referrals would receive bonuses. Additionally, the defendants posted misleading trade statements online that failed to “accurately reflect the Bitcoin trading purportedly undertaken by [the d]efendants and led certain customers to believe they were earning significant amounts of money from [the d]efendants’ trading of Bitcoin on their behalf.” The CFTC further claimed that when customers tried to unsuccessfully withdraw their funds, the defendants would first claim their website or smartphone app were experiencing technical problems, but then eventually stopped responding to the customer requests. The CFTC seeks to enjoin the defendants’ allegedly unlawful acts and practices, to compel compliance with the Commodity Exchange Act and CFTC regulations, and to further enjoin the defendants from engaging in any commodity interest-related activity. In addition, the CFTC seeks civil monetary penalties, restitution, trading and registration bans, and other statutory, injunctive, or equitable relief as the court may deem necessary and appropriate.
SEC issues $10 million whistleblower award
On September 14, the SEC announced a more than $10 million award to a whistleblower in connection with a successful agency enforcement action. According to the SEC’s press release, the whistleblower’s information and assistance “were of crucial importance” to the action. The redacted order on the whistleblower award claim states that (i) the whistleblower provided “extensive and ongoing assistance,” which included “identifying witnesses and helping staff understand complex fact patterns and issues”; (ii) the SEC used the information to “craft its initial document requests” and create its investigation plan; and (iii) the whistleblower “made persistent efforts to remedy the issues, while suffering hardships.”
SEC charges participants of two allegedly fraudulent ICOs
On September 11, the SEC announced charges against five Atlanta-based individuals for allegedly promoting unregistered and fraudulent initial coin offerings (ICOs) owned by one of the defendants, a film producer, who promised investors he would build a digital streaming platform and a digital-asset trading platform. Two companies controlled by the film producer that conducted the ICOs were also charged. According to the SEC’s complaint, the film producer, among other things, allegedly misappropriated the funds raised in the ICOs, transferred and sold certain tokens to generate an additional $2.2 million in profits, and engaged in manipulative trading to artificially inflate the price of other tokens. The SEC charged the film producer with violating the registration, antifraud, and anti-manipulation provisions of the federal securities laws. The other defendants were charged with various securities violations, including violating registration, antifraud, and anti-touting provisions for their roles in promoting, offering, selling, or conducting the ICOs. The complaint seeks injunctive relief, disgorgement, and civil monetary penalties, as well as an officer-and-director bar against the film producer and certain prohibitions against the other defendants.
The SEC’s press release noted that it had entered into proposed settlements subject to court approval with several of the defendants except for the film producer, which would require three of the defendants to each pay a $25,000 penalty and subject them to “conduct-based injunctions prohibiting them from participating in the issuance, purchase, offer, or sale of any digital asset security for a period of five years.” An order reached with another defendant—who neither admitted nor denied the findings—imposes a $75,000 civil monetary penalty and bans the defendant from participating in the offering or sale of digital-asset securities for at least five years.
SEC issues two separate whistleblower awards totaling over $3.75 million
On September 1, the SEC announced a joint award of $2.5 million to two whistleblowers for providing a tip “based largely on highly probative independent analysis of a public company’s filings,” which led to “several successful enforcement actions.” According to the redacted order, (i) the tip was the “underlying source that formed the basis” for the enforcement action; and (ii) the whistleblowers provided “substantial, ongoing assistance,” helping to focus the investigation and conserve the SEC’s time and resources.
Additionally, on August 31, the SEC announced a $1.25 million award to a whistleblower in connection with a successful enforcement action. According to the SEC’s press release, the whistleblower provided “significant information,” which “prompted the agency to initiate a cause examination and bring an enforcement action” resulting in “millions of dollars” being returned to harmed investors. The redacted order states that (i) the whistleblower “expeditiously alerted” the SEC to the potential wrongdoing; and (ii) there was “high law enforcement interests” in the information provided.
These press releases also noted that as of September 1, the SEC has awarded 92 individuals a total of approximately $510 million in whistleblower awards since its first award in 2012.
Texas State Securities Board halts cryptocurrency debit card investment scheme
On August 14, the Texas State Securities Board issued a cease and desist order against three South African companies and an officer of the companies (collectively, “defendants”) accused of violating the state’s securities act by engaging in an international cryptocurrency debit card scheme. The defendants allegedly solicited Texas residents to make investments that promised guaranteed gains based on the number of cardholders that eventually signed up for the cryptocurrency debit card. The cryptocurrency debit card was promoted as a prepaid Mastercard that would allow cardholders to use various types of stablecoins to avoid certain taxable events. However, the defendants allegedly intentionally failed to disclose the risks associated with the use of stablecoins (e.g. stablecoin transactions are not reversible and “a party sending stablecoins to an address accepts the risk that the party may lose access to, or any claim on, the stablecoins”), nor did they disclose that legislation and regulations may negatively impact the taxation of cryptocurrencies. Additionally, the order states that the defendants concealed business information about their relationships, contracts, compensation, and the use of the funds, and that because they are not registered as dealers or agents with the Texas State Securities Board, they cannot sell their investment products in Texas.
Arkansas Securities Department extends work-from-home guidance
On August 18, the Arkansas Securities Department further extended interim regulatory guidance previously issued to licensed mortgage companies, mortgage loan officers, and branch managers. The original interim regulatory guidance, previously covered here, and extended in May, permits mortgage loan officers to conduct activities requiring a license from home, provided certain data security provisions are met. This guidance is extended through the duration of the emergency declared by the governor of Arkansas.
Broker dealer assessed $38 million in penalties for AML violations
On August 10, the Financial Industry Regulatory Authority (FINRA), SEC, and the CFTC announced separate settlements with a broker-dealer following investigations into its anti-money laundering (AML) programs. The broker-dealer did not admit or deny any of the charges, and the agencies all considered remedial actions undertaken by the broker-dealer. FINRA fined the broker-dealer $15 million for allegedly failing to establish and implement AML processes reasonably designed to detect and report suspicious transactions as required by the Bank Secrecy Act, including foreign currency wire transfers to and from countries known to be at high risk for money laundering. Additionally, the broker-dealer “lacked sufficient personnel and a reasonably designed case management system.” The broker-dealer consented to the terms of the Letter of Acceptance, Waiver and Consent and agreed to retain a third-party consultant to take steps to remediate its AML program.
In a separate investigation conducted by the SEC, the broker-dealer reached a settlement to resolve allegations that it repeatedly failed to file suspicious activity reports (SARs) as required by the Exchange Act for U.S. microcap securities trades executed on behalf of its customers. According to the SEC, because the broker-dealer’s “AML policies and procedures were not reasonably tailored to the risks of [its] U.S. microcap securities business,” over a one-year period, it failed to (i) recognize red flags; (ii) properly investigate suspicious activity; and (iii) file more than 150 SARs in a timely fashion even after compliance personnel flagged the suspicious transactions. Under the terms of the order, the broker-dealer has agreed to be censured, will cease and desist from committing future violations, and will pay an $11.5 million civil penalty.
The CFTC also announced a settlement to resolve allegations that the broker-dealer failed to (i) diligently supervise the handling of several commodity trading accounts; (ii) sufficiently oversee its employees’ handling of these accounts, leading to its “failure to maintain an adequate [AML] program and to conduct appropriate customer monitoring”; and (iii) identify or conduct adequate investigations necessary to detect and report suspicious transactions. Under the order, the broker-dealer is required to pay an $11.5 million civil penalty and disgorge $706,214 it earned as the futures commission merchant for certain accounts that were the subject of a 2018 CFTC enforcement action.
SEC urges firms impacted by Covid-19 to review supervisory and compliance policies
On August 12, the SEC’s Office of Compliance Inspections and Examinations issued a risk alert to broker-dealers and investment advisers (firms) impacted by the Covid-19 pandemic addressing observations and recommendations related to several categories, including investor asset protection; personnel supervision; practices related to fees, expenses, and financial transactions; investment fraud; business continuity; and protecting sensitive information. The alert recommends firms review—and where appropriate—modify supervisory and compliance policies and procedures as they deal with market volatility and technological challenges brought by the Covid-19 pandemic. The alert notes that firms may need to update their practices to address, among other things, (i) unusual or unscheduled investor withdrawals; (ii) staffers communicating or executing transactions off-site or on personal devices, or making securities recommendations tied to market sectors experiencing high volatility or fraud; and (iii) supervisors having less oversight and interaction with staff in remote environments, leading to difficulties in maintaining effective due diligence, conducting background checks when hiring, or overseeing requisite examinations. Additionally, firms are instructed to monitor potential conflicts of interest and fee errors when informing investors about the costs of services, investment products, and related compensation, while also ensuring recommendations are made in the “best interest of investors.” The alert also recognizes that “times of crisis or uncertainty can create a heightened risk of investment fraud through fraudulent offerings,” and advises firms to “be cognizant of these risks when conducting due diligence on investments and in determining that the investments are in the best interest of investors.” Firms and investors who suspect fraud are advised to contact the SEC and report the potential fraud.