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Bank settles SEC allegations of mishandled American Depositary Receipts
On December 26, the SEC announced a settlement with a national bank to resolve allegations that the bank mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. The SEC alleged that the bank improperly provided thousands of pre-released ADRs where neither the broker nor its customers possessed the required shares. According to the SEC’s order, the bank’s alleged practice of allowing pre-released ADRs, that were in many instances not backed by ordinary shares, violated the Securities Act of 1933. The bank has neither admitted nor denied the SEC’s allegations, but has agreed to pay more than $71 million in disgorgement, roughly $14.4 million in prejudgment interest, and an approximate $49.7 million penalty. The SEC’s order further acknowledges the bank’s cooperation in the investigation and implementation of remedial measures.
District Court approves $480 million settlement between national bank and investors over incentive compensation sales program
On December 18, the U.S. District Court for the Northern District of California granted final approval following a fairness hearing to a $480 million settlement with a national bank to resolve a consolidated class action related to the bank’s previous incentive compensation sales program. As previously covered by InfoBytes, an agreement in principle was announced last May. The court’s order resolves class action allegations stemming from the September 2016 consent order between the bank and the CFPB, which resolved allegations related to the opening of deposit and credit card accounts for consumers without consent. (See previously InfoBytes coverage here.)
Global investment bank settles SEC allegations of mishandled American Depositary Receipts
On December 17, the SEC announced a settlement with a global investment bank to resolve allegations that the bank mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. The SEC alleged that the bank improperly provided thousands of pre-released ADRs where neither the broker nor its customers beneficially owned the required shares. According to the SEC’s order, the bank’s alleged practice of allowing pre-released ADRs that were in many instances not backed by ordinary shares violated the Securities Act of 1933. The bank has neither admitted nor denied the SEC’s allegations, but has agreed to pay more than $29.3 million in disgorgement, roughly $4.2 million in prejudgment interest, and a $20.5 million penalty. The SEC’s order further acknowledges the bank’s cooperation in the investigation and implementation of remedial measures.
District Court rejects dismissal bid, determining plaintiff sufficiently alleged ICO tokens were unregistered stock
On December 10, the U.S. District Court for the District of New Jersey denied a motion to dismiss a putative class action, finding the plaintiff sufficiently alleged that a company’s sale of unregistered cryptocurrency tokens were “investment contracts” under securities law. According to the opinion, the plaintiff filed the proposed class action against the company alleging it sold unregistered securities in violation of the Securities Act after purchasing $25,000 worth of tokens during the company’s initial coin offering (ICO). The company moved to dismiss the complaint, arguing that the tokens were not securities subject to the registration requirements of the Act. The court applied the three-prong “investment contract” test from SEC v. W.J. Howey Co.—“the three requirements for establishing an investment contract are: (1) an investment of money, (2) in a common enterprise, (3) with profits to come solely from the efforts of others”—and determined the token sales met the requirements. Focusing on the second and third prongs, because the company acknowledged the first was satisfied, the court concluded that the plaintiff sufficiently alleged the existence of a common enterprise by showing a “horizontal commonality” from the pooling of the contributions used to develop and maintain the company’s tasking platform. As for the third prong, the court determined the investors had an expectation of profit rather than simply a means to use the tasking platform, as demonstrated by the company’s marketing of the ICO as a “‘unique investment opportunity’ that would ‘generate better financial returns[.]’”
Two ICO issuers settle SEC charges for securities offering registration violations
On November 16, the SEC announced cryptocurrency-related settlements imposing civil money penalties against two companies that allegedly offered and sold digital tokens through initial coin offerings (ICO). The settlements are the SEC’s first cases imposing civil money penalties based solely on alleged ICO securities offering registration violations. According to the SEC, the two companies allegedly violated the Securities and Exchange Act of 1934 by offering and selling ICO tokens without (i) registering them pursuant to federal securities laws; or (ii) qualifying for an exemption to registration requirements. Under the terms of the settlement agreements (available here and here), the companies—who have neither admitted nor denied the findings—have each agreed to pay a $250,000 civil money penalty, and will also (i) return funds to impacted investors; (ii) register the digital tokens as securities; and (iii) file periodic reports with the SEC.
Colorado Division of Securities issues cease-and-desist orders against ICOs
On November 20, the Colorado Department of Regulatory Agencies Division of Securities (Division) released a statement announcing four new cease-and-desist orders taken against companies for allegedly selling unregistered securities through initial coin offerings (ICOs) to Colorado consumers. The orders come as a result of investigations conducted by the Division’s ICO Task Force, which was created to investigate potentially fraudulent activity. According to the announcement, the Colorado Securities Commissioner has now signed orders for 18 cases against ICOs, and currently has at least two additional pending orders.
SEC announces first settlement with a digital currency exchange
On November 8, the SEC announced its first enforcement action settlement with a digital currency platform for allegedly operating as an unregistered national securities exchange. According to the cease-and-desist order, the founder of the digital currency exchange, who has since sold the exchange to foreign buyers, allegedly violated federal securities laws by providing an online platform for secondary market trading of digital assets, including ERC20 tokens, without registering with the Commission or operating pursuant to a registration exemption. ERC20 tokens are digital assets issued and distributed on the Ethereum Blockchain using the ERC20 protocol, which, according to the SEC, is the standard coding protocol currently used by a significant majority of issuers in initial coin offerings. The order emphasizes that 92 percent of the trades on the exchange took place after the SEC released its Report of Investigation Pursuant To Section 21(a) Of The Securities Exchange Act of 1934: The DAO (the DAO Report) in July 2017, advising that non-exempt digital currency exchanges must register with the Commission. Without admitting or denying the findings, the founder agreed to pay $300,000 in disgorgement plus interest and a $75,000 penalty.
Financial services firm settles SEC allegations of mishandled American Depositary Receipts
On November 7, the SEC announced a settlement with a financial services firm to resolve allegations that the firm mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. The SEC alleged that the firm improperly provided thousands of ADRs where neither the broker nor its customers possessed the required shares. According to the SEC’s order, the firm’s alleged practice of allowing pre-released ADRs, that were in many instances not backed by ordinary shares, violated the Securities Act of 1933. The firm has neither admitted nor denied the SEC’s allegations, but has agreed to pay more than $25.1 million in disgorgement and prejudgment interest, along with a $13.5 million penalty. The SEC’s order further acknowledges the firm’s cooperation in the investigation.
Bank settles with New York for $65 million over incentive compensation sales program
On October 22, the New York Attorney General announced a $65 million settlement with a national bank to resolve allegations regarding its retail sales business model in violation of the Martin Act and New York common law. The Attorney General had alleged the bank failed to disclose to investors that the success of the bank’s incentive compensation program may encourage certain misconduct.
As previously covered by InfoBytes, in May, the bank announced it reached an agreement in principle to pay $480 million to investors to resolve a consolidated action related to the same issues.
Japanese bank's U.S. branch and affiliates settle RMBS misconduct claims for $480 million
On October 16, the U.S. Attorney for the Eastern District of New York announced that the U.S. branch of a Japanese bank and several of its affiliates would settle claims related to the bank’s marketing, sale, and issuance of residential mortgage-backed securities (RMBS) in the lead-up to the 2008 financial crisis. In particular, the U.S. Attorney alleged that the bank, among other things, (i) misrepresented the effectiveness of its due diligence loan review procedures and the quality of the RMBS to investors; (ii) overruled due diligence warnings and allowed the securitization of loans that failed to comply with underwriting guidelines without investors’ knowledge; and (iii) continued to work with originators that “had ‘systemic’ underwriting issues and employed ‘questionable’ origination practices.” The bank disputes the allegations and does not admit to any liability or wrongdoing, but agreed to pay a $480 million civil money penalty pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act to resolve the matter.