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  • SEC announces first settlement with a digital currency exchange

    Securities

    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.

    Securities Cryptocurrency Virtual Currency SEC Settlement Fintech

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  • Financial services firm settles SEC allegations of mishandled American Depositary Receipts

    Securities

    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.

    Securities Settlement FTC American Depositary Receipts

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  • Japanese bank's U.S. branch and affiliates settle RMBS misconduct claims for $480 million

    Securities

    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.

    Securities DOJ Settlement RMBS FIRREA

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  • International bank settles with DOJ for $765 million regarding alleged RMBS misconduct

    Securities

    On October 9, the U.S. Attorney for the District of Colorado announced that an international bank would settle claims related to the bank’s packaging, securitizing, issuing, marketing and sale of residential mortgage-backed securities (RMBS) in the lead-up to the 2008 financial crisis. In particular, the U.S. alleged that (i) the bank’s due diligence loan review procedures disclosed to investors were not, in certain instances, followed; (ii) bank managers overruled due diligence vendors’ warnings regarding the quality of certain loans included in securitizations; and (iii) the bank misrepresented the quality of the RMBS to investors. The bank disputes the allegations and does not admit to any liability or wrongdoing, but agreed to pay a $765 million civil money penalty pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act to resolve the matter.

    Securities DOJ Settlement RMBS FIRREA

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  • SEC awards nearly $4 million to whistleblower living overseas

    Securities

    On September 24, the SEC announced a whistleblower award of almost $4 million to an individual residing in a foreign country. The SEC determined the individual voluntarily provided critical information and continued assistance, which helped the agency bring a successful enforcement action. The SEC now has awarded over $326 million to 59 individuals since 2012.

    Securities SEC Whistleblower

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  • SEC announces second-largest whistleblower award; waives “voluntary” requirement for one claimant

    Securities

    On September 6, the SEC announced a whistleblower award totaling more than $54 million— $39 million to one (the second-largest award given under the SEC’s whistleblower program) and $15 million to another—for critical information and continued assistance, which helped the agency bring an enforcement action. The redacted order highlights the denial of related-action claims by both claimants and notes an exception made to the “voluntary submission” requirement for claimant two.

    According to the order, the SEC denied claimant one’s request for an additional award based on another agency’s related action, because the claimant failed to demonstrate the causal relationship required to establish that the “submission significantly contributed to the success of the [related action].” Specifically, the SEC noted that the claimant’s information was never directly transmitted to the other agency, which relied on the SEC’s order to pursue its action. The SEC rejected the claimant’s argument that providing information directly to another agency would be “at war with Congress’ clear instruction that the identity of a whistleblower must be protected” due to the fact that the other agency may not offer the same anonymity as possible under the SEC’s whistleblower program. The SEC notes that while a whistleblower may choose not to provide the information to another agency themselves, the rules allow for the SEC to transmit the information directly, while requiring the other agency to maintain confidentiality, which was not done in this case.

    The SEC also denied claimant two’s related action request, concluding that the claimant should seek an award through the alternative program available from the other agency. The SEC noted that if the claimant were to receive a related-action award there would be the potential that the cumulative award would exceed the 30-percent ceiling established by Congress and would produce an “irrational result” encouraging “multiple ‘bites at the apple’” as it would allow whistleblowers to have multiple opportunities to adjudicate and obtain separate rewards on the same enforcement actions.

    Notably, for claimant two, the redacted order demonstrates that the SEC made an exception to the “voluntary” submission requirements under the rules. Specifically, Rule 21F-4(a)—in order to create an incentive for whistleblowers to proactively provide information about possible violations—requires that a whistleblower “must come forward before the government or regulatory authorities designated in the rule seek information from the whistleblower.” In this instance, it was undisputed that claimant two provided the SEC information after an investigative review by another agency; however, the SEC exercised discretionary authority to grant a limited waiver of Rule 21F-4(a) and permit an award to claimant two. The SEC determined that a limited waiver was appropriate because, although claimant 2 previously “appeared before [the other agency] for an investigative interview” regarding the same violations, at the time of that appearance the claimant  was unaware of the information that would ultimately be deemed by the SEC to be the “critical basis” for the whistleblower claim. The SEC concluded that once claimant two became aware of the critical information, they promptly reported it to both agencies, despite no legal obligation to do so and having no other “self-interested motive to come forward,” achieving a primary policy goal of the program to encourage prompt reporting of information about possible securities law violations.

    Securities Whistleblower Dodd-Frank

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  • SEC awards whistleblower $1.5 million after reducing amount for reporting delay

    Securities

    On September 14, the Securities and Exchange Commission (Commission) announced a whistleblower award likely to yield the whistleblower more than $1.5 million for volunteering information that led to a successful enforcement action. In its order, the Commission notes that it “severely reduced the award here after considering the award criteria identified in Rule 21F-6 of the Exchange Act.” Specifically, the Commission alleges the whistleblower was culpable and “unreasonably delayed” reporting the information for over a year after the occurrence of the underlying facts, only doing so after learning a Commission investigation was ongoing and receiving a “significant and direct financial benefit.”

    The SEC’s whistleblower program has awarded approximately $322 million to 58 individuals since issuing its first award in 2012.

    Securities SEC Whistleblower Enforcement

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  • District court rules U.S. securities law may cover initial coin offering in criminal case

    Securities

    On September 11, the U.S. District Court for the Eastern District of New York issued a ruling that the U.S. government can proceed with a case for purposes of federal criminal law against a New York-based businessman who allegedly made “materially false and fraudulent representations and omissions” connected to virtual currencies/digital tokens backed by investments in real estate and diamonds sold through associated initial coin offerings (ICOs). The defendant—who was charged with conspiracy and two counts of securities fraud for his role in allegedly defrauding investors in two ICOs—claimed that the ICOs at issue were not securities but rather currencies, and that U.S. securities law was unconstitutionally vague as applied to ICOs. However, the U.S. government asserted that the investments made in the tokens were “investment contracts” and thereby “securities” as defined by the Securities Exchange Act. The U.S. government further argued that the jury should apply the central test used by the U.S. Supreme Court in SEC v. W.J. Howey Co. to determine if a financial instrument “constitutes an ‘investment contract’ under the federal securities laws.” The judge commented that “simply labeling an investment opportunity as ‘virtual currency’ or ‘cryptocurrency’ does not transform an investment contract—a security—into a currency.” Moreover, while the judge cautioned that it was too early to determine whether the virtual currencies sold in the ICOs were covered by U.S. securities law, he concluded that a “reasonable jury” may find that the allegations in the indictment support such a finding.

    Securities Courts Initial Coin Offerings Virtual Currency Fraud Securities Exchange Act Fintech

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  • CFTC wins $1.1 million judgment in cryptocurrency fraud action

    Securities

    On August 23, the U.S. District Court for the Eastern District of New York entered final judgment in favor of the Commodity Futures Trading Commission (CFTC) in its suit against a cryptocurrency trading advice company and its owner (defendants) for allegedly misappropriating investor money through a cryptocurrency trading scam. As previously covered by InfoBytes in March, the court granted the CFTC’s request for a preliminary injunction, holding that the CFTC has the authority to regulate virtual currency as a “commodity” within the meaning of the Commodity Exchange Act and that the CFTC has jurisdiction to pursue fraudulent activities involving virtual currency even if the fraud does not directly involve the sale of futures or derivative contracts. The final judgment orders the defendants to pay over $1.1 million in restitution and civil money penalties and permanently enjoins them from engaging in future activities related to commodity interests and virtual currencies.

    Securities CFTC Virtual Currency Cryptocurrency Fraud

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  • International bank agrees to pay $4.9 billion in civil penalties to settle allegations of RMBS misconduct

    Securities

    On August 14, the DOJ announced a settlement with an international bank to resolve federal civil claims of misconduct in the bank’s underwriting and issuing of residential mortgage-backed securities (RMBS) to investors in the lead-up to the 2008 financial crisis. According to the press release, the bank allegedly violated the Financial Institutions Reform, Recovery, and Enforcement Act by, among other things, failing to accurately disclose the risk of the RMBS investments when selling the securities. Under the terms of the settlement, the bank has agreed to pay a civil penalty of $4.9 billion. The bank disputes the allegations and does not admit to any liability or wrongdoing.

    Securities DOJ Settlement RMBS Mortgages International FIRREA

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