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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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  • Massachusetts Attorney General announces $26.8 million settlement with firm for securitization of subprime mortgages

    Securities

    On August 6, the Massachusetts Attorney General announced a settlement with a securities firm related to the allegedly unfair purchase and securitization of residential mortgage loans that were alleged to be presumptively unfair under Massachusetts law. The settlement is a part of the Attorney General’s ongoing review of subprime mortgage securitization practices in the state. The agreement requires the securities firm to pay $26.8 million, which includes a $5 million payment to the state to compensate governmental entities that allegedly suffered harm, “including cities and towns that incurred extra expenses due to foreclosures.” The remaining funds will be made available to eligible homeowners to assist with principal reductions and related loan payments, and to assist those whose homes were subject to foreclosure.

    Securities State Attorney General Settlement Securitization Mortgages

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  • CFTC announces multiple whistleblower awards totaling $45 million

    Securities

    On August 2, the Commodity Futures Trading Commission (CFTC) announced multiple whistleblower awards, totaling $45 million, to individuals who volunteered information that led to successful enforcement actions. Earlier in July, the CFTC also announced its largest award, of approximately $30 million, to one whistleblower (previously covered by InfoBytes here), and the first award made to a whistleblower living in a foreign country. Under the CFTC’s whistleblower program, eligible whistleblowers can receive between 10 and 30 percent of the monetary sanctions collected from the resulting enforcement action. The CFTC’s Enforcement Director anticipates that this trend of substantial awards will “continue as the Commission continues to receive increasing numbers of high-quality whistleblower tips.”

    The announcement also included three related orders (see here, here, and here).

    Securities CFTC Whistleblower Dodd-Frank

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  • Global investment bank subsidiaries to settle SEC allegations of mishandled American Depositary Receipts

    Securities

    On July 20, the SEC announced it had reached a settlement with two U.S.-based subsidiaries of a global investment bank to settle allegations that the subsidiaries mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. According to the SEC’s separately issued orders, the bank’s depository bank subsidiary and the broker-dealer subsidiary allowed pre-released ADRs to be “used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.” The SEC explained in its press release that ADRs can only be “pre-released” without the deposit of foreign shares, provided the brokers receiving the ADRs have an agreement with a depository bank and the broker or the broker's customer owns an amount of the underlying shares that corresponds to the number of shares the ADR represents. However, the SEC alleged that the depository bank subsidiary improperly provided thousands of ADRs where neither the broker nor its customers possessed the required shares, and that the broker-dealer subsidiary’s policies, procedures and supervision failed to prevent and detect violations tied to the borrowing and lending of pre-released ADRs. While the two subsidiaries neither admitted nor denied the SEC’s allegations, the depository bank has agreed to pay more than $51 million in disgorgement and prejudgment interest, along with a $22.2 million civil money penalty. The broker-dealer subsidiary has agreed to pay approximately $1.1 million in disgorgement and prejudgment interest and a nearly $500,000 civil money penalty.

    Securities SEC Settlement

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  • CFTC announces $30 million whistleblower award

    Securities

    On July 12, the Commodity Futures Trading Commission (CFTC) announced an approximately $30 million award to a whistleblower who volunteered information that led to an enforcement action. This is the fifth and largest award—previously the highest was around $10 million— given by the CFTC’s whistleblower program, created by the Dodd-Frank Act. Director of the CFTC’s Whistleblower Office, Christopher Ehrman, stated, “The award today is a demonstration of the program’s commitment to reward those who provide quality information to the CFTC.” Under the CFTC’s program, whistleblowers are eligible to receive between 10 and 30 percent of the monetary sanctions collected from the resulting enforcement action.

    The announcement does not provide details of the information provided or the related enforcement action.

    Securities Whistleblower Dodd-Frank CFTC

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  • NYDFS fines global banking firm $205 million for alleged FX violations

    Securities

    On June 20, the New York Department of Financial Services (NYDFS) announced a $205 million settlement with a global banking firm to resolve allegations that the bank engaged in unsafe and unsound practices in its foreign exchange (FX) trading business. According to the consent order, the bank did not implement and maintain sufficient controls to identify and prevent unsafe and unsound activities conducted by certain FX traders. Among other things, the order states that FX traders (i) used electronic chatrooms to coordinate trading activity with competitors to improperly affect FX prices; (ii) engaged in a practice known as “jamming the fix,” which entails accumulating a large trading position and subsequently making aggressive trades with the intention of moving the fix price in a desired direction; (iii) disclosed confidential customer information to competitors through electronic chatrooms; and (iv) mislead customers by hiding markups on trades. In addition to the fine, the bank is required to improve its internal controls and programs to comply with applicable New York State and federal laws and regulations, submit a written plan to improve its compliance risk management program, and provide an enhanced written internal audit program.

    Securities NYDFS Enforcement Bank Compliance Foreign Exchange Trading

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  • Bitcoin and ether not considered securities by SEC

    Securities

    On June 14, the Director of the SEC Division of Corporation Finance, William Hinman, stated that the SEC does not consider the cryptocurrencies bitcoin and ether to be securities. In his remarks at the Yahoo Finance All Markets Summit, Hinman emphasized a number of factors that are considered when assessing whether a cryptocurrency or ICO should be considered a security. These factors include, primarily, whether a third party drives the expectation of a return—the central test used by the Supreme Court in SEC v. W.J. Howey Co.. According to Hinman, bitcoin’s and ether’s networks are decentralized without a central third party controlling the enterprise and, thus, applying the disclosure rules of federal securities laws to these cryptocurrencies would add little value to the market. Hinman did note that whether something is considered a security is not static and emphasized that if a cryptocurrency were to be placed into a fund and interests were sold, the fund would be considered a security.

    Securities Virtual Currency Blockchain SEC Cryptocurrency

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