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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.
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.
FINRA fines firm for alleged financial risk management failures
On July 30, the Financial Industry Regulatory Authority (FINRA) entered into a Letter of Acceptance, Waiver and Consent (AWC), fining a global securities firm $650,000 for allegedly failing to “establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial risks of its market access business activity.” As a result, because the firm’s controls allegedly failed to monitor and prevent (i) orders exceeding pre-set customer credit thresholds, or (ii) erroneous orders, the firm executed erroneous orders on “at least two trade dates.” Additionally, FINRA claimed that even though the firm knew internally of the potential issues in its financial risk management controls, in several instances it took years for the identified gaps to be fixed. The firm neither admitted nor denied the findings set forth in the AWC agreement but agreed to pay the fine and complete a review of its financial risk management controls and supervisory procedures to ensure compliance with SEC regulations.
CFTC awards $9 million to whistleblower
On July 27, the CFTC announced an approximately $9 million whistleblower award to a claimant who reported “specific, credible and timely” information that led to a successful Commodity Exchange Act (CEA) enforcement action. The associated order notes that the claimant voluntarily provided original information leading to the opening of an investigation and the enforcement action, and was under no “legal obligation” to provide the information. The order does not provide any other significant details about the information provided or the related enforcement action. The CFTC has awarded approximately $120 million to whistleblowers since the enactment of its Whistleblower Program under the Dodd-Frank Act, and whistleblower information has led to nearly $950 million in monetary relief.
SEC’s new exam team focuses on emerging threats
On July 28, the SEC announced the creation of the Event and Emerging Risks Examination Team (EERT), which will “proactively engage with financial firms about emerging threats and current market events.” Specifically, the new team will be held in the agency’s Office of Compliance Inspections and Examinations (OCIE) and will work collaboratively with OCIE’s exam staff in regional offices to, among other things, (i) ensure that firms are “better prepared” to address existing threats and emerging risks; and (ii) provide expertise and support in response to market events that place investor assets at risk, such as cyber-security or operational resiliency concerns.
SEC issues $3.8 million whistleblower award
On July 14, the SEC announced a $3.8 million award to a whistleblower in an enforcement action. According to the SEC’s press release, the whistleblower “provided significant information that helped the SEC disrupt an ongoing fraudulent scheme,” which resulted in “millions of dollars” being returned to harmed investors. The formal order also states that the information the whistleblower provided was “discrete and narrow in scope.”
As of June 14, the SEC has awarded 87 individuals a total of approximately $505 million in whistleblower awards since its first award in 2012.
SEC issues $18.5 million civil penalty for unregistered digital token offering
On June 26, the SEC announced a settlement with two offshore entities, resolving allegations that the entities violated federal securities laws by raising more than $1.7 billion in unregistered digital token offerings. As previously covered by InfoBytes, in October 2019, the SEC obtained a temporary restraining order, halting the offerings. According to the SEC, the entities violated Sections 5(a) and 5(c) of the Securities Act by failing to register its offers and sales of securities with the SEC. Prior to the restraining order, the entities had sold approximately 2.9 million digital tokens worldwide, including more than 1 billion tokens to 39 U.S. purchasers. The settlement requires the entities to return more than $1.2 billion to investors in “ill-gotten gains” from the token offerings. Additionally, the parent company is required to pay an $18.5 million civil penalty and give proactive notice to the SEC before participating in any digital asset issuances for the next three years. The entities entered into the settlement without admitting or denying the allegations in the SEC’s complaint.