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Brokers to pay $4.5 million to settle ADR mishandling claims
On August 16, the SEC announced a settlement with two brokers to resolve allegations concerning the improper handling of pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent shares of a foreign companies.” According to the SEC, both brokers improperly “obtained pre-released ADRs when they should have known that the pre-release transactions were not backed by foreign shares.” The SEC asserted the brokers improperly obtained the pre-released ADRs from other broker-dealers—with one of the brokers also obtaining the pre-released ADRs from depository banks—which “resulted in an inflated total number of foreign issuer’s tradeable securities and short selling and dividend arbitrage.” The SEC further alleged the brokers violated the Securities Act of 1933 and failed to reasonably supervise their securities lending desk personnel. While neither broker admitted nor denied the SEC’s findings, the orders require them to pay, combined, more than $4.5 million in disgorgement, prejudgment interest, and penalties. The orders acknowledge the brokers’ cooperation in the investigation.
SEC obtains court order halting token offering
On August 12, the SEC announced it obtained a court order halting an alleged fraud involving the sale of digital securities which raised $14.8 million in 2017 and 2018. In addition, the court approved an emergency asset freeze to preserve at least $8 million of the funds raised, the SEC said in its press release. According to the complaint filed the same day in the U.S. District Court for the Eastern District of New York, an individual and two entities he controlled allegedly violated the registration, antifraud, and manipulative trading provisions of the federal securities laws, by, among other things, knowingly (i) marketing and selling securities tokens by creating false investor demand through the use of material misrepresentations and omissions; and (ii) misleading investors by claiming to have product ready to generate revenue even when no such product existed. Additionally, the SEC alleged that the individual defendant engaged in manipulative trading on an unregistered digital asset platform, and transferred a “significant amount” of dissipated assets from investors into his personal account. Among other things, the SEC seeks permanent injunctions, disgorgement of profits associated with the fraudulent activity, plus interest and penalties, a ban from offering digital securities, and an officer-and-director bar against the individual defendant.
SEC awards $500,000 to overseas whistleblower
On July 23, the SEC announced a $500,000 award to an overseas whistleblower whose “expeditious reporting” on an important witness assisted the Commission in bringing a successful enforcement action. The SEC’s order noted that the whistleblower’s tip was the first information that the Commission received on the charged misconduct, and that without the information—which was substantiated by other witnesses—the violations would have been difficult to identify and prove partly because the misconduct happened abroad. The order does not provide any additional details regarding the whistleblower or the company involved in the enforcement action. Since the program’s inception in 2012, the SEC has awarded approximately $385 million to 65 whistleblowers.
SEC settles with U.S. affiliate of Japanese financial institution for mortgage-backed securities failures
On July 15, the SEC announced an approximately $25 million settlement with the U.S. affiliate of a Japanese financial holding company, resolving allegations that the company failed to adequately supervise mortgage-backed securities traders. According to the orders, covering commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS), from approximately January 2010 through April 2014 several traders allegedly made false or misleading statements while negotiating the sales of CMBS and RMBS, including information about (i) the company’s purchase price of the securities; (ii) the compensation the company would receive on the trades; and (iii) the current ownership of the securities. The SEC alleges the company failed to reasonably supervise traders to prevent the alleged violations of federal antifraud provisions. The orders acknowledge the company’s significant cooperation in the matter and require the company to reimburse customers the full amount of profits earned from the identified trades, totaling over $4.2 million to CMBS customers and over $20.7 million to RMBS customers. Additionally, the orders penalize the company $500,000 related to the CMBS trades and $1 million related to the RMBS trades.
SEC, FINRA address digital asset securities compliance requirements
On July 8, the SEC and the Financial Industry Regulatory Authority (FINRA) issued a joint statement in response to compliance questions received from broker-dealer participants who handle digital asset securities. While recognizing that the application of federal securities law and FINRA rules to digital asset securities, as well as related innovative technologies, “raise novel and complex regulatory and compliance questions and challenges,” the joint statement encourages “reasonably practicable” efforts to address these issues. Among other things, the guidance emphasizes that broker-dealer participants who try to maintain custody of clients’ digital asset securities must comply with the SEC’s Customer Protection Rule to safeguard customers’ assets and prevent investor loss or harm. In situations involving noncustodial digital asset securities activities, relevant laws, rules, and requirements must also be followed, even if these activities generally do not raise the same level of concern. The SEC and FINRA also acknowledge that compliance with these rules may be challenging as technological enhancements and situations unique to digital asset securities continue to develop, and emphasize that they will continue to engage with broker-dealer participants as the marketplace evolves.
CFTC awards a reduced $2.5 million to whistleblower after reporting delay
On June 24, the Commodity Futures Trading Commission (CFTC) announced a whistleblower award of approximately $2.5 million to an individual who reported information that led to a successful enforcement action. The CFTC noted that the award was reduced because of the individual’s unreasonable delay in reporting the violations to the CFTC. CFTC officials emphasized that while there may be reasons to delay reporting, “[this] case illustrates the importance of reporting violations to the CFTC as soon as reasonably possible. Reporting early lessens the harm violators can inflict on the public and hastens our investigations to bring the culprits to justice.” The associated order does not provide details of the information provided or the related enforcement action. Since 2014, the CFTC has awarded over $90 million to whistleblowers, whose information has led to more than $730 million in sanctions.
SEC separately settles ADR allegations against international bank subsidiary and securities company
On June 14, the SEC announced a $42 million settlement with a wholly-owned subsidiary of an international bank to resolve allegations that certain associated persons on its securities lending desk allegedly improperly pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent shares in foreign companies.” The SEC announcement explains that “[t]he practice of ‘pre-release’ allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADRs represent.” According to the SEC, the subsidiary “improperly obtained pre-released ADRs from depositary banks when [the subsidiary] should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.” The SEC asserts that this resulted in an inflated total number of foreign issuer’s tradeable securities and short selling and dividend arbitrage. The SEC alleged that these practices violated the Securities Act of 1933 and claimed that the subsidiary failed to reasonably supervise its securities personnel. The consent order requires the subsidiary to pay more than $24 million in disgorgement, roughly $4.4 in prejudgment interest, and a civil money penalty of approximately $14.3 million. The order acknowledges the subsidiary’s cooperation in the investigation.
On the same day, the SEC announced an $8.1 million consent order with a securities company to resolve allegations that the company allegedly improperly pre-released American Depositary Receipts (ADRs). According to the SEC, the company, in violation of the Securities Act of 1933, “improperly obtained pre-released ADRs from depositary banks when [the company] should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.” The SEC announcement asserts that the lack of shares to support the ADRs resulted in an inflated total number of foreign issuer’s tradeable securities and short selling and dividend arbitrage. Additionally, the SEC alleges the company failed to establish and implement effective policies and procedures to address whether the company was in compliance with its obligations in connection with pre-release transactions. The consent order requires the company to pay more than $4.8 million in disgorgement, approximately $800,000 in prejudgment interest, and a civil money penalty of more than $2.4 million. The order acknowledges the company’s cooperation in the investigation.CFTC charges U.K. company with fraudulent bitcoin scheme
On June 18, the CFTC announced it filed a complaint in the U.S. District Court for the Southern District of New York against a United Kingdom-based bitcoin trading and investment company and its principal (collectively, “defendants”) for allegedly fraudulently obtaining and misappropriating almost 23,000 bitcoin from more than 1,000 customers. The CFTC alleges the defendants violated the Commodity Exchange Act by fraudulently soliciting customers to purchase bitcoin with cash and then deposit the bitcoin in accounts controlled by the defendants. The CFTC alleges that the defendants misrepresented that they “employed expert virtual currency traders who earned guaranteed daily trading profits on customers’ Bitcoin deposits.” Additionally, the CFTC alleges the defendants also fabricated weekly trade reports and “manufactured an aura of profitability” by depositing new customer bitcoin purchases to other customer accounts. The scheme, according to the CFTC, obtained almost 23,000 bitcoins “from more than 1,000 members of the public,” “which reached valuation of at least $147 million.” The CFTC is seeking civil monetary penalties, restitution, rescission, disgorgement, trading and registration bans, and injunctive relief against further violations of the federal commodity laws.
SEC settles American Depositary Receipts allegations against international bank subsidiary
On June 14, the SEC announced a $42 million settlement with a wholly-owned subsidiary of an international bank to resolve allegations that certain associated persons on its securities lending desk allegedly improperly pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent shares in foreign companies.” According to the SEC, the subsidiary “improperly obtained pre-released ADRs from depositary banks when [the subsidiary] should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.” The SEC asserts that this resulted in an inflated total number of foreign issuer’s tradeable securities and short selling and dividend arbitrage. The SEC alleged that these practices violated the Securities Act of 1933 and claimed that the subsidiary failed to reasonably supervise its securities personnel. The consent order requires the subsidiary to pay more than $24 million in disgorgement, roughly $4.4 in prejudgment interest, and a civil money penalty of approximately $14.3 million. The order acknowledges the subsidiary’s cooperation in the investigation.
SEC charges issuer with conducting sale of unregistered digital tokens
On June 4, the SEC announced it had filed a lawsuit in the U.S. District Court for the Southern District of New York against a tech company issuer for allegedly raising approximately $100 million through an unregistered initial coin offering. According to the complaint, the issuer failed to provide required disclosures to investors and did not register the offer or sale of its digital tokens with the SEC, as required by Section 5 of the Securities Act of 1933. The SEC contends that the issuer marketed the digital tokens as an investment opportunity and told investors that they could earn future profits from the issuer’s efforts to create, develop, and support a digital “ecosystem.” According to the SEC, “[f]uture profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.” The SEC’s suit seeks a permanent injunction, disgorgement of profits plus interest, and a civil penalty.