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  • SEC issues $800,000 whistleblower award after reconsideration

    Securities

    On October 15, the SEC announced a more than $800,000 award to a whistleblower in connection with two successful agency enforcement actions, after a request for reconsideration. According to the redacted order, the whistleblower contested a preliminary denial and after review, the SEC determined the whistleblower satisfied the program requirements by “author[ing] information containing a detailed analysis that alerted Commission staff to the underlying securities violations.” The order notes that the whistleblower did not provide any further assistance beyond the initial tips.

    The SEC has now paid a total of $562 million to 107 individuals since the inception of the program.  

    Securities SEC Whistleblower Enforcement

  • Issuer pays $5 million penalty for unregistered digital offering

    Securities

    On October 21, the SEC announced the U.S. District Court for the Southern District of New York entered a final judgment against a tech company issuer that raised approximately $100 million through an unregistered initial coin offering. As previously covered by InfoBytes, the SEC filed an action alleging 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 Act). The SEC argued 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.” 

    The court granted summary judgment in favor of the SEC at the end of September, concluding, among other things, that the issuer violated Section 5 of the Act when it conducted an unregistered offering of securities that did not qualify for any exemption from registration requirements. The final judgment (i) requires the issuer to pay $5 million in a civil penalty; (ii) permanently enjoins the issuer from violating Section 5 of the Act; and (iii) requires the issuer, for a period of three years, to provide notice to the SEC before engaging in any “issuance, offer, sale or transfer” of specified assets.

    Securities Digital Assets SEC Initial Coin Offerings Virtual Currency Enforcement Courts

  • CFTC charges cryptocurrency derivatives platform and owners with AML violations

    Securities

    On October 1, the CFTC filed charges against five entities and three individuals for allegedly owning and operating an unregistered cryptocurrency derivatives platform and failing to implement required anti-money laundering procedures. The complaint alleges that the platform “illegally offer[ed] leveraged retail commodity transactions, futures, options, and swaps” on cryptocurrencies without implementing key safeguards required by the Commodity Exchange Act and several CFTC regulations compliance measures, such as know-your-customer procedures or actions designed to detect and prevent illicit activities. The CFTC also claims that the exchange operated as an unregistered futures commission merchant and did not have CFTC approval to operate as a designated contract market or swap execution facility. The complaint requests civil monetary penalties and remedial ancillary relief in the form of (i) permanent trading and registration bans; (ii) disgorgement; (iii) restitution; (iv); pre- and post-judgment interest; and (v) a permanent injunction from future violations.

    In a parallel action, the U.S. Attorney for the District of New York indicted the three individuals along with a fourth individual on federal charges of violating, and conspiring to violate, the Bank Secrecy Act “by willfully failing to establish, implement, and maintain an adequate anti-money laundering [] program” at the exchange.

    Securities Digital Assets CFTC DOJ Enforcement Cryptocurrency Anti-Money Laundering Bank Secrecy Act

  • SEC has “record-setting” whistleblower fiscal year

    Securities

    On September 30, the SEC announced six new whistleblower awards to finish a “record-setting” fiscal year. In the first announcement, the SEC details an award of nearly $30 million to two whistleblowers. The first, received approximately $22 million for providing information that led SEC staff to open and investigation and subsequently “provided substantial, ongoing assistance.” The second whistleblower received approximately $7 million for providing “additional valuable information” during the investigation.

    In the second announcement, the SEC details four whistleblower awards totaling nearly $5 million. In the first order, the SEC awarded a whistleblower almost $2.9 million for alerting the agency of “alleged wrongdoing, which would have been difficult to detect in the absence of [the information.” The second order awards a whistleblower more than $1.7 million for providing “ongoing and extensive assistance” to SEC staff. And the third order, awards nearly $400,000 to two whistleblowers for providing a joint tip and “continu[ed] corporation and assistance, including having numerous meetings and discussions with staff.”

    Earlier on September 28, the SEC announced an over $1.8 million award to a whistleblower in connection with a successful agency enforcement action. The whistleblower—an unaffiliated company outsider—“expeditiously reported significant information to the Commission about ongoing securities law violations.” According to the SEC, the award illustrates the important role company outsider intelligence can play in halting ongoing violations. 

    The SEC announced on September 25 two separate whistleblower awards, totaling over $2.5 million, for information regarding overseas conduct. The first, an award for over $1.8 million, was given to a whistleblower for taking “personal and professional risks” by using an internal compliance system at a company to report information. The tip resulted in an internal investigation, revealing overseas conduct that “would otherwise have been hard to detect.” The company then subsequently reported the findings to the SEC. The second whistleblower was awarded $750,000 for reporting concerns internally about securities violations occurring overseas that led to a successful enforcement action.

    The SEC has now paid a total of $562 million to 106 individuals since the inception of the program.

    Securities SEC Whistleblower Enforcement

  • SEC settles with ratings agency for $2 million over inadequate policies

    Securities

    On September 29, the SEC announced a credit ratings agency agreed to pay more than $2 million to resolve separate charges alleging the agency’s commercial mortgage-backed securities (CMBS) and collateralized loan obligation combination notes (CLO Combo Notes) policies and procedures were insufficient. According to the CMBS order, in violations of Section 15E(c)(3)(A) of the Securities Exchange Act, the agency allowed analysts to “use their professional judgment” to make adjustments, which had material effects on final CMBS ratings, without an analytical method to follow nor a requirement to document the rationale for the adjustments. Moreover, according to the CLO Combo Notes order, in violations of Rule 17g-8(b)(1) of the Exchange Act, the agency failed to establish and maintain policies and procedures that addressed the probability that CLO Combo Notes issuers may “default, fail to make timely payments, or otherwise not make payments to investors.”

    Without admitting or denying the SEC’s allegations, the agency agreed to pay a civil penalty of $1.25 million in the CMBS action, a $600,000 civil penalty in the CLO Combo Notes action, and $160,000 in disgorgement and prejudgment interest into a Fair Fund for affected persons.

    Securities SEC Commercial Mortgage Backed Securities

  • CFTC reaches $4.5 million settlement with bank over lost audio files

    Securities

    On September 28, the CFTC announced a $4.5 million settlement with a national bank and two affiliated entities to resolve allegations that they failed to preserve audio files, including trader recordings that were subpoenaed in 2017. According to the CFTC, in early 2018 the bank stated that it had directed staff to preserve the recordings and asked for an extension to turn over the requested audio files. The Commission granted the request. In late 2018, the bank, however, said the audio files had been deleted due to a design flaw in its audio preservation system. The CFTC claimed that the bank was aware of the audio-preservation issue as early as 2014. As such, according to the CFTC, the bank “did not maintain adequate internal controls with respect to its preservation of audio and thus failed to diligently supervise matters related to its business as a CFTC registrant.” The entities did not admit or deny the CFTC’s findings, but have agreed to pay the $4.5 million civil penalty plus post-judgment interest.

    Securities CFTC Enforcement

  • SEC issues two separate whistleblower awards totaling over $2.65 million

    Securities

    On September 21, the SEC announced a $2.4 million award to a whistleblower in connection with a successful agency enforcement action. The SEC’s press release states that the whistleblower’s “timely submission of information” led to the initiation of an investigation and enforcement action that stopped the ongoing misconduct. The redacted order determining the whistleblower award claim states that the whistleblower’s information helped SEC staff “identify key witnesses and parties and draft targeted subpoenas, which saved the staff time and resources in conducting the investigation.”

    Earlier on September 17, the SEC announced a nearly $250,000 joint whistleblower award in connection with a successful agency enforcement action. According to the SEC’s press release, the whistleblowers raised their concerns internally before reporting the potential securities violations to the SEC. According to the redacted order, the claimants’ concerns prompted enforcement staff to open an investigation. The order notes, however, that while the claimants’ information identified certain parties and transactions that were ultimately subjects of the covered action, “many of their allegations did not directly relate to the Commission’s charges” in covered action, which played a role in the SEC’s determination of the appropriate award percentage.

    The SEC has now paid a total of $523 million to 97 individuals since the inception of the program.

    Securities SEC Enforcement Whistleblower

  • CFTC charges multi-level cryptocurrency marketing scheme

    Securities

    On September 11, the CFTC filed a complaint in the U.S. District Court for the Southern District of Texas against four individuals accused of operating a purported multi-level marketing scheme involving the solicitation of nearly $100,000 in customer funds that were to be used to speculate in cryptocurrency. The CFTC alleged that the defendants violated the Commodity Exchange Act by, among other things, creating the false illusion that their business employed “master traders” with years of cryptocurrency trading experience, that customers’ earnings would increase based on the amount of their deposits, and that customers who made referrals would receive bonuses. Additionally, the defendants posted misleading trade statements online that failed to “accurately reflect the Bitcoin trading purportedly undertaken by [the d]efendants and led certain customers to believe they were earning significant amounts of money from [the d]efendants’ trading of Bitcoin on their behalf.” The CFTC further claimed that when customers tried to unsuccessfully withdraw their funds, the defendants would first claim their website or smartphone app were experiencing technical problems, but then eventually stopped responding to the customer requests. The CFTC seeks to enjoin the defendants’ allegedly unlawful acts and practices, to compel compliance with the Commodity Exchange Act and CFTC regulations, and to further enjoin the defendants from engaging in any commodity interest-related activity. In addition, the CFTC seeks civil monetary penalties, restitution, trading and registration bans, and other statutory, injunctive, or equitable relief as the court may deem necessary and appropriate.

    Securities Digital Assets CFTC Enforcement Cryptocurrency Commodity Exchange Act

  • SEC issues $10 million whistleblower award

    Securities

    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.”

    Securities SEC Whistleblower Enforcement

  • SEC charges participants of two allegedly fraudulent ICOs

    Securities

    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.

    Securities Digital Assets SEC Enforcement Initial Coin Offerings

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