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SEC charges bank holding company with over-issuance of securities
On September 29, the SEC announced a cease and desist order against a London-based bank holding company and its subsidiary (collectively, “respondents”) for engaging in unregistered offers and the sale of securities as a result of a failure to implement internal controls to track such transactions. According to the SEC’s order, after the SEC settled an action against an affiliate of the subsidiary, the subsidiary lost its status as a well-known seasoned issuer. As a result, it had to quantify the total number of securities that it anticipated offering and selling and pay registration fees for those offerings upon the filing of a new registration statement. The SEC further noted that, given this requirement, the subsidiary’s “personnel understood the consequences of this status change, including that they should consider implementing a mechanism to track offers and sales of securities off any shelf, relative to the registered amount of securities available to be offered or sold off that shelf, in order to ensure that no securities in excess of the amount registered were offered or sold.” However, according to the SEC, no internal controls were established. According to the SEC’s order, as a result of this failure, the subsidiary allegedly offered and sold approximately $17.7 billion of securities in unregistered transactions. The SEC noted that the subsidiary self-reported its over-issuances to regulators, voluntarily provided documents during the SEC investigation, and subsequently commenced a rescission offer. The SEC found that the subsidiary violated provisions of the Securities Act of 1933 and that both respondents violated provisions of the Securities Exchange Act of 1934. Without admitting or denying the SEC’s findings, the respondents agreed to cease-and-desist from violating the charged provisions and to comply with certain undertakings designed to effect compliance with Section 5 of the Securities Act, in addition to paying the $200 million civil penalty. The subsidiary also agreed to pay disgorgement of $149 million and prejudgment interest of $11 million deemed satisfied by its offer of rescission.
SEC fines tech company $23 million for FCPA violations
On September 27, the SEC announced that a multinational information technology company headquartered in Texas (the “Company”) agreed to pay over $23 million to settle claims that its agents and employees of its subsidiaries in Turkey, the United Arab Emirates (UAE), and India violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA. According to the SEC’s order, from at least 2014 through 2019, several subsidiary employees used discount schemes and false marketing reimbursement payments to create slush funds used to bribe foreign officials in exchange for business. The slush funds were also used to provide other benefits, including paying for foreign officials and their families to attend technology conferences around the world and trips to the U.S. The SEC explained that first-level supervisors at the subsidiaries could approve purchase orders under $5,000 without evidence that marketing activity actually took place. By exploiting this loophole in the company’s controls, employees of the Company’s subsidiaries in Turkey, the UAE, and India were able to funnel money into the slush funds undetected. Employees of the Turkish subsidiary allegedly used the funds to bribe government officials and pay for the travel and accommodation expenses of customers, including foreign officials, the SEC claimed. Employees of the UAE subsidiary allegedly used the funds to pay $130,000 in bribes to government officials in exchange for six contracts. Employees in India also allegedly engaged in a similar scheme, with one employee claiming that the Company would lose out on a deal if the Indian Ministry of Railways was not provided a 70 percent software discount. According to the SEC, the Ministry’s procurement website showed that the Indian subsidiary faced no competition because the Ministry required the use of the Company’s products for the project.
The resolution requires the Company to pay a $15 million civil money penalty, $7,114,376 million in disgorgement, and $791,040 in prejudgment interest. The Company neither admitted nor denied the allegations.
This is the second time the Company has resolved FCPA charges with the SEC. In 2012, the Company paid a $2 million penalty to settle allegations that it violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA when it allegedly failed to prevent an India subsidiary from maintaining unauthorized side funds at distributors.
SEC, CFTC fine Wall Street firms $1.8 billion
On September 27, the SEC and CFTC announced settlements (see here and here) with numerous broker-dealers for alleged recordkeeping failures. According to the SEC, from January 2018 through September 2021, the firms’ employees communicated about business matters using text messaging applications on their personal devices. The SEC further alleged that the firms violated federal securities laws by failing to maintain or preserve the substantial majority of these off-channel communications. The SEC charged each of the firms with violating certain recordkeeping provisions of the Securities Exchange Act of 1934, and with failing to reasonably supervise and detect such violations. Additionally, an investment adviser was charged with violating certain recordkeeping provisions of the Investment Advisers of 1940. In addition to paying a total of $1.1 billion in fines, the firms were ordered to cease and desist from future violations of the relevant recordkeeping provisions and were censured. The firms agreed to retain compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices. The SEC recognized the firms’ cooperation with the investigation.
Separately, in a related action, the CFTC announced settlements with many of the same firms for related conduct, totaling nearly $710 million. The CFTC noted that each firm acknowledged to CFTC staff that it was aware employees used unapproved methods to engage in business-related communications. The CFTC also said that as a result of each firm’s failure to ensure that its employees complied with communication policies and procedures, the firms failed to maintain business-related communications. The CFTC found that each firm failed to diligently “supervise its business as a CFTC registrant or registrants, in violation of CFTC recordkeeping and supervision provisions.”
SEC targets crypto developer and influencer for sale of unregistered securities
On September 19, the SEC issued a cease and desist order against a software development company and its founder (collectively, “respondents”) for the unregistered offer and sale of crypto asset securities. The SEC also announced charges against a crypto influencer involved in promoting the company. According to the SEC’s order, from April 2018 into July 2018, the respondents allegedly conducted an unregistered securities offering of crypto asset securities, which raised approximately $30 million from nearly 4,000 investors. The SEC noted that the respondents told investors that the crypto asset securities would raise in value, that the company’s management would continue to improve the company, and that they would make the tokens available on a crypto trading platform. The order also found that the crypto asset securities were not registered with the SEC and were not applicable for a registration exemption. The SEC alleged the respondents violated the offering registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933.
According to the SEC’s complaint against the influencer, which was filed in the U.S. District Court for the Western District of Texas, the influencer purchased $5 million worth of the company’s crypto asset securities and promoted it on social media platforms from approximately May 2018 to July 2018. He also allegedly failed to disclose that the company had agreed to provide him a 30 percent bonus on the tokens that he purchased, as consideration for his promotional efforts. Additionally, the SEC alleged that he also organized an investing pool, despite not registering the offering with the SEC. The complaint alleged violations of the offering registration provisions of Section 5(a) and (c) of the Securities Act, as well as violations of Section 17(b) of the Act, and seeks injunctive relief, disgorgement plus prejudgment interest, and civil penalties.
Without admitting or denying the allegations, the company agreed to pay $30 million in disgorgement, $4 million in prejudgment interest, and a $500,000 civil penalty. The company also agreed to destroy its remaining tokens, request the removal of its tokens from trading platforms, and publish the SEC’s order on its website and social media channels. The founder, without admitting or denying the SEC’s findings, agreed to refrain from participating in offerings of crypto asset securities for a period of five years and will pay a $250,000 civil penalty.
Brazilian airline agrees to $41 million FCPA settlement
On September 15, a São Paulo-based domestic airline agreed to pay over $41 million to resolve parallel civil and criminal investigations by the SEC and DOJ. The investigations related to a bribery scheme executed by the airline to secure favorable payroll tax and fuel tax treatment through two pieces of new legislation. At the time of the conduct, the airline was the largest air transportation and travel services group in Brazil and its shares traded on the New York Stock Exchange. The favorable tax treatment provided the airline, along with all other Brazilian airlines, reduced taxes and expenses.
According to the SEC and DOJ, a member of the airline’s Board of Directors (the “Director”) orchestrated the scheme, meeting and communicating with Brazilian officials and politicians and their close associates on numerous occasions. At one point, the Director communicated with a close associate of a Brazilian official who, “in turn, discussed the bribe schemes . . . with the Brazilian Official . . . via an ephemeral messaging application that uses end-to-end encrypted and content-expiring messages.” The servers of this messaging application were exclusively located in the United States (one the jurisdictional hooks relied on by the government).
The Director ultimately authorized and directed the bribe payments from the airline to officials, and payments were made both directly from the airline and from companies controlled by the Director to various companies controlled by Brazilian officials or their close associates. Some of the intermediary companies receiving the corrupt payments were based in the U.S. and some of the payments were transmitted through a U.S. correspondent bank. The payments made directly by the airline were authorized from the Director’s own “Cost Center,” which had been created under the airline’s legal department and over which the Director had full discretion with no clearly defined controls or limits. The payments were inaccurately recorded in the airline’s books and records as payments to various third-party vendors for services that were never actually rendered. The airline did not have an effective review process of the documentation submitted before or after the disbursement of funds to monitor whether the invoices were authentic or whether the payments were for bona fide expenditures.
As a result of this conduct, the SEC and DOJ determined that the airline violated the anti-bribery provisions, the books and records provisions, and the internal controls provisions of the FCPA.
To resolve the civil charges, the airline agreed to a cease-and-desist order, disgorgement and pre-judgment interest totaling $70 million, although all but $24.5 million was waived based upon the airline’s present financial condition.
To resolve the criminal charges, the airline entered into a deferred prosecution agreement (DPA). The original criminal penalty was calculated to be $87 million but was reduced to $17 million in light of the airline’s financial condition. In calculating the penalty, the DOJ acknowledged full credit for the airline’s cooperation, despite the fact that the airline did not self-report the violations. The DOJ also considered the airline’s remedial measures, which included terminating the Director at issue and relationships with all third-party vendors involved in the underlying misconduct, and a complete overhaul of its compliance program. However, the DPA did not require the appointment of a corporate compliance monitor.
The DOJ and SEC each agreed to offset $1.7 million in penalties the airline is expected to pay to resolve the parallel Brazilian proceedings against their respective resolutions.
SEC proposes new rules for clearing agencies
On September 14, the SEC announced a proposed rule regarding risk management practices for central counterparties in the U.S. Treasury Department market. Among other things, the proposed rule would update the membership standards required of covered clearing agencies for the Treasury market with respect to a member’s clearance and settlement of specified secondary market transactions. Specifically, the proposal would require that clearing agencies in the U.S. Treasury market adopt policies and procedures designed to require their members to submit for clearing certain specified secondary market transactions, which would include: “all repurchase and reverse repurchase agreements collateralized by U.S. Treasury securities entered into by a member of the clearing agency; all purchase and sale transactions entered into by a member of the clearing agency that is an interdealer broker; and all purchase and sale transactions entered into between a clearing agency member and either a registered broker-dealer, a government securities broker, a government securities dealer, a hedge fund, or a particular type of leveraged account.” According to a statement by SEC Chair Gary Gensler, the proposed rule would “reduce risk across a vital part of our capital markets in both normal and stress times.” The SEC also released a Fact Sheet providing more information on the proposal. Comments are due 60 days after publication in the Federal Register.
SEC opens crypto assets office
On September 8, SEC Chair Gary Gensler issued remarks before the Practising Law Institute to discuss cryptocurrency tokens and corresponding SEC regulation. During his remarks, Gensler stated his view that the “vast majority” of cryptocurrency tokens on the market are securities that are subject to SEC regulation. As a result, investors in cryptocurrencies “deserve disclosure to help them sort between the investments that they think will flourish and those that they think will flounder,” and that the law requires such protections. Gensler, also addressed stablecoins, which he also concluded raised significant policy issues. Gensler pointed out that depending on their attributes, stablecoins “may be shares of a money market fund or another kind of security,” and therefore require registration and deserve investor protections. Finally, addressing crypto intermediaries, Gensler noted that they are either engaging “in the business of effecting transactions in crypto security tokens for the account of others, which makes them brokers, or engage in the business of buying and selling crypto security tokens for their own account, which makes them dealers.” He warned that because crypto intermediaries often commingle other functions with a market, investors are inherently exposed to conflicts of interest and risks. To address this, Gensler noted that he encouraged SEC staff to collaborate “with intermediaries to ensure they register each of their functions—exchange, broker-dealer, custodial functions, and the like—which could result in disaggregating their functions into separate legal entities to mitigate conflicts of interest and enhance investor protection.” Gensler noted that legislation should be crafted in a way that maintains the SEC’s oversight of crypto security tokens, and added that these kind of assets make up most of the digital assets that are currently traded.
The same week, the SEC announced it is establishing an Office of Crypto Assets and an Office of Industrial Applications and Services to the Division of Corporation Finance’s Disclosure Review Program (DRP), which “has long had offices to review company filings by issuers.” According to the SEC, the offices will join the seven existing offices that provide focused review of issuer filings to continue the SEC’s efforts in promoting capital formation and protecting investors. The Office of Crypto Assets will permit “the DRP to better focus its resources and expertise to address the unique and evolving filing review issues related to crypto assets.”
House Oversight seeks info from digital asset exchanges, financial regulators
On August 30, the Subcommittee on Economic and Consumer Policy of the House Committee on Oversight and Reform announced that Representative Raja Krishnamoorthi (D-IL), Chair of the Subcommittee, sent letters to the U.S. Treasury Department, SEC, CFTC, and FTC, in addition to five digital asset exchanges, requesting information on how they are combating cryptocurrency-related fraud and scams. According to his letters, Chairman Krishnamoorthi is “concerned about the growth of fraud and consumer abuse linked to cryptocurrencies.” He further added that “[t]he lack of a central authority to flag suspicious transactions in many situations, the irreversibility of transactions, and the limited understanding many consumers and investors have of the underlying technology make cryptocurrency a preferred transaction method for scammers.” In the letters to the federal agencies, he stated that “the federal government has been slow to curb cryptocurrency scams and fraud,” and that “[e]xisting federal regulations do not comprehensively or clearly cover cryptocurrencies under all circumstances.” In one of the letters to the digital asset exchanges, Krishnamoorthi noted that “cryptocurrency exchanges must themselves act to protect consumers conducting transactions through their platforms.” The letters requested that all recipients provide information to the subcommittee outling “steps they are taking to combat cryptocurrency-related fraud and scams and additional actions that are needed to protect Americans” in order to “help Congress understand what they are doing to protect consumers and inform legislative solutions to bring stability to the digital asset industry.”
SEC files charges in undisclosed transactions case
On August 30, the SEC filed a complaint against two North Carolina-based executives, and their Malta-based registered investment adviser company (collectively, “defendants”) in the U.S. District Court for the Middle District of North Carolina for allegedly engaging in a fraudulent scheme involving undisclosed transactions. According to the SEC, the defendants “repeatedly recommended and entered into transactions that were not disclosed to and were not in the best interests of their clients.” Specifically, one of the executives allegedly “acquired 100% ownership of four North Carolina insurance companies [] and a reinsurance trust, which gave him control over hundreds of millions of dollars in premiums from their policyholders.” The complaint further stated that “[a]lthough the funds were supposed to be used to pay the policyholders’ insurance claims, [the executive] treated the funds as his own assets and used the money for any purpose he decided was in his best interest.” The SEC found that the executive allegedly conducted the schemes through “complex” investment structures and affiliate companies and allegedly used the proceeds to pay himself or to divert the funds to his other businesses. The complaint also noted that the defendants “breached their fiduciary duties to their advisory clients by engaging in numerous undisclosed related-party transactions and by misappropriating over $57 million in client funds” and over $21.4 million in advisory fees generated in connection with these schemes. The SEC’s complaint alleged violations of anti-fraud provisions of the Investment Advisers Act of 1940. The complaint seeks a permanent injunction against the defendants, disgorgement of ill-gotten gains, penalties, bars, and other equitable relief.
SEC amends whistleblower rules
On August 26, the SEC adopted two amendments to its whistleblower program rules, which will expand the circumstances in which the Commission can pay whistleblowers for their information and assistance in connection with non-SEC actions, and affirms the Commission’s authority to consider the dollar amount of a potential award for the purposes of increasing, but not decreasing, an award. Specifically, the final rule amends Rule 21F-3 to allow the SEC “to pay whistleblower awards for certain actions brought by other entities, including designated federal agencies, in cases where those awards might otherwise be paid under the other entity’s whistleblower program.” The expanded circumstances contemplated by the SEC include instances “when the other [federal] entity’s program is not comparable to the [SEC]’s program or if the maximum award that the [SEC] could pay on the related action would not exceed $5 million.” The final rule also amends the SEC’s authority under Rule 21F-6 to ”affirm the [SEC]’s authority … to consider the dollar amount of a potential award for the limited purpose of increasing the award.” The amendment “eliminate[s] the [SEC]’s authority to consider the dollar amount of a potential award for the purpose of decreasing the award.” SEC Chair Gary Gensler stated that the amendments “will strengthen [the SEC’s] whistleblower program.” Commissioner Hester M. Peirce in contrast said that while the amendments are “inconsequential” to the success of the whistleblower program, they “carry harmful consequences both for the whistleblower program and for the [SEC]’s rulemaking processes” and “further complicate the already byzantine rules governing [the SEC’s] whistleblower program.”