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SEC issues more than $16 million in whistleblower awards
On August 9, the SEC announced whistleblower awards totaling more than $16 million to two whistleblowers for providing information and assistance in a successful SEC enforcement action. According to the redacted order, the SEC awarded approximately $13 million to one of the whistleblowers for prompting the opening of the investigation and providing critical information, including information on “difficult to detect” violations. The whistleblower also identified key witnesses and helped staff “understand complex fact patterns and issues related to the matters under investigation.” The second whistleblower received a more than $3 million award for submitting important new information during the course of the investigation, which provided the staff a more complete picture. The SEC attributed the lower award amount to the fact that the second whistleblower delayed reporting the wrongdoing for several years, whereas the first whistleblower “persistently alerted the Commission to the ongoing abusive practices for a number of years before the investigation was opened.”
The SEC has awarded more than $1.3 billion to 281 individuals since issuing its first whistleblower award in 2012.
SEC orders cryptocurrency company to register tokens as securities or pay more than $30 million fine
On August 9, the SEC issued a cease and desist order to a cryptocurrency company accused of allegedly holding an unregistered securities offering. The company raised approximately $30.9 million by selling cryptocurrency tokens to investors through an initial coin offering from November 2017 to January 2018. The SEC asserted, however, that the tokens were offered and sold as investment contracts (and therefore should be considered securities), and that the company’s offering constituted an unregistered securities offering. “A purchaser in the offering of [the tokens] would have had a reasonable expectation of obtaining a future profit based upon [the company’s] efforts in using the proceeds from the offering to create an online identity attestation system that would increase the token’s value on crypto asset trading platforms,” the SEC said in the order, which alleged violations of Sections 5(a) and 5(c) of the Securities Act. While at the time of the offering the company required certain purchasers to agree that they were buying the tokens for “utility” rather than an investment, the SEC argued that the company’s marketing promotions and statements made by early purchasers indicated that purchasers “had a reasonable expectation of profit.” Under the terms of the order, the company agreed to register its tokens with the SEC and notify purchasers in its offering that they may be able to claim a refund on their token purchases. The company also agreed to pay a $300,000 civil penalty. If the company fails to take these actions it faces a $30.9 million fine, minus the amount already paid to the SEC or to token purchasers, the order stated. The SEC noted that the company has already voluntarily taken steps to prepare for registration.
SEC fines company $50 million over misleading account statements
On July 18, the SEC issued a cease and desist order to a life insurance company for allegedly providing materially misleading account statements to roughly 1.4 million variable annuity investors in violation of the antifraud provisions of the Securities Act of 1933. According to the SEC, since at least 2016, the company misled investors into thinking that their quarterly account statements listed all fees paid during the period. An SEC investigation found, however, that the statements listed only administrative, transaction, and plan operating fees that investors infrequently incurred. The SEC noted that these fees were usually negligible, and only a slight fraction of the overall fees paid by an investor. “When considering how to invest their hard-earned money and save for retirement, it is essential that investors not be misled about the fees they are paying,” Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said in the announcement. “This case should serve as an important reminder to investment firms to carefully review their statements to ensure fee information is disclosed properly.” Without admitting or denying the allegations, the company agreed to pay a $50 million civil penalty that will be distributed to affected investors. The company will also cease and desist from committing or causing any future violations and will revise the way it presents fee information in its variable annuity account statements.
SEC issues multiple whistleblower awards
On July 19, the SEC announced that it awarded whistleblowers nearly $17 million for providing information and assistance in a covered action and related action. According to the redacted order, the whistleblower provided information that caused the SEC to open the investigation that resulted in the covered action. The whistleblower also provided SEC staff with detailed information and documents early in the investigation, and offered ongoing assistance by, among other things, speaking with the SEC staff on several occasions, which led to the successful enforcement of the covered action. Further, because the whistleblower provided original information to staff that contributed to the successful enforcement of the related action, the whistleblower is also entitled to an award based on amounts collected in the related action.
Earlier in the week, the SEC announced whistleblower awards totaling more than $6 million to two whistleblowers for providing information and assistance in two separate covered actions. According to the first redacted order, the SEC awarded approximately $3 million to a whistleblower who was solicited to invest in a product that they believed was being misrepresented. The whistleblower then notified the SEC, which prompted an investigation. According to the second redacted order, the SEC awarded more than $3 million to an individual who provided information that prompted SEC staff to open an investigation, which led to a successful enforcement action. The whistleblower reported their concerns internally, then submitted a detailed tip and met with SEC staff on multiple occasions to provide additional information throughout the investigation.
The SEC has awarded approximately $1.3 billion to 276 individuals since issuing its first award in 2012.
Payday lender to pay $39 million in alleged misappropriated funds suit
On June 29, the U.S. District Court for the District of South Florida granted final judgment against a Florida-based payday loan company and an individual (collectively, “defendants”), resolving SEC allegations that the company fraudulently misappropriated funds from investors. According to the complaint, the SEC claimed that the defendants falsely represented to many Venezuelan-American investors that the company would use their funds to finance payday loans through the offer and sale of “safe and secured” promissory notes. However, the complaint noted that “the proceeds [the company] generated from its consumer loan business were woefully insufficient to cover principal and interest payments to investors,” and had been offered in violation of registration and anti-fraud provisions of the Securities Act and Exchange Act. The complaint also noted that the individual allegedly misappropriated $2.9 million for personal use and authorized the transfer of $3.6 million to friends and relatives for no apparent legitimate business purpose. According to the order, the company: (i) is permanently restrained and enjoined from violating sections of the Securities Act and Exchange Act; (ii) must pay $30.3 million in disgorgement; and (iii) must pay $2 million interest on disgorgement and a $7 million civil penalty. The individual is jointly liable for more than $4.6 million in disgorgement.
DOJ charges six with crypto fraud
On June 30, the DOJ charged six individuals in four separate cases for allegedly playing a role in several cryptocurrency-related fraud schemes. In its press release announcing the indictments, the DOJ said these schemes include “the largest known Non-Fungible Token (NFT) scheme charged to date, a fraudulent investment fund that purportedly traded on cryptocurrency exchanges, a global Ponzi scheme involving the sale of unregistered crypto securities, and a fraudulent initial coin offering.”
- Crypto NFT Scheme: The DOJ charged a Vietnamese national with one count of conspiracy to commit wire fraud and one count of conspiracy to commit international money laundering related to his involvement in an NFT project, in which the individual and his co-conspirators allegedly engaged in a “rug pull” that ended the investment project and stole roughly $2.6 million from investors. Shortly after the rug pull, the DOJ said in its announcement that the individuals allegedly “laundered investors’ funds through ‘chain-hopping,’ a form of money laundering in which one type of coin is converted to another type and funds are moved across multiple cryptocurrency blockchains.” The individuals also allegedly used decentralized cryptocurrency swap services to hide the trail of investors’ stolen funds.
- Crypto Ponzi and Unregistered Securities Scheme: The DOJ charged two Brazilian nationals and a Florida resident with one count of conspiracy to commit wire fraud and one count of conspiracy to commit securities fraud in connection with a global cryptocurrency-based Ponzi scheme that generated approximately $100 million from investors. The Brazilian nationals were also charged with conspiracy to commit international money laundering. According to the DOJ, the individuals fraudulently promoted a cryptocurrency investment platform and unregistered securities offering by misrepresenting a purported proprietary trading bot and falsely guaranteeing returns to investors. The Brazilian nationals allegedly laundered investors’ funds through a foreign-based cryptocurrency exchange and paid earlier platform investors with money obtained from later investors, the DOJ said. The SEC also filed a lawsuit against all three individuals and their company in the U.S. District Court for the Southern District of Florida.
- Crypto Initial Coin Offering Scheme: A California resident who founded a cryptocurrency investment platform was charged by the DOJ with one count of securities fraud for his role in a cryptocurrency fraud scheme involving the platform’s initial coin offering (ICO), which raised roughly $21 million from investors globally. According to the DOJ, the individual falsified information in company white papers for prospective investors, promoted fake testimonials, and fabricated purported business relationships with the Federal Reserve Board and dozens of major companies to appear legitimate.
- Crypto Commodities Scheme: The DOJ charged the owner of a cryptocurrency investment platform with one count of conspiracy to commit wire fraud, four counts of wire fraud, one count of conspiracy to commit commodities fraud, and one count of obstruction of justice. The Nevada resident allegedly raised approximately $12 million from investors by using the platform to solicit investors’ participation in an unregistered commodity pool (“a fund that combines investors’ contributions to trade on the futures and commodity markets”), told investors that he used a trading bot that “could execute over 17,000 transactions per hour on various cryptocurrency exchanges” to earn profits, and falsely represented that this trading bot would generate between 500 to 600 percent returns on the amount invested.
“Our office is committed to protecting investors from sophisticated scammers seeking to capitalize on the relative novelty of digital currency,” U.S. Attorney Juan Antonio Gonzalez for the Southern District of Florida stated. “As with any emerging technology, those who invest in cryptocurrency must beware of profit-making opportunities that appear too good to be true.”
CFTC charges South African fund with CEA violations
On June 30, the CFTC filed charges against a South African investment fund and its CEO for an allegedly fraudulent scheme that raised over $1.7 billion worth of Bitcoin from the public in violation of the Commodity Exchange Act (CEA) and CFTC Regulations. The complaint alleged that the CEO used various websites and social media to fraudulently solicit bitcoin from public participants to participate in a commodity pool controlled by the company, and “purportedly traded off-exchange, retail foreign currency (‘forex’) on a leveraged, margined and/or financed basis with participants who were not eligible contract participants (‘ECPs’) through a proprietary ‘bot’ or software program.” The CFTC is seeking: (i) full restitution for defrauded investors; (ii) disgorgement; (iii) civil monetary penalties; (iv) permanent registration and trading bans; and (v) a permanent injunction from future violations.
SEC publishes final rule modernizing electronic filings
On June 24, the SEC announced a final rule to require certain documents filed by investment advisers, institutional investment managers, and certain other entities be submitted electronically—a change that is “intended to promote efficiency, transparency, and operational resiliency.” Among other things, the final rule requires the electronic filing or submission of: (i) applications for orders under the Advisers Act on EDGAR; (ii) confidential treatment requests for Form 13F filings on EDGAR; and (iii) Form ADV-NR (through the IARD system).
The SEC also released a Fact Sheet further explaining the final rule and what is required. According to a statement released by SEC Chair Gary Gensler, “these amendments benefit filers, investors, and the SEC” as “it is important for filers to have easy, online methods to submit information to the Commission, and where appropriate for investors to have easy, online access as well.”
SEC settles allegations regarding robo-adviser service
On June 13, the SEC announced a settlement with three subsidiaries of a financial services holding company (collectively, “respondents”) regarding their robo-adviser service. The order, which the respondents consented to without admitting or denying the findings, imposes a civil money penalty of $135 million and a total of $52 million in disgorgement. The order also provides that the respondents must cease and desist from committing or causing any future violations of the antifraud provisions in the Investment Advisers Act.
SEC enters $78 million FCPA settlement with steel pipe manufacturer
On June 6, the SEC announced that a Luxembourg-based manufacturer and supplier of steel pipe products agreed to pay over $78 million to settle the SEC’s claims that it violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA and the Exchange Act. The settlement is the latest in the long-running investigation regarding Brazilian state-owned and controlled energy company Petrobras, and resolves allegations that agents and employees of the company’s Brazilian subsidiary paid approximately $10.4 million in bribes between 2008 and 2013 to obtain over $1 billion in new contracts and to retain existing business from Petrobras. The bribes were allegedly funded on behalf of the company through entities associated with its controlling shareholder and paid to Brazilian government officials in exchange for using their influence to persuade Petrobras to forego an international tender process. The DOJ closed its parallel investigation without charges.
This is the second time the Luxembourg-based company has resolved FCPA charges with U.S. authorities, following 2011 resolutions with both the DOJ and SEC related to a state-owned entity in Uzbekistan. The company had been the first ever to enter into a Deferred Prosecution Agreement with the SEC.
The current resolution involves a $25 million monetary penalty, as well as $42.8 million in disgorgement and over $10 million in prejudgment interest. The company neither admitted nor denied the allegations.