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SEC charges hemp company with misrepresentations
On October 5, the SEC filed a civil fraud complaint against a Canadian-based hemp company and its two co-founders (collectively, “defendants”), alleging that they fraudulently raised over $15 million from investors, and that they misappropriated a significant portion of the funds for personal and other unrelated uses. The SEC claims that the defendants made misrepresentations, including that the company was a fully integrated company that was processing hemp from its own farm. However, the SEC alleges that the company did not process any of its hemp, instead using products supplied by third parties. The complaint further contends that the financial information given to investors “misstated historical revenue numbers and included baseless projections about future revenue that were unsupported by the [c]ompany’s own internal forecasts.”
The SEC’s complaint, which was filed in U.S. District Court for the Southern District of New York, charges the defendants with violating antifraud provisions of federal securities laws. The complaint seeks a permanent injunction against the defendants, disgorgement with prejudgment interest, civil penalties, and an officer and director and penny stock ban against the co-founders. In addition, the U.S. Attorney’s Office for the Southern District of New York filed criminal charges against the co-founders in a parallel action.
National bank to pay $37 million for alleged foreign exchange violations
On September 27, a proposed settlement was filed in the U.S. District Court for the Southern District of New York resolving allegations that a national bank (defendant) allegedly defrauded nearly 800 commercial customers by charging higher prices on foreign exchange (FX) transactions despite having fixed-pricing agreements. According to the complaint, from 2010 to 2017, the defendant allegedly defrauded customers who utilized its FX services, which violated the mail fraud, wire fraud, and bank fraud statutes of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), by: (i) falsely representing that the defendant would charge fixed FX spreads or sales margins on the customers’ FX transactions; (ii) financially incentivizing the FX sales specialists to overcharge while failing to certify that FX sales specialists comply with fixed-pricing agreements; and (iii) systematically charging “higher [FX] spreads or sales margins than [the bank] represented it would charge and/or was charging in fixed-pricing agreements or otherwise, while concealing the overcharges from the Customers.” Under the terms of the proposed settlement, the defendant must pay nearly $35.3 million plus interest, while an additional $2 million payment plus interest is subject to forfeiture to the U.S. The proposed settlement notes that the defendant paid $35.3 million in restitution to commercial customers who utilized the bank’s FX services. According to the order, the whistleblower who filed a declaration in 2016 with the U.S. under the Financial Institutions Anti-Fraud Enforcement Act will receive $1.6 million of the civil penalty. The DOJ sent a letter informing the court “that the United States and [the bank] have entered into a proposed Stipulation and Order of Settlement and Dismissal (the ‘Settlement’) resolving this action.”
SEC charges Florida payday lender with making fraudulent misrepresentations in offering
On September 27, the SEC filed charges against a Florida-based payday lender and its CEO (collectively, “defendants”) for fraudulently raising more than $66 million through the sale of promissory notes to hundreds of retail investors, including members of the South Florida Venezuelan-American community. The SEC charges the defendants with falsely promising investors that their money would be used solely to make small-dollar, short-term loans and for associated costs. However, the defendants allegedly misappropriated roughly $2.9 million for personal use, transferred approximately $3.6 million to family and friends without an apparent legitimate business purpose, and used at least $19.2 million of investor funds to make Ponzi-like payments to other investors. The complaint further contends that the defendants mislead investors by promising high annual returns and representing that the business was profitable, and made misrepresentations about the safety and security of the promissory notes. The SEC’s complaint alleges violations of the registration and antifraud provisions of the federal securities laws, and charges the CEO with acting as an unregistered broker. The complaint seeks a permanent injunction against the defendants, disgorgement with prejudgment interest, civil penalties, and an officer and director ban against the CEO.
SEC claims principals misled investors about subprime auto loans
On September 23, the SEC filed a complaint against two former principals of a subprime automobile finance company for allegedly misleading investors about certain subprime auto loans. According to the SEC, the defendants made false and misleading statements and engaged in deceptive conduct concerning the company’s servicing practices in connection with a $100 million offering backed by a pool of subprime auto loans. The SEC alleged that the defendants took measures to artificially inflate the value of the collateral underlying the offering, such as by (i) including poorly-performing and delinquent loans that were disguised to appear to be performing better than they really were; (ii) applying “fake borrower payments” to delinquent loans; and (iii) extending terms on delinquent loans without contacting the borrower to disguise how far behind the borrowers were on payments. Because of these improper practices, the SEC claimed that servicing and performance information provided by the company to investors at the time of the offering and later on was false. The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, and seeks permanent injunctions, officer and director bars, disgorgement with prejudgment interest, and civil penalties.
SEC charges cryptocurrency lending platform involved in $2 billion scheme
On September 1, the SEC filed a complaint against an online cryptocurrency lending platform, its founder, and an additional executive and his affiliated company (collectively, “defendants”) alleging they fraudulently raised approximately $2 billion from retail investors through a global unregistered offering of investments involving digital assets. According to the SEC, the defendants sold securities in the form of investments tied to the company’s lending program, and falsely promised investors that its purported proprietary “volatility software trading bot” could generate monthly returns as high as 40 percent. However, the SEC alleged that instead of trading investor funds, the defendants used the funds for their own benefit, such as transferring funds to a digital wallet controlled by their top U.S. promoter (one of the defendants here). To hide the fact that they were not trading the funds as promised, the SEC claimed the defendants “conducted a Ponzi-like scheme in which they at times used funds deposited by newer investors in order to satisfy withdrawal demands made by earlier investors.” The SEC charged the defendants with violating antifraud and registration provisions of the federal securities laws, and is seeking injunctive relief, disgorgement plus prejudgment interest, and civil penalties. In a parallel action, the DOJ announced the same day that the top U.S. promoter pleaded guilty to criminal charges for his role in the cryptocurrency scheme.
DOJ charges payment processing executives involved in $150 million scheme
On August 26, the DOJ unsealed an indictment in the District of Massachusetts against four individuals, charging them with “conspiring to deceive banks and credit card companies into processing more than $150 million in credit and debit card payments on behalf of merchants involved in prohibited and high-risk businesses, including online gambling, debt collection, debt reduction, prescription drugs, and payday lending.” According to the announcement, executives of a Los Angeles-based payment processing company secured payment processing for these high-risk businesses through fraudulent misrepresentations about merchant clients. As a payment processor, the company “enabl[ed] merchant clients to accept debit and credit card payments over global electronic payment networks run by major card brands” and “served as an intermediary between its merchant clients and financial institution members of the card brand networks.” Two of the individuals were charged with conspiring to commit wire fraud, and two others were charged with conspiring to commit wire fraud and bank fraud. Among other things, the DOJ asserts that the individuals and their co-conspirators allegedly made fraudulent misrepresentations to financial institutions, card brands, and others about the type of transactions that were being processed along with the true identities of the merchant clients, created shell companies and fake websites to make it appear that they were selling low-risk goods, and “miscategorized the true nature of the transactions” by using industry-standard codes.
SEC sues mutual fund for diverting investor funds into shell companies
On June 21, the SEC filed a complaint against a Cayman Islands-registered mutual fund and its operators (collectively, “defendants”) in the U.S. District Court for the Southern District of New York alleging they diverted millions of dollars in investor funds to shell companies under the defendants’ control through uncollateralized loan transactions, and issued “false or misleading statements of material facts to investors to disguise their misconduct.” According to the SEC, the defendants have also blocked investors from redeeming the roughly $106 million they invested in the fund, and have transferred $64 million of the investors’ deposits into the fund’s brokerage account, from which the assets were allegedly “subject to further dissipation and misappropriation.” The SEC’s complaint alleges violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, and seeks a permanent injunction against the defendants, a permanent ban prohibiting the participation in future securities offerings through entities owned or controlled by the defendants, disgorgement of ill-gotten gains, civil penalties, and an asset freeze.
FinCEN recognizes law enforcement agencies for use of BSA data
On June 24, the Financial Crimes Enforcement Network (FinCEN) honored the recipients of its 2021 Law Enforcement Awards Program, which recognizes agencies that use Bank Secrecy Act (BSA) data provided by financial institutions to successfully pursue and prosecute criminal investigations. The awards were presented in eight different categories related to: (i) Covid-19 fraud; (ii) cyber threats; (iii) transnational organized crime; (iv) transnational security threats; (v) state and local law enforcement; (vi) third-party money launderers; (vii) a suspicious activity review team; and (viii) significant fraud. Awards work included investigation into Paycheck Protection Program fraud that resulted in the seizure of case over $3 million, seizure of over $47 million dollars in narcotics proceeds, and seizure of 300 cryptocurrency accounts, among other work. FinCEN acting Director Michael Mosier stated that “[t]he law enforcement work that we recognize today highlights both the importance of an effective partnership between FinCEN, financial institutions, and our law enforcement agencies, and the value of BSA reporting in protecting the American people from fraud, cybercrime, and the illicit finance threats confronting our nation.”
MSB out from under deferred prosecution agreement
On June 10, the U.S. District Court for the Middle District of Pennsylvania granted the DOJ’s unopposed motion to dismiss anti-money laundering charges brought against a money services business, ending an extended deferred prosecution agreement (DPA) related to deficiencies in the company’s anti-fraud and anti-money laundering (AML) programs. As previously covered by InfoBytes, the DOJ filed charges against the company in 2012 for allegedly “willfully failing to maintain an effective AML program and aiding and abetting wire fraud,” including scams targeting the elderly and other vulnerable groups that involved victims sending funds through the company’s money transfer system. In 2018, the DOJ and the company extended and amended the DPA through May 2021 after the DOJ alleged that the company continued to experience significant weaknesses in its AML and anti-fraud programs. At the time, the company agreed to, among other things, comply with additional enhanced anti-fraud and AML compliance obligations. The DOJ noted in its motion to dismiss with prejudice that the company has forfeited $225 million as required and has “satisfied the conditions and obligations imposed under the DPA and the Amendment.” Additionally, the DOJ confirmed that an independent compliance monitor has certified that the company’s “anti-fraud and anti-money laundering compliance program, including its policies and procedures, are reasonably designed and implemented to detect and prevent fraud and money laundering and to comply with the Bank Secrecy Act.”
FTC may seek civil penalties under Covid-19 Consumer Protection Act
Recently President Trump signed the Consolidated Appropriations Act, 2021—a funding measure which extends certain emergency authorities and temporary regulatory relief contained in the CARES Act (covered by InfoBytes here)—that includes a provision under Title XIV Covid-19 Consumer Protection Act, which allows the FTC to seek civil penalties for first-time violations of the FTC Act related to Covid-19 scams and deceptive practices. Specifically, the provision targets conduct “associated with—(1) the treatment, cure, prevention, mitigation, or diagnosis of COVID-19; or (2) a government benefit related to COVID-19.” Such a violation would be “treated as a violation of a rule defining an unfair or deceptive act or practice prescribed under section 18(a)(1)(B) of the Federal Trade Commission Act (15 U.S.C. 57a(a)(1)(B)),” with violators subject to civil penalties. This authority is granted to the FTC for the duration of the Covid-19 pandemic.