Securities Industry Commentator by Bill Singer Esq

Two Towering Dissents Against CFTC Order Involving Goldman Sachs (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/7154/goldman-sachs-cftc/
Yet another regulator pulls its punches when it comes to one of the Big Boys. As if a smaller firm or individual would have gotten off as lightly as Goldman Sachs in response to a regulator's finding that the firm "violated the cease-and-desist provision of a prior order." $5 million in fines probably is less than what Goldman spends on toilet paper each day. CFTC Commissioner Pham offers a compelling dissent voicing concerns about the regulator's failure to factor in the stresses of the Covid pandemic. In contrast, CFTC Commissioner Johnson goes for the jugular with her admonition that "the civil monetary penalty imposed today is quite literally less than the profit Goldman can earn by the end of the day today."

Bill Singer, Esq. Files Form TCR With SEC Seeking Investigation Of FINRA Election Interference (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/7143/bill-singer-finra-election-sec/
I have filed a Form TCR with the SEC and have asked the federal regulator to investigate FINRA’s conduct of the 2023 Small Firm Governor election, which is so tarnished that even if the number of votes cast (including abstentions) rises to the one-third quorum, the victorious candidate will never be viewed as legitimate. If FINRA 's Board of Governors will not declare the 2023 election invalid and order a new vote without the interference of the proxy solicitor, then I call upon the uncontested candidates to voluntarily withdraw from the election. Shamefully, no sitting Governor has spoken out against FINRA's election interference; but, in truth, we have come to expect such equivocation from this lackluster Board.

Financial Professionals Coalition, Ltd.
JOIN TODAY -- FREE MEMBERSHIP
https://www.finprocoalition.com/#members

A Clearinghouse of Solutions
for
Financial Professionals

The Financial Professionals Coalition, Ltd. is a diverse resource for over 1.2 million registered representatives, associated persons, traders, bankers, back-office staff, and owners of broker-dealers and registered investment advisors. The Coalition provides courtesy consultations with industry experts. Membership is free.

RAO, Circuit Judge: It is a fundamental principle of administrative law that agencies must treat like cases alike. The Securities and Exchange Commission recently approved the trading of two bitcoin futures funds on national exchanges but denied approval of Grayscale’s bitcoin fund. Petitioning for review of the Commission’s denial order, Grayscale maintains its proposed bitcoin exchange-traded product is materially similar to the bitcoin futures exchange-traded products and should have been approved to trade on NYSE Arca.

We agree. The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products. We therefore grant Grayscale’s petition and vacate the order.

In pertinent part, the DCCir Opinion notes that:

Even if the spot and futures markets are highly correlated and the respective ETPs are functionally identical, the Commission maintained Grayscale would not pass the first prong of the significant market test. Why? The Commission claimed “correlation analysis” does not “provide evidence of the causal economic relationship of interest: namely, whether fraud or manipulation that impacts spot bitcoin would also similarly impact CME bitcoin futures contracts.” Grayscale Order, 87 Fed. Reg. at 40,318 n.224. The Commission’s explanation is insufficient.

at Page 15 of the DCCir Opinion

In summarizing its dissatisfaction with the SEC overly facile handling of Grayscale's application, the Court stated that:

at Page 21 of the DCCir Opinion

DOJ

Four Men Convicted of $18M Global Investment Fraud Scheme (DOJ Release)
https://www.justice.gov/opa/pr/four-men-convicted-18m-global-investment-fraud-scheme
After a jury trial in the United States District Court for the Western District of Arkansas, John C. Nock, Brian Brittsan, Kevin Griffith, and Alexander Ituma were convicted of conspiracy to commit wire fraud, wire fraud, and conspiracy to commit money laundering; and, additionally, Nock was convicted of money laundering. As alleged in part in the DOJ Release,between at least 2013 and 2021, the Defendants:

conspired to engage in an investment fraud scheme through an entity known as “The Brittingham Group,” which Nock founded. Together, the four defendants falsely represented the nature of their investment offerings and promised outsize returns to victims that, in reality, the defendants could not and did not produce. To promote and conceal the conspiracy, Nock and Brittsan directed victims to send their money to bank accounts that Griffith, Ituma, and other co-conspirators controlled. Once the money was in the hands of the co-conspirators, the defendants transferred victim money through a complex web of worldwide bank accounts.

“Plain and simple, these four individuals ran a fraudulent scheme. They falsely represented the nature of their business and lied about potential investment returns to bilk unsuspecting victims out of more than $18 million,” said IRS Criminal Investigation (IRS-CI) Chief Jim Lee. “I commend the Criminal Division’s Fraud Section who prosecuted the case, and our special agents and partners at the FBI uncovered the complex web of financial transactions that led to the defendants’ convictions yesterday.”

Two Individuals Admit Conspiring with Convicted Ponzi Schemer and Others to Defraud Investors of Tens of Millions of Dollars (DOJ Release)
https://www.justice.gov/usao-nj/pr/two-individuals-admit-conspiring-convicted-ponzi-schemer-and-others-defraud-investors
In the United States District Court for the District of New Jersey, Christopher Anderson and Richard Curry pled guilty to Informations charging them with one count of conspiracy to commit securities fraud. As alleged in part in the DOJ Release:

Weinstein, Aryeh “Ari” Bromberg, Joel Wittels, Shlomo Erez, and Alaa Hattab were previously charged by complaint with conspiracy to commit wire fraud and conspiracy to obstruct justice based on allegations arising from the same scheme in which Anderson and Curry pleaded guilty today. That complaint remains pending.

Anderson and Curry admitted, among other things, to conspiring with each other, Weinstein, Bromberg, Wittels, Hattab and Erez to make materially false and misleading statements and omissions to investors and potential investors. These statements included actively concealing Weinstein’s identity, history of fraud and role in purported investments, and falsely claiming that investors funds would be used to invest in lucrative deals.

Weinstein was convicted two times in New Jersey federal court for defrauding investors. His first case involved a real estate Ponzi scheme, and his second case stemmed from additional fraud Weinstein committed while on pretrial release. For these crimes, which resulted in combined losses to investors of approximately $230 million, Weinstein was sentenced to serve 24 years in prison, followed by three years of supervised release. On Jan. 19, 2021, after Weinstein had served less than eight years in prison, the President of the United States at that time commuted Weinstein’s term to time served, leaving intact the rest of his sentence.

Qakbot Malware Disrupted in International Cyber Takedown / Qakbot Malware Infected More Than 700,000 Victim Computers, Facilitated Ransomware Deployments, and Caused Hundreds of Millions of Dollars in Damage (DOJ Release)
https://www.justice.gov/usao-cdca/pr/qakbot-malware-disrupted-international-cyber-takedown
In what DOJ characterizes as the "largests U.S.-led financial and technical disruption of a botnet infrastructure," the Qakbot malicious code is being deleted from victim computers, preventing it from doing any more harm. Also, DOJ seized over $8.6 million in cryptocurrency in illicit profits. As alleged in part in the DOJ Release:

[Q]akbot, also known by various other names, including “Qbot” and “Pinkslipbot,” is controlled by a cybercriminal organization and used to target critical industries worldwide. The Qakbot malware primarily infects victim computers through spam email messages containing malicious attachments or hyperlinks. Once it has infected a victim computer, Qakbot can deliver additional malware, including ransomware, to the infected computer. Qakbot has been used as an initial means of infection by many prolific ransomware groups in recent years, including Conti, ProLock, Egregor, REvil, MegaCortex, and Black Basta. The ransomware actors then extort their victims, seeking ransom payments in bitcoin before returning access to the victim computer networks.

These ransomware groups caused significant harm to businesses, healthcare providers, and government agencies all over the world, including to a power engineering firm based in Illinois; financial services organizations based in Alabama, Kansas, and Maryland; a defense manufacturer based in Maryland; and a food distribution company in Southern California. Investigators have found evidence that, between October 2021 and April 2023, Qakbot administrators received fees corresponding to approximately $58 million in ransoms paid by victims.

The victim computers infected with Qakbot malware are part of a botnet (a network of compromised computers), meaning the perpetrators can remotely control all the infected computers in a coordinated manner. The owners and operators of the victim computers are typically unaware of the infection.

As part of the takedown, the FBI was able to gain access to Qakbot infrastructure and identify over 700,000 computers worldwide, including more than 200,000 in the United States, that appear to have been infected with Qakbot. To disrupt the botnet, the FBI was able to redirect Qakbot botnet traffic to and through servers controlled by the FBI, which in turn instructed infected computers in the United States and elsewhere to download a file created by law enforcement that would uninstall the Qakbot malware. This uninstaller was designed to untether the victim computer from the Qakbot botnet, preventing further installation of malware through Qakbot.

The scope of this law enforcement action was limited to information installed on the victim computers by the Qakbot actors. It did not extend to remediating other malware already installed on the victim computers and did not involve access to or modification of the information of the owners and users of the infected computers.

Bill Singer's Comment: There are times when prosecutors and regulators do their job in a superlative fashion; and this is one of those moments. Bravo! Not only was the threat responded to in a relatively short period of time but the actions seemed to be effective and measured. That being said, malware (being what it is) is an ever evolving threat that adapts and adopts to the best of efforts to contain its harm.

Former Stockbroker Pleads Guilty to Penny-Stock Securities Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-ma/pr/former-stockbroker-pleads-guilty-penny-stock-securities-fraud-scheme
In the United States District Court for the District of Massachusetts, Joseph A. Padilla pled guilty to one count of conspiracy to commit securities fraud, two counts of securities fraud and one count of attempting to cause the production of an identification document without lawful authority. As alleged in part in the DOJ Release:

Padilla is a former stockbroker who was barred from the securities industry in 2012 by the U.S. Securities and Exchange Commission (SEC). Between 2020 and 2022, Padilla allegedly conspired with others to commit securities fraud by facilitating and participating in market manipulation schemes involving the concealed-control of the shares of penny-stock companies.

Specifically, between October 2020 and July 2022, Padilla participated in a market manipulation scheme involving the shares of Oncology Pharma, Inc., a thinly traded company that traded on the over-the-counter securities market under the ticker symbol ONPH. As part of the scheme, a co-conspirator allegedly caused nearly all of ONPH’s free-trading shares to be transferred to multiple brokerage accounts for the benefit of Padilla’s clients at the Cayman Islands broker Valor Capital, with which Padilla had a close, unofficial association. Padilla then engaged in manipulative trading in ONPH designed, at least in part, to artificially drive up the company’s stock price, after which Padilla began dumping the ONPH shares—which were under common control—to unsuspecting investors in Massachusetts and throughout the United States during a promotional campaign, generating illicit proceeds alleged to be in the tens of millions of dollars.

Additionally, between January 2020 and April 2021, Padilla participated in a similar scheme involving the shares of Charlestowne Premium Beverages Inc., a thinly traded company that traded on the over-the-counter market under the ticker symbol FPWM. As part of the scheme, Padilla orchestrated an effort designed, at least in part, to artificially increase Charlestowne’s stock price. He then facilitated the sale of millions of Charlestowne’s shares during a promotional campaign to unsuspecting investors in Massachusetts and throughout the United States, generating illicit proceeds alleged to be in the millions of dollars.

Padilla was arrested on a criminal complaint in August 2022 and released on pre-trial conditions, which included surrendering his passport and not obtaining another passport. While on pre-trial release, Padilla attempted to acquire a fraudulent Ukrainian passport so that he could flee prosecution. Padilla was arrested in January 2023 for violating his terms of release and his pre-trial release was revoked.

Alleged Business Scammers Indicted After Nationwide Scheme to Defraud Investors, Including Elderly, of More than $30M (DOJ Release)
https://www.justice.gov/usao-ut/pr/alleged-business-scammers-indicted-after-nationwide-scheme-defraud-investors-including
In the United States District Court for the District of Utah, an Indictment was filed charging William J. Bowser; Christopher J. Ashby; Scott W. Beynon; Jordan S. Nelson; Scott L. Rutherford; John D. Hamrick; Edmund and Wheeler Inc., and the company's Vice President and Director with 18 counts of wire fraud. As alleged in part in the DOJ Release, from January 2015 through May 2019, the Defendants:

conspired together to engage in a nationwide scheme to defraud investors. The victims, who were mostly retired and elderly individuals, were defrauded of more than $30,000,000 after being induced by the defendants to invest in Noah Event Centers. As alleged in the indictment, Noah Event Centers were, collectively, an unprofitable enterprise sustained only through infusions of new investor funds. The defendants did not use investor funds as promised in their marketing materials, purchase agreements and related representations. Instead, they misappropriated and diverted investor funds meant for the development and construction of new event centers to pay large commissions, Noah’s operations, prior investors, construction costs of other event centers, and rents on previously sold Noah Event Centers. As part of their alleged scheme, the defendants used the internet, telephone, email, and other means to promote, offer and sell fractional Tenant-in-Common interests in five Noah Event Centers through the use of a network of financial planners, 1031 exchange specialists, real estate brokers and other salespeople, using glossy marketing materials showing pictures of beautifully constructed buildings and promising impressive long-term financial returns.

SEC

SEC Charges China-Based Big Data Analytics Company with Failure to Disclose Related Party Payments, including more than $5 million that benefited the CEO’s Family / Company also Charged with Misuse and Unreported Use of IPO Proceeds (SEC Release)
https://www.sec.gov/litigation/litreleases/lr-25822
In the United States District Court for the Southern District of New York, the SEC filed a Complaint charging Gridsum Holding, Inc. (formerly Nasdaq: GSUM) and its Chief Executive Officer Guosheng Qi with violating Sections 17(a)(1)-(3) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and further charging Gridsum with violation Sections 13(a) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder; and, also, charging Qi with violating Exchange Act Rules 13a-14 and 13b2-2, and having aided and abetted Gridsum’s violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. As alleged in part in the SEC Release:

[F]rom September 2016 to June 2020, Gridsum, and Qi directed a series of undisclosed payments to Qi’s wife and mother-in-law for supposed consulting contracts between Gridsum and a company controlled by Qi’s mother-in-law. The complaint alleges that the total value of these related party transactions equaled $7.1 million, and Qi and his family directly or indirectly received at least $5.2 million.

According to the complaint, Gridsum and Qi also falsely stated in Gridsum’s 2016, 2017, and 2018 annual reports that no IPO proceeds were used to pay officers, directors, or their associates. The SEC alleges that instead, Gridsum’s officers, directors, and associates received approximately $3.8 million of IPO proceeds that were paid from U.S. bank accounts that Qi controlled. According to the complaint, Qi’s wife received approximately $2.5 million of these IPO proceeds.

SEC Directs Equity Exchanges and FINRA to Improve Governance of Market Data Plans (SEC Release)
https://www.sec.gov/news/press-release/2023-166
The SEC issued an Order https://www.sec.gov/rules/other/2023/34-98271.pdf directing the equity exchanges and the Financial Industry Regulatory Authority (FINRA) (the participants) FINRA to file a new national market system plan (NMS plan) to replace the three existing national market system plans that govern the public dissemination of real-time, consolidated equity market data for national market system stocks.
Bill Singer's Comment: Yet the latest in a multi-year string of regulatory pronouncements coming from an inept federal regulator and directed to apparently incompetent market participants. The SEC's abysmal failure to foster much-needed solutions to the shortcomings of the NMS proves that the Commission-model of federal regulation is an failed anachronism addled by partisanship and ineffective managers.

SEC Charges Recidivist and Others in Real Estate Offering Fraud (SEC Release)
sec.gov/litigation/litreleases/lr-25818
In the United States District Court for the Northern District of Texas, the SEC filed a Complaint https://www.sec.gov/files/litigation/litreleases/2022/comp25818.pdf that charges Brady Speers, Chatree “Ben” Thiranon, and GHAP, LLC d/b/a Blue Star Texas with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act, and the securities-registration provisions of Sections 5(a) and 5(c) of the Securities Act. Without admitting or denying the allegations in the SEC Complaint, Speers, Thiranon, and Blue Star agreed to a partial settlement, consented to the entry of a judgment that permanently enjoins them from future violations of the charged provisions and orders each to pay disgorgement, prejudgment interest, and civil penalties in amounts that will be determined by the court upon future motion of the SEC. Additionally, Speers and Thiranon consented to conduct-based injunctions and bars from serving as an officer or director of a public company. Finally, the Defendants have agreed to the appointment of a liquidation agent to sell properties that are under renovation. As alleged in part in the SEC Release:

[S]peers, Thiranon, and Blue Star, a company they owned and controlled, raised funds by misrepresenting and omitting material information. The SEC’s complaint alleges that Blue Star told investors that their funds were secured by property interests in the real estate assets underlying the investments, when in reality Blue Star only secured investor interests in isolated instances and sometimes never even held title to the properties at issue. The SEC also alleges that Blue Star rolled over investor funds to other projects without required authorization. Additionally, the complaint alleges that Blue Star touted Speers’s business experience and background without also disclosing that the SEC charged him with violations of the antifraud provisions of the federal securities laws in 2015 and that he filed for personal bankruptcy on two separate occasions.

SEC Charges Accountant for Aiding and Abetting a $110 Million Ponzi Scheme and Orchestrating a Separate Fraudulent Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/lr-25819
In the United Stated District Court for the Northern District of Georgia, the SEC filed a Complaint that charges William V. Conn, Jr., Certified Public Accountant with violating the antifraud provisions of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") and Rule 206(4)-8 thereunder; and further charges Conn with aiding and abetting John Woods and Horizon Private Equity, I, Horizon Private Equity, III, LLC in previously charged violations of the antifraud provisions of Sections 206(1) and 206(2) of the Advisers Act, Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Actand Rule 10b-5 thereunder. As alleged in part in the SEC Release:

[B]etween 2007 and 2021, Conn agreed to serve as the public-facing manager of Horizon III, so Woods could perpetrate a Ponzi scheme that raised more than $110 million from over 400 investors without being detected by the investment adviser firm at which he was employed. In August 2021, the SEC charged Woods with multiple counts of securities fraud based on his role in orchestrating the Horizon III Ponzi scheme. The Complaint also alleges that, between 2008 and 2022, Conn solicited 21 of his accounting clients to invest nearly $2 million in his investment fund, Horizon I. Initially, Conn represented that the money would be invested in selected hedge funds. Ultimately, however, Conn allegedly misappropriated and misused the investor funds to support his accounting business, pay personal expenses, and pay expenses related to a failed real-estate project.

SEC Charges Plug Power for Financial Reporting, Accounting, and Controls Violations / Company to pay an additional springing penalty if it fails to remediate continuing controls deficiencies (SEC Release)
https://www.sec.gov/enforce/34-98243-s
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/files/litigation/admin/2023/34-98243.pdf that found that the company had violated the financial reporting, accounting, and controls provisions of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange, and Rules 13a-1, 13a-13, and 13a-15(a) – (c) thereunder, Plug Power, Inc. agreed to pay a civil penalty of $1.25 million and to implement undertakings, including a requirement to fully remediate the company’s material weakness in internal control over financial reporting ("ICFR"), and ineffective disclosure controls and procedures ("DCP") within one year; or, if the undertakings are not timely satisfied the company will pay an additional civil penalty of $5 million. As alleged in part in the SEC Release:

[F]rom 2018 through the third quarter of 2020, Plug Power failed
to properly account for its right-of-use assets and lease liabilities for certain sale-leaseback transactions, failed to properly classify and present certain costs related to research and development activities as cost of revenue, and failed to properly estimate loss accruals for extended-maintenance contracts. The SEC’s Order finds that, due to these and other accounting errors, Plug Power announced on March 16, 2021, that its prior annual reports on Form 10-K for 2018 and 2019, and prior quarterly reports on Form 10-Q for 2019 and 2020, should no longer be relied upon. The SEC’s Order further finds that Plug Power restated these financial statements in its 2020 Form 10-K filed on May 14, 2021. According to the SEC’s Order, Plug Power’s restatement also identified a material weakness in internal control over financial reporting (ICFR), and ineffective disclosure controls and procedures (DCP), due to the company’s failure to maintain a sufficient complement of trained, knowledgeable personnel to execute their responsibilities for certain financial statement accounts and disclosures. Despite these deficiencies, Plug Power raised over $5 billion from investors during the relevant filing period, as defined in the SEC’s Order.

The SEC’s Order further finds that Plug Power prepared a remediation plan during the restatement process and began implementing the plan in 2021. In Plug Power’s 2022 Form 10-K, the company disclosed that management considered certain material weaknesses to be remediated as of December 31, 2022. As the SEC’s Order finds, however, Plug Power’s material weakness in ICFR has not been fully remediated.

SEC Charges Citigroup Global Markets Inc. with Recordkeeping Failures concerning Underwriting Expenses (SEC Release)
https://www.sec.gov/news/press-release/2023-165

Without admitting or denying the findings in an SEC Order https://www.sec.gov/files/litigation/admin/2023/34-98238.pdf that the company had violated Section 17(a) of the Exchange Act and Rule 17a-3 thereunder, Citigroup Global markets Inc. ("CGMI") consented to a cease-and-desist order, a censure, and a civil penalty of $2.9 million. As alleged in part in the SEC Release:

[F]rom at least 2009 through May 2019, CGMI used an unsubstantiated and unverified method to calculate and record indirect expenses associated with its work as an underwriter. According to the SEC’s order, CGMI calculated an indirect expense amount based on a fixed percentage of the underwriting fee for each deal where it was engaged as a lead underwriter and then, using fixed “allocation grids,” divided that amount into specific categories of expenses. The order finds that, upon calculating these indirect expenses through this unsubstantiated method, CGMI recorded the amounts in its general ledger. According to the order, for at least a decade, CGMI did not know the basis of this indirect expense calculation method and conducted no review or similar process to verify that this method was reasonable.

SEC Obtains Final Judgment against Bittrex, Inc. and Bittrex Global Gmbh (SEC Release)
https://www.sec.gov/litigation/litreleases/lr-25817
In the United States District Court for the Western District of Washington, the SEC obtained a Final Judgment against Bittrex Inc and its co-founder/former Chief Executive Officer William Shihara from violating Sections 5, 15(a), and 17A of the Securities Exchange; and further enjoins Bittrex’s foreign affiliate, Bittrex Global GmbH from violating Section. Bittrex and Bittrex Global will pay, on a joint and several basis, disgorgement of $14.4 million, prejudgment interest of $4 million, and a civil penalty of $5.6 million, for a total monetary payment of $24 million. As alleged in part in the SEC Release:

[B]ittrex acted as an unregistered broker, exchange, and clearing agency by providing services to U.S. investors in connection with crypto assets that the SEC’s complaint alleged were offered and sold as securities. The complaint further alleged that Bittrex and Shihara directed issuers who sought to have their crypto assets made available for trading on Bittrex’s platform to first delete from public channels certain “problematic statements” that Shihara believed would lead a regulator, such as the SEC, to investigate whether the crypto asset was offered and sold as a security. Prior to the filing of the SEC’s complaint, Bittrex announced its intention to shut down its trading platform in the United States and, on May 8, 2023, filed for bankruptcy in the state of Delaware.

SEC Charges Archipelago Trading Services with Failing to File Suspicious Activity Reports (SEC Release)
https://www.sec.gov/news/press-release/2023-164
Without admitting or denying the findings in an SEC Order that the company violated Section 17(a) of the Securities Exchange Act and Rule 17a-8 when it failed to file hundreds of Suspicious Activity Reports ("SARs) between August 2012 and September 2020, Archipelago Trading Services Inc. ("ATSI") agreed to a censure and a cease-and-desist order plus a $1.5 million penalty. As alleged in part in the SEC Release:

[ATSI]’s sole line of business is to operate an OTC equity securities ATS, known as Global OTC, which is used by broker-dealers to execute trades in OTC securities. Global OTC plays a significant role in executing trades of microcap and penny stock securities, which are not listed on any national exchange and tend to be high-risk securities. Despite thousands of high-risk microcap and penny stock securities transactions executed daily on Global OTC, the SEC order found that ATSI failed to establish an anti-money laundering surveillance program for its transactions until September 2020. ATSI therefore failed to surveil transactions executed on Global OTC for possible red flags regarding suspicious manipulative trading activity, including possible spoofing, layering, wash trading, and pre-arranged trading. As a result, the SEC’s order found, ATSI failed to file at least 461 SARs, most of which involved microcap or penny stock securities.

Bill Singer's Comment: Clearly, ATSI's in-house Compliance/Surveillance Department failed to do its job. Worse, the failure transpired "between August 2012 and September 2020," which means that the lapse covered over eight years. Somewhat lost in the SEC's case, however, is that regulation also failed to do its job. Inherent in the SEC's allegations is that for over eight years, the SEC apparently took ATSI's word for the fact that the firm had a robust AML program -- which according to the SEC Order, the firm did not. Exacerbating this compliance/regulatory disaster is that the SEC is entering into a settlement in 2023 for eight years of industry misconduct that ended about three years ago in September 2020. Between the in-house blindness and the regulatory ineptitude, no investor should sleep well.

SEC Charges REIT Advisors and Their Principal for Improper Expense Reimbursements (SEC Release)
https://www.sec.gov/enforce/33-11227-s
Without admitting or denying the findings in an SEC Order that they had violated the antifraud provisions of Sections 17(a)(2) and 17(a)(3) of the Securities Act, Legacy Hospitality II, LLC, Legendary Capital REIT III, LLC, and their principal Corey R. Maple agreed to a cease-and-desist order, to pay total disgorgement of $2,746,900 (addition to a prior $2.1 million reimbursement that Legacy made to Fund 2), total interest of $544,444.17, and total penalties of $1,475,000. Legacy and Legendary will also perform undertakings that include the retention of an independent consultant to review their policies, procedures, and controls relating to the reimbursement of fees and expenses by any REITs they manage. As alleged in part in the SEC Release:

[F]rom 2014 through 2020, Lodging Opportunity Fund Real Estate Investment Trust ("Fund 2") and Lodging Fund REIT III, Inc. ("Fund 3"), collectively raised approximately $215 million from investors for the purpose of investing in and managing hotels nationwide. Fund 2, which did not solicit investments after 2018, was managed by Legacy and Fund 3, which was formed in 2018, was managed by Legendary. As described in the order, Legacy, Legendary, and Maple represented to investors that Legacy and Legendary, not Funds 2 and 3, would be responsible for the overhead expenses from managing the REITs, primarily payroll and office rent. The order finds that from 2014 to 2020, the Respondents improperly directed Funds 2 and 3 to reimburse approximately $5 million of overhead expenses. According to the order, Maple received periodic distributions from Legacy and Legendary.

SEC Charges LA-Based Media and Entertainment Co. Impact Theory for Unregistered Offering of NFTs (SEC Release)
https://www.sec.gov/news/press-release/2023-163
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/files/litigation/admin/2023/33-11226.pdf, Impact Theory, LLC agreed to a cease-and-desist order and the company will pay over $6.1 million in disgorgement, prejudgment interest, and a civil penalty. Impact Theory agreed to destroy all Founder’s Keys in its possession or control, publish notice of the order on its websites and social media channels, and eliminate any royalty that Impact Theory might otherwise receive from future secondary market transactions involving the Founder’s Keys. As alleged in part in the SEC Release:

[F]rom October to December 2021, Impact Theory offered and sold three tiers of NFTs, known as Founder’s Keys, which Impact Theory called “Legendary,” “Heroic,” and “Relentless.” The order finds that Impact Theory encouraged potential investors to view the purchase of a Founder’s Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts. Among other things, Impact Theory emphasized that it was “trying to build the next Disney,” and, if successful, it would deliver “tremendous value” to Founder’s Key purchasers. The order finds that the NFTs offered and sold to investors were investment contracts and therefore securities. Accordingly, Impact Theory violated the federal securities laws by offering and selling these crypto asset securities to the public in an unregistered offering that was not otherwise exempt from registration.

NFTs & the SEC: Statement on Impact Theory, LLC by SEC Commissioner Hester M. Peirce and Commissioner Mark T. Uyeda
https://www.sec.gov/news/statement/peirce-uyeda-statement-nft-082823

Today the Commission brought its first non-fungible token (NFT)[1] enforcement action. We dissented in part because we disagreed with the application of the Howey analysis. Regardless of what one thinks of the Howey analysis, this matter raises larger questions with which the Commission should grapple before bringing additional NFT cases.

The facts underlying the settlement are mostly unremarkable: Impact Theory sold almost $30 million of NFTs along with making loud promises that the NFTs would increase in value. Purchasers of the NFTs shared the excitement; the order quotes one purchaser as saying: “Buying a founders key is [l]ike investing in Disney, Call of Duty, and YouTube all at once.” Order ¶ 9 C. However, the NFTs were not shares of a company and did not generate any type of dividend for the purchasers. The Commission charged Impact Theory with engaging in an unregistered securities offering on the theory that the NFTs were offered and sold as investment contracts. The settlement does not include fraud charges.

We understand why the Commission was concerned about this NFT sale. Even though we believe strongly that adults should be able to spend their money as they choose, we share our colleagues’ worry about the type of hype that entices people to spend almost $30 million for NFTs seemingly without having a clear idea about how they will use, enjoy, or profit from them. This legitimate concern, however, is not a sufficient basis to pull the matter into our jurisdiction. The handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract. We do not routinely bring enforcement actions against people that sell watches, paintings, or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items.

Even if the NFT sales here fit squarely within Howey, is this set of facts one that warrants an enforcement action? The typical cure for a registration violation is a rescission offer, which the company already made in the form of repurchase programs. The company offered to repurchase the NFTs from primary and secondary-market purchasers in December 2021 and August 2022. Order at ¶ 16. It paid out a total of $7.7 million worth of Ether. Presumably other purchasers likewise could have sold their NFTs back to the company.[2]

Because it is the first NFT settlement, this enforcement action raises many difficult questions. The Commission should have grappled with these questions long ago and offered guidance when NFTs first started proliferating. Nevertheless, having a discussion about NFTs now could help the Commission to approach the topic sensibly. Some questions we have include:

Non-fungible tokens are not an easy-to-characterize asset class, particularly because they can give the owner a wide array of rights to digital or physical assets. People are experimenting with a lot of different uses of NFTs. Consequently, any attempt to use this enforcement action as precedent is fraught with difficulty. Are there useful ways for the Commission to categorize NFTs for purposes of thinking about whether and how the securities laws apply to offers and sales?
If the Commission were to craft guidance for NFT creators seeking to understand potential intersections with the securities laws, what questions would be helpful for us to address?
How should recent legislative efforts to construct a framework for crypto inform our thinking about the application of securities laws to NFTs?
Is a securities law regime best suited to ensure that NFT purchasers obtain the information they need before buying an NFT? What type of information do these purchasers want? Might other regulatory frameworks be more appropriate?
If a securities law regime is best, how could SEC registration requirements be tailored to reflect the unique nature of NFTs?
Would compliance with any requirements be prohibitively costly? If so, what alternative approaches would be more workable, but still achieve the Commission’s objectives of protecting investors and the integrity of the marketplace?
Does this action indicate that the Commission generally views previous NFT offerings as securities offerings? If so, will the Commission provide specific guidance to those issuers describing what they need to do to come into compliance?
What, if any, restrictions should apply to secondary market sales of NFTs that the issuer sold as the object of an investment contract?
This settlement includes an undertaking by the issuer to destroy NFTs in its possession. What precedent does this set for future cases in which the NFTs at issue represent unique pieces of digital art or music?
The settlement includes an undertaking to “[r]evise the smart contract(s) or any other programming code(s) or computer protocol(s) underlying the KeyNFTs to eliminate any royalty.” Given that one of the promising features of NFTs is the ability to reward creators with royalties every time an NFT they created is sold, what precedent does this set for future cases?
= = =
[1] One definition of an NFT is:

An NFT is a unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset. Ownership of an NFT may provide the holder a right with respect to a digital file (such as a digital image, digital music, a digital trading card, or a digital sports moment) that typically is separate from the NFT. Alternatively, NFT ownership may provide the holder a right with respect to an asset that is not a digital file, such as a right to attend a ticketed event, or certify ownership of a physical item.

See Internal Revenue Service, https://www.irs.gov/pub/irs-drop/n-23-27.pdf at 1 (footnote omitted). See also https://crsreports.congress.gov/product/pdf/R/R47189.

[2] The money collected from the company as a result of this action will be distributed to purchasers of the NFTs through a Fair Fund. If purchasers receive such a distribution, it is unclear whether they will have to surrender their NFTs.

SEC Charges North Carolina Man in Fraudulent "Free-Riding" Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/lr-25816
Without admitting or denying the allegations in an SEC Complaint
https://www.sec.gov/files/litigation/complaints/2023/comp25816.pdf filed in the United States District Court for the Middle District of North Carolina charging him with violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, Deyonte Jahtori Anthony entered into a Consent Judgment, which would permanently enjoin him from violating the charged provisions, impose injunctions on his future brokerage activities, and impose a civil penalty in an amount to be determined at a later date by the court upon motion of the Commission. As alleged in part in the SEC Release:

[B]etween July 1 and 6, 2022, Anthony opened a new brokerage account using a fraudulent application on which he overstated his personal income and then made $1 million in bogus deposits from his bank account, which held only nine cents at the time. The complaint also states that, before Anthony's deposits reversed for insufficient funds in his bank account, he used "immediate access" credit extended to him by his broker-dealer to purchase $199,956.65 in securities. According to the complaint, Anthony's broker-dealer discovered the scheme before Anthony could make any profits, froze his account, and liquidated his holdings.

SEC Awards $600,000 to Whistleblower Claimant
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-98236; Whistleblower Award Proc. File No. 2023-82)
https://www.sec.gov/files/rules/other/2023/34-98236.pdf
The Claims Review Staff ("CRS") issued a Preliminary Determination recommending a $600,000 Whistleblower Award to Claimant. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that:

[C]laimant provided substantial, ongoing assistance that included providing key evidence to support the Covered Action; and there was a substantial law enforcement interest in the information provided by Claimant given that it related to a type of violation that is often difficult to identify and assess.

SEC Awards About $1.5 Million to Whistleblower Claimant
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-98235; Whistleblower Award Proc. File No. 2023-81)
https://www.sec.gov/files/rules/other/2023/34-98235.pdf
The Claims Review Staff ("CRS") issued a Preliminary Determination recommending the recommending a Whistleblower Award of about $1.5 million to Claimant. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that:

[C]laimant provided helpful information that saved Commission staff time and resources, including providing ongoing assistance over the course of the investigation, identifying potential witnesses, and assisting with staff with document requests.

CFTC

CFTC Orders Goldman Sachs to Pay $5.5 Million for Recordkeeping Violations and Violating a Prior Commission Order (CFTC Release)
https://www.cftc.gov/media/9181/enfgoldmansachsorder082923/download
A CFTC Order settled charges against Goldman Sachs & Co. The CFTC Order finds that Goldman violated the cease-and-desist provision of a prior order and committed recordkeeping violations in connection with its failure to properly record and retain certain audio files; and the company is required to pay a $5.5 million civil monetary penalty and to cease and desist from further violations of the recordkeeping provisions of the Commodity Exchange Act and CFTC regulations. As alleged in part in the CFTC Release:

In November 2019, the CFTC entered an order that found Goldman failed to record the phone lines of a trading and sales desk for 20 calendar days in January and February 2014, after its recording hardware malfunctioned following a software patch. The CFTC ordered Goldman to pay a $1 million civil monetary penalty and to cease and desist from further violations of CFTC recordkeeping provisions.

The order entered today finds that, following the issuance of the November 2019 order, Goldman had additional recordkeeping failures, in violation of the cease-and-desist provision of the earlier order. Specifically, Goldman used a vendor service to record calls made on mobile devices. Beginning in March 2020, increased use of the vendor’s recording service during the pandemic led to increased failures in the vendor’s hardware. As a result, Goldman failed to fully record and retain thousands of mobile device calls. Goldman discovered the issue when investigating reports of poor call quality from employees using the recording service. An interim fix was implemented in May 2020, and the vendor’s hardware was replaced with an alternative system in September 2020.

Separately, beginning in March 2020, Goldman began using software from another vendor that was designed to replicate the experience of a hard-wired trading turret—a specialized phone setup used to facilitate trading—via a computer. In late May 2020, Goldman discovered a software issue where the system sometimes failed to properly record audio. As a result, Goldman failed to fully record and retain thousands of calls. After implementing an interim fix, a permanent fix in the form of a software update was completed in June 2022.

Bill Singer's Comment: Yet another regulator pulls its punches when it comes to one of the Big Boys. As if a smaller firm or individual would have gotten off as lightly as Goldman in response to a regulator's finding that "Goldman violated the cease-and-desist provision of a prior order." $5 million in fines probably is less than what Goldman spends on toilet paper each day. CFTC Commissioner Caroline Pham dissented from this Order https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement082923b based upon her concerns that the unprecedented impact of Covid placed impediments in the path of effective compliance; and, in part, she opined that:

I respectfully dissent from the order and settlement in the administrative proceeding In re Goldman Sachs & Co. LLC, because I believe that this enforcement action is fundamentally unfair, unjust, and does not best serve the public interest. Based on my review of the record, I believe that this enforcement action is wrong—we are not doing the right thing here on vendor issues arising out of the unprecedented move to remote work because of the COVID-19 pandemic, and I cannot support it.

Regulation by enforcement has a darker counterpart. This order and settlement reflects the Commission’s disturbing trend of “examination by enforcement”—where the Division of Enforcement imposes a disproportionately high civil monetary penalty for one-off, non-material operational or technical issues with no misconduct, harm to clients, or financial losses, and that every other major regulatory authority addresses through an examination program conducted by supervisory staff (i.e., examiners).

By taking this approach, the CFTC is an outlier amongst U.S. and non-U.S. regulators. It does not best serve the Commission’s mandate to provide oversight of market participants, and it does not meaningfully contribute to market integrity. Examination by enforcement is inherently ad hoc, not applied consistently across market participants, and does not provide a horizontal view to inform the Commission of potential systemic risk.

Federal Court Orders Texas Trading Advisor and Owner to Pay $100,000 Penalty for Registration Violations (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8770-23
The United States District Court for the Western District of Texas entered a Consent Order for permanent injunction, monetary sanctions, and equitable relief against BareIt Media LLC and its owner Ryan Masten. https://www.cftc.gov/media/9186/enfryanmastenconsentorder082923/download The Order requires Defendants to pay a $100,000 civil monetary penalty and permanently enjoins them from operating as commodity trading advisors (CTA) or associated persons (AP) of a CTA without first registering with the CFTC as required in the Commodity Exchange Act and CFTC regulations. As alleged in part in the CFTC Release:

[B]areIt Media did business as SignalPush from approximately May 1, 2013 through May 1, 2017. SignalPush offered customers and prospective customers the ability to obtain trade signals and to automate trading on binary options using those trade signals. According to the order, Masten controlled BareIt Media and solicited customers and prospective customers to sign up for the SignalPush service. During this time, BareIt Media was not registered as a CTA, and Masten was not registered as an AP of BareIt Media.

FINRA

Cybersecurity Alert - FINRA Notifies Member Firms of Joint CISA & FBI Cybersecurity Advisory (AA23-242A)
https://www.finra.org/rules-guidance/guidance/cybersecurity-alert-finra-notifies-member-firms-joint-cisa-fbi-advisory-aa23-242a

(Firms should also review this information with any vendors who provide information technology services to the firm.)

FINRA is highlighting a recent joint Cybersecurity and Infrastructure Security Agency (CISA) and Federal Bureau of Investigation (FBI) Cybersecurity Advisory published on August 30, 2023, which may be updated as new intelligence is uncovered. This Advisory complements the successful effort of the FBI and international partners to disrupt Qakbot on August 25, 2023, which included the seizure of over $8.6 million worth of crypto assets extorted from victims. As part of the successful operation, law enforcement agencies were able to identify over 700,000 computers that may have been infected by Qakbot, which has been implicated as one of the most active forms of ransomware in 2023. Threat actors typically deliver Qakbot via social engineering.

The Joint CISA and FBI Advisory provides an overview of Qakbot’s infrastructure and indicators of compromise (IOCs) of which organizations should be aware. The Cyber and Analytics Unit (CAU) within FINRA’s Member Supervision program suggests firms evaluate the IOCs with appropriate personnel to determine whether their systems, including any provided by vendors, are at risk.

Questions related to this Alert or other cybersecurity-related topics can be emailed to the CAU. As indicated in the joint Advisory, if potential compromise is detected, member firms should apply the incident response recommendations included in the CISA and FBI Advisory and report key findings to a local FBI Field Office or CISA at cisa.gov/report.

ALSO READ: Qakbot Malware Disrupted in International Cyber Takedown / Qakbot Malware Infected More Than 700,000 Victim Computers, Facilitated Ransomware Deployments, and Caused Hundreds of Millions of Dollars in Damage (DOJ Release)

FINRA Sanctions Network 1 Financial Securities and Its CCO for Supervision
In the Matter of Network 1 Financial Securities, Inc., and Michael Molinaro, Respondents (FINRA AWC 2021070851501)
https://www.finra.org/sites/default/files/fda_documents/2021070851501
%20Network%201%20Financial%20Securities%2C%20In
c.%20CRD%2013577%20and%20Michael%20R%20Molinaro
%20CRD%202358346%20AWC%20lp.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Network 1 Financial Securities, Inc. and Michael Molinaro submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Network 1 Financial Securities, Inc. has been a FINRA member firm since 2006 with 21 registered representatives at four branches; and that Molinaro was first registered in 1983, by 2014, he was registered with Network 1, and in 2017 became the firm's Chief Compliance Officer. In accordance with the terms of the AWC, FINRA imposed upon

Network 1 Financial Securities, Inc. a Censure, $200,000 fine, $533.587 in restitution, and an undertaking to certify compliance with the cited issues; and
Molinaro a $5,000 fine and three-month-suspension in Principal-only capacities.

As alleged in part in the "Overview" of the AWC [Ed: footnote omitted]:

From January 2016 through March 2022, Network 1 did not establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 and the Care Obligation of Rule 15l-1 of the Securities Exchange Act of 1934 (Regulation BI or Reg BI) as they pertain to excessive trading in violation of FINRA Rules 3110 and 2010. As of June 30, 2020, Network 1 also violated Reg BI’s Compliance Obligation by not establishing, maintaining, and enforcing WSPs reasonably designed to achieve compliance with Reg BI.

Additionally, from July 2017 through March 2022, Molinaro violated FINRA Rules 3110 and 2010 by not establishing, maintaining, and enforcing a supervisory system, including WSPs, reasonably designed to achieve compliance with FINRA Rule 2111 and, as of June 30, 2020, Reg BI, as they pertain to excessive trading.

FINRA Censures and Fines Lebenthal Financial Services For Consolidated Reports
In the Matter of Lebenthal Financial Services, Inc., Respondent (FINRA AWC 2021069350601)
https://www.finra.org/sites/default/files/fda_documents/2021069350601
%20Lebenthal%20Financial%20Services%2C%20Inc.
%20CRD%20137988%20AWC%20lp.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Lebenthal Financial Services, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Lebenthal Financial Services, Inc. has been a FINRA member firm since 2006 with 21 registered representatives at four branches. In accordance with the terms of the AWC, FINRA imposed upon Lebenthal Financial Services, Inc. a Censure and $50, 000 fine . As alleged in part in the "Overview" of the AWC:

From at least April 2010 until April 2021, Lebenthal Financial failed to reasonably supervise the use of consolidated reports in violation of FINRA Rules 3110 and 2010,and NASD Rule 3010. 2 In addition, the firm disseminated to customers consolidated reports that omitted material disclosures in violation of FINRA Rules 2210 and 2010. Finally, the firm failed to preserve copies of the consolidated reports it disseminated to customers in violation of Section 17(a) of the Securities Exchange Act of 1934, Exchange Act Rule 17a-4, and FINRA Rules 4511 and 2010.

Permalink

Securities Industry Commentator by Bill Singer Esq

Search RRBDLaw

Related Topics

Previous Entries

Tag Cloud