Dec 13, 2018 | Shareholder & Investor Protection
On December 12, 2018, the SEC announced that two former executives behind an allegedly fraudulent initial coin offering (“ICO”) stopped by the SEC earlier this year have been ordered in federal court to pay nearly $2.7 million and prohibited from serving as officers or directors of public companies or participating in future offerings of digital securities.
The SEC reported that AriseBank’s then-CEO, Jared Rice, Sr. (“Rice”), and then-COO, Stanley Ford (“Ford”), were accused of offering and selling unregistered investments in their purported “AriseCoin” cryptocurrency by depicting AriseBank as a first-of-its-kind decentralized bank offering a variety of services to retail investors.
“Rice and Ford lied to AriseBank’s investors by pitching the company as a first-of-its kind decentralized bank offering its own cryptocurrency for customer products and services,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office. “The officer-and-director bar and digital securities offering bar will prevent Rice and Ford from engaging in another cryptoasset-based fraud.”
According to the SEC, to settle the charges, Rice and Ford agreed to be held jointly and severally liable for $2,259,543 in disgorgement plus $68,423 in prejudgment interest, and each must pay a $184,767 penalty. Rice and Ford also agreed to lifetime bars from serving as officers and directors of public companies and participating in digital securities offerings, and permanent prohibitions against violating the antifraud and registration provisions of the federal securities laws.
Chief Judge Barbara M.G. Lynn of United States District Court for the Northern District of Texas ordered the sanctions on December 11. Rice and Ford agreed to the settlements without admitting or denying the allegations in the SEC’s complaint, and on Nov. 28, 2018, the U.S. Attorney’s Office for the Northern District of Texas announced parallel criminal charges against Rice.
Source: SEC.gov
Nov 30, 2018 | Shareholder & Investor Protection
SEC Warns That Scammers May Try to Take Advantage of California Wildfires
On November 29, 2018, the SEC’s Office of Investor Education and Advocacy issued an investor alert warning investors, including individuals who may receive lump sum payouts from insurance companies and others as a result of damage from the California wildfires, about fraudulent investment scams.
The SEC advised that fraudsters often try to use natural disasters, like the recent California wildfires, as a way to lure victims into investment scams. These scams include:
- So-called “investments” in companies purportedly involved in cleanup, repair and recovery efforts;
- False claims of affiliation with state and federal governments or large, well-known companies; and
- Sales of stock in small publicly-traded companies as part of “pump-and-dump” scams (promising high returns for investments in companies that supposedly will reap huge profits from recovery and cleanup efforts).
Some scams, according to the SEC, are circulated through unsolicited e-mail or social media, as well as by telephone. Fraudsters also may target individuals receiving money from insurance companies or other sources. The SEC warns that individuals, including those receiving lump sum insurance payouts, should be extremely wary of potential investment scams.
Investors: Use Caution, Ask Questions
The SEC advises investors that one of the best ways to avoid investment fraud is to ask questions. Investors should be suspect, if approached by somebody touting an investment opportunity. It is important for an investor to ask that individual whether he or she is licensed and whether the investment is registered with the SEC or with a state. Investors should confirm their answers with an objective source, such as the SEC’s Office of Investor Education and Advocacy or a state securities regulator. Importantly, promises of high or guaranteed profits with little or no risk are classic signs of fraud.
Investors should carefully review their entire financial situation, before making any investment decision, especially if a recipient of a lump-sum payment. The SEC reminds investors that a payment may have to help finance rebuilding and recovery as well as last one and his/her family for a long time.
The SEC’s publication, Ask Questions, discusses many of the other questions to ask anyone who wants you to make an investment.
SEC Investor Resources
Source: SEC.gov
Nov 9, 2018 | Shareholder & Investor Protection
On November 8, 2018, the Commodity Futures Trading Commission (“CFTC”) announced that it issued an Order filing and simultaneously settling charges against Commerzbank AG (Commerzbank) for numerous violations of the Commodity Exchange Act (“CEA”) and CFTC Regulations, including failing to supervise its Swap Dealer’s activities for more than 5 years and making misleading statements and material omissions to the CFTC concerning its Swap Dealer’s operations and compliance with the CEA and CFTC Regulations. Commerzbank AG is a global banking and financial services company based in Frankfurt, Germany, that has been provisionally registered with the CFTC as a Swap Dealer since December 31, 2012.
The CFTC Order requires Commerzbank to pay a $12 million civil monetary penalty and comply with specified undertakings including retention of an outside consultant to review swap dealer compliance for a period of two years and to generate, during that period, annual reports assessing the swap dealer’s compliance with the CEA and CFTC Regulations. The Order further requires Commerzbank to submit annual reports to the CFTC regarding swap dealer compliance and remedial efforts for a period of two years.
According to the Order, Commerzbank management failed to supervise its Swap Dealer’s activities from December 31, 2012 until at least 2018. The Order found that Commerzbank’s failure to supervise its Swap Dealer was systemic and directly resulted in thousands of violations of other provisions of the CEA and CFTC Regulations. In particular, the Order found that Commerzbank failed to adopt any effective process for determining whether swap transactions with certain non-U.S. swap counterparties were subject to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, in violation of Regulation 23.402(b); failed to report swap transactions to swap data repositories (“SDRs”) in violation of Section 2(a)(13)(G) of the CEA and Regulations 43.3 and 45.3; failed to submit Large Trader Reports (LTRs) consistent with the CFTC’s requirements in violation of Section 4s(f)(1)(A) of the CEA and Regulations 20.4 and 20.7; and failed to execute certain swaps on swap execution facilities (“SEFs”) in violation of Section 2(h)(8) of the CEA and Regulation 37.9(a)(2).
Additionally, the CFTC Order found that Commerzbank made misleading statements and material omissions in its 2014 and 2015 annual Chief Compliance Officer reports to the CFTC, in violation of Section 6(c)(2) of the CEA. In these Chief Compliance Officer reports, Commerzbank failed to adequately disclose numerous deficiencies in its systems and controls for swap dealer compliance and made misleading statements and material omissions regarding the Swap Dealer’s compliance with the CEA and Regulations.
Source: CFTC.gov
Nov 8, 2018 | Shareholder & Investor Protection
On November 8, 2018, the Securities and Exchange Commission announced settled charges against Zachary Coburn (“Coburn”), the founder of EtherDelta, a digital “token” trading platform. This is the SEC’s first enforcement action based on findings that such a platform operated as an unregistered national securities exchange.
According to the SEC’s order, EtherDelta is an online platform for secondary market trading of ERC20 tokens, a type of blockchain-based token commonly issued in Initial Coin Offerings (ICOs). The order found that Coburn caused EtherDelta to operate as an unregistered national securities exchange.
EtherDelta provided a marketplace for bringing together buyers and sellers for digital asset securities through the combined use of an order book, a website that displayed orders, and a “smart contract” run on the Ethereum blockchain. EtherDelta’s smart contract was coded to validate the order messages, confirm the terms and conditions of orders, execute paired orders, and direct the distributed ledger to be updated to reflect a trade.
Over an 18-month period, EtherDelta’s users, according to the SEC, executed more than 3.6 million orders for ERC20 tokens, including tokens that are securities under the federal securities laws. Almost all of the orders placed through EtherDelta’s platform were traded after the SEC issued its 2017 DAO Report, which concluded that certain digital assets, such as DAO tokens, were securities and that platforms that offered trading of these digital asset securities would be subject to the SEC’s requirement that exchanges register or operate pursuant to an exemption. EtherDelta offered trading of various digital asset securities and failed to register as an exchange or operate pursuant to an exemption.
The SEC has previously brought enforcement actions relating to unregistered broker-dealers and unregistered ICOs, including some of the tokens traded on EtherDelta.
Without admitting or denying the findings, Coburn consented to the order and agreed to pay $300,000 in disgorgement plus $13,000 in prejudgment interest and a $75,000 penalty. The SEC’s order recognizes Coburn’s cooperation, which the SEC considered in determining not to impose a greater penalty.
Source: SEC.gov
Nov 7, 2018 | Shareholder & Investor Protection
On November 7, 2018, the Securities and Exchange Commission announced that Citibank N.A. has agreed to pay $38.7 million to settle charges of improper handling of “pre-released” American Depositary Receipts (“ADRs”).
According to the SEC, ADRs – U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank. The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.
The SEC found that Citibank improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs. Such practices, according to the SCE, resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring.
This is the second action against a depositary bank and sixth action against a bank or broker resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices. Information about ADRs is available in an SEC Investor Bulletin.
Without admitting or denying the SEC’s findings, Citibank agreed to pay more than $20.9 million in disgorgement of ill-gotten gains plus $4.2 million in prejudgment interest and a $13.5 million penalty for a total of more than $38.7 million. The SEC’s order acknowledged Citibank’s remedial acts and cooperation in the investigation.
Source: SEC.gov
Nov 7, 2018 | Shareholder & Investor Protection
On November 7, 2018, the Securities and Exchange Commission announced that ITG Inc. and its affiliate, AlterNet Securities Inc., have agreed to pay $12 million to settle charges arising from ITG’s misstatements and omissions about the operation of the firm’s dark pool, POSIT, and ITG’s failure to establish adequate safeguards and procedures to protect POSIT subscribers’ confidential trading information.
The SEC’s order found that despite assuring subscribers that it would maintain the confidentiality of their trading information, ITG improperly disclosed the confidential dark pool trading information of firm clients. For example, from 2010 to 2015, ITG sent daily Top 100 Reports for the prior day’s trading activity. The reports identified the top 100 stocks for which certain orders were submitted to POSIT and the top 100 stocks for which certain orders were executed. ITG informed some high frequency trading firms that they could use these Top 100 Reports to identify “potential unsatisfied liquidity needs” in the dark pool, despite assuring subscribers that ITG would not signal their trading intentions.
According to the SEC’s order, ITG misleadingly omitted important structural features of the dark pool. From 2010 to mid-2014, ITG split the dark pool into two separate pools, which prevented certain orders in the two pools from interacting with one another. ITG failed to disclose the separate pools, which had different performance and fill rates, despite specific questions from subscribers about whether ITG “tiered” or segmented the dark pool in any way. The SEC’s order also found that from mid-2014 to late 2016, ITG failed to disclose that the firm applied a “speedbump” to slow down interactions involving orders from certain high frequency trading firms.
According to the SEC, without admitting or denying the findings, ITG and AlterNet consented to the entry of the SEC’s order finding that they violated the antifraud provisions of the securities laws as well as the rules governing the requirements for dark pools. The SEC’s order directed that ITG and AlterNet cease and desist from committing or causing any future violations of those provisions, censures ITG and AlterNet, and orders them to pay the $12 million penalty.
The charges are in addition to charges filed in August 2015 against ITG and AlterNet for operating an undisclosed proprietary trading desk that used confidential customer trading information to trade in the POSIT dark pool.
Source: SEC.gov
