by T. GormanPosted on Posted in SECActions

Rules and more rules. The Commission seems to continually be proposing new rules. This is not to say that new rules, or at least updated rules, are not needed in many areas. The agency under Chair Gary Gensler, however, seems to have a never-ending agenda of proposed new rules.

The latest proposed rules focus on conflicts of interest at clearing agencies, the basic plumbing of the markets. The statutory authority traces to Section 765 of Dodd-Frank. There Congress directed the Commission to address conflicts of interest for security-based swap clearinghouses.

The Commission’s new proposed rules would cover the Dodd-Frank provision but apply more broadly to all clearing facilities. The proposed rules would also build on those adopted in 2012 for clearinghouses which were strengthened in 2016.

The rules proposed have several key provisions:

·1) To establish policies and procedures regarding conflicts of interest which include board members;

·2) The provisions adopted by the clearing agencies must promote consideration of the views of owners, participants and other relevant stakeholders;

·3) Any new provisions adopted must cover the functioning, composition and membership of the nominate and management committees; and

·4) The provisions must be structured so that the majority of the board members are independent.

Finally, clearinghouses will be required to develop policies and procedures to oversee it the firm’s relationship with certain critical service providers. Chairman Gary Gensler, Statement on Proposal to Enhance Clearing Agency Governance (Aug. 8, 2022)(here).

While the proposals are built on familiar concepts such as eliminating conflicts and having a board majority of independent directors, two Commissioners stated they do not support the proposals. Commissioner Mark Uyada raised a number of concerns despite initially stating that an effective regulatory framework is “particularly important . . .” in view of the impact of clearing agencies. His concerns included the fact that the rules may limit competition, increase market concentration, appear overly broad and do not clearly mirror differences among clearing agencies. Commissioner Mark T. Uyeda, Statement on Clearing Agency Governance and Conflicts of Interest (Aug. 8, 2022)(here).

Commissioner Hester M. Peirce also did not support the proposals. She effectively summarized her concerns by stating: “The proposal takes an overly prescriptive, regulator-knows-best approach to these matters that risks diluting the duties of directors to the clearing agency and depriving clearing agencies of the flexibility and expertise needed to effective governance.” Commissioner Hester M. Peirce, Dissenting from Shareholder Governance for Clearing Agencies (Aug. 8, 2022)(here).

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by T. GormanPosted on Posted in SECActions

Complex products and crypto were themes for the past week. Last week the Commission revisited the question of complex products when considering and accepting settlements in cases centered on the sale of these products to retail investors without proper procedures being in place. Crypto was also key as the Commission filed an action against a crypto based pyramid scheme involving eleven individuals. And, Congress was working on a bill to cede regulatory authority over the area to the CFTC at the time.

Be careful, be safe this week

SEC Enforcement – Filed and settled actions

Last week the Commission filed 5 civil injunctive actions and 3 administrative actions, exclusive of 12j, default, tag-a-long and other similar proceedings.

Offering fraud: SEC v. Semisub, Inc. Civil Action No. 1:22-cv-00349 (D. Haw. Filed August 3, 2022) is an action which names as defendants: the company; Curtiss Jackson; and Jamey Jackson. Mr. Jackson founded the company and served as its CEO. Jamey is his wife and the president of the company. Over a five-year period, beginning in January 2017, Defendants sold a variety of securities in the company. Investors were told that the funds would be used to develop it. In fact, much of the money was used for the personal expenses of the individual defendants. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25462 (August 3, 2022).

Improper revenue recognition: SEC v. Hutchison, Civil Action No. 1:22-cv-02296 (D.D.C. Filed August 3, 2022) is an action which names as a defendant Brian Hutchison, formerly the CEO of RTI Surgical Holdings. Beginning in early 2015, and continuing through the second quarter of 2016, CEO Hutchison set very aggressive revenue goals for the firm and then urged employees to deliver product early customers to meet them. This effectively “pulled forward” sales and negatively impacted the firm’s relation with its customers and future revenue which dropped. Over the period this resulted in the firm repeatedly missing its goals. After the Commission initiated an investigation, the firm conducted an internal investigation which ultimately resulted in a restatement of the firm’s financial statements for five years and the dismissal of Mr. Hutchison. The former CEO has not reimbursed the company. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 13(b)(5) and SOX Section 304. See also In the Matter of Surgalign Holdings, Inc., Adm. Proc. File No. 3-20945 (August 3, 2023)(proceeding against the firm and its CFO based on same facts as above; resolved consent to the entry of cease-and-desist-orders as to each Respondent based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) as to each Respondent and, in addition, SOX Section 304 as to the former CFO who is also denied the privilege of appearing before the Commission as an accountant with the right to reapply after 5 years; the firm will also pay a penalty of $2 million while the former CFO will pay a penalty of $75,000). See Lit. Rel. No. 25463 (August 3, 2022).

Unregistered broker: SEC v. Crown Bridge Partners, LLC, Civil Action No. 1:22-cv-06537 (S.D.N.Y. Filed August 2, 2022) is an action which names as defendants: the firm, Soheil Ahdoot and Sepas Ahdoot,. The individual Defendants are brothers who each own one half of Crown Bridge. Over a four year period beginning in early 2016, Defendants have repeatedly purchased convertible notes from ;penny stock issuers. The notes could be converted into shares of the issuer’s stock, typically at a discount of 25% to 50% of market. Accordingly, Defendants purchased the notes and then converted them and quickly sold the shares to try and capture the discount. The shares were not registered. The complaint alleges violations of Exchange Act Section 15(a)(1). Defendants settled the action, consenting to the entry of a permanent injunctions based on the Section cited in the complaint. They also paid disgorgement in the amount of $8,390,601.27 and a civil penalty of $810,307. Defendants also agreed to the entry of a five year penny stock bar. See Lit. Rel. No. 25461 (August 2, 2022).

Pyramid scheme – crypto: SEC v. Okhotnikov , Civil Action No. 22-cv-3978 (N.D. Ill. Filed August 1, 2022). The Commission named 11 individuals as defendants in the complaint. The defendants can be divided into three groups: 1) The Founders: Vladimir Okhotnikov, a Russian national who is a co-founder of Forsage and the “face” of the operation; Jane Doe about whom little is known except her public name of Lola Ferrari; Mikail Sergeev, also a Russian national and a co-founder of Forsage; and Sergey Maslakov, a resident of Moscow and also a co-founder of Forsage. 2) The Promoters: Samuel Ellis, the lead promoter of Forsage; Mark Hamlin, a lead promoter; Sarah Theissen, an ambassador to the Crypto Crusaders group and a lead promoter of Forsage in the U.S. 3) The Crypto Crusaders: Carlos Maertinez, a co-founder of the group; Ronald Deering, also a co-founder of the group; Cheri Beth Bowen, a co-host of many promotional events; and Alisha Sheppard, also a co-host of many webinars. Forsage is a website that permits large numbers of retail investors in the United States and other countries to enter into transactions using smart contracts created by the Founders on the Ethereum, Tron and Binance blockchains. During the period, beginning at the end of January 2020 and continuing to the present, the Founders perpetuated Forsage and its smart contracts through aggressive promotions. The Founders also engaged the promoters to promote Forsage and Forsage hosted platforms. In doing so the Founders engaged in the offer and sale of unregistered securities in Forsage as detailed below. Transactions to date total over $300 million. Beginning in early June 2020 the Crypto Crusaders led the largest Forsage promotion group in the U.S. In doing so this group also promoted the sale of unregistered securities in Forsage as did the Founders. This is because Forsage is a classic pyramid and Ponzi scheme. It did not sell any product. The primary way for investors to make money was to recruit others to participate in the scheme. To participate, investors created a crypto-asset wallet and then purchased slots in Forsage’s smart contract. That gave them the right to earn compensation for others who they recruited and compensation for the large Forsage community of investors. When an investor purchased a slot, a portion of that investment was directed to the persons who recruited the investor. During the period Forsage operated on the Ethereum, Tron and Binance blockchains. Algorithmic or smart contracts were used to direct money to an investor as more investors were recruited. The smart contracts were used to allocate payments to investors using a Forsage ID. The structure was created by the Founders who devised and controlled the essential operations of Forsage. The Founders also coded one of Forsage’s smart contracts on the Ethereum blockchain to divert a portion of investor funds to a crypto-asset wallet not associated with a Forsage ID assigned to any investor. The investor slots in the Forsage smart contracts, and the right of investors to earn compensation from the sale of those slots and profits from shares of profits were in fact investment contracts and securities. Accordingly, the scheme violated Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Defendants Ellis and Theissen agreed to settle the matter and be permanently enjoined based on the Sections cited in the complaint. They also agreed to pay disgorgement and civil penalties in amounts to be determined by the Court at a later date. The case continues as to the other defendants. See Lit. Rel. No. 25460 (August 1, 2022).

Complex products: SEC v. Applebaum, Civil Action No. 9:22-cv-81115 (S.D. Fla. Filed July 28, 2022) centers on a product called VRSP which was repeatedly recommended by a market professional at Aegis Capital Corp. to investors who were not properly informed about the product. Defendant Alan Applebaum was a Managing Director at Aegis. Over a three-year period, beginning in July 2017, Mr. Applebaum made over 140 recommendations and purchases of VRSPs for clients. The product has a complex structure under which recovery of principal at maturity is contingent upon the operation of derivative features linked to equity indexes such as the Russell 2000 stock market indexes. Customers faced the risk of losing all of their investment even if the VRSP did not default. Defendant Applebaum recommended this product to investors despite the fact that they had expressed a preference for investments that had “moderate” risk. In making the recommendations, Defendant Applebaum omitted material facts about the suitability of the product as an investment and at times made misstatements. Defendant executed hundreds of trades in the instruments for seven customers who suffered six and seven figure losses. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25459 (July 29, 2022). See also In the Matter of Aegis Capital Corp., Adm. Proc. File No. 3-20940 (July 28, 2022)(Eleven firm employees made hundreds of recommendations that clients purchase VRSPs despite the fact that the product was not suitable for the clients and that the firm failed to develop reasonable systems to implement its policies and procedures; settled with a cease-and-desist order based on Securities Act Sections 17(a)(2) & (3) and Exchange Act Section 17(a)(1) and the pertinent rules. The firm will also pay disgorgement of $165,828, prejudgment interest of $55,037 and a penalty of $2.3 million); In the Matter of Paul F. Gallivan, Adm. Proc. File No. 3-20939 (July 28, 2022)(action based on similar facts against firm representative Gallivan; resolved with a cease-and-deist order based on Securities Act Sections 17(a)(2) & (3), the payment of disgorgement in the amount of $26,807, prejudgment interest of $3,166 and a penalty of $25,000 and certain suspensions from various activities). See Lit. Rel. No,. 25459 (July 29, 2022).

Hong Kong

Publication: The Securities and Futures Commission published its Agenda for Green and Sustainable Finance on August 2, 2022 (here). The publication sets out further steps to support Hong Kong’s role as a regional green finance center. It follows the attainment of the goals set out in its Strategic Framework for Green Finance published in 2018.

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