Pricing services are frequently relied on by those trying to determine the value of a security. Frequently they are used to aid the valuation of thinly traded stocks. In some instances, the services are used to aid valuing more complex instruments. It is the use of these services, and what must be disclosed about them, which is at the heart a recent case brought by the Commission. In the Matter of Bloomberg Finance, L.P., Adm. Proc. File No. 3-21284 (January 23, 2023).

Respondent Bloomberg Finance is a subsidiary of Bloomberg I.P., a privately held financial, software, data and media firm based in New York City. The firm has long operated a pricing service known as BVAL. It provides daily price valuations to numerous subscribers and customers. Bloomberg Finance is an industry leader.

Customers of the firm are told that when valuing fixed income securities it did so either by direct observation algorithm or observed comparable algorithm. The former includes market data about the target security. Those observations are filtered by Bloomberg to include only the highest quality observations. The approach requires that executable levels and indicative market quotes are statistically corroborated.

The firm also uses what it calls the Evaluator Input or EIT. This approach incorporates into the algorithm a single data point about the target security. This can be a broker quote that may not have been automatically incorporated by BVAL.

What Respondent did not explicitly disclose over a six-year period, beginning in 2016, is that in certain circumstances the use of EIT could result in a valuation based on an uncorroborated single data input. This made the Bloomberg disclosure materially misleading, according to the Order Instituting Proceedings. This is because it conveyed that the prices of fixed income securities from the observed composable algorithm were based on value relative to comparable securities only. That in fact is not correct since a single broker quote for the target security might be the basis. The Order alleges violations of Securities Act Section 17(a)(2).

To resolve the matter, Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. In addition, Respondent will pay a penalty of $5 million.

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Last week the Commission returned to its roots, filing one of the type of cases that have been brought for decades a prime bank fraud action. The DOJ announced the filing of another action involving a crypto exchange. The Department also announced the modification of its corporate cooperation policy.

SEC

Whistleblowers: An award of $18 million was made to three whistleblowers, according to a January 18, 2023 release.

Be careful, be safe this week

SEC Enforcement – Filed and settled actions

During the last week the Commission filed 1 new civil injunctive action and no new administrative proceedings, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.

Prime bank fraud: SEC v. Marino, Civil Action No. 2:23-cv-00403 (C.D. Cal. Filed January 19, 2023) is an action which names as defendants: John Marino, a disbarred attorney; Jason Johnson; Abraham Borensten, an attorney; and Anthony Brown. The complaint centers on a transaction in which Defendants convinced a senior citizen investor couple to put up $150,000 of their retirement funds on the promise of a short-term gain of about $1 million. The investor funds were supposed to be used to monetize a 1.5 billion Euro based note. Investors were told they were paying the fees for the note to secure the “opportunity of a lifetime.” To convince the victims, Defendants provided them with Euroclear documentation and bank statements regarding the claimed note. The investors were also told to wire their funds to the attorney trust account of Mr. Borenstein who would complete the transaction by distributing the funds. All the representations and claims were false. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and aiding and abetting. See Lit. Rel. No. 25618 (January 19, 2023).

Manipulation: SEC v. Zinkwich, Civil Action No. 1:20-cv-11746 (D. Mass.) is a previously filed action which named as defendants Todd Zinkwich’ and his associate, Eric Landis. The complaint alleges that Mr. Zinkwich orchestrated several market manipulations of microcap stocks for individuals and groups that held large blocks the issuers’ stocks. To resolve the matter, Defendant Zinkwich consented to the entry of a final judgment, based on Securities Act Section 17(a) and Exchange Act Sections 9(a) and 10(b) ,which enjoins him from future violations of each Section. Defendant is also barred from participating in any future penny stock offering. The judgment, in addition, orders him to pay $300,000 in disgorgement and prejudgment interest. Payment of those amounts, except $12,000, is waived based on financial condition. See Lit. Rel. No.. 25615 (January 17, 2023). Eric Landis, Defendant’s associate, was charged separately for participating in the manipulations by creating the appearance of market activity in the stocks which were traded among a group of stocks. That action is also settled.

Misappropriation: SEC v. Hug, Civil Action No. 2:19-cv-16290 (D.N.J.) is a previously filed action which named as defendants George Hug and Kurt Steams, two former executives of SITO Mobile, Ltd, a mobile advertising provider based in New Jersey. The initial complaint alleges that Mr. Streams used at least $200,000 of firm money for his personal benefit. The amended complaint added a claim alleging that Defendant Hug improperly charged the corporate credit card for $77,000 and that about $160,000 of firm expenses had no apparent business purpose or for which Mr. Hug did not provide proper documentation. Mr. Steams settled with the Commission, consenting to the entry of a permanent injunction based on Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) & (B), 13(b)(5) and 14(a). The order directs payment of $48,796.00 in disgorgement and of a civil penalty in the amount of $20,204.00. A two-year officer/director bar was also ordered. In a related administrative proceeding, the Commission barred Mr. Streams from appearing or practicing before the Commission as an accountant. Mr. Hug was enjoined from future violations of Securities Act Section 17(a)(3) and Exchange Act Sections 13(b)(5) and 14(a). He was also ordered to pay a penalty of $50,000. See Lit. Rel. No. 245614 (January 13, 2023).

DOJ

Remarks – crypto exchanges: Assistant Attorney General Kenneth Polite, Jr. delivered remarks centered on a new action in which the founder and majority owner of a crypto exchange was charged with processing illicit funds, on January18, 2023 (here). The announcement centered on the work of the National Cryptocurrency Enforcement Team or NCET, formed in late 2021. The remarks were published on January 18, 2023. The underlying case was filed the same day (here).

Remarks: Asst. AG Kenneth Polite, Jr. delivered remarks on the revisions to the criminal division’s corporate enforcement policy, January 17, 2023 (here).

Crypto Regulation: The Cornerstone Report

Since the Commission filed its first enforcement action in 2013 the agency has initiated 127 cases tied to crypto assets. Cornerstone Research, SEC Cryptocurrency Enforcement (2022 Update)(“Report”) (here). Those results reflect, at least in part, Chair Gensler’s efforts to augment the Commission staff since it appears that new legislation for the area is not likely.

Of the 127 crypto actions filed by the agency, 82 were of the cases were filed in federal court. The remaining 45 actions were administrative proceedings, the Report noted. The agency has also filed 20 trading suspension orders and 12 delinquent filing orders.

In 2022 a total of 30 enforcement actions were filed. The majority – 22 or 73% – were based on the sale of unregistered securities in violation of Securities Act Sections 5(a) and 5(c). Close behind are the fraud cases. There 70% or 21of the cases filed in 2022 alleged fraud in violation of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, four actions alleged violations of the broker-dealer registration provisions of Exchange Act Section 15(a). And, two cases alleged touting in violation of Section 17(b) by a celebrity and crypto promoter.

FinCEN

Alert: The Financial Crimes Enforcement Network has identified a virtual currency exchange tied to Russian money laundering under its authority in Section 9714. This is the first time the agency has invoked this authority, according to the January 18, 2023 release (here).

U.K.

Announcement: The Board of Directors has established a new advisory committee to the board. The Committee will work on Environmental, Social and Governance or ESG issues, according to the release (here).

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