by T. GormanPosted on Posted in SECActions

Cyber security is an area that has rapidly evolved over the past few years. Once a threat that was considered obscure by some and not significant by others, it is now a key area of focus for many. The stakes today are by any definition significant. A breach can result in millions of records held by an issuer or market participant such as a broker-dealer being obtained and perhaps disseminated. Frequently those records contain personal information of thousands if not millions of persons, including financial and credit card data. As activity in this area has evolved the Commission and DOJ have investigated and filed cases.

Last year the Commission proposed rules for issuers designed to require the creation of policies and procedures to protect the company and its information. The proposals also including reporting obligations in case of a breach. Now the agency is proposing that market participants adopt similar rules.

The proposals

Proposed Rule 10 is at the center of the proposed rules for market participants. It would require that Market Entities – essentially most broker-dealers other those some small firms – address the risks presented in the area by adopting a set of policies and procedures which are reasonably designed to address the risks. Those policies and procedures would be reviewed each year and amended or updated in view of the evolving cyber risks. Market entities would also be required to provide the Commission with a written electronic notice immediately if there is a reasonable basis for believing that a breach has occurred as well as updates and disclosure as discussed below.

Form SCIR – updates/disclosure

Covered entities would be required under Rule 10 to complete Form SCIR to update the Commission and provide disclosure. One section of the form provides the Commission with periodic updates. Another section focuses on disclosure. It provides summary descriptions of the cyber risks and significant incidents experienced in the current and prior year that are to be published on the broker-dealer’s website. Customers opening a new account would be furnished a copy of the disclosures as well as existing customers when updates are made, including the yearly update.

The material would also be posted on the firm’s website.

Comment

The proposals initiated by the Commission build on those launched last year for issuers and the series of enforcement actions which predated those proposals. Collectively, the proposals last year and now are designed to provide an overall response to the rapidly increasing threat posed by cyber while assuring the markets and the public that confidential information will be protected.

To be sure, the proposals are a good starting point, thoughtfully designed to address the key points of a threat that is well recognized, acknowledged by many and rapidly evolving. At the same time, they are controversial even among the Commissioners who acknowledge the threat. Chair Gensler and Commissioners Crenshaw and Lizarraga support the proposals. Commissioners Peirce and Uyeda do not. No doubt there will be a variety of comments furnished to the agency before the process is completed.

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by T. GormanPosted on Posted in SECActions

Some things just don’t seem to end. If you thought the challenges to the SEC’s administrative hearing process were over, think again. Last week the Commission requested that the Supreme Court consider a Fifth Circuit ruling, concluded that the process is unconstitutional. Could this be the end? Stay tuned.

Crypto bank Silvergate Capital Corporation filed for bankruptcy protection last week, handing the industry yet another blow.

Be careful, be safe this week.

SEC Enforcement – Filed and settled actions

Last week the Commission filed 3 new civil injunctive actions and 12 new administrative proceedings, exclusive of 12j, default, conflicts (which are included in tabulating the number of cases), tag-a-long and other similar proceedings.

Beneficial ownership: In the Matter of Ralph Bartel, Adm. Proc. File No. 3-21337 (March 9, 2023) is a proceeding which names Mr. Bartel, a German citizen resident in Switzerland as Respondent. Mr. Bartel first had a disclosure obligation with respect to the shares of NASDAQ listed Wilhelmina International Inc. securities he controlled in mid-December 2015 when his holdings exceeded 5%. About one year later a Schedule 13G was filed about one year later but it only for those shares in his name. He also failed to comply with his Section 16(a) obligations beginning in mid-May 2017 when his holdings in the company exceeded 10%. Again, accurate disclosures were not made. The Order alleges violations of Exchange Act Sections 13(d)(1), 13(g)(1), and 16(a). To resolve the matter, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, he will pay a penalty of $100,000.

Microcap fraud-manipulation: SEC v. Moyners, Civil Action No. 22-cv-11006 (D. Mass.) is a previously filed action which named as defendant Canadian citizen Bradley Moyners and his Canadian firm Digatrade Financial Corp. The complaint alleges that defendants used other firms to conceal their control of Digatrade and then paid promoters to tout the stock, reaping over $1.5 million in profits. The final judgment entered by the court prohibits future violations of Securities Act Sections 5(a), 5(c) and 17(a) as well as Exchange Act Section 10(b) and prohibits Mr. Moyners from engaging in such conduct with any security held through other entities. The order also includes an officer/director bar and penny stock bar. Mr. Moyners was also ordered to pay disgorgement in the amount of $1,042,407, prejudgment interest of $253,868 and a penalty of $207,183. The company was directed to pay disgorgement of $510,000, prejudgment interest of $133,309 and a penalty of $100,000. The order states that $$62,000 of the disgorgement ordered against the company is joint and several with Mr. Moyners. See Lit. Rel. No. 25661 (March 9, 2023).

Insider trading: SEC v. Abdelkader, Civil Action No. 3:23-cv-01032 (March 9, 2023) is a previously filed action which names as defendant Mahmoud Ali Abdelkader. This insider trading case centered on a deal announcement on December 2, 2019. The announcement stated that Audentes Therapeutics Inc. would be acquired by Astalla Pharma, Inc. for $3 billion. Defendant’s wife was employed by the target of the takeover. She was the source of the inside information he possessed. Prior to the deal announcement Defendant purchased out-of-the-money call options on Audentes. Following the deal announcement, he had profits of about $31,580. To resolve the matter he consented to the entry of a final judgment based on Exchange Act Section 10(b) and agreed to pay disgorgement and prejudgment interest of $909,570 as well as a penalty of $81,580. See Lit. Rel. No. 25660 (March 9, 2023).

Cybersecurity: SEC v. Blackbaud, Inc., Adm. Proc. File No. 3-21339 (March 9, 2023) is a proceeding which names as respondent the firm, a provider of donor relationship software to non-profit organizations. In May 2020, the firm discovered it had been the victim of a cyber attack. At first the firm believe that the attack resulted in the unauthorized access and exfiltration of over a million files related to 13,000 persons, about one quarter of its customers. By mid-July 2020 the company announced the incident on its website and notified impacted customers. The disclosed information stated that the attack did not result in the access of donor information and social security numbers. Within days the company learned this information was incorrect. Nevertheless, the company filed a Form 10-K in early August which failed to disclose the correct facts about the impact of the attack. Rather the filing only provided general information about it. In early September the company finally disclose the actual scope of the attack. Blackbaud also failed to maintain disclosure controls and procedures as defined in Exchange Act Rule 13a-15(c). The Order alleges violations of Securities Act Section 17(a)(2) & (3) and Exchange Act Section 13(a) along with the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections and Rules cited in the Order. In addition, the agreed to pay a penalty of $3 million.

Continuous disclosure re muni offerings: In the Matter of Keybank Capital Markets Inc., Adm. Proc. File No. 3-21336 (March 7, 2023). Over a four year period, beginning in September 2017, Respondent failed to comply with its obligations under Rule 15c2-12 which generally provides for what the industry calls continuous disclosure. Under the rule an underwriter of muni securities such as Respondent is obligated for offerings over $100,000 that involve sales to 35 persons or more to make continuous disclosures with certain exceptions keyed to the knowledge and experience of the purchaser. Here Respondent did not comply with its obligations and did not determine that the exception applied. Indeed, Respondent did not have policies and procedures in place requiring the determination be made. Accordingly, the Order alleges violations of Exchange Act Rule 15c2-12 and MSRB Rule G-27. The Commission considered the remedial efforts of Respondent. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on Exchange Act Section 15B(c)(1), Rule 15c2-12 and MSRB Rule G-27. Respondent also agreed to pay disgorgement of $263,607.66, prejudgment interest of $33,528.55 and a penalty of $100,000. A portion of the penalty will be transferred to the MSRB.

Crypto scheme to defraud: SEC v. BKCoin Management, LLC, Civil Action No. 1:23-cv-20719 (S.D. Fla. Filed under seal Feb. 23, 2023; unsealed March 6, 2023) names as defendants the firm and Min Woo Kang a/k/a/ Kevin Kang. Defendants are, respectively, an exempt reporting adviser and one of its managing members. Over a period of about four years, beginning in 2018, defendants raised about $100 million from investors who were promised their investments would largely be put into crypto assets. In fact, portions of the money was used to make Ponzi type payments and misused by Defendant Kang. Eventually the firm began to run short on cash and filed an emergency petition in the eleventh circuit court of appeals and sought to freeze all withdraws. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending.

Crypto fraud scheme: SEC v. Green United, LLC, Civil Action No. 2:23-cv-00159 (D. Utah Filed March 3, 2023) is an action which names as defendants Green United, LLC, Wright W Thurston and Kristoffer A. Korohn. The firm was created by Defendant Thurston and used to sell Green Boxes to the public. Mr. Korohn was also retained to sell Green Boxes. Over a four-year period, beginning in 2018 Defendants raised over $18 through the sale of investments in the form of Green Boxes and Green Nodes. Defendants led investors to believe that Green United planned to develop the Green Blockchain and create a public global decentralized power grid. The Green Token would then increase in value. In fact, the claims were false – Green, a kind of token, could not be mined; Green had no realizable value. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 25659 (March 8, 2023).

Unregistered broker: In the Matter of Daniel J. Mackler, Sr., Adm. Proc. File No. 3-21325 (March 3, 2023) is a proceeding which names as respondents Mr. Mackler Sr. and Silver Edge Financial, LLC, respectively, the managing member of Silver Edge, and the manager of Silver Edge Funds, which is not registered with the Commission. Since 2019 Respondents have sold membership interests in two pooled investment vehicles that were formed to invest in pre-IPO securities (the “Funds”). Since 2019 Respondents have sold over $65 million of interests in the Funds. Respondents were not registered with the Commission. The Order alleges violations of Exchange Act Section 15(a). In resolving the proceedings Respondents agreed to retain an independent distribution consultant and to fully cooperate with the creation of a distribution plan. Each Respondent also consented to the entry of a cease-and-desist order based on the Section cited in the Order and, in addition, prohibits participation in any penny stock offering for five years. Respondents will pay disgorgement of $2,251,139.92, prejudgment interest of $268.33 and a penalty of $975,000. See also In the Matter of Scott Esposito, Adm. Proc. File No. 3-21327 (March 3, 2023)(sales representative at Silver Edge; resolved with entry of cease-and-desist order in accord with above and the payment of a penalty of $88,000); In the Matter of Equity Acquisition Company Ltd., Adm. Proc. File No. 3-21326 (March 3, 2023)(Respondent EAC, a Bermuda firm, founded by Respondent and German citizen Carsten Klein; Respondents have since at least 2019 been in the business of purchasing shares of U.S. firms believed to be in a pre-deal mode of an IPO or merger; the firm has purchased over 14 million shares of private firms and sold over 13.4 million shares to different pre-IPO funds or holding companies; each Respondent resolved the matter by agreeing to certain undertakings which include cooperation and registering within two years; each consented to the entry of a cease-and-desist order based on Exchange Act Section 15(a) and agreed to pay disgorgement in the amount of $3,363,526, prejudgment interest of $294,550.18 and a penalty of $269,360); In the Matter of Richard Konopka, Adm. Proc. File No. 3-21328 (March 3, 2023)(sales representative at Silver Edge who solicited investors for the firm; resolved with consent to the entry of a cease-and-desist order based on Exchange Act Section 15(a), the entry of a bar from the securities business and from participating in a penny stock offering, each with the right to reapply after two years, and the payment of a penalty in the amount of $61,000); In the Matter of Dave Necolas, Adm. Proc. File No. 3-21324 (March 3, 2023)(sales representative at Silver Edge; resolve with entry of an order as in Konopka, and payment of a penalty in the amount of $70,000); In the Matter of Dave Nicolas, Adm. Proc. File No. 3-21324 (March 3, 2023)(salesman for Silver Edge; resolved with consent decree similar to the one in Konopka above and payment of $70,000); In the Matter of Robert Daniel Louis, Adm. Proc. File No. 3-21323 (March 3, 2023)(sales representative for Silver Edge; resolved with consent decree per Konopka above and the payment of a penalty in the amount of $124,320); In the Matter of Daniel Valentino, Adm. Proc. File No. 3-21322 (March 3, 2023)(sales representative for Silver Edge; resolved with consent decree per Konopka above and the payment of a penalty in the amount of $123,000); and In the Matter of Joshua Simmons, Adm. Proc. File No. 3-21321 (March 3, 2023)(sales representative for Silver Edge; resolved with consent decree per Konopka above and the payment of a penalty in the amount of $105,000). See Lit. Rel. No. 25657 (March 6, 2023).

CLASS ACTION SETTLEMENTS

Report: Cornerstone Research issued a report titled Securities Class Action Settlements on March 8, 2023 (here). Key highlights of the Report include the fact that in 2022 the number of settlements in the area increased to 105 compared to 87 in 2021 and 76 in 2020. In addition, there were eight mega settlements during the year ranging from $100 million to $809.5 million.

ESMA

MOU: ESMA, the European Securities Market Authority, and ACER, the EU Agency for the Cooperation of Energy Regulators, updated their MOU on cooperation. Key areas involved include market integrity, energy derivatives and transparency, according to the March 6, 2023 release (here).

Hong Kong

Report: The Securities and Futures Commission of Hong Kong issued its quarterly report on March 7, 2023 (here). The Report highlights the fact that during the quarter the regulator authorized the registration of a larger number of products than had been available.

MAS

Remarks: Ravi Menon, Managing Director of Monetary Authority of Singapore or MAS, delivered remarks titled “Three New Drivers of Asset Markets” as the Opening Remarks at the IMAS-Bloomberg Investment Conference, March 9, 2023 (here).

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