This Week In Securities Litigation (Week of June 12, 2023)
The Commission continued to focus on crypto assets this week. Chair Gensler, for example, delivered remarks on the subject as the week drew to a close. The agency also filed two significant crypto asset cases detailed below.
Be careful; be safe this week.
Remarks: Chair Gary Gensler delivered remarks titled “We’ve Seen This Story Before” at the Global Exchange and Fintech Conference, Washington D.C. on June 8, 2023 (here). His remarks focused on crypto assets.
Regulations: The agency adopted amendments to remove references to Credit Ratings from Regulation M on June 7, 2023.
Regulations: The Commission adopted rules to prevent fraud in connection with security-based swaps transactions. The new rules are also designed to prevent undue influence over CCOs, according to the June 7, 2023 release (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 3 civil injunctive action and 1 administrative proceedings, excluding 12j and tag-along proceedings as well as those presenting conflicts for the author.
Improper professional conduct: In the Matter of Boyle CPA, Adm. Proc. File No. 3-21486 June 9, 2023) names as respondents the audit firm and Robert Allan Boyle, CPA. The Order alleges that Respondents failed to conduct proper audits for seven public issuers during the period January 2020 to April 2022. Respondents failed to comply with the PCAOB standards when conducting these audit which for each client involved at least one of the following: 1) not maintaining complete audit documentation: 2) failing to communicate with the board of directors; 3) not communicating with the client’s prior auditors; 4) not having an adequate audit inventory; 5) not having adequate and timely engagement quality reviews conducted; and 6) not exercising due professional care. As a result Respondents engaged in improper professional conduct within the meaning of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. Respondents resolve the proceedings with each consenting to the entry of a cease-and-desist order based on Rule 2-02(b)(1) of Regulation S-K and Exchange Act Sections 13(a) and 15(d). Each Respondent is denied the privilege of appearing and practicing before the Commission as an accountant. Mr. Boyle can apply for reinstatement after three years. Respondents will, jointly and severely, pay disgorgement of $166,581 and prejudgment interest of $10,282. Respondent Boyle CPA will also pay a penalty of $50,000.
Unregistered broker/exchange: SEC v. Coinbase, Inc., Civil Action No. 23 Civ. 4738 (S.D.N.Y. Filed June 6, 2023) names as defendants Coinbase, Inc., the largest crypto asset trading platform in the U.S. and Coinbase Global, Inc., a holding company. Since at least 2019 Coinbase has acted as an unregistered broker, including soliciting potential investors, handling customer funds and assets and providing a marketplace. The firm also has wallets to facilitate the transactions and provides clearing services. All of these traditional security operations are collapsed into one firm. The firm has worked for years to facilitate crypto asset transactions. It is well aware of the test of a security developed in the Howey case and claims to adhere to its principles – it does not, according to the complaint. The firm also operates a Staking Program that allows investors to earn financial returns through its managerial efforts with respect to certain protocols. Under the program assets are transferred to and pooled by Coinbase and subsequently “staked” or committed by the firm in exchange for certain rewards. The firm has never registered with the Commission in any capacity. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 15(a) and 17A(b). The case is in litigation.
Offering fraud: SEC v. McKelvey, Civil Action No. 4:23-cv-564 (N.D. Tx. Filed June 6, 2023). Defendant Douglas McKelvey was a registered representative and investment adviser at the Southlake, Texas branch of a large investment firm. He began at the firm in 2008 and remained until he was terminated in April 2022 after the underlying facts in this matter were uncovered. Mr. McKelvey is alleged to have misappropriated over $1.7 million from accounts of two elderly relatives during the period when he served as their financial adviser using a variety of methods. Beginning in 2013, for example, Defendant typically caused unauthorized checks to be issued from Customer A’s account at Financial Institution. The checks were used to make credit card payments on his accounts. In 2015 Defendant changed his approach. He continued to make credit card payments on his accounts but now by initiating unauthorized ACH transactions through credit card companies that withdrew the funds from the customer account. In some instances, Mr. McKelvey first initiated fraudulent internal journals at Financial Institution from the customers’ accounts to a trust account he controlled. The funds were then used to make credit card payments via ACH transactions. At other times, Defendant McKelvey sold securities in the customers’ accounts just prior to making a fraudulent transfer to make the credit card payments. On some occasions Defendant caused checks to be issued from Customer A’s loan account that was used to collateralize that customer’s brokerage account. The complaint alleges violations of Exchange Act Section 10(b). In a parallel action the U.S. Attorney’s Office for the Eastern District of Texas announced criminal charges against Mr. McKelvey who pleaded guilty to the charges. See Lit. Rel. No. 25743 (June 7, 2023).
Unregistered exchange: SEC v. Binance Holdings Limited, Civil Action No. 1:23-cv-01599 (D.D.C. Filed June 5, 2023). Named as defendants are: Holdings, one of a number of entities using the well-known Binance name, a group that includes Binance.com and Binance.US Platform — crypto trading platforms; BAM Trading Services Inc. and BAM Management US Holdings Inc., two entities recently created by Changpeng Zhao, generally called CZ, the control person of all entity Defendants. Collectively, the Binance named entities deliver a wide variety of well-known securities type services. Those include trading crypto assets like a stock exchange, buying and selling those assets like a broker-dealer and transferring those assets like a securities transfer agent. The difference between the Binance entities delivering those services to investors and those in the securities industry is regulation, oversight and information. Those in the securities industry are registered, regulated by the SEC and required to disclose material information about their services to investors. The Binance entities are not registered and not regulated. Those entities are not required to furnish investors information about their services. As the CCO of Binance stated: “we do not want [Binance].com to be regulated ever.” The case focuses 2018 and the aftermath of actions then initiated when Mr. Zhao and the Defendants took a series of steps to ensure that the vision of their CCO continued – no regulation. BAM Management and BAM Trading were created. The entities were designed to control the Binance.US Platform. These steps were followed by public representations that the Biance.com Platform did not provide services to U.S. persons. In fact, nothing changed according to the SEC’s complaint. Mr. Zhao continued to control everything just as he did prior the creation of the two new entities and U.S. investors were still served – only the talking points delivered to the public that U.S. investors now claimed those investors were not being served, a false statement. Behind the BAM façade Defendants transferred the millions of dollars of U.S. investor assets they held at will among the various entities. In some instances, the crypto assets and fiat assets held were commingled and diverted to an account held by a Zhao-controlled entity know as Merit Peak Limited. Later the assets were at times moved to a third party. While BAM Management and BAM Trading touted their surveillance and controls, in fact they seemed to be lacking. For example, there none stopping the “wash trading” and self-dealing on the Binance.US Platform that began in 2019 when Sigma Chain AG, another Zhao owned and controlled entity, engaged in wash trading that artificially inflated the trading volume of crypto assets securities on the Biance.US Platform. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and 17(a)(2) and (a)(3) and Exchange Act Sections 5. 15(a) and 17A(b). The case is in litigation.
Risk Alert: The Division issued an Alert focused on areas of the Adviser Marketing Rule (June 8, 2023)(here).
Notes: The Australian Securities and Investment Commission and the Australian Prudential Regulation Authority released notes from the fourth Superannuation CEO Roundtable on June 9. 2023 (here).
Consultation: The Securities and Futures Commission of Hong Kong concluded a consultation on the position limit regime. It published on June 5, 2023 proposed changes to the position limit regime for the derivatives market (here).
Announcement: The Monetary Authority of Singapore announced that it will set supervisory expectations to steer financial institutions’ transition planning processes to facilitate credible decarbonization efforts by their clients, according to a June 8, 2023 release (here).