In a joint appearance before the House of Representatives’ Committee on Financial Services, Securities and Exchange Commission co-directors of Enforcement, Stephanie Avakian and Steven Peiken, said that the Supreme Court’s 2017 decision requiring the Commission to commence enforcement actions seeking disgorgement within five years after the date of alleged wrongdoing potentially will “severely limit the recovery available to harmed investors.” This is because, said the co-directors, some “egregious fraud cases” are well hidden and may not be uncovered until many years after the fraud has been committed.
The Supreme Court made its ruling in a case against Charles Kokesh who was accused by the SEC in 2009 of misappropriating US $34.9 million in connection with two investment adviser firms he operated from 1995 to 2009. The co-directors noted that, because of the Supreme Court’s ruling, Mr. Kokesh, who was found liable for defrauding his advisory clients of US $35 million, was able to keep more than 80 percent of the money he stole. (Click here for background in the article “Diamonds May Be Forever, but US Supreme Court Rules SEC Ability to Seek Disgorgement Limited to Five Years” in the June 11, 2017 edition of Bridging the Week.)
In their presentation before the House Finance Committee, Ms. Avakian and Mr. Peiken also discussed the Division’s enforcement activities involving cryptocurrencies. Separately last week, the SEC issued a much-publicized fake initial coin offering of its own involving HoweyCoins. Potential investors signing up for the ICO were greeted by a warning “If You Responded to an Investment Offer Like This, You Could Have Been Scammed – HoweyCoins Are Completely Fake.” The SEC listed a number of common characteristics of bogus ICOs, including claims of high, guaranteed returns; celebrity endorsements; suggestions that the ICO tokens will trade on SEC-compliant exchanges, when the referenced platforms are not registered or SEC-regulated; and encouragement to purchase ICO tokens with credit cards.
Unrelatedly, the New York Department of Financial Services granted its fifth Bitlicense to Genesis Global Trading Inc., an SEC-registered broker-dealer and a member of the Financial Industry Regulatory Authority. (Click here for details.)
My View: Kudos to the SEC for devising its HoweyCoin white paper and website. It is an exceptionally creative effort by the SEC to communicate the danger of investing in potentially fraudulent fundraising activities. Hopefully, when developing these fake offering materials, the SEC recognized that – despite the issues with many bogus ICOs – there is great appetite by other than the most sophisticated investors for simplified disclosure materials and by at least some entrepreneurs for a quicker and more efficient means to raise capital. Hopefully, the SEC will leverage this knowledge to help create new offering mechanisms to support legitimate persons and their fundraising activities, as well as investor demand.
Compliance Weeds: NY’s BitLicense regime, adopted in 2015, established a licensing requirement for all financial intermediaries who engage in a virtual currency business activity from New York or to a NY resident. What constitutes a virtual currency business activity is broadly defined and includes (1) receiving virtual currency for transmission or transmitting virtual currency except where the transaction is for non-financial purposes and only involves a nominal amount; (2) storing or holding virtual currency for others; (3) buying and selling virtual currency as a customer business; (4) engaging as a customer business in the conversion or exchange of (a) fiat currency or other value into virtual currency, (b) virtual currency into fiat currency or other value, or (c) one form of virtual currency into another form of virtual currency; or (5) controlling, administering or issuing a virtual currency.
In general, under NY’s Bitlicense regime, all financial intermediaries engaging in a virtual currency business must apply and obtain a so-called BitLicense, and maintain certain minimum standards and programs to help ensure customer protection, cybersecurity and anti-money laundering compliance.
Earlier this year, NY DFS imposed new requirements on all state-licensed virtual currency businesses to help avoid fraud and market manipulation. Specifically, such businesses, including those additionally licensed as money transmitters in the state, must put in place measures “to effectively detect, prevent, and respond to fraud, attempted fraud, and similar wrongdoing,” including manipulation.
(Click here for more background in the article “NYS Financial Services Regulator Ups the Obligations of State-Licensed Virtual Currency Entities” in the February 11, 2018 edition of Bridging the Week.)