Securities Industry Commentator by Bill Singer Esq

Federal Circuit Court Sustains Registered Rep's Conviction and Sentence of 90 Months (BrokeAndBroker.com Blog)

SEC Obtains Judgment Against Massachusetts Man Who Defrauded Investors in International Real Estate Investment Scheme (SEC Release)

SEC Awards About $32 Million and about $8 Million to Two Whistleblowers 

Order Determining Whistleblower Award Claim 

SEC Awards Over $300,000 to Whistleblower 

Order Determining Whistleblower Award Claim 

SEC Awards About $400,000 to Whistleblower 

Order Determining Whistleblower Award Claim

CFTC Orders Tether and Bitfinex to Pay Fines Totaling $42.5 Million / Tether to Pay $41 million Over Claims that Tether Stablecoin was Fully Backed by US Dollars / Bitfitnex to Pay $1.5 Million for Illegal Transactions While Operating Bitfinex Cryptocurrency Trading Platform and Violation of Prior CFTC Order (CFTC Release)

Concurring Statement by CFTC Commissioner Dawn D. Stump Regarding Tether and Bitfinex Settlement

FINRA Fines and Suspends Non-Registered Fingerprint Person for Away Brokerage Account 

In the Matter of Brandon Lopez, Respondent (FINRA AWC)

In June 2020, the Commission charged Trikantzopoulos and Navis for running a multi-year scheme that solicited investors for various international real estate ventures but then used the investors' funds for unauthorized personal expenses. On June 21, 2021, the Court granted the SEC's motion for summary judgment on all of the claims in its complaint. Trikantzopoulos also conducts business under the name Basil Trikantzopoulos, and an alternate spelling of his name, Trikatzopoulos. The Court found Trikantzopoulos and Navis liable for fraudulently misrepresenting to investors Trikantzopoulos' background, the expected return on their investments, and the use of their investments.

[(1)] Claimant 1's tip was the initial source of the underlying investigation; (2) Claimant 1's tip exposed abuses Redacted Redacted including at the Firm, that would have been difficult to detect without Claimant 1's information; (3) Claimant 1 provided Enforcement staff with extensive and ongoing assistance during the course of the investigation, including identifying witnesses, including Redacted and helping staff understand complex fact patterns and issues related to the matters under investigation; (4) the Commission used information Claimant 1 provided to devise an Redacted investigative plan and to craft its initial document requests to the Firm and Redacted (5) Claimant 1 made persistent efforts to remedy the issues, while suffering hardships; and (6) Claimant 1 was the main source of information for the investigation and an important source of information for the Covered Action. 

With regard to Claimant 2, we positively assessed the following factors: (1) Claimant 2 was a valuable first-hand witness who also provided helpful information relevant to the practices engaged in by the Firm, albeit several years after the Commission had received Claimant 1's information; (2) Claimant 2 provided information and documents, participated in staff interviews, and provided clear explanations to the staff regarding the issues that Claimant 2 brought to the staff's attention; (3) Claimant 2's information gave the staff a more complete picture of how events from an earlier period impacted the Firm's practices and put the Firm on notice that Redacted which the staff was able to use in settlement discussions with the Firm's counsel. 

Finally, we note that, in contrast to Claimant 1, who persistently alerted the Commission to the ongoing abusive practices for a number of years before the investigation was opened, Claimant 2 delayed reporting to the Commission for several years after becoming aware of the wrongdoing. Accordingly, we find that Claimant 2 unreasonably delayed reporting to the Commission and that a reduction in Claimant 2's award percentage is appropriate.⁴

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Footnote 4:  We have taken into consideration in this regard the fact that Claimant 2 provided Claimant 1 with information Redacted knowing that Claimant 1 was forwarding this information to the Commission staff. As a result, we have reduced Claimant 2's award by a smaller amount than we otherwise might have.

Claimant alerted Enforcement staff to the potential wrongdoing, prompting the opening of the investigation. Claimant also provided significant ongoing assistance to Enforcement during the investigation that saved time and resources that helped shut down an ongoing fraudulent scheme. 

[(i)]Enforcement staff was unaware of the misconduct until Claimant submitted the tip, (ii) Claimant's documents and assistance allowed the staff to conserve considerable resources, (iii) the charges brought by the Commission were based on conduct that was the subject of the information provided by Claimant, (iv) Claimant unreasonably delayed reporting to the Commission while investors continued to be harmed, and (v) Claimant was a Redacted who facilitated the underlying misconduct by Redacted and was therefore culpable.

Tether Case Background

The Tether order finds that since its launch in 2014, Tether has represented that the tether token is a stablecoin with its value pegged to fiat currency and 100% backed by corresponding fiat assets, including U.S. dollars and euros. However, the Tether order finds that from at least June 1, 2016 to February 25, 2019, Tether misrepresented to customers and the market that Tether maintained sufficient U.S. dollar reserves to back every USDT in circulation with the "equivalent amount of corresponding fiat currency" held by Tether and "safely deposited" in Tether's bank accounts. In fact Tether reserves were not "fully-backed" the majority of the time. The order further finds that Tether failed to disclose that it included unsecured receivables and non-fiat assets in its reserves, and that Tether falsely represented that it would undergo routine, professional audits to demonstrate that it maintained "100% reserves at all times" even though Tether reserves were not audited.

As found in the order, Tether held sufficient fiat reserves in its accounts to back USDT tether tokens in circulation for only 27.6% of the days in a 26-month sample time period from 2016 through 2018. The order also finds that, instead of holding all USDT token reserves in U.S. dollars as represented, Tether relied upon unregulated entities and certain third-parties to hold funds comprising the reserves; comingled reserve funds with Bitfinex's operational and customer funds; and held reserves in non-fiat financial products. The order further finds that Tether and Bitfinex's combined assets included funds held by third-parties, including at least 29 arrangements that were not documented through any agreement or contract, and that Tether transferred Tether reserve funds to Bitfinex, including when Bitfinex needed help responding to a "liquidity crisis."

In addition, the order finds that Tether failed to complete routine, professional audits during the relevant time period. According to the order, Tether retained an accounting firm to perform a review of Tether reserves on a date Tether selected in advance, and Bitfinex transferred over $382 million to Tether's bank account in advance of that review. The order recognizes that Tether has not completed an audit of the Tether reserves. 

Bitfinex Case Background

The Bitfinex order finds that from at least March 1, 2016 through at least December 31, 2018, Bitfinex offered, entered into, executed, and confirmed the execution of illegal, off-exchange financed retail commodity transactions with U.S. persons that were not eligible contract participants (ECPs) under the CEA. 

The Bitfinex order further finds that Bitfinex operated as an FCM without CFTC registration by accepting orders for, acting as a counterparty to, and accepting funds or property, including bitcoin and USDt tokens, in connection with those same retail commodity transactions. According to the order, the substantial majority of margin trading was financed through Bitfinex's peer-to-peer funding program through which Bitfinex customers who held fiat or cryptocurrency in their Bitfinex account would "lend" those funds to other Bitfinex customers who would then use those funds to buy, sell, and trade on the Bitfinex platform. The order also finds that, during the relevant period, Bitfinex force-liquidated certain customer positions and acted as the counterparty to certain transactions.  In so doing, Bitfinex violated the terms of the 2016 order, which had directed Bitfinex to cease and desist from offering, entering into, executing, or confirming the execution of illegal, off-exchange financed retail commodity transactions, and from accepting orders and receiving funds in connection with retail commodity transactions.

In connection with this order, Bitfinex must comply with certain undertakings by December 31, 2021, including implementing, as necessary, and maintaining systems and procedures reasonably designed to prevent non-ECP U.S. persons from engaging in retail commodity transactions. . . .

I agree with the Commission's findings that the respondents in the Tether matter violated Section 6(c)(1)(A) of the Commodity Exchange Act (CEA) and CFTC Regulation 180.1(a)(2), and that the respondents in the Bitfinex matter violated Sections 4(a) and 4d of the CEA and Part VII. A of the Commission's June 2, 2016 Order finding that BFXNA had violated the then-effective Sections 4(a) and 4d of the CEA.

The settlement with the Tether respondents finds that there were misrepresentations regarding the assets backing tether, specifically that the USDt tokens were backed 1-to-1 by US dollars.  The evidence establishes that this assurance provided to tether customers was not 100% true, 100% of the time.  When reviewing this record, it is clear to me that wrongdoing occurred, and that someone should be held accountable.  For all of these reasons, I concur in the Commission's acceptance of the Tether respondents' offers of settlement.

However, because this is the first time the CFTC has applied the CEA's broad definition of "commodity" [1] to a stablecoin, I wish to reiterate my concern that enforcement actions such as this involving digital assets may cause confusion about the CFTC's role in this area.  While the definition of a "commodity" is relied upon in applying the anti-fraud provisions in CEA Section 6(c), we should seek to ensure the public understands that we do not regulate stablecoins and we do not have daily insight into the businesses of those who issue such.  But in pursuing and settling this matter, do we provide users of stablecoins with a false sense of comfort that we are overseeing those who issue and sell these coins such that they are protected from wrongdoing?

In a recent speech, SEC Commissioner Hester Peirce asked an important question when it comes to the US regulators' review of stablecoins: "Are we fighting for investors or are we fighting for jurisdiction?"[2]  This question is front-and-center in my mind as I consider these settlements.

Do the actions of the CFTC in entering into this settlement with the Tether respondents create a false sense of security for those investing in stablecoins?  Are we leading the general public to believe that stablecoins are safe from fraud and manipulation because of the CFTC is the full-time 'cop on the beat'? Will our actions lead to greater protections, or have we taken an opportunity to push the limits of our enforcement authority in order to claim a piece of the jurisdictional pie?

I also concur in the findings that Bitfinex violated CEA Sections 4(a) and 4d by engaging in illegal, off-exchange retail commodity transactions and failing to register as a Futures Commission Merchant (FCM).  However, while I will not repeat the point in full here, I encourage you to read my concurring statement in the recent Kraken case.  As I stated there:

I believe that if the Commission is going to hold an exchange liable for operating as an unregistered FCM with respect to retail commodity transactions, it is incumbent upon the Commission to explain in a transparent manner the relevant legal requirements for such an entity that seeks to register as an FCM and how the Commission will apply them in enabling the entity to conduct business with U.S. customers.[3]

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[1] CEA Section 1a(9), 7 U.S.C. § 1a(9).

[2] See Commissioner Hester M. Peirce, Lawless in Austin, SEC (Oct. 8, 2021), available at https://www.sec.gov/news/speech/peirce-2021-10-08.

[3] See Concurring Statement of Commissioner Dawn D. Stump Regarding Enforcement Action Against Payward Ventures, Inc. (d/b/a Kraken) (Sept. 28, 2012), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement092821b.

[L]opez worked in a middle office role. Among other duties, Lopez facilitated the settlement of trades and reconciled trading desk positions against the investment bank's positions. Lopez also was responsible for booking certain transactions in options and structured products. 

On March 3, 2020, UBS filed an amended Form NRF disclosing the termination of the non-registered fingerprint relationship with Lopez on February 7, 2020.

In March 2017, prior to associating with UBS, Lopez opened a personal investment account at another member firm. After associating with UBS in June 2017, Lopez did not disclose or obtain the written consent required to maintain his outside investment account. He also failed to notify the firm where he maintained the account of his employment with UBS. Between October 2018 and November 2019, Lopez executed 141 options trades in 28 different securities in the outside account. Lopez closed his outside investment account in January 2020, after the firm questioned him about outside investment accounts pursuant to a FINRA inquiry. 

During the above period, Lopez also falsely attested twice on firm compliance questionnaires that he understood and followed the firm's outside investment account disclosure requirements. 

By failing to disclose and obtain the written consent of UBS to maintain the outside investment account, and by failing to notify the member firm where the account was maintained of his employment with UBS, Lopez violated FINRA Rule 3210. A violation of FINRA Rule 3210 is also a violation of FINRA Rule 2010, which requires that registered representatives, in the conduct of their business, shall "observe high standards of commercial honor and just and equitable principles of trade." 

Therefore, Respondent violated FINRA Rules 3210 and 2010.  

• Securities Industry Commentator
• Bill Singer