Securities Industry Commentator by Bill Singer Esq

The European-Style Consolatory Cheek Kiss, the UBS Lawsuit, and the Certified Question (BrokeAndBroker.com Blog)

Two Iranian Nationals Indicted in Local Cryptojacking Case (DOJ Release)

Former Chief Financial Officer and Former Head of Corporate Communications of $21 Billion Biopharmaceutical Company Arrested for Insider Trading (DOJ Release)

SEC Charges Pharma CFO and Former Partner with Insider Trading (SEC Release)

SEC Charges Latvian Citizen With Digital Asset Fraud (SEC Release)

SEC Charges Two in Fraudulent Microcap Scheme (SEC Release)

Remarks before the Investor Advisory Committee by SEC Chair Gary Gensler

Remarks before the Investor Advisory Committee by SEC Commissioner Hester M. Peirce

Georgia inmate sentenced for running a multi-million-dollar fraud scheme from state prison (DOJ Release)

SEC Charges Former Linear Technology Corporation Officer and Three Others with Insider Trading (SEC Release)

SEC Awards Over $175,000 To Whistleblower Claimant

Order Determining Whistleblower Award Claims

Did You Hear About The FINRA Arbitration Against Fidelity For Dental Pain and Suffering? (BrokeAndBroker.com Blog)

Cryptojacking is when cyber criminals fraudulently gain access to a victim's device to use its computing power to generate or "mine" cryptocurrency. Computing power is needed for a virtual master ledger that uses complicated algorithms to verify and record cryptocurrency transactions. Individuals or groups can dedicate their computer power and be rewarded with cryptocurrency.

According to court documents, both defendants conspired to victimize a technology company in St. Charles, Missouri by fraudulently gaining access and using the company's account on a cloud service. By misrepresenting themselves through the victim company's account, the defendants fraudulently authorized the cloud service provider to build and install at least five new computer servers in the cloud. The purpose of the new servers was to run and operate software programs to generate cryptocurrency.

The fraud came to light when the victim company received a bill of more than $760,000 from the cloud service provider related to the use of fraudulent servers.

From 2018 through October 2020, Malik was the chief financial officer (CFO) of a New Jersey-based biopharmaceutical company listed on the NASDAQ Stock Exchange. On April 6, 2020, Company-1 publicly announced for the first time that its breast cancer drug - an antibody-based drug designed to treat certain breast cancer patients who had very limited treatment options beyond chemotherapy - had proven effective in pre-market clinical trials. In October 2020, Biopharmaceutical Company-2 acquired Company-1 for approximately $21 billion. 

As Company-1's CFO, Malik was among the first, and one of the few, employees who received the material non-public information about the breast cancer drug before the April 6, 2020 announcement. Within minutes of obtaining that information, Malik passed it along to Wood, who lived with Malik at the time and was formerly the head of corporate communications for Company-1. Malik also provided the non-public information to a number of his relatives.  Before April 6, 2020, and within hours of receiving the insider information from Malik, Wood placed an order for approximately 7,000 shares of Company-1 stock, despite the fact that Company-1 stock had recently been downgraded by financial experts. After Company-1 announced on April 6, 2020, that its cancer drug had proven effective in pre-market clinical trials, Company-1's stock price increased. After selling her shares, Wood more than doubled her investment, realizing gross profits of $213,618, and returning $65,000 to Malik.

[W]hile serving as CFO of Immunomedics, Usama Malik learned that the FDA had permitted the company to halt a clinical trial for a breast cancer drug because the existing trial data provided compelling evidence that the drug was effective. The complaint alleges that Malik - who was subject to a trading "black-out" that prohibited him and anyone living in his household from purchasing Immunomedics stock - immediately tipped Lauren S. Wood, with whom he lived at the time, as well as three family members. According to the complaint, Wood and two of the family members then bought Immunomedics stock, as did an account in the name of the third family member's spouse. As alleged, after Immunomedics announced the FDA's decision, its stock price nearly doubled, resulting in a gain of $67,060 to Wood and a combined gain of approximately $21,000 to the family members. The complaint further alleges that, when Malik was asked about Wood's trading as part of an inquiry by the Financial Industry Regulatory Authority (FINRA), he failed to identify her as his romantic partner and falsely claimed that he had not communicated with her during the relevant period.

In the first scheme, the complaint alleges that, from January 2018 through March 2018, Auzins fraudulently offered and sold unregistered digital tokens as part of an ICO of Denaro, a purported "multi-currency debit card platform." Specifically, the complaint alleges that Auzins falsely claimed Denaro enabled users to store their digital assets in a secure digital wallet and then spend them "like any other debit card" which could be provided by a credit card issuer. In fact, the complaint alleges, all of the claimed products or services being offered were fictitious, including the relationship with the credit card issuer. Finally, the complaint alleges that Auzins misappropriated all of the ICO's proceeds.

In the second scheme, the complaint alleges that, from April 2019 to July 2019, Auzins fraudulently offered the unregistered securities of Innovamine, which purportedly offered a cloud mining program.  According to the complaint, Auzins claimed that investors could contribute digital assets to Innovamine, and then the company would perform mining activities and provide investors with a daily "automatic payout . . . in whichever coin they mine." The complaint alleges that these promises were untrue, and that Auzins misappropriated nearly all of the funds raised in the offering.      

[F]rom 2016 through at least October 2020, Canadian residents Vincenzo Carnovale and Amar Bahadoorsingh secretly gained control of thinly traded microcap companies, hired stock promoters to create demand for their stock, and generated substantial illicit profits by selling the stock to unsuspecting investors. Carnovale and Bahadoorsingh allegedly hid the fact that they controlled the securities of publicly traded companies. They allegedly misled investors, brokers, and transfer agents (companies that maintain records of stock ownership) in order to convince these parties that the defendants' stock shares were eligible for trading in the public markets, when in fact their stock was not appropriately registered for sale with the SEC. They also allegedly caused the microcap companies to make materially false and misleading statements in their publicly filed financial statements and reports. Additionally, Bahadoorsingh allegedly fabricated documents that he provided to brokers and transfer agents, in order to avoid due diligence procedures those parties had in place to comply with the securities laws.

Thank you. It's good to be back with the Investor Advisory Committee again. As is customary, I will note that my views are my own, and I'm not speaking on behalf of my fellow Commissioners or the staff.

I'd like to thank the members for volunteering their time to provide us with advice. In addition to the important work you're doing, I understand you'll be announcing today a new Subcommittee on Disclosure. That's a great addition to the fold.

Since the SEC's founding in the Great Depression, we've been requiring disclosure of important information from companies.

The basic bargain is this: Investors get to decide what risks they wish to take. Companies that are raising money from the public have an obligation to share full and fair information with investors on a regular basis. Investors also are protected against fraud. There's a reason President Roosevelt called the '33 Act the "Truth in Securities" law.

Over the intervening decades, there have been many enhancements to those disclosures. Each change has been with an eye to our three part mission - investors, capital formation, and that which is in the middle, the efficiency of capital allocation.

Today, we have a number of projects related to how we can update disclosure regimes for modern markets.

This is about investors. Today, investors increasingly want to understand the climate and cybersecurity risks, as well as the human capital, of the companies whose stock they own or might buy. Large and small investors, representing literally tens of trillions of dollars, are looking for consistent, comparable, and decision-useful disclosures in these areas to determine whether to invest, sell, or make a voting decision one way or another.

I look forward to hearing from your new Subcommittee on those areas.

Today, I understand that you'll be holding panel discussions on the crypto markets and the importance of protecting senior investors, as well as also making recommendations with respect to Individual Retirement Accounts.

I can't stress how important it is to continue to protect older investors and those who are trusting their retirement savings to our markets. We at the SEC take that obligation seriously, and it gets to the heart of our work. I look forward to the readouts from all these conversations.

As to the crypto markets, I'd like to share a few thoughts.

First, Satoshi Nakamoto's "Bitcoin Whitepaper"[1] and the crypto markets that followed have been catalysts for change. This innovation challenged some early financial technologies: money and ledgers. It also has challenged incumbent business models of trading, lending, and collectibles, as well as the official sector.

Second, with a $2.6 trillion aggregate market capitalization and more than 100 tokens purportedly with market capitalizations each more than $1 billion,[2] this is an asset class that belongs inside public policy frameworks of looking after investors, guarding against illicit activity, and protecting our financial stability.

Third, unfortunately, this asset class is rife with fraud, scams, and abuse in certain applications. There's a great deal of hype and spin about crypto assets and crypto projects. In many cases, investors aren't able to get rigorous, balanced, and complete information on tokens or trading and lending platforms.

Fourth, right now, we just don't have enough investor protection in crypto. The American public is buying, selling, and lending crypto on trading, lending, and decentralized finance (DeFi) platforms, where there are significant gaps in investor protection.

This leaves markets open to manipulation. This leaves investors vulnerable. If we don't address these issues, I worry a lot of people will be hurt.

Fifth, many of these tokens are offered and sold as securities. There's actually a lot of clarity on that front. In the 1930s, Congress established the definition of a security, which included about 20 items, like stock, bonds, and notes.

One of the items is an investment contract. I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight.

A typical trading platform has more than 50 tokens on it. While each token's legal status depends on its own facts and circumstances, the probability is quite remote, with 50 or 100 tokens, that any given platform has zero securities.

Make no mistake: To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they meet an exemption.

Make no mistake: If a lending platform is offering securities, it also falls into SEC jurisdiction.

Sixth, it's best not to wait for a big spill on aisle three - the crypto aisle, with all its tokens, trading and lending going on - to clean up the investor protection issues.

Thus, I'd like to ask anybody who may be operating crypto platforms or issuing crypto tokens, please, come in and talk to the staff at the SEC. To the extent there are challenges about how to register or come into compliance, we'd like to hear what those are. The staff is standing by, ready to better understand if any bespoke adjustments may be appropriate. At the same time, investors should receive the same protections they receive in other asset classes.

For those who want to encourage innovations in crypto, I'd like to note that financial innovations throughout history don't long thrive outside of our public policy frameworks. If this field is going to continue, or reach any of its potential to be a catalyst for change, we'd better bring it into public policy frameworks.

I'll close with that. Thank you.

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[1] See http://satoshinakamoto.me/whitepaper/.

[2] See https://coinmarketcap.com/.

Thank you, Jennifer [Marietta-Westberg], for chairing this committee, and thank you to Heidi [Stam] for your leadership as well. We will miss your insights and are grateful for your contributions over the years. Welcome to the new officers of the Committee and the new Disclosure Subcommittee: Christopher [Mirabile], Leslie [Van Buskirk], Brian [Hellmer], and Cambria [Allen-Ratzlaff]. I look forward to working with you in your new capacities.

Today's meeting addresses two issues that deserve attention-elder financial abuse and crypto. With respect to the former, I am very much looking forward to the discussion about older investors' unique susceptibility to fraud and how the SEC can help combat it.

The Investor Advisory Committee's consideration of crypto is also much needed. Certainly, all of us in this virtual room have a shared interest in preventing people from falling prey to fraudsters peddling crypto, and, human nature being what it is, there is no shortage of such fraudsters. I expect that aspect of investor protection will be a big part of today's discussion. Other aspects of investor protection, however, also merit consideration:

• Regulatory Clarity. When a regulator clearly delineates rules, people trying to do the right thing can work within those rules and investors can more distinguish the fraudsters from the legitimate actors. The SEC has not provided clarity in response to repeated questions on crypto from reputable players, but has instead embraced an approach that has been described aptly to me as "strategic ambiguity." Such an approach facilitates enforcement actions, but it is costly and treacherous for well-intentioned developers and their lawyers. This Committee, speaking for investors, can urge the Commission to tackle questions such as:
  
  
• If a token is sold as part of an investment contract, must it always trade as a security? If so, how will that work in practice?
• Can a platform trade crypto securities alongside traditional securities and non-securities? How would such a platform register with us?
• Who can custody crypto and how?
• What aspects of non-fungible token markets might implicate the securities laws?
  
  
• Investor Access. The Commission recently took the big step of permitting bitcoin futures-based exchange-traded funds. We have yet to approve a spot exchange-traded product ("ETP") despite many applications over the last four years. Many commentators have noted the unsatisfying reasoning the Commission has relied on in allowing bitcoin futures-based products, but prohibiting spot products. Other countries have moved ahead with spot products. Substitute products offering some level of exposure to bitcoin but usually at higher prices and without the same level of convenience have emerged in our markets. Our denials, the most recent of which the Commission issued just yesterday,[1] hint that spot products are not getting approved because we do not regulate bitcoin trading venues. Forcing investors who want exposure to crypto through traditional investment products into more expensive and less efficient wrappers is hardly the hallmark of an investor protection-focused regulatory scheme. My objections to the Commission's approach to date are well known, but perhaps this Committee can help shine some light on the harm to investors resulting from the Commission's refusal to allow a spot bitcoin ETP.
  
  
• Individual Liberty. Congress has charged us with regulating the securities markets, but it has not charged us with surveilling every financial transaction or overriding investor decisions. As we regulate the crypto markets, we should be thinking about whether unique aspects of the technology-its transparency and its objective participation criteria embedded in the code-make it possible for us to regulate with a lighter hand so that people can be more free in their financial lives. People find value in using tools like stablecoins and decentralized finance ("DeFi"), so we should take care not to use regulation to force them into our comfort zone by, for example, replacing stablecoins with central bank digital currencies and DeFi with the centralized intermediaries of traditional finance.

I hope some of these themes will weave their way into your discussions, any recommendations that emerge from them, and then into our regulatory approach. Thank you to all of the members of the Committee and today's panelists. I look forward to the discussions.

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[1] Order Disapproving a Proposed Rule Change to List and Trade Shares of the WisdomTree Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, Release No. 34-93700 (Dec. 1, 2021), available at https://www.sec.gov/rules/sro/cboebzx/2021/34-93700.pdf.

[S]ince 2010, Damon Thomas Young has been an inmate with the Georgia Department of Corrections, incarcerated first at Georgia State Prison in Reidsville, Georgia, and then at Hays State Prison in Trion, Georgia.  Young is serving a 20-year state sentence for aggravated assault on a police officer and a 10-year sentence for violation of the Georgia Racketeer Influenced and Corrupt Organizations (RICO) Act.  Young also has prior convictions for theft by taking, impersonating a public officer, arson, forgery, burglary and arson, and theft by deception.  His maximum possible release date from state prison is June 16, 2030.

While serving his state prison sentence, in 2019, Young used a contraband cell phone to defraud, or attempt to defraud, multiple heavy equipment dealers out of equipment worth millions of dollars.  Using the alias Morgan Sylvia and pretending to be a purchasing officer with AbbVie, a real biopharmaceutical company, Young ordered heavy construction equipment that he had delivered in and around Ranger, Georgia, where he and his family lived.  He then put the equipment up for sale to buyers on Craigslist.

To carry out his fraud, Young called heavy equipment dealers, posed as Morgan Sylvia, a fictitious purchasing officer, and stated that he wanted to order some heavy construction equipment.  Using the Sylvia alias, Young misrepresented that AbbVie needed the equipment because it was building a facility in Ranger.  He ordered heavy equipment, such as wheel loaders, skid steer loaders, an excavator, a horizontal grinder, and dump trucks.  Young communicated with the equipment dealers by phone, text, and email from prison.  He fraudulently completed credit applications, purchase orders, sales contracts, and insurance documents and emailed them to the dealers as part of the scheme.  He also emailed a fraudulent AbbVie corporate resolution document, purportedly signed by actual corporate officers of the company, but in truth he had forged the signatures on the document. 

As part of his scheme, Young fraudulently ordered equipment worth over $2.8 million from six different equipment dealers.  Most of the dealers caught the fraud before shipment, but Young was successful in acquiring four pieces of equipment worth over $500,000.  He sold some of the stolen equipment online and used the proceeds to purchase two Chevrolet work trucks.  The Gordon County Sheriff's Office has since recovered all of the stolen equipment that was shipped.

[D]obkin, a founder and the then chief technical officer of Linear Technology Corporation, was provided with highly confidential information about the impending merger of Linear Technology and Analog Devices. The complaint alleges that Dobkin tipped his friends, Cynthia Braun and Michael Fiorillo, who purchased Linear securities, including out-of-the-money call options, in advance of the July 26, 2016 announcement. The complaint also alleges that Fiorillo tipped his friend, Jeffrey S. Gregersen, who also illegally traded on the information.

[(1)] the significance of information provided to the Commission; (2) the assistance provided in the Covered Actions; (3) the law enforcement interests in deterring violations by granting awards; (4) participation in internal compliance systems; (5) culpability; (6) unreasonable reporting delay; and (7) interference with internal compliance and reporting systems. Here, Claimant performed calculations and otherwise assembled information that provided important insights about the company's conduct that was not otherwise apparent. However, while Claimant's information played a role in the Commission staff's decision to open an investigation, the Commission received several other tips from multiple other sources that also contributed to the staff's decision to open an investigation. Further, after submitting the tip, Claimant had no communication with Commission staff responsible for the investigation and provided no additional information or assistance.

• Securities Industry Commentator
• Bill Singer