DOJ

SEC

 

Overdue: Statement of Dissent on LBRY by SEC Commissioner Hester M. Peirce
https://www.sec.gov/news/statement/peirce-statement-lbry-102723

The Commission has brought many troubling crypto enforcement actions, but the LBRY, Inc. (“LBRY”) case has especially unsettled me. A statement on the case is overdue. I did not support bringing the case, but have been unable to speak publicly about my concerns while the case has been in litigation. Last week, after losing in federal district court on the question of whether the sale of LBRY tokens was an unregistered securities offering, LBRY announced that it will not move forward with an appeal of the decision.[1] Instead, the company will shut down and its assets will be placed in receivership and used to satisfy its debts, including the civil money penalty owed to the Commission.[2] Are investors and the market really better off now after the Commission’s litigation contributed to the demise of a company that had built a functioning blockchain with a real-world application running on top of it? This case illustrates the arbitrariness and real-life consequences of the Commission’s misguided enforcement-driven approach to crypto.

One does not have to dig deep to find fraudulent crypto projects that sold tokens with promises that they did nothing to fulfill. This sad reality makes the Commission’s decision to bring a case against LBRY especially puzzling. LBRY’s approach was more conservative than the approach many other projects took.[3]Here, the blockchain was up and running at the time most tokens were sold, and the Commission’s complaint did not allege, and the court did not find, evidence of fraud. LBRY built a blockchain to facilitate data sharing, afford greater control to content creators, and make censorship more difficult. LBRY created a popular platform on the blockchain for sharing videos and other media.[4] The open-source LBRY blockchain was available for anyone else to use.[5] Why go after a company that sold a token for a functioning blockchain with an established use when we could have pursued plenty of other projects that were outright frauds and did not attempt to comply with the securities laws? To make matters worse, the Commission took an extremely hardline approach in this case. For example, after winning on summary judgment, the Commission sought monetary remedies of $44 million and asserted that LBRY’s offer to burn all tokens in its possession was not sufficient assurance that LBRY would not violate the registration provisions in the future.[6] The Commission’s requested remedies were entirely out of proportion to any harm. Indeed, the court stated during the remedies hearing that “the absence of fraud allegations, [and] the fact that there was some measure of uncertainty” regarding the application of the securities laws when LBRY commenced its offering were facts that “should be taken into account when considering a penalty.”[7] After the remedies hearing, the Commission pared its penalty request back to a significantly lower $111,614, which the court approved.[8]

The application of the securities laws to token projects is not clear, despite the Commission’s continuous protestations to the contrary. There is no path for a company like LBRY to come in and register its functional token offering.[9] Even if a company did manage to register its token offering, it would not be a particularly useful effort. Compliance with the securities laws is important because we want to ensure that people buying securities receive accurate and reliable information so they can assess the risks and rewards of an investment. Here, LBRY made significant disclosures outside of the registration process—disclosures that the Commission did not allege were fraudulent or misleading—and there is little to indicate that LBRY’s disclosures did not provide token purchasers with information adequate to assess whether the tokens were a good fit for them.[10] The time and resources we expended on this case could have been devoted to building a workable regulatory framework that companies like LBRY could have followed. Then the market could have decided LBRY’s fate.

Even if, as the judge ruled here, the offering of tokens should have been registered, our scorched earth approach in remedying the violation was completely out of proportion to any investor harm. How does the result in this case protect LBRY investors, who likely would have preferred that the company continue to exist to support the blockchain, which is still in its infancy? The judge did not rule on whether the token itself was a security or on the status of secondary sales of LBRY tokens,[11] which means that the LBRY blockchain may live on, but its path forward is difficult. The Commission’s action forced a group of entrepreneurs to abandon what they built. Our disproportionate reaction in this case will dissuade people from experimenting with blockchain technology, which LBRY aptly describes as “technology that enables dissent.”[12] A government of a free people should welcome dissent and the technologies that enable it.

Earlier this year, LBRY tweeted: “It’s the year 2028, hundreds of thousands of Americans have been jailed for using illegally cryptocurrency instead of CBDCs, and Hester Pierce [sic] is still just writing dissenting memos.”[13] Although I will be tending bees, not writing dissents, in 2028, I think often about the crux of that criticism and ask myself: “What I could do to help prevent another group of people with a big idea for changing the world from going through what LBRY has over the past several years?” I have not come up with an answer to that question; however, I urge people who have suggestions about how the Commission can right its course on crypto and innovation more broadly, to send them my way.[14]

[1] The End of LBRY, Oct. 19, 2023, https://odysee.com/@lbry:3f/theendoflbryinc:d?fbclid=IwAR1bBr_IiP-iP9F3hapkGWcn0D0rOpMG9B8mxN2L73DkJDA77B24uNGt52I.

[2]Id. (“LBRY must die, there is no escaping this. It has lost a judgment to the federal government, has several million dollars in debts, and has pledged to shut down.”).

[3] See, e.g., DAO Today with Alexa Mil Podcast (Dec. 27, 2022), at approximately minute 12 (comments of Jonathan Schmalfeld) (“Lots of people looked at LBRY as doing things the right way. They weren’t doing the ICO. When they released the fully developed platform. The tokens were consumptive. There was an actual use for them on release date. They did a traditional investment raise. They brought on shareholders. They used securities and venture investing. And they didn’t sell tokens as part of that. There wasn’t any kind of pre-token rounds as part of that. And then they waited a year until after the platform was actually working and functional and there was a good amount of videos on there.”).

[4]See Odysee, https://help.odysee.tv/category-basics/whatisodysee/ (last visited Oct. 24, 2023). LBRY subsequently transferred this platform to its Odysee subsidiary.

[5] See LBRY, https://lbry.com/faq/what-is-lbry (last visited Oct. 24, 2023) (describing the LBRY protocol). As the district court noted when it granted summary judgment to the Commission, it was “generally uncontested” that “(1) LBC is a utility token designed for use on the LBRY Blockchain, and (2) some unknown number of purchasers of LBC acquired it at least in part with the intention of using it rather than holding it as an investment.” SEC v. LBRY, Inc., 639 F.Supp.3d 211, 220 (D.N.H. 2022).

[6] Commission’s Opposition to LBRY’s Motion to Limit the Commission’s Remedies at 9-11, 13-15, SEC v. LBRY, Inc., No. 21-cv-260 (D.N.H. Dec. 19, 2022), ECF No.94 (requesting $22 million in disgorgement and a $22 million civil money penalty).

[7]Transcript of Motions Hearing Before the Honorable Paul J. Barbadoro at 50, SEC v. LBRY, Inc., No. 21-cv-260 (D.N.H. Jan. 30, 2023), ECF No. 105; see also id. at 17 (“Let’s be fair here. You are not alleging that LBRY engaged in any fraudulent activity, first. Second, although I held that LBRY had fair notice sufficient to allow for the enforcement of the Securities Act against it for those offerings, the fact of the matter is that this was one of the first non-fraud cases that did not involve an initial coin offering . . .”); and id. at 51 (“You have to go back to the time this action was filed. This was relatively early on in the development of the SEC’s position with respect to crypto offerings . . .”).

[8]Commission’s Supplemental Brief on Remedies at 3-4, SEC v. LBRY, Inc., No. 21-cv-260 (D.N.H. May 12, 2023), ECF No. 107 (requesting a $111,614 civil money penalty and withdrawing the request for disgorgement); SEC v. LBRY, Inc., 2023 WL 4459290 *5 (D.N.H. July 11, 2023) (imposing $111,614 civil money penalty).

[9] See, e.g., Rodrigo Seira, Justin Slaughter, and Katie Biber, The Current SEC Disclosure Framework Is Unfit for Crypto (Apr. 20, 2023), https://policy.paradigm.xyz/writing/secs-path-to-registration-part-iii (“As we have shown above, the current securities framework was tailor-made to regulate fundraising by centralized legal entities issuing securities, such as a company selling shares to the public in its ‘IPO.’ However, crypto assets differ fundamentally from securities and therefore raise different investor disclosure considerations.”).

[10]See, e.g., Coinbase, Re: Petition for Rulemaking – Digital Asset Securities Regulation at 5-6 (Jul. 21, 2022), https://www.sec.gov/rules/petitions/2022/petn4-789.pdf (“The SEC disclosure regime has historically focused on ensuring that investors have material information necessary to make an informed investment decision. Current disclosure requirements, however, do not cover a number of features unique to digital assets that would undoubtedly be considered important when making an investment decision. For example, investors would likely find information about the risk of a network attack, what kind of governance rights are embedded in which tokens, who has the ability to change the code underlying the assets or the network, and other features that do not exist with respect to traditional securities to be material. Additionally, investors would benefit from comparable disclosures across each digital asset security to assist in identifying differences among investment opportunities.”).

[11]SEC v. LBRY, Inc., 2023 WL 4459290, *3 (D.N.H. July 11, 2023).

[12] The End of LBRY, Oct. 19, 2023, https://odysee.com/@lbry:3f/theendoflbryinc:d?fbclid=IwAR1bBr_IiP-iP9F3hapkGWcn0D0rOpMG9B8mxN2L73DkJDA77B24uNGt52I.

[13]LBRY Inc, LLC (@LBRYcom), X (Feb. 9, 2023, 4:39 PM), https://twitter.com/LBRYcom/status/1623798813881163778. Public blockchains eliminate the need for reliance on a central intermediary, which makes censoring information stored on a blockchain more difficult.

[14]Email suggestions to CommissionerPeirce@sec.gov.

SEC Obtains Emergency Relief Freezing Assets of Investment Adviser Charged with Defrauding Elderly Clients (SEC Release) 
https://www.sec.gov/litigation/litreleases/lr-25885
In the United States District Court for the Central District of California, the SEC filed a Complaint https://www.sec.gov/files/litigation/complaints/2023/comp25885.pdf that  Julie Ann Darrah and  Vivid Financial Management, Inc. (“VFM”) with violating Section 10(b) and Rules 10b-5(a) and (c) of the Securities Exchange Act; Section 17(a)(1) of the Securities Act; and Sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940 (the “Advisers Act”). Additionally, the Complaint charges VFM with violating Section 206(4) and Rules 206(4)-2 and 206(4)-7 of the Advisers Act; and it charges Darrah with aiding and abetting VFM’s primary violations of those provisions. Darrah agreed to the entry of a preliminary injunction against her as well as an order freezing assets, requiring an accounting, prohibiting the destruction of documents, and granting expedited discovery. As alleged in part in the SEC Release, Darrah and VFM:

misappropriated approximately $2.25 million from at least nine clients who had hired Darrah and VFM to be their investment adviser. The complaint alleges that Darrah primarily targeted elderly female advisory clients, many of whom had come to rely on Darrah for their financial well-being, including one client who lives in a memory care facility. The complaint states that Darrah gained control of her victim’s assets by becoming the trustee of their trusts, using standing letters of authorization to transfer funds from their brokerage accounts to their bank accounts, becoming the signatory on their bank accounts, and/or obtaining power of attorney over their property and accounts. According to the complaint, Darrah transferred her victims’ money to her personal bank accounts, where she commingled the funds with her own money that she used to buy and improve real properties, pay her personal expenses, buy luxury vehicles, and buy and operate restaurant businesses at a loss. The complaint further alleges that Darrah concealed her scheme by, among other things, changing client account mailing addresses to her own address, falsely disclosing that she was not acting as the trustee for any clients, and having a client initial two backdated promissory notes that Darrah provided to the SEC in response to its subpoenas.

SEC Charges BlackRock with Failing to Properly Disclose Investments by Publicly Traded Fund it Advised (SEC Release)
https://www.sec.gov/news/press-release/2023-226
Without admitting or denying the findings in an SEC Order https://www.sec.gov/files/litigation/admin/2023/ia-6468.pdf that it violated the Investment Advisers Act of 1940 and the Investment Company Act of 1940, BlackRock Advisors, LLC agreed to a cease-and-desist order, a Censure, and a $2.5 million monetary penalty. Previously, the SEC charged and then resolved its action against William Sadleir, the founder of Aviron, for misappropriating BIT funds invested in Aviron. As alleged in part in the SEC Release:

The SEC’s order finds that, from 2015 to 2019, BlackRock Multi-Sector Income Trust (BIT) made significant investments, through a lending facility, in Aviron Group, LLC, a company that developed print and advertising plans for one to two films per year. According to the SEC’s order, in many of BIT’s annual and semi-annual reports that were publicly available to investors and filed with the SEC, BlackRock inaccurately described Aviron as a “Diversified Financial Services” company. The SEC’s order also finds that BlackRock stated that Aviron paid a higher interest rate than was actually the case. In 2019, BlackRock identified these inaccuracies and BIT accurately reported the Aviron investment in reports going forward. 

“Partners of Honest Business and Prosecutors of Dishonesty”: Remarks Before the 2023 Securities Enforcement Forum by SEC Chair Gary Gensler
https://www.sec.gov/news/speech/gensler-remarks-securities-enforcement-forum-102523

I am pleased to join you at the 2023 Securities Enforcement Forum. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the SEC staff.

When I spoke with you two years ago, I shared what the SEC’s first chair, Joseph Kennedy, said in his first speech: “The Commission will make war without quarter on any who sell securities by fraud or misrepresentation.”[1]

In a subsequent speech, just four months later, Kennedy emphasized: “We are not prosecutors of honest business, nor defenders of crookedness. We are partners of honest business and prosecutors of dishonesty. We shall not prejudge, but we shall investigate.”[2]

These words remain just as true today.

I am appearing here today in front of an audience of lawyers, accountants, and compliance officials. While you serve your clients, you also have a responsibility to the law and to the public.

William O. Douglas—before serving as the SEC’s third chair and a Supreme Court Justice—once said to an audience of lawyers: “Service to the client has been the slogan of our profession. And it has been observed so religiously that service to the public has been sadly neglected.”[3]

Thus, as Felix Frankfurter said in advising President Franklin Roosevelt on staffing the newly formed SEC: “You need administrators … who have stamina and do not weary of the fight, who are moved neither by blandishments nor fears, who in a word, unite public zeal with unusual capacity.” [4]

That’s why we’re so fortunate to have the remarkable staff at the SEC. Every day, they work to advance our mission and ensure the markets work on behalf of investors and issuers, not the other way around.

In fiscal year 2023, our staff once again “[did] not weary of the fight.”

We filed more than 780 actions, including more than 500 standalone cases. We obtained judgments and orders totaling $5 billion. Our work led to $930 million distributed to harmed investors.

These numbers, though, tell only part of the story. Our philosophy behind them tells a fuller one.

Again, I think of our enforcement program through five themes: Economic Realities, Accountability, High-Impact Cases, Process, and Positions of Trust.[5]

Economic Realities

First, economic realities. In thinking about economic realities, I once again will quote a Supreme Court Justice: Thurgood Marshall.

“Congress’ purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.”[6] This is not just a talking point. This is the law of the land, as Justice Thurgood Marshall wrote in the Supreme Court’s famous Reves decision.

Thus, to effectuate Congress’s purpose, we don’t enforce the securities laws based on a product’s label. Rather, we look to the underlying economic realities.

This is true across all of the securities markets, but let me focus on one of its sectors.

There is nothing about the crypto asset securities markets that suggests that investors and issuers are less deserving of the protections of our securities laws.[7]

Congress could have said in 1933 or in 1934 that the securities laws applied only to stocks and bonds. Yet Congress included a long list of items in the definition of a security, including “investment contract.”

Let me ask with a show of hands—how many of you in the audience have clients in the crypto markets?

For those of you who raised your hand, I’m presuming that you entered into an engagement agreement with them. That you know who they are. That most of them have websites. That there’s some identifiable person that you’re relying on to retain you and pay for the services you provide.

In most cases, that’s the economic reality at hand. As the Supreme Court said in the famous Howey decision: An investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.[8]

As I’ve previously said, without prejudging any one asset, the vast majority of crypto assets likely meet the investment contract test, making them subject to the securities laws.[9]

Further, it follows that most crypto intermediaries—transacting in these crypto asset securities—are subject to the securities laws as well.

With wide-ranging noncompliance, frankly, it’s not surprising that we’ve seen many problems in these markets. We’ve seen this story before. It’s reminiscent of what we had in the 1920s before the federal securities laws were put in place. This is a field rife with fraud, scams, bankruptcies, and money laundering. While many entities in this space claim they operate beyond the reach of regulations issued before Satoshi Nakamoto’s famous white paper, they also are quick to seek the protections of the law, in bankruptcy court and litigating their private disputes.[10]

We have brought numerous enforcement actions against actors in this space—some settled, and some in litigation. [11]

Accountability

Second, nothing motivates individuals and firms quite like accountability.

We use all of the tools in our toolkit to hold bad actors accountable—including bars, penalties, injunctions, undertakings, and litigating where appropriate.

Accountability starts with a robust set of allegations or findings of fact. The public benefits and justice benefits. The allegations and findings of fact convey to market participants—many of them, your clients—what about the action crosses the line.

While the press often reports on the monetary remedies, accountability also is about the undertakings or the commitments of firms to update their procedures or retain independent compliance officers.

As just one example, the Options Clearing Corporation (OCC).[12] As a systemically important clearinghouse, the OCC provides critical services for market stability. Yet the OCC violated its own rules, putting the markets the OCC serves at risk. This is unacceptable. In holding the OCC accountable, we not only penalized the firm but required it to revamp its risk management.

For sure, monetary remedies geared and appropriate to the circumstances are important—as large last fiscal year as $413 million involving Danske Bank.[13]

Accountability also is about individuals, not just firms. Last year, fully two-thirds of the matters we brought charged individuals.

Accountability includes protecting the public by barring individuals—whether from practicing before the SEC, association bars, or otherwise. Last year, we obtained 133 bars on individuals from serving as officers and directors—our highest in a decade.

That includes a five-year bar on the former CEO from McDonald’s, who made false statements about the circumstances that led to his termination.[14]

That also includes a permanent bar on a former Wells Fargo senior executive, whom we charged with misleading investors about the bank’s abusive sales practices.[15]

And don’t get me started on crypto.

I won’t even name all the individuals we’ve charged in this highly noncompliant field. [16]

High-Impact Cases

Third, we look at high-impact cases.

When you’re a victim of fraud, misconduct, and abuse, the highest-impact case is the one that affects you—whether you lost $20,000 due to affinity fraud or your life savings in a crypto-related scam.

We do not hesitate to protect investors, including vulnerable investors—such as by holding violators accountable for affinity fraud,[17] including through the critical work of our Fraud Against Minority Groups Initiative.[18]

All cases are important, and that’s why we work quickly to seek penalties and prophylactic relief to keep bad actors out of the markets. It’s important to us that you in the audience work with your clients to create a culture of proactive compliance.

There’s also those cases that will garner the attention of lawyers, compliance officers, and the like, far beyond this room—and yes, often get reported by the press. They help change behavior and bring greater compliance with the law.

Let me highlight just one such area.

Since the 1930s, recordkeeping obligations have been vital to market integrity and the SEC’s oversight. At a fundamental level, failures in recordkeeping—like those involving off-channel communications—obstruct such market integrity.

Since December 2021, in part through an ongoing sweep for potential violations, we have brought cases against 40 firms, required significant undertakings, and ordered more than $1.5 billion in penalties. In the last fiscal year alone, we settled recordkeeping-related charges with 23 firms.[19]

Our actions uncovered not only the widespread use of personal devices and non-official channels to discuss business, but a complete failure of financial firms to maintain or preserve those off-channel communications.

Further, last fiscal year, we brought in rapid succession three cases against both public and private companies that used employee exit agreements to impede an employee’s ability to file whistleblower complaints with the SEC.[20]

The exit agreements forced employees to choose between violating a separation agreement by providing information to the SEC or withholding information that could benefit victims of a securities law violation. That violates longstanding whistleblower protections.

Some may call high-impact cases regulation by enforcement. I call it enforcing the laws and the regulations that are on the books.

Process

Fourth, process.

Process is about fairness. We strive to be fair to those who have been wronged, those who we investigate, and the public at large.

Process also is about timeliness—working to bring matters to a thoughtful yet expeditious resolution.

Process is about working with our partners at the federal, state, and international levels, as well as with self-regulatory organizations. I thank all our partners involved in matters from the recent fiscal year. [21]

Process also is about working with our most important partners—the public. The public’s tips, complaints, and referrals (TCRs) are essential to our work as a cop on the beat. We received more than 40,000 TCRs in the previous fiscal year, including more than 18,000 from those critical whistleblowers.

Further, process is about meaningful cooperation. I’m talking about more than showing up for testimony or producing documents under subpoena. It means going above and beyond to self-report, cooperate, and remediate.

Across numerous actions last fiscal year, the Commission ordered zero or reduced penalties based on the respondents’ cooperation.[22] Keep these actions in mind as you in the audience advise clients on the benefits of self-reporting and cooperation.

Finally, process is about following the facts wherever they lead—whether it’s to close a case or, where appropriate, into court. We are not afraid to litigate matters, whether against the best-resourced founders, the oldest firms, the newest industries, and yes, the largest crypto exchanges. [23]

Positions of Trust

Finally, trust in the markets depends on gatekeepers like auditors, lawyers, underwriters, and others—gatekeepers like you.

When those in positions of trust abuse that trust, we will not hesitate to hold them to account.

One example amongst others[24] relates to Marcum. Marcum is an auditing firm that took on more than 600 new clients that were Special Purpose Acquisition Companies (SPACs), a sixfold increase in just one year. The strain of this growth exposed the firm’s widespread quality control and audit standard violations.[25]

Marcum neglected its role as a gatekeeper, putting its clients and the investing public at risk. On top of imposing a $10 million penalty on Marcum for the violations, we required undertakings limiting the firm’s ability to accept new clients.

In the last fiscal year, we also continued to hold credit rating agencies,[26] underwriters,[27] and lawyers[28] to account.

When we hold accountable those in positions of trust, that builds trust in the markets.

Conclusion

I started by quoting Kennedy, Douglas, Frankfurter, and Marshall—four individuals critical to creating, shaping, and interpreting the securities laws—laws that Congress established to protect the investing and issuing public.

I hope you all in this audience, when advising your clients, take these leaders’ words to heart.

I know that the dedicated staff of the SEC do. I couldn’t be prouder of what the staff do, in enforcement and beyond, every day to live up to the words and spirit of these quotes and the SEC’s mission.

I thank them for their work to maintain the trust on which our markets depend.

Thank you.

[1] See “Address of Hon. Joseph P. Kennedy, Chairman of Securities and Exchange Commission, at National Press Club” (July 25, 1934), available at https://www.sec.gov/news/speech/1934/072534kennedy.pdf.

[2] See “Address of Hon. Joseph P. Kennedy, Chairman of the Securities and Exchange Commission, at Meeting of the Boston Chamber of Commerce” (Nov. 15, 1934), available at https://www.sechistorical.org/collection/papers/1930/1934_11_15_Kennedy_Boston_Sp.pdf.

[3] See William O. Douglas, “Address delivered to Duke Bar Association” (April 22, 1934), available at https://www.sec.gov/news/speech/1934/042234douglas.pdf.

[4] See SEC Historical Society, available at https://www.sechistorical.org/collection/papers/1930/1934_05_23_Frankfurter_to_FD.pdf.

[5] See Gary Gensler, “‘This Law and Its Effective Administration’: Remarks Before the Practising Law Institute’s 54th Annual Institute on Securities Regulation” (Nov. 2, 2022), available at https://www.sec.gov/news/speech/gensler-remarks-practising-law-institute-110222. See also “Prepared Remarks At the Securities Enforcement Forum” (Nov. 4, 2021), available at https://www.sec.gov/news/speech/gensler-securities-enforcement-forum-20211104.

[6] Reves v. Ernst & Young, 494 U.S. 56, 60-61 (1990).

[7] See Gary Gensler, “‘We’ve Seen This Story Before’: Remarks before the Piper Sandler Global Exchange & Fintech Conference” (June 8, 2023), available at https://www.sec.gov/news/speech/gensler-remarks-piper-sandler-060823.

[8] SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

[9] “While helpful as a shorthand reference, the security … is not simply” the crypto token, “which is little more than alphanumeric cryptographic sequence. Howey refers to an investment contract, i.e. a security, as a ‘contract, transaction, or scheme,’ using the term ‘scheme’ in a descriptive, not pejorative way.” These crypto asset securities present such investment “schemes.” SEC v. Telegram Grp., Inc., 448 F. Supp. 3d 352, 379 (S.D.N.Y. 2020).

[10] See “Bitcoin: A Peer-to-Peer Electronic Cash System” available at https://bitcoin.org/bitcoin.pdf.

[11] See, e.g., “SEC Charges Samuel Bankman-Fried with Defrauding Investors in Crypto Asset Trading Platform FTX” (Dec. 13, 2022), available at https://www.sec.gov/news/press-release/2022-219; “SEC Charges Genesis and Gemini for the Unregistered Offer and Sale of Crypto Asset Securities through the Gemini Earn Lending Program” (Jan. 12, 2023), available at https://www.sec.gov/news/press-release/2023-7; “Nexo Agrees to Pay $45 Million in Penalties and Cease Unregistered Offering of Crypto Asset Lending Product” (Jan. 19, 2023), available at https://www.sec.gov/news/press-release/2023-11; “Kraken to Discontinue Unregistered Offer and Sale of Crypto Asset Staking-As-A-Service Program and Pay $30 Million to Settle SEC Charges” (Feb. 9, 2023), available at https://www.sec.gov/news/press-release/2023-25; “SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes” (Feb. 16, 2023), available at https://www.sec.gov/news/press-release/2023-32; “SEC Charges Crypto Entrepreneur Justin Sun and His Companies for Fraud and Other Securities Law Violations” (March 22, 2023), available at https://www.sec.gov/news/press-release/2023-59; “SEC Charges Crypto Trading Platform Beaxy and its Executives for Operating an Unregistered Exchange, Broker, and Clearing Agency” (March 29, 2023), available at https://www.sec.gov/news/press-release/2023-64; “SEC Charges Crypto Asset Trading Platform Bittrex and its Former CEO for Operating an Unregistered Exchange, Broker, and Clearing Agency” (April 17, 2023), available at https://www.sec.gov/news/press-release/2023-78; “SEC Files 13 Charges Against Binance Entities and Founder Changpeng Zhao” (June 5, 2023), available at https://www.sec.gov/news/press-release/2023-101; and “SEC Charges Coinbase for Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency” (June 6, 2023), available at https://www.sec.gov/news/press-release/2023-102.

[12] See “SEC Charges Options Clearing Corporation with Rule Failures” (Feb. 16, 2023), available at https://www.sec.gov/news/press-release/2023-31. See also In re The Options Clearing Corporation, Exchange Act Release No. 96945 (Feb. 16, 2023), available at https://www.sec.gov/files/litigation/admin/2023/34-96945.pdf.

[13] See “SEC Charges Danske Bank with Fraud for Misleading Investors about Its Anti-Money Laundering Compliance Failures in Estonia” (Dec. 13, 2022), available at https://www.sec.gov/news/press-release/2022-220

[14] See “SEC Charges McDonald’s Former CEO for Misrepresentations About His Termination” (Jan. 9, 2023), available at https://www.sec.gov/news/press-release/2023-4.

[15] See “Former Wells Fargo Senior Executive Carrie Tolstedt Agrees to Settle SEC Fraud Charges for Misleading Investors About Abusive Sales Practices to Inflate a Key Performance Metric” (May 30, 2023), available at https://www.sec.gov/news/press-release/2023-99.

[16] See, e.g., “SEC Charges Samuel Bankman-Fried with Defrauding Investors in Crypto Asset Trading Platform FTX” (Dec. 13, 2022), available at https://www.sec.gov/news/press-release/2022-219; “SEC Charges Caroline Ellison and Gary Wang with Defrauding Investors in Crypto Asset Trading Platform FTX” (Dec. 21, 2022), available at https://www.sec.gov/news/press-release/2022-234; “SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes” (Feb. 16, 2023), available at https://www.sec.gov/news/press-release/2023-32; “SEC Charges Nishad Singh with Defrauding Investors in Crypto Asset Trading Platform FTX” (Feb. 28, 2023) available at https://www.sec.gov/news/press-release/2023-40; “SEC Charges Crypto Entrepreneur Justin Sun and His Companies for Fraud and Other Securities Law Violations” (March 22, 2023), available at https://www.sec.gov/news/press-release/2023-59; “SEC Charges Crypto Trading Platform Beaxy and its Executives for Operating an Unregistered Exchange, Broker, and Clearing Agency” (March 29, 2023), available at https://www.sec.gov/news/press-release/2023-64; and “SEC Files 13 Charges Against Binance Entities and Founder Changpeng Zhao” (June 5, 2023), available at https://www.sec.gov/news/press-release/2023-101.

[17] For a set of FY 2023 actions involving alleged affinity fraud, see, e.g., “SEC Obtains Emergency Relief To Halt Nearly $130 Million Fraud Targeting Indian American Community” (Oct. 16, 2023), available at https://www.sec.gov/news/press-release/2023-223; “SEC Alleges Son and Father-in-Law Touted Faith to Target Church Members in $20 Million Offering Fraud” (May 2, 2023), available at https://www.sec.gov/news/press-release/2023-84; “SEC Charges Mexico-based Company, its CEO, and Four Individuals in Ponzi Scheme Targeting Spanish-Speaking U.S. Investors” (Sept. 21, 2023), available at https://www.sec.gov/news/press-release/2023-190; “SEC Charges Former New Jersey Corrections Officer with Crypto Fraud Scheme Targeting Law Enforcement Personnel” (Aug. 23, 2023), available at https://www.sec.gov/news/press-release/2023-157; “SEC Charges Four Individuals in Crypto Pyramid Scheme that Targeted Spanish-Speaking Communities” (Dec. 14, 2022), available at https://www.sec.gov/news/press-release/2022-227; “SEC Charges California Resident with Multimillion Dollar Ponzi Scheme Targeting Tongan American Community” (Sept. 19, 2023), available at https://www.sec.gov/news/press-release/2023-187; and “SEC Charges Los Angeles Individual With Perpetrating A $47 Million Affinity Fraud Targeting Members Of The Orthodox Jewish Community” (Lit. Release, Jan. 12, 2023), available at www.sec.gov/litigation/litreleases/2023/Lr25613.htm.

[18] See, e.g., “SEC Charges Florida Resident for Operating $112 Million Ponzi Scheme that Targeted Haitian-American Community” (June 26, 2023), available at https://www.sec.gov/news/press-release/2023-118; and “SEC Charges Florida Resident with Operating $35 Million Ponzi Scheme that Targeted Church Members” (July 26, 2023), available at https://www.sec.gov/news/press-release/2023-142.

[19] See “SEC Charges HSBC and Scotia Capital with Widespread Recordkeeping Failures” (May 11, 2023), available at https://www.sec.gov/news/press-release/2023-91; “SEC Charges 11 Wall Street Firms with Widespread Recordkeeping Failures” (Aug. 8, 2023), available at https://www.sec.gov/news/press-release/2023-149; and “SEC Charges 10 Firms with Widespread Recordkeeping Failures” (Sept. 29, 2023), available at https://www.sec.gov/news/press-release/2023-212.

[20] See “SEC Charges Privately Held Monolith Resources for Using Separation Agreements that Violated Whistleblower Protection Rules” (Sept. 8, 2023), available at https://www.sec.gov/news/press-release/2023-172; “SEC Charges CBRE, Inc. with Violating Whistleblower Protection Rule” (Sept. 19, 2023), available at https://www.sec.gov/news/press-release/2023-184; and “SEC Charges D. E. Shaw with Violating Whistleblower Protection Rule” (Sept. 29, 2023), available at https://www.sec.gov/news/press-release/2023-213. For other actions during FY 2023, see also “Activision Blizzard to Pay $35 Million for Failing to Maintain Disclosure Controls Related to Complaints of Workplace Misconduct and Violating Whistleblower Protection Rule” (Feb. 3, 2023), available at https://www.sec.gov/news/press-release/2023-22.

[21] See e.g., “SEC Charges Coinbase for Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency” (June 6, 2023), available at https://www.sec.gov/news/press-release/2023-102; “SEC Charges Florida Resident for Operating $112 Million Ponzi Scheme that Targeted Haitian-American Community” (June 26, 2023), available at https://www.sec.gov/news/press-release/2023-118; “SEC Charges UK Audit Firm, CEO, and Senior Auditor for Failures in Connection with De-SPAC Transaction” (Aug. 14, 2023), available at https://www.sec.gov/news/press-release/2023-152; “SEC Charges Canadian Cannabis Company and Former Senior Executive with Accounting Fraud” (Oct. 24, 2022), available at https://www.sec.gov/news/press-release/2022-191; “SEC Charges Investment Fund Founder William K. Ichioka with $25 Million Offering Fraud” (June 22, 2023), available at https://www.sec.gov/news/press-release/2023-116; “SEC Charges Creator of CoinDeal Crypto Scheme and Seven Others in Connection with $45 Million Fraud” (Jan. 4, 2023), available at https://www.sec.gov/news/press-release/2023-2; “Goldman to Pay SEC $6 Million in Penalties for Providing Deficient Blue Sheet Data” (Sept. 22, 2023), available at https://www.sec.gov/news/press-release/2023-191; and “SEC Charges Red Rock Secured, Three Executives in Fraud Scheme Targeting Retirement Accounts” (May 15, 2023), available at https://www.sec.gov/news/press-release/2023-93.

[22] See, e.g., In the Matter of Perella Weinberg Partners LP; Tudor, Pickering, Holt & Co. Securities LLC; and Perella Weinberg Partners Capital Management LP, Exchange Act Release No. 98632 (Sept. 29, 2023), available at https://www.sec.gov/files/litigation/admin/2023/34-98632.pdf; “SEC Charges GTT Communications for Disclosure Failures” (Sept. 25, 2023), available at https://www.sec.gov/news/press-release/2023-195; “SEC Charges CBRE, Inc. with Violating Whistleblower Protection Rule” (Sept. 19, 2023), available at https://www.sec.gov/news/press-release/2023-184; “Linus Financial Agrees to Settle SEC Charges of Unregistered Offer and Sale of Securities” (Sept. 7, 2023), available at https://www.sec.gov/news/press-release/2023-171; “SEC Charges Privately Held Monolith Resources for Using Separation Agreements that Violated Whistleblower Protection Rules” (Sept. 8, 2023), available at https://www.sec.gov/news/press-release/2023-172; “SEC Charges Stanley Black & Decker and Former Executive for Failures in Executive Perks Disclosure” (June 20, 2023), available at https://www.sec.gov/news/press-release/2023-111; “SEC Charges McDonald’s Former CEO for Misrepresentations About His Termination” (Jan. 9, 2023), available at https://www.sec.gov/news/press-release/2023-4; and “SEC Charges Canadian Cannabis Company and Former Senior Executive with Accounting Fraud” (Oct. 24, 2022), available at https://www.sec.gov/news/press-release/2022-191.

[23] See “SEC Files 13 Charges Against Binance Entities and Founder Changpeng Zhao” (June 5, 2023), available at https://www.sec.gov/news/press-release/2023-101; and “SEC Charges Coinbase for Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency” (June 6, 2023), available at https://www.sec.gov/news/press-release/2023-102.

[24] See, e.g., “SEC Charges UK Audit Firm, CEO, and Senior Auditor for Failures in Connection with De-SPAC Transaction” (Aug. 14, 2023), available at https://www.sec.gov/news/press-release/2023-152; “SEC Charges International Accounting Firm Prager Metis with Hundreds of Auditor Independence Violations” (Sept. 29, 2023), available at https://www.sec.gov/news/press-release/2023-214; “SEC Charges Mattel with Financial Misstatements and Former PwC Audit Partner with Improper Professional Conduct” (Oct. 21, 2022), available at https://www.sec.gov/news/press-release/2022-189; and “SEC Charges International Accounting Firm Prager Metis with Hundreds of Auditor Independence Violations” (Sept. 29, 2023), available at https://www.sec.gov/news/press-release/2023-214.

[25] See “SEC Charges Audit Firm Marcum LLP for Widespread Quality Control Deficiencies” (June 21, 2023), available at https://www.sec.gov/news/press-release/2023-114. See also In re Marcum LLP, Exchange Act Release No. 97773 (June 21, 2023), available at https://www.sec.gov/files/litigation/admin/2023/34-97773.pdf.

[26] See “SEC Charges S&P Global Ratings with Conflict of Interest Violations” (Nov. 14, 2022), available at https://www.sec.gov/news/press-release/2022-205. See also “SEC Charges Two Credit Rating Agencies, DBRS and KBRA, with Longstanding Recordkeeping Failures” (Sept. 29, 2023), available at https://www.sec.gov/news/press-release/2023-211.

[27] See “SEC Charges Citigroup Global Markets Inc. with Recordkeeping Failures concerning Underwriting Expenses” (Aug. 29, 2023), available at https://www.sec.gov/news/press-release/2023-165.

[28] See “SEC Charges Former Attorney at U.S.-Based Global Law Firm with Insider Trading” (Aug. 23, 2023), available at https://www.sec.gov/news/press-release/2023-158.

Remarks at New York City Bar Association Compliance Institute by SEC Division of Enforcement Director Gurbir Grewal 
https://www.sec.gov/news/speech/grewal-remarks-nyc-bar-association-compliance-institute-102423

Good afternoon, everyone.

Thank you to the New York City Bar Association for the invitation, and to Adam for the kind introduction.

It’s a real privilege to join you for this important institute.

As is customary, my comments today are provided in my official capacity as Director of the Division of Enforcement, but do not necessarily reflect the views of the Commission, the Commissioners, or members of the staff.

* * *

I’d like to start by returning to a theme that I’ve touched on before, and that is how public trust in our institutions is faltering.[1] No sector is immune from this trend. From Congress to law enforcement to the courts, these levels are at, or below, historic lows.[2] Studies also show that only a small percentage of Americans have any significant level of confidence in banks, technology companies, or big business.[3]

Regardless of whether you are a regulator, financial professional, or an attorney who counsels large entities, you should all be concerned. This decline in trust is bad for everyone. It undermines the investor confidence needed for the fair, efficient, and orderly operation of our markets and for capital formation.

It is simple really. If the public doesn’t think the system is fair, at a minimum, they are not going to invest their hard-earned money. This hurts all those companies, professionals, and other market participants who are playing by the rules and doing the right thing.

Each day, however, the dedicated Enforcement Division staff work tirelessly to enhance that trust, by bringing impactful enforcement actions and meaningful relief to investors. While we have not yet released our 2023 fiscal year-end numbers, I can give you a sneak preview: we had another incredibly productive year on behalf of the investing public.

But it is clear that we cannot reverse those trends and enhance Americans’ trust in our financial institutions through our efforts alone. We need your help to do so. We need to work together to create what I call a culture of proactive compliance.

In many ways, it’s each of you – the compliance professionals, consultants, attorneys, accountants, and others in this space – that serve as the first lines of defense against misconduct.[4]

You are the ones that can work with firms to implement effective policies and procedures to ensure that those firms comply with their legal obligations on the front end, so that, instead of reading about compliance failures, the public understands that organizations like yours are proactively doing what they can to be compliant.

This is by no means easy work. Creating a culture of proactive compliance requires three things: education, engagement, and execution.

First, it requires you to educate yourselves about the law and external developments relevant to your business, particularly emerging and heightened risk areas.

When we recommend a new enforcement action, we put a lot of thought into making sure that our charging documents, whether settled or litigated, clearly telegraph the basis of the misconduct to industry participants.

So when a new action, examination priority,[5] or Commission rule is relevant to your company, you should digest it and examine which segments of your company have exposure to the same or similar issues.

Let me give you an example.

The SEC’s Whistleblower Program is a critical part of our enforcement efforts. Each year we receive thousands of whistleblower tips, and throughout the history of the program those tips have resulted in billions in monetary recovery, a significant portion of which has been returned to harmed investors, and some of which has funded whistleblower awards.[6]

The Dodd-Frank whistleblower protection rule – Rule 21F-17 – is important to the program’s success. It prohibits entities from taking actions that impede employees from reporting possible securities law violations to the SEC.

This past fiscal year, the Commission brought a number of actions charging firms for using employment agreements that expressly violated the plain language of the rule in various ways, including by:

• requiring employees to attest that they had not filed a complaint against the company with any federal agency;[7] or
• requiring employees to waive their rights to financial whistleblower awards;[8] or
• requiring departing former employees to provide notice to the company if they received a request for information from the Commission’s staff.[9]

The penalties in these cases included $10 million against the investment firm, D.E. Shaw. [10] That is the highest penalty on record for a standalone violation of the rule.

Our message through these actions and orders could not be more clear: we take compliance with Rule 21F-17 v-ery seriously, and so should each of you who work in a compliance function or advise companies.

You need to look at these orders and the violative language cited by the Commission and think about how those actions may impact your firms. And if they do, then take the steps necessary to effect compliance.

Another goal of our detailed charging documents is to empower you in the compliance function by publicizing the cost of noncompliance, allowing you to advise your management or clients that proactive compliance is cheaper and better for business than facing a potential enforcement action.

And that leads me to engagement. Proactive compliance also requires you to really engage with personnel inside your company’s different business units and to learn about their activities, strategies, risks, financial incentives, counterparties, and sources of revenues and profits.

You may come across aspects of your firm’s business that you do not completely understand. That’s not an excuse to punt. Take whatever steps are necessary to learn and understand the issues.

Those of you who work in the compliance function are leaders inside your organization and through proactive internal engagement you will be better prepared to discharge your duties. This understanding is critical to designing and adopting meaningful policies and procedures.

In our 21F-17 example, it means working with your firm’s human resource and legal functions to make sure that your employment agreements and policies are up-to-date and not in violation of that rule.

But none of this can be a one-time thing. Your businesses and operations change, risk areas change, and enforcement priorities change. There is also new Commission rulemaking. So education and engagement always needs to be a continuing, ongoing effort.

Finally, adopting meaningful policies and procedures is only part of the battle. Effective execution is equally important.

Time and again, we see firms that have good policies, but fall short on implementation.

Our ongoing off-channel communications sweep to ensure that regulated entities, including broker-dealers and investment advisers, comply with their recordkeeping requirements is a good example.

Since December 2021, it has resulted in charges against 40 firms and over $1.5 billion in civil penalties for failures to maintain and preserve electronic communications.[11]

As the orders in these actions describe, in every case, the firms had policies and procedures in place, but employees nevertheless communicated through unapproved methods. That is because there was widespread failure in implementing those policies. In fact, as detailed in all the orders, the individuals charged with supervising employees to prevent this misconduct were themselves violating the procedures.

What these actions make clear is that adopting the policies is just the first step, not the last. Through leadership, training, constant oversight and the right tone at the top, you need to ensure that the policies are actually implemented and followed.

That’s what proactive compliance requires.

And if despite all of your efforts, you do detect a securities law violation, the best thing to do would be to self-report and cooperate. Because, even as we emphasize robust penalties, we have also aggressively rewarded meaningful cooperation, most notably by recommending that the Commission impose substantially reduced penalties—or even no penalties at all. We did this frequently this past fiscal year.[12]

The Commission’s public orders describe the kinds of steps that companies took to obtain this type of cooperation credit. For example, in our off-channel communications sweep, the penalties the Commission has ordered have, as I think all in this room would agree, been high – record penalties, in fact, for books and records violations. But one recent order was not like any of the others. It detailed Perella Weinberg’s self-report and cooperation.[13] In that case, the Commission ordered a $2.5 million penalty – a very substantial reduction from the penalties imposed on other broker-dealers and advisers.

Other types of behaviors that have resulted in reduced or zero penalties have included:

• preemptively remediating and ceasing the unlawful behavior;
  proactively providing compensation to victims;
• providing detailed financial analyses, explanations, and summaries of factual issues to the staff;
• proactively identifying key documents and witnesses that the staff has not yet identified; and
• facilitating interviews of former employees.

These orders should aid each of you who are counseling companies and individuals deciding between coming forward or sitting back and taking the chance – gamble, really – that we do not discover the violation or that a whistleblower does not report it.

Let me conclude by addressing the proverbial elephant that shows up in any room where a regulator like me is speaking to those working in compliance: when does the Enforcement Division recommend charges against a compliance officer?

The short answer is that we do not second-guess good faith judgments of compliance personnel made after reasonable inquiry and analysis.[14] That is why such actions are rare.

There are really three situations where the Commission typically brings enforcement actions against compliance personnel:[15]

• where compliance personnel affirmatively participated in misconduct unrelated to the compliance function;
• where they misled regulators; and
• where there was a wholesale failure by them to carry out their compliance responsibilities.

The first category is easy: being a member of the compliance function is not a “get-out-of-jail” card, so when compliance officers violate the securities laws in ways that have nothing to do with exercising their compliance responsibilities, they are held accountable just like anyone else.

Here is one example. In June, the SEC charged the chief compliance officer of an international payment processing company with insider trading, alleging that he traded based on material nonpublic information that he surreptitiously obtained from his girlfriend’s laptop about upcoming mergers and acquisitions in which her employer was involved.[16] He then allegedly traded on that information and tipped it to his friends, who also traded.

The second category involves cases where a compliance officer obstructs or misleads the Commission’s staff or provides false information to regulators.

For example, the SEC charged a CCO with aiding and abetting and causing a firm’s books and records violation when she provided backdated and factually inaccurate compliance review memos to the SEC, falsely claiming that she created the memos contemporaneously with the reviews.[17]

In a similar case, the SEC charged a CCO with aiding and abetting a firm’s policies and procedures violations when she provided SEC staff compliance reports that she had falsified to give the misleading appearance that she had timely prepared the reports, when she, in fact, had not.[18]

These cases do not involve the SEC second-guessing good faith judgment calls; they involve deliberate conduct by the CCO intended to thwart the SEC’s ability to exercise effective oversight of the compliance function.

The third category involves wholesale failures by compliance personnel to fulfill their obligations.

Last month, for example, the Commission charged a partner at Marcum LLP, a public accounting firm, with failing to sufficiently address and timely remediate numerous deficiencies in Marcum’s quality control system.[19]

While not a CCO, the partner oversaw the firm’s quality control policies and procedures, and supervised all personnel working within Marcum’s quality control function.

According to the SEC’s order, for several years, the partner knew that the PCAOB had identified various deficiencies in that function and that Marcum’s own inspections had also revealed several deficiencies. Yet, he failed to address them, leading to various compliance failures in the firm. The partner agreed to pay a $75,000 civil penalty to resolve the case and was ordered to have no leadership role at an accounting firm for three years.

In another example from this past fiscal year, the Commission charged the CCO of a registered investment adviser who was responsible for implementing and adopting the firm’s compliance policies and procedures.[20]

For at least 10 years, instead of adopting policies and procedures that actually related to the firm’s business or even the federal securities laws, the firm adopted a handbook published by a professional trade organization containing standards of practice for candidates preparing for that organization’s examinations. The firm did not tailor the handbook to its actual business. In fact, the handbook did not even mention the applicable federal securities laws. On top of that, the firm also did not conduct any compliance training or annual reviews of its program.

In simple terms, in these cases, there was no education, no engagement and no execution. Rather, there were wholesale failures to carry out compliance responsibilities and to conduct even basic inquiry and analysis.

But cases like these are rare. The Commission has filed well over 1,000 standalone cases since I became Enforcement Director and only a handful have involved charges against compliance officers.

As I have said, we have no interest in pursuing enforcement actions against compliance personnel who undertake their responsibilities in good faith and based on reasonable inquiry and analysis.

We fully recognize that this is challenging work, but there is a way to meet those challenges and it requires, as I have detailed: education, engagement and execution.

Thank you again to the New York City Bar Association for the invitation to address you today.

I look forward to working with each of you towards our shared goal of fostering a culture of proactive compliance, so we can, together, enhance public trust and confidence in our markets and institutions.

And thank you all again for your efforts.

[1] See, e.g., Gurbir S. Grewal, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Remarks at SEC Speaks (Oct. 13, 2021), available at www.sec.gov/news/speech/grewal-sec-speaks-101321.

[2] Id.

[3] See, e.g., Gallup Historical Trends, “Confidence in Institutions,” available at https://news.gallup.com/poll/1597/confidence-institutions.aspx.

[4] As officials across the SEC have long recognized, compliance professionals play an important role within our regulatory framework. See, e.g., Peter B. Driscoll, Dir., Div. of Office of Compliance Inspections and Examinations, U.S. Sec. & Exch. Comm’n, Opening Remarks at National Investment Adviser/Investment Company Compliance Outreach 2020 (Nov. 19, 2020), available at www.sec.gov/news/speech/driscoll-role-cco-2020-11-19; Hester M. Peirce, Comm’r, U.S. Sec. & Exch. Comm’n, NSCP Remarks I (Oct. 30, 2018), available at www.sec.gov/news/speech/speech-peirce-103018; Andrew Ceresney, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, 2015 National Society of Compliance Professionals, National Conference: Keynote Address (Nov. 4, 2015), available at www.sec.gov/news/speech/keynote-address-2015-national-society-compliance-prof-cereseney; Chair Mary Jo White, Remarks at National Society of Compliance Professionals National Membership Meeting (Oct. 22, 2013), available at www.sec.gov/News/Speech/Detail/Speech/1370539960588.

[5] See Div. of Examinations, U.S. Sec. & Exch. Comm’n, 2024 Examination Priorities, available at www.sec.gov/files/2024-exam-priorities.pdf.

[6] See, e.g., Securities and Exchange Commission, “SEC Whistleblower Office Announces Results for FY 2022” (Nov. 15, 2022), available at www.sec.gov/files/2022_ow_ar.pdf.

[7] Securities and Exchange Commission, “SEC Charges D. E. Shaw with Violating Whistleblower Protection Rule” (Sept. 19, 2023), available at www.sec.gov/news/press-release/2023-213; Securities and Exchange Commission, “SEC Charges CBRE, Inc. with Violating Whistleblower Protection Rule” (Sept. 19, 2023), available at www.sec.gov/news/press-release/2023-184.

[8] Securities and Exchange Commission, “SEC Charges Privately Held Monolith Resources for Using Separation Agreements that Violated Whistleblower Protection Rules” (Sept. 8, 2023), available at www.sec.gov/news/press-release/2023-172.

[9] Securities and Exchange Commission, “Activision Blizzard to Pay $35 Million for Failing to Maintain Disclosure Controls Related to Complaints of Workplace Misconduct and Violating Whistleblower Protection Rule” (Feb. 3, 2023), available at www.sec.gov/news/press-release/2023-22.

[10] Securities and Exchange Commission, “SEC Charges D. E. Shaw with Violating Whistleblower Protection Rule” (Sept. 19, 2023), available at www.sec.gov/news/press-release/2023-213 ($10 million civil penalty).

[11] Securities and Exchange Commission, “SEC Charges 10 Firms with Widespread Recordkeeping Failures (Sept. 29, 2023), available at www.sec.gov/news/press-release/2023-212; Securities and Exchange Commission, “SEC Charges 11 Wall Street Firms with Widespread Recordkeeping Failures” (Aug. 8, 2023), available at www.sec.gov/news/press-release/2023-149; Securities and Exchange Commission, “SEC Charges HSBC and Scotia Capital with Widespread Recordkeeping Failures” (May 11, 2023), available at www.sec.gov/news/press-release/2023-91; Securities and Exchange Commission, “SEC Charges 16 Wall Street Firms with Widespread Recordkeeping Failures” (Sept. 27, 2022), available at www.sec.gov/news/press-release/2022-174; Securities and Exchange Commission, “JPMorgan Admits to Widespread Recordkeeping Failures and Agrees to Pay $125 Million Penalty to Resolve SEC Charges” (Dec. 17, 2021), available at www.sec.gov/news/press-release/2021-262.

[12] See, e.g., Securities and Exchange Commission, “SEC Charges 10 Firms with Widespread Recordkeeping Failures (Sept. 29, 2023), available at www.sec.gov/news/press-release/2023-212 (Perella Weinberg Capital); Securities and Exchange Commission, “SEC Charges CBRE, Inc. with Violating Whistleblower Protection Rule” (Sept. 19, 2023), available at www.sec.gov/news/press-release/2023-184; Securities and Exchange Commission, “SEC Charges Privately Held Monolith Resources for Using Separation Agreements that Violated Whistleblower Protection Rules” (Sept. 8, 2023), available at www.sec.gov/news/press-release/2023-172; Securities and Exchange Commission, “Linus Financial Agrees to Settle SEC Charges of Unregistered Offer and Sale of Securities” (Sept. 7, 2023), available at www.sec.gov/news/press-release/2023-171; Securities and Exchange Commission, “SEC Charges ‘Smart’ Window Manufacturer, View Inc., with Failing to Disclose $28 Million Liability (July 3, 2023), available at www.sec.gov/news/press-release/2023-126; Securities and Exchange Commission, “SEC Charges Stanley Black & Decker and Former Executive for Failures in Executive Perks Disclosure” (June 30, 2023), available at www.sec.gov/news/press-release/2023-111; Securities and Exchange Commission, “SEC Charges McDonald’s Former CEO for Misrepresentations About His Termination” (Jan. 9, 2023), available at www.sec.gov/news/press-release/2023-4; Securities and Exchange Commission, “SEC Charges Canadian Cannabis Company and Former Senior Executive with Accounting Fraud” (Oct. 24, 2022), available at www.sec.gov/news/press-release/2022-191.

[13] In the Matter of Perella Weinberg Partners LP, et al., Admin. Proc. File No. 3-21769 (Sept. 29, 2023), available at www.sec.gov/files/litigation/admin/2023/34-98632.pdf.

[14] See, e.g., Andrew Ceresney, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, 2015 National Society of Compliance Professionals, National Conference: Keynote Address (Nov. 4, 2015), available at www.sec.gov/news/speech/keynote-address-2015-national-society-compliance-prof-cereseney; Chair Mary Jo White, Remarks at National Society of Compliance Professionals National Membership Meeting (Oct. 22, 2013), available at www.sec.gov/News/Speech/Detail/Speech/1370539960588; see also In the Matter of the Application of Thaddeus J. North, Admin. Proc. File No. 3-17909 (Oct. 29, 2018) (Commission Opinion) (collecting Commission decisions) (“These decisions reflect the principle that, in general, good faith judgments of CCOs made after reasonable inquiry and analysis should not be second guessed.”), available at www.sec.gov/files/litigation/opinions/2018/34-84500.pdf, aff’d sub nom. North v. S.E.C., 829 Fed. App’x 729, 730 (D.C. Cir. Oct. 23, 2020).

[15] See, e.g., Andrew Ceresney, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Keynote Address at Compliance Week 2014 (May 20, 2014), available at www.sec.gov/news/speech/2014-spch052014ajc.

[16] Securities and Exchange Commission, “SEC Charges Stockbroker and Friend with Insider Trading” (June 29, 2023), available at www.sec.gov/news/press-release/2023-124.

[17] In the Matter of Meredith A. Simmons, Admin. Proc. File No. 3-20114 (Sept. 30, 2020), available at www.sec.gov/files/litigation/admin/2020/34-90061.pdf.

[18] In the Matter of Gilder Gagnon Howe & Co. LLC, et al., Admin. Proc. File No. 3-20014 (Sept. 17, 2020), available at www.sec.gov/files/litigation/admin/2020/ia-5582.pdf.

[19] Securities and Exchange Commission, “SEC Charges National Office Partner at Marcum for Causing Widespread Quality Control Deficiencies” (Sept. 12, 2023), available at www.sec.gov/news/press-release/2023-174.

[20] In the Matter of Two Point Capital Management, Inc., and John McGowan, Admin. Proc. File No. 3-21249 (Dec. 5, 2022), available at www.sec.gov/files/litigation/admin/2022/ia-6199.pdf

CFTC 

CFTC and State Regulators Enter Consent Order with California Precious Metals Dealer in $68 Million Fraud Targeting the Elderly (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8812-23
The United States District Court for the Central District of California entered a Consent Orderhttps://www.cftc.gov/media/9506/enfsafeguardmetalsconsentorder102023/download  against Safeguard Metals LLC and Jeffrey Ikahn (formerly Jeffrey Santulan a/k/a Jeffrey Hill) finding them liable for operating a nationwide $68 million fraudulent scheme, involving the sale of fraudulently overpriced silver coins that targeted elderly and retirement-aged people. The Order enjoins them from future violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged; future violations of state laws and regulations, as charged; and from trading or registering with the CFTC and the states in this action. As alleged in part in the CFTC Release:

The order finds Safeguard Metals and Ikahn executed a nationwide fraud, from approximately October 2017 through at least July 2021, in which the defendants solicited and received approximately $68 million in investor funds. The majority of the funds were retirement savings solicited from approximately 450 people to purchase precious metals, primarily silver coins. 

The order finds the defendants’ fraudulent scheme involved deceiving customers into purchasing precious metals through false and misleading statements, including about the risk and safety of their investments in traditional retirement accounts. The defendants also deceived customers into purchasing silver coins at prices that included grossly inflated price markups that vastly exceeded the price markups disclosed to customers. For example, customers paid an average markup of 71% when the customer agreement stated the defendants would charge a maximum markup of 23% on silver coins. These excessive markups caused customers an immediate and substantial loss on their investment. Also, to disguise their fraudulent scheme, the defendants misled their customers about the true value of the silver coins they purchased.

Parallel Civil Action

In a parallel, separate action, on February 1, 2022, the Securities Exchange Commission (SEC) filed a civil action against Safeguard Metals and Ikahn for violations arising from the fraudulent precious metals scheme and fraudulently overpriced silver coins, and for rendering unlawful investment advice. SEC v. Safeguard Metals, Case No. 2:22-cv-00693 JFW (C.D. Cal. Feb. 1, 2022). On June 14, the SEC entered a similar consent order with the defendants where they admitted liability. The consent order enjoined them from further violations, and allowed the amount of disgorgement and civil monetary penalty to be determined at a later date.

CFTC Orders Minnesota Grain Merchandiser to Pay $3 Million Penalty for Attempted Manipulation of Oats Futures Prices (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8810-23
October 23, 2023
A settled CFTC Order https://www.cftc.gov/media/9491/enfceresglobalorder102323/download alleges that senior personnel at Ceres Global Ag Corp. knew about and facilitated the building of large long positions at or close to the spot month speculative limits in the July 2016 and March 2017 oats futures contracts, and holding those long positions into the delivery period, and taking delivery of oats, intending both to boost the price of oat futures in those contracts and to obtain higher quality oats at lower delivery prices. Pursuant to the settlement, Ceres will pay a $3 million civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act (CEA), as charged. The Order recognizes Ceres has undertaken significant remedial steps to ensure future compliance with the CEA. As alleged in part in the CFTC Release:

[C]eres attempted to manipulate the July 2016 and March 2017 oats futures contracts. In June 2016, a former officer directed the company’s oat traders to flip the company’s existing short position in the July 2016 oat futures contract and attempt to reach a long position of 600 contracts, or 3 million bushels, the speculative position limit set by the exchange. In addition to building its long futures position, the former officer directed oats traders to buy back shipping certificates the company previously tendered to other market participants in a way that would not “tip [their] hand” about Ceres’s plan to take delivery at the expiration of the contract. In connection with this attempt to affect the July 2016 oats futures contract price, Ceres took delivery of 484 contracts and entered into offsetting transactions of an additional 53 contracts.

The order also finds Ceres engaged in similar activity in connection with the March 2017 oats futures contract, again intending to affect the futures price. The company built a long position in the March 2017 oats futures contract, held its long position into delivery, and took delivery of 337 contracts and entered into offsetting transactions of an additional 224 contracts, even though it had no immediate need for the oats. 

FINRA

FINRA Fines and Suspends Rep For Willful Failure to Disclose Five Judgments
In the Matter of Nathan Wilks, Respondent (FINRA AWC  2022074637301)
https://www.finra.org/sites/default/files/fda_documents/2022074637301
%20Nathan%20Wilks%20CRD%207291086%20AWC%20lp.pdff
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Nathan Wilks submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Nathan Wilks was first registered in June 2021 with Northwestern Mutual Investment Services, LLC. In accordance with the terms of the AWC, FINRA imposed upon Wilks a $5,000 fine and a three-month suspension from associating with any FINRA member in all capacities. The AWC contains this disclosure:

Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA’s By-Laws, this omission makes him subject to a statutory disqualification with respect to association with a member. 

As alleged in part in the "Overview' of the AWC:

Between April 2021 and January 2023, Wilks willfully failed to amend his Uniform Application for Securities Industry Registration or Transfer (Form U4) to disclose five unsatisfied judgments totaling approximately $320,000, in violation of Article V, Section 2(c) of FINRA’s By-Laws and FINRA Rules 1122 and 2010.

In November 2022, Wilks falsified a receipt that he submitted to the firm, in violation of FINRA Rule 2010.

FINRA Fines and Suspends Rep Over Wire Transfers
In the Matter of Brian Francis Giammona, Respondent (FINRA AWC 2022074075101)
https://www.finra.org/sites/default/files/fda_documents/2022074075101
%20Brian%20Francis%20Giammona%20CRD%20
%206386081%20AWC%20gg.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Brian Francis Giammona submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Brian Francis Giammona was first registered in 2015 and by 2020, he was registered with Morgan Stanley. In accordance with the terms of the AWC, FINRA imposed upon Giammona a $5,000 fine and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

From September 2020 through February 2022, Giammona was part of a team of advisors who assisted customers of his branch with wire transfer requests. Firm procedures required employees  processing outgoing wire transfer requests to follow certain instructions before processing the wire, including identifying   whether the request came from a person authorized on the account to make such requests, verifying the identity of the person making the request, and confirming details of the wire with the authorized person. Firm employees were prohibited from accepting wire transfer requests in the body of an email without additional documentation or verification. One of the methods firm employees could use to authenticate a wire request was to contact the customer via telephone and ask authentication questions or otherwise verify the authorized person’s identity with 100% confidence before confirming the details of the wire request.

During his time at the firm, Giammona regularly completed wire transfer documents in which he stated that he had “spoke[n] to” firm customers and received verbal confirmation of their identity and wire instructions. For at least 47 wire transfers across at least eight customer accounts, Giammona did not actually contact the customer via telephone or receive any other form of verbal confirmation, but only followed instructions delivered via email. Giammona also either falsely documented that the customer had correctly answered authentication questions or falsely attested that he had ascertained the customer’s identity with 100% confidence.

By falsifying Morgan Stanley’s wire transfer request forms, Giammona violated FINRA Rule 2010. Moreover, Giammona violated FINRA Rules 4511 and 2010 by causing Morgan Stanley to maintain inaccurate books and records. 

FINRA Fines and Suspends Rep Over Extension of Paid Leave 
In the Matter of Christian Thomas Holmes, Respondent (FINRA AWC 2022076303801)
https://www.finra.org/sites/default/files/fda_documents/2022076303801
%20Christian%20Thomas%20Holmes%20CRD%206810142%20AWC%20vr.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Christian Thomas Holmes submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Christian Thomas Holmes was been registered with Goldman Sachs & Co. from September 2021 to September 2022. In accordance with the terms of the AWC, FINRA imposed upon Holmes a $5,000 fine and a five-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

On June 24, 2022, and July 22, 2022, Holmes forged a third party’s signature on forms that he submitted to Goldman Sachs in support of his application to extend a paid leave of absence from the firm. Holmes typed the third party’s name on the signature line of the forms, without the person’s authorization or knowledge.

Therefore, Holmes violated FINRA Rule 2010. 

FINRA Fines and Suspends Rep for Mismarked Order Tickets
In the Matter of Kevin Zappia, Respondent (FINRA AWC 2023079976101)
https://www.finra.org/sites/default/files/fda_documents/2023079976101
%20Kevin%20Zappia%20CRD%201360824%20AWC%20lp.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Kevin Zappia submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Kevin Zappia has been registered since 1985, and by September 2016, he was registered with The Investment Center. In accordance with the terms of the AWC, FINRA imposed upon Zappia a $2,500 fine and a 15-business-day suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Between September 2020 and August 2021, Zappia mismarked 73 order tickets as unsolicited when he had solicited the trades. Zappia's mismarking of these order tickets caused The Investment Center to make and preserve inaccurate books and records with respect to these trades in violation of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder.

Therefore, Zappia violated FINRA Rules 4511 and 2010. 

FINRA Censures and Fines Electronic Transaction Clearing for Registration Failures
In the Matter of Electronic Transaction Clearing, Inc, Respondent (FINRA AWC 2021069322001)
https://www.finra.org/sites/default/files/fda_documents/2021069322001
%20Electronic%20Transaction%20Clearing%2C%20Inc.
%20CRD%20146122%20AWC%20vr.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Electronic Transaction Clearing, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Electronic Transaction Clearing, Inc. has been a FINRA member firm since 2009 with about 25 registered representatives at three branches. In accordance with the terms of the AWC, FINRA imposed upon Electronic Transaction Clearing, Inc. a Censure and $100,000 fine (of which $5,000 is paytable to FINRA). As alleged in the "Overview" of the AWC [Ed: footnote omitted]:

From May 2017 through December 2021, ETC permitted eight individuals to operate in capacities for which they were not qualified or not properly registered pursuant to FINRA registration requirements, in violation of NASD Rules 1021, 1022, 1031, and 1032, and FINRA Rules 1210, 1220 and 2010. Additionally, from December 2020 through December 2021, ETC failed to establish, maintain and enforce a supervisory system, including written supervisory procedures ("WSPs"), reasonably designed to achieve compliance with FINRA registration requirements, in violation of FINRA Rules 3110 and 2010

FINRA Arbitration Panel Awards $125,000 in Damages Against Ameriprise Financial Services LLC in Disputed Variable Annuity Recommendation
In the Matter of the Arbitration Between Loretta Bynum, Individually and on Behalf of her Individual Retirement Account, Claimant, v. Ameriprise Financial Services, LLC, Respondent (FINRA Arbitration Award 22-02263)
https://www.finra.org/sites/default/files/aao_documents/22-02263.pdf
In a FINRA Arbitration Statement of Claim filed in October 2022, public customer Claimant Bynum asserted violation of the Michigan Uniform Securities Act; negligence; failure to act in Claimant’s best interest; misrepresentation and omission of material facts; violations of other industry standards of care, including FINRA Rules 2010, 2090, 2020, and 3110; breach of fiduciary duty; breach of contract; and respondeat superior. The FINRA Arbitration Award asserts that the "causes of action relate to Claimant’s allegation that Respondent, through its advisor, recommended that Claimant invest in a variable annuity, which was inappropriate for Claimant." Claimant sought in excess of $500,000 in damages, interest, fees, and costs. Respondent generally denied the allegations and asserted affirmative defenses. Without any explanation, the FINRA Arbitrators found Respondent Ameriprise liable to and ordered it to pay to Claimant $125,000 in compensatory damages.

Bill Singer's Comment: Frankly, a shameful Award given that the issue is a retirement account and that the customer prevailed to the tune of some $125,000. The allegations against Respondent Ameriprise are serious -- at the core, the customer alleged that the variable annuity at issue was "inappropriate" for her. Equally troubling is the lack of any explanation as to why or how the Panel calculated only $125,000 in damages versus the not-less-than $500,000 demanded by Claimant. As always, there may well be sensible explanations for the awarding of a lesser amount than sought; however, given the issues involved in this consumer dispute, at the very least, FINRA owes the investing public some cursory presentation of what happened, why it was wrong, and how the damages were calculated.

FINRA Arbitration Panel Awards Apex Clearing Corporation Damages for Breach of Clearing Agreement
In the Matter of the Arbitration Between Qwikt Global Securities LLC, Claimant/Counter-Respondent, v. Apex Clearing Corporation, Respondent/Counter-Claimant (FINRA Arbitration Award 22-02011)
https://www.finra.org/sites/default/files/aao_documents/22-02011.pdf
In a FINRA Arbitration Statement of Claim filed in September 2022, Claimant asserted breach of fiduciary duty, breach of contract, violation of FINRA Rules, unjust enrichment, and gross negligence or willful misconduct. The causes of action relate to  Claimant’s allegation that Respondent and its agent willfully refused to return its Deposit Account upon termination of the Clearing Agreement, which caused foreseeable damage and a net capital violation that impaired the sale of Claimant’s Broker-Dealer firm. As asserted in the FINRA Arbitration Award:

In the Statement of Claim, Claimant requested $21,103.61 in damages for return of the balance of the Security Deposit, $100,000.00 in damages for impaired valuation of attempted sale of Claimant’s Broker-Dealer, $3,825.00 in costs, specific performance, and declaratory judgment, and such other relief as is deemed just and proper.

At the hearing, Claimants requested $250,928.86 in damages and attorneys’ fees.

Respondent generally denied the allegations and asserted affirmative defenses. Additionally, Respondent Counter-Claimed by asserting breach of contract related to the allegation that Claimant failed to pay the amounts due under the Clearing Agreement, including termination fees. As asserted in the FINRA Arbitration Award:

In the Statement of Answer and Counterclaim, Respondent requested that the Panel dismiss Claimant’s Statement of Claim in its entirety; award Respondent its damages for Claimant’s breach of the Clearing Agreement; award Respondent its reasonable attorneys’ fees and all costs associated with this arbitration, including those fees and costs for defending against Claimant’s meritless claims; award any other relief that the Panel deems just and equitable; and award Respondent damages for all amounts due and owing to it under the Clearing Agreement, specifically $200,000.00 in termination fees, as well as $53,573.81 from previous invoices, for total contract damages of $253,573.81.

The FINRA Arbitration Panel found denied Claimant's claims. Further, the Panel found Claimant liable to and ordered it to pay to Respondent liable and ordered it to pay to Claimant:

• $253,573.81, which includes $200,000.00 (in termination fees) and $53,573.81 (in previous unpaid invoices). This amount is offset by the sum of $126,111.53, which includes $125,139.64 (Respondent retained Claimant’s deposit account) and $971.89 (Respondent retained Claimant’s proprietary account). As such, the net amount Claimant is liable for and shall pay to Respondent is the sum of $127,462.28 in compensatory damages;
• pre-judgment interest;
• $150,059.85 in attorneys’ fees; and
• $4,466.20 in costs.