Senate Democrats introduced a resolution to strike down the SEC’s amendments to Rule 14-8 of the Exchange Act on Friday, April 2, 2021. The resolution was submitted under the Congressional Review Act which requires only a simple majority. The amended rule placed stricter requirements on shareholders seeking to submit ballot proposals. The Commission approved the rule changes in September 2020 by a 3-2 vote.
The Examinations Division issued a risk alert last week focusing on AML issues as FinCEN moves forward with drafting rules to implement the Business Transparency Law passed at the end of the year last. The law aims to strengthen the rules against money laundering.
Be careful, be careful this week
PSPC statement: Division of Corporation Staff Statement on Certain Special Purpose Acquisition Company Matters (March 31, 2020) (here). The statement focuses on the key points that a private company should consider before committing to a transaction with a PSPC.
Alert: The Examinations Division or REVIEWS issued an AML alert this week titled “Compliance Issues Related to Monitoring and Reporting Suspicious Activity at Broker-Brokers” (March 29, 2021). It recounts staff observations during reviews focused on AML issues (here).
Alert launcher: The Commission awarded more than $ 500,000 to a whistleblower who previously reported the information internally. The company carried out an internal investigation and the information was eventually communicated to the Commission by another agency. The whistleblower reported the information separately under the Safe Harbor provision which treats a report made within 120 days of the internal disclosure as having occurred at the same time.
SEC Application – Deposited and Paid Shares
The Commission filed 4 new injunctive civil actions and no administrative proceedings last week, excluding 12d, accompanying proceedings and other similar cases.
Offer fraud: SEC v. Randolph, Civil action n ° 1: 21-cv-01321 (ND Ga. Filed on April 1, 2021) is an action which names as defendant Richard J. Randolph, III. Over the past five years, Mr. Randolph, who has various real estate interests, has raised approximately $ 1.6 million more from investors linked to his real estate interests. Randolph Associates Inc. was used to raise a lot of the money. Investors have been advised of a possible merger with Gallagher Management Group, LLC. The defendant provided investors with financial information on this company which he also controlled. The information was fraudulent. The defendant also embezzled parts of the investor’s capital. The complaint alleges violations of every paragraph of section 17 (a) of the Securities Act and section 10 (b) of the Foreign Exchange Act. The defendant solved the problem by accepting the entry of a permanent injunction based on the articles cited in the complaint. In addition, he has accepted the entry of an officer-director bar and to participate in the issue, purchase, offer or sale of any security. Financial penalties will be determined at a later date. The US District Attorney’s Office for the Northern District of Georgia has filed a parallel criminal action. See Bed. Rel. No. 25054 (April 1, 2021).
Offer fraud: SEC c. Blankenbaker, Civil action n ° 1: 21-cv-790 (SD Ind. Filed March 31, 2021) is an action which names as defendants George Blankenbaker, Stargrower Commercial Bridge Loan Fund 1 LLC, Stargrower Asset Management LLC and Blankenbaker Investments Fund 17 LLC. Over a three-year period, Blankenbaker and his companies have raised more than $ 11 million from at least 109 investors, many of whom are seniors. Investors were told the funds would be used to provide short-term loans to food exporters in Asia. Investors were to receive interest payments on the products. Mr Blankenbaker did not tell investors that most of their money was for an investment in hemp, while other parts of the funds were being diverted for his personal use. Two of the three offers were not registered. The complaint alleges violations of Articles 5 (a), 5 (c) and 17 (a) of the Securities Law and Article 10 (b) of the Foreign Exchange Law. Mr. Blankenbaker’s companies have consented to the registration of permanent injunctions and have agreed to pay restitution and pre-judgment interest of $ 5,196,641 on a joint and several basis. Mr. Blankenbaker consented to the registration of permanent injunctions based on the articles cited in the complaint and to a bar of guiding officers. He also agreed to pay restitution, pre-judgment interest and a penalty, the amounts of which will be determined later. Mr. Blankenbaker was excluded from trading in securities in a separate administrative proceeding. In a parallel action brought by the United States Attorney’s Office for the Southern District of Indiana, criminal charges were laid against Mr. Blankenbaker. See Bed. Rel. No. 25063 (April 1, 2021).
Fraudulent fees / trading: SEC v. Elstun, Civil Action No. 4: 21-cv-00206 (WD MO. Filed March 29, 2021) is an action which names as the defendant Douglas Elstun, an investment advisor and former owner of Crossroads Financial Management, Inc. The complaint Alleges Defendant defrauded some high income sports clients by charging a higher percentage than agreed. For other clients, he applied management fees to accounts he did not manage. In addition, a number of clients have been placed in very high risk investments such as reverse ETFs for significant periods of time, while the instruments were designed only for short term investments. Finally, a number of clients have been placed in inappropriate investments. The complaint alleges violations of Articles 206 (1), 206 (2), 206 (4) and 204 of the Counselors Act. The case is pending. See Bed. Rel. no. 206 (March 30, 2021).
Crypto Assets: SEC vs. LBRY, Inc., Civil action n ° 1: 21-cv-00260 (DNH filed on March 29, 2021). Defendant LBRY, Inc. is a privately held company based in Manchester, New Hampshire. It was created in 2015 to deliver digital content. It started with video distribution as a potential competitor for YouTube, Amazon, and other video platforms. To move forward with its vision, LBRY claimed it would use blockchain technology by: 1) creating a “protocol” or set of rules for the transfer of data between devices; 2) create a user application; 3) create the software necessary to activate the protocol; 4) recruit those who are needed to make the videos; and 5) attract consumers. To support these efforts, the company offered to sell LBC – LBRY credits. The fundraising effort began in March 2016 with an announcement on the company’s website about the program. In June 2016, the firm launched its protocol after having designed the first 400 million AMLs in its possession. This represented 40% of the total supply authorized under the protocol. The AML was then divided into three funds: the operational fund; the Community Fund; and the institutional fund. Each fund was used slightly differently to achieve the overall goal. For example, the Community Fund focused on consumers; the Institutional Fund has turned to institutions for partnerships, grants, donations and similar issues; and the Operational Fund sought to profit. Starting in 2016, the company offered the Community Fund LBC in exchange for contributions to the network. Subsequently, at various times over a three-year period starting in 2017, AMLs of each of the funds were offered to investors. These investors bought LBC in exchange for US currency, bitcoin, or other consideration such as services. The reason for the purchases was an expectation of profits from the pooling of their funds with others and the efforts of the defendant. Following these transactions, LBRY continued to sell LBC. Around 10 million LBCs have been sold to retail investors. At the end of June, the firm took measures to stabilize the price of LBC, which varied considerably. In October 2020, the company reported on its website that LBC would only gain in value as usage of its network grows. Efforts to keep promises made to investors continued in March 2021. AMLs are not registered with the Commission. The complaint alleges violations of Sections 5 (a) and 5 (c) of the Securities Act. The case is pending. See Bed. Rel. No. 25060 (March 29, 2021).
Drafting of proposed rules: The regulator announced on April 1, 2021 the launch of a new regulatory process related to the reporting requirements of beneficial owners. The announcement is advance notice to solicit public comments for future regulation based on the recently passed Business Transparency Law (here).
To prohibit: The Australian Securities and Investments Commission announced a ban on the sale of binary options to retail clients on April 1, 2021.
Initiatives: The Securities and Exchange Surveillance Commission published a brochure on its initiatives for reliable and attractive capital markets 2020-2022 on March 26, 2021 (here).
Notes: Mark Steward, Executive Director of Enforcement and Market Surveillance at the Financial Conduct Authority, delivered remarks on March 24, 2021 titled The Importance of Targeted Anti-Money Laundering Controls (here). The director focused on increasing AML investigations and the importance of proper controls.