Category: finance

Ohio Votes to Legalize Sports Betting

Ohio lawmakers have reached an agreement that will legalize sports betting for those 21 and older. House Bill 29, which was passed by the Ohio House of Representatives and Senate on December 8 and is expected to be signed into law by Governor DeWine in the coming days, will allow licensed gaming operations to begin accepting wagers as soon as April 1, 2022.

Since the Supreme Court of the United States struck down federal law prohibiting state-sponsored sports betting in 2018, 33 states and Washington D.C. have passed legislation establishing regulated markets for wagering on sports. Ohio now becomes the 34th as it hopes to curb the flow of its residents’ entertainment and tourism dollars into neighboring Michigan, Pennsylvania, Indiana and West Virginia, all of whom have already legalized sports betting.

Oversight. The Ohio Casino Control Commission (“OCCC”) will be responsible for regulating and monitoring all sports gambling activity in the state. Once the bill is signed into law, the OCCC is required to establish a licensing process, consumer protections, advertising guidelines, and financial requirements for licensees. As an enforcement agency, it will also be given the authority to create other administrative rules it deems necessary to carry out its oversight duties.

Licenses. The OCCC will being accepting license applications on January 1, 2022 and can begin issuing a limited number of licenses on April 1, 2022. The law provides guidance as to how the OCCC will evaluate applicants, and establishes three classes of licenses: (1) Type A licenses for casinos, racinos and sportsbooks operating online and via mobile app; (2) Type B licenses for brick-and-mortar sportsbooks, which will be distributed throughout the state based on county population; and (3) Type C licenses for betting terminals to be placed in restaurants, bars and the like that possess D-1, D-2, or D-5 liquor permits.

Taxes.  A 10% tax will be placed on the new industry’s revenues. Combined with the fees and fines collected by the OCCC, most of this money will be earmarked for distribution by the Ohio General Assembly to public and nonpublic K-12 education programs and a state-sponsored Problem Sports Gaming and Addiction Fund. The bill also creates certain tax incentives for licensed operators beginning in 2027.

Be Ready. Businesses affected by legalization, whether pursuing a license, contracting with a license-holder or being indirectly impacted, need to stay vigilant as Ohio’s sports betting regulatory framework develops. From financial reporting to employment practices, failure to understand and implement processes to comply with the forthcoming regulations could result in significant fines or even criminal penalties.

©2021 Roetzel & Andress

Federal Regulators Issue New Cyber Incident Reporting Rule for Banks

On November 18, 2021, the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency issued a new rule regarding cyber incident reporting obligations for U.S. banks and service providers.

The final rule requires a banking organization to notify its primary federal regulator “as soon as possible and no later than 36 hours after the banking organization determines that a notification incident has occurred.” The rule defines a “notification incident” as a “computer-security incident that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, a banking organization’s—

  1. Ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business;
  2. Business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value; or
  3. Operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States.”

Under the rule, a “computer-security incident” is “an occurrence that results in actual harm to the confidentiality, integrity, or availability of an information system or the information that the system processes, stores, or transmits.”

Separately, the rule requires a bank service provider to notify each affected banking organization “as soon as possible when the bank service provider determines it has experienced a computer-security incident that has materially disrupted or degraded or is reasonably likely to materially disrupt or degrade, covered services provided to such banking organization for four or more hours.” For purposes of the rule, a bank service provider is one that performs “covered services” (i.e., services subject to the Bank Service Company Act (12 U.S.C. 1861–1867)).

In response to comments received on the agencies’ December 2020 proposed rule, the new rule reflects changes to key definitions and notification provisions applicable to both banks and bank service providers. These changes include, among others, narrowing the definition of a “computer security incident,” replacing the “good faith belief” notification standard for banks with a determination standard, and adding a definition of “covered services” to the bank service provider provisions. With these revisions, the agencies intend to resolve some of the ambiguities in the proposed rule and address commenters’ concerns that the rule would create an undue regulatory burden.

The final rule becomes effective April 1, 2022, and compliance is required by May 1, 2022. The regulators hope this new rule will “help promote early awareness of emerging threats to banking organizations and the broader financial system,” as well as “help the agencies react to these threats before they become systemic.”

Copyright © 2021, Hunton Andrews Kurth LLP. All Rights Reserved.
For more articles on banking regulations, visit the NLR Financial Securities & Banking section.

Don’t Use “Build Back Better” to Sabotage the False Claims Act

Congress is on the verge of setting a dangerous precedent.  As part of the Build Back Better Act, it has added two provisions equivalent to a “get out of jail free card” for Big Banks that violate federal law when they hand out billions in federal mortgage-related benefits.   The two provisions create exemptions to False Claims Act liability by creating blanket immunity from liability when banks fail to exercise due diligence, violate FHA housing regulations, or even directly violate federal laws such as the Truth in Lending Act.

It is obvious why banks want to have their federally sponsored mortgage practices immunized from exposure to the False Claims Act (“FCA”).  The FCA works remarkably well and is widely recognized as “the most powerful tool the American people have to protect the government from fraud.”   The law has directly recovered over $64.450 billion in sanctions from fraudsters since Congress modernized it in 1986.  During the debates on the massive trillion-dollar infrastructure laws enacted or debated this year, corporate lobbyists have been extremely active in successfully preventing Congress from adding any new anti-fraud measures to protect taxpayers from fraud.  As part of these efforts, they targeted the False Claims Act as enemy #1 and already have blocked one key amendment needed to close some weaknesses in that law.

With the Build Back Better Act, these corporate lobbyists have taken their opposition to effective anti-fraud laws to a higher level.  Instead of trying to repeal the FCA, they are simply exempting Big Banks from liability under that law in two new programs.  It is obvious why the Big Banks want the exemption from FCA liability.  As a result of illegal or irresponsible lending and foreclosure practices, such as those that fueled the 2008 financial collapse, banks have had to pay billions in sanctions to the United States.

Two words explain why the FCA is “the most powerful tool” protecting taxpayers from fraud:  Whistleblowers and sanctions.  If you accept federal taxpayer monies, you are required to spend that money according to your contractual agreement or the law.  The FCA’s first secret weapon is whistleblowers.  The law encourages whistleblowers, known as qui tam “relators,” to report violations of the FCA.  Whistleblowers disclosures trigger the overwhelming majority of FCA cases, and the law incentivizes employees to risk their careers to serve the public interest. The second secret weapon is how you prove liability.  Second, when an institution accepts federal monies (such as banks that operate various federally sponsored loan programs), liability can attach if the institution acts in “deliberate ignorance of the truth” when spending federal dollars.  Similarly, if payments are made with “reckless disregard of the truth,” liability can attach.  In other words, corporations (including banks) that accept federal money must ensure that these monies are spent as required by law, regulation, or contract.  Safeguards must be in place to prevent fraud.  If a bank does not have adequate compliance programs to protect against fraud, it cannot plead ignorance when the law is broken and taxpayers are ripped off.

These two key elements of the False Claims Act are precisely what the banking lobby is attempting to undermine through the Build Back Better Act.  The tactics employed by the Big Banks are somewhat devious.  They are doing an end-run around the False Claims Act by exempting themselves from having to engage in any due diligence when spending billions in federal dollars.  The banks are seeking to add language to the Build Back Better Act that will immunize themselves from liability under the False Claims Act when they make payments in “reckless disregard” to the legality of those payments.  The immunities they are seeking legalize “deliberate ignorance” in the use of taxpayer money, in complete defiance of the False Claims Act. Thus, whistleblowers who report these frauds will be stripped of protections they have under the False Claims Act, and the federal government will have no effective way to recover damages from these frauds.

What language in the Build Back Better Act creates an exemption to False Claims Act liability?

Two highly technical provisions are deeply buried within the 2135 pages of the Build Back Better Act’s legislative text. The provisions are sections 40201 and 40202 of the Build Back Better Act.  These two sections establish helpful programs that will provide needed financial support to first-generation homebuyers.  Section 40201(d)(5) would provide $10 billion in down payment assistance. Section 40202(f) would give an interest rate reduction on new FHA 20-year mortgage products to first-time homeowners with a potential value of $60 billion.  But the banking lobby has corrupted these otherwise well-meaning programs. The exemptions obtained by the banks are incubators for massive fraud.  It permits the Big Banks to escape any liability when they abuse the generosity of taxpayers and dole out billions to unqualified individuals.

How do the exemptions work?  To qualify for these taxpayer-financed benefits, an applicant simply has to “attest” that they are first-time/first-generation homebuyers.  That would be the end of the inquiry a bank would need to approve making a payment from the billions allocated in these two programs. Anyone could simply stroll into a bank and “attest” to being such a first-time homebuyer and would thereafter qualify for the federal benefits.  The banks would not be required to do any diligence of their own to confirm the borrower’s eligibility.  Willful ignorance would be legalized.  Reckless disregard in the handling of taxpayer monies would be permitted under this law.  Safeguards, such as requiring banks to adhere to the Truth in Lending Act, which requires verification of a borrower’s statements, would not apply.

Under Sections 40201(d)(5) and 40202(f), banks will not be held liable once they are lied to, even if the bank has reason to know that the borrower is not eligible for the federal payout.  Banks can spend taxpayer money even if the information on an applicant’s loan application directly contradicts the borrower’s attestation that they are a first-time homeowner.  Given the lack of any compliance standards, the temptation to engage in fraud in these programs will be overwhelming.

Permitting banks to escape liability under the False Claims Act opens the door to paying billions of dollars in benefits to unqualified persons.  Such payments rip off the taxpayers and severely hurt all honest first-generation homebuyers denied benefits.  For every fraudster who benefits from this program, an honest homebuyer will be left in the cold due to the reckless disregard of the banks.

Congress should never use a back-door procedure to undermine the False Claim Act, as it sets a dangerous precedent.  It is a devious way to undermine America’s “most effective” anti-fraud law.  Instead of undermining the False Claims Act by granting immunities to Big Banks, Congress should be strengthening anti-fraud laws to protect the taxpayers and ensure that the trillions of dollars spent on COVID-19 relief programs and infrastructure improvement are lawfully spent in the public interest.

Copyright Kohn, Kohn & Colapinto, LLP 2021. All Rights Reserved.
For more articles about banking and finance, visit the NLR Financial, Securities & Banking section.

The Confidentially Marketed Public Offering for the Smaller Reporting Company

What is it?

A Confidentially Marketed Public Offering (“CMPO”) is an offering of securities registered on a shelf registration statement on Form S-3 where securities are taken “off the shelf” and sold when favorable market opportunities arise, such as an increase in the issuer’s price and trading volume resulting from positive news pertaining to the issuer.  In a CMPO, an underwriter will confidentially contact a select group of institutional investors to gauge their interest in an offering by the issuer, without divulging the name of the issuer.  If an institutional investor indicates its firm interest in a potential offering and agrees not to trade in the issuer’s securities until either the CMPO is completed or abandoned, the institutional investor will be “brought over the wall” and informed on a confidential basis of the name of the issuer and provided with other offering materials.  The offering materials made available to investors are typically limited to the issuer’s public filings, and do not include material non-public information (“MNPI”).  By avoiding the disclosure of MNPI, the issuer mitigates the risk of being required to publicly disclose the MNPI in the event the offering is terminated.  Once brought over the wall, the issuer, underwriter and institutional investors will negotiate the terms of the offering, including the price (which is usually a discount to the market price) and size of the offering.  Once the offering terms are determined, the issuer turns the confidentially marketed offering into a public offering by filing a prospectus supplement with the Securities and Exchange Commission (“SEC”) and issuing a press release informing the public of the offering.  Typically, this occurs after the close of markets.  Once public, the underwriters then market the offering broadly to other investors, typically overnight, which is necessary for the offering to be a “public” offering as defined by NASDAQ and the NYSE (as discussed further below).  Customarily, before markets open on the next trading day, the issuer informs the market of the final terms of the offering, including the sale price of the securities to the public, the underwriting discount per share and the proceeds of the offering to the issuer, by issuing a press release and filing a prospectus supplement and Current Report on Form 8-K with the SEC.  The offering then closes and shares are delivered to investors and funds to the issuer, typically two or three trading days later.

What Type of Issuer Can Conduct a CMPO and How Much Can an Issuer Raise?

To be eligible to conduct a CMPO, an issuer needs to have an effective registration statement on Form S-3, and is therefore only available to companies that satisfy the criteria to use such form.  For issuers that have an aggregate market value of voting and non-voting common stock held by non-affiliates of the issuer (“public float”) of $75M or more, the issuer can offer the full amount of securities remaining available for issuance under the registration statement.  Issuers that have a public float of less than $75M will be subject to the “baby shelf rules”.   In a CMPO, issuers subject to the baby shelf rules can offer up to one-third of their public float, less amounts sold under the baby shelf rules in the trailing twelve month period prior to the offering.  To determine the public float, the issuer may look back sixty days from the date of the offering, and select the highest of the last sales prices or the average of the bid and ask prices on the exchange where the issuer’s stock is listed.  For an issuer subject to the baby shelf rules, the amount of capital that the issuer can raise will continually fluctuate based on the issuer’s trading price.

What Exchange Rules Does an Issuer Need to Consider?

The public offering period of a CMPO must be structured to satisfy the applicable NASDAQ or New York Stock Exchange criteria for a “public offering”.  In the event that the criteria are not satisfied, rules requiring advance shareholder approval for private placements where the offering could equal 20% or more of the pre-offering outstanding shares may be implicated.  Moreover, a sale of securities in a transaction other than a public offering at a discount to the market value of the stock to insiders of the issuer is considered a form of equity compensation and requires stockholder approval.  Nasdaq also requires issuers to file a “listing of additional shares” in connection with a CMPO.

Advantages and Disadvantages of CMPOs

There are a number of advantages of a CMPO compared to a traditional public offering, including the following:

  • A CMPO offers an issuer the ability to raise capital on an as needed basis as favorable market conditions arise through a process that is much faster than a traditional public offering.
  • The shares issued to investors in a CMPO are freely tradeable, resulting in more favorable pricing for the issuer.
  • In a CMPO, the issuer can determine the demand for its securities on a confidential basis without market knowledge.  If terms sought by investors are not agreeable to the issuer, the issuer can abandon the CMPO, generally without adverse consequences on its stock price.
  • If properly structured as a public offering, a CMPO will negate the requirement to obtain stockholder approval for the transaction under applicable Nasdaq and NYSE rules.

Disadvantages of conducting a CMPO include:

  • To conduct a CMPO, an issuer must be eligible to use Form S-3 and have an effective registration statement on file with the SEC.
  • Issuers subject to the baby shelf rules may be limited in the amount of capital they can raise in a CMPO.
  • In the event a CMPO is abandoned, investors that have been “brough over the wall” and received MNPI concerning the issuer may insist that the issuer publicly disclose such information to enable such investors to publicly trade the issuer’s securities.

This article is for general information only and may not be relied upon as legal advice.  Any company exploring the possibility of a CMPO should engage directly with legal counsel.

© Copyright 2021 Stubbs Alderton & Markiles, LLP
For more articles on the NASDAQ and NYSE, visit the NLR Financial, Securities & Banking section.

OFAC Reaffirms Focus on Virtual Currency With Updated Sanctions Law Guidance

On October 15, 2021, the US Department of the Treasury’s Office of Foreign Asset Control (OFAC) announced updated guidance for virtual currency companies in meeting their obligations under US sanctions laws. On the same day, OFAC also issued guidance clarifying various cryptocurrency-related definitions.

Coming on the heels of the Anti-Money Laundering Act of 2020—and in the context of the Biden administration’s effort to crackdown on ransomware attacks—the recent guidance is the latest indication that regulators are increasingly focusing on virtual currency and blockchain. In light of these developments, virtual currency market participants and service providers should ensure they are meeting their respective sanctions obligations by employing a “risk-based” anti-money laundering and sanctions compliance program.

This update highlights the government’s continued movement toward subjecting the virtual currency industry to the same requirements, scrutiny and consequences in cases of noncompliance as applicable to traditional financial institutions.

IN DEPTH

The release of OFAC’s Sanctions Compliance Guidance for the Virtual Currency Industry indicates an increasing expectation for diligence as it has now made clear on several occasions that sanctions compliance “obligations are the same” for virtual currency companies who must employ an unspecified “risk-based” program (See: OFAC Consolidated Frequently asked Questions 560). OFAC published it with the stated goal of “help[ing] the virtual currency industry prevent exploitation by sanctioned persons and other illicit actors.”

With this release, OFAC also provided some answers and updates to two of its published sets of “Frequently Asked Questions.”

FAQ UPDATES (FAQ 559 AND 546)

All are required to comply with the US sanctions compliance program, including persons and entities in the virtual currency and blockchain community. OFAC has said time and again that a “risk-based” program is required but that “there is no single compliance program or solution suitable for all circumstances” (See: FAQ 560). While market participants and service providers in the virtual currency industry must all comply, the risk of violating US sanctions are most acute for certain key service providers, such as cryptocurrency exchanges and over-the-counter (OTC) desks that facilitate large volumes of virtual currency transactions.

OFAC previously used the term “digital currency” when it issued its first FAQ and guidance on the subject (FAQ 560), which stated that sanctions compliance is applicable to “digital currency” and that OFAC “may include as identifiers on the [Specially Designated Nationals and Blocked Persons] SDN List specific digital currency addresses associated with blocked persons.” Subsequently, OFAC placed certain digital currency addresses on the SDN List as identifiers.

While OFAC previously used the term “digital currency,” in more recent FAQs and guidance, it has used a combination of the terms “digital currency” and “virtual currency” without defining those terms until it released FAQ 559.

In FAQ 559, OFAC defines “virtual currency” as “a digital representation of value that functions as (i) a medium of exchange; (ii) a unit of account; and/or (iii) a store of value; and is neither issued nor granted by any jurisdiction.” This is a broad definition but likely encompasses most assets, which are commonly referred to as “cryptocurrency” or “tokens,” as most of these assets may be considered as “mediums of exchange.”

OFAC also defines “digital currency” as “sovereign cryptocurrency, virtual currency (non-fiat), and a digital representation of fiat currency.” This definition appears to be an obvious effort by OFAC to make clear that its definitions include virtual currencies issued or backed by foreign governments and stablecoins.

The reference to “sovereign cryptocurrency” is focused on cryptocurrency issued by foreign governments, such as Venezuela. This is not the first time OFAC has focused on sovereign cryptocurrency. It ascribed the use of sovereign backed cryptocurrencies as a high-risk vector for US sanctions circumvention. Executive Order (EO) 13827, which was issued on March 19, 2018, explicitly stated:

In light of recent actions taken by the Maduro regime to attempt to circumvent U.S. sanctions by issuing a digital currency in a process that Venezuela’s democratically elected National Assembly has denounced as unlawful, hereby order as follows: Section 1. (a) All transactions related to, provision of financing for, and other dealings in, by a United States person or within the United States, and digital currency, digital coin, or digital token, that was issued by, for, or on behalf of the Government of Venezuela on or after January 9, 2018, are prohibited as of the effective date of this order.

On March 19, 2018, OFAC issued FAQs 564, 565 and 566, which were specifically focused on Venezuela issued cryptocurrencies, stating that “petro” and “petro gold” are considered a “digital currency, digital coin, or digital token” subject to EO 13827. While OFAC has not issued specific FAQs or guidance on other sovereign backed cryptocurrencies, it may be concerned that a series of countries have stated publicly that they plan to test and launch sovereign backed securities, including Russia, Iran, China, Japan, England, Sweden, Australia, the Netherlands, Singapore and India. With the release if its most recent FAQs, OFAC is reaffirming that it views sovereign cryptocurrencies as highly risky and well within the scope of US sanctions programs.

The reference to a “digital representation of fiat currency” appears to be a reference to “stablecoins.” In theory, stablecoins are each worth a specified value in fiat currency (usually one USD each). Most stablecoins were touted as being completely backed by fiat currency stored in segregated bank accounts. The viability and safety of stablecoins, however, has recently been called into question. One of the biggest players in the stablecoin industry is Tether, who was recently fined $41 million by the US Commodities Futures Trading Commission for failing to have the appropriate fiat reserves backing its highly popular stablecoin US Dollar Token (USDT). OFAC appears to have taken notice and states in its FAQ that “digital representations of fiat currency” are covered by its regulations and FAQs.

FAQ 646 provides some guidance on how cryptocurrency exchanges and other service providers should implement a “block” on virtual currency. Any US persons (or persons subject to US jurisdiction), including financial institutions, are required under US sanctions programs to “block” assets, which requires freezing assets and notifying OFAC within 10 days. (See: 31 C.F.R. § 501.603 (b)(1)(i).) FAQ 646 makes clear that “blocking” obligations applies to virtual currency and also indicates that OFAC expects cryptocurrency exchanges and other service providers be required to “block” the virtual currency at issue and freeze all other virtual currency wallets “in which a blocked person has an interest.”

Depending on the strength of the anti-money laundering/know-your-customer (AML/KYC) policies employed, it will likely prove difficult for cryptocurrency exchanges and other service providers to be sure that they have identified all associated virtual currency wallets in which a “blocked person has an interest.” It is possible that a cryptocurrency exchange could onboard a customer who complied with an appropriate risk-based AML/KYC policy and, unbeknownst to the cryptocurrency exchange, a blocked person “has an interest” in one of the virtual currency wallets. It remains to be seen how OFAC will employ this “has an interest” standard and whether it will take any cryptocurrency exchanges or other service providers to task for not blocking virtual currency wallets in which a blocked person “has an interest.” It is important for cryptocurrency exchanges or other service providers to implement an appropriate risk-based AML/KYC policy to defend any inquiries from OFAC as to whether it has complied with the various US sanctions programs, including by having the ability to identify other virtual currency wallets in which a blocked person “has an interest.”

UPDATED SANCTIONS COMPLIANCE GUIDANCE

OFAC’s recent framework for OFAC Compliance Commitments outlines five essential components for a virtual currency operator’s sanctions compliance program. These components generally track those applicable to more traditional financial institutions and include:

  1. Senior management should ensure that adequate resources are devoted to the support of compliance, that a competent sanctions compliance officer is appointed and that adequate independence is granted to the compliance unit to carry out their role.
  2. An operative risk assessment should be fashioned to reflect the unique exposure of the company. OFAC maintains both a public use sanctions list and a free search tool for that list which should be employed to identify and prevent sanctioned individuals and entities from accessing the company’s services.
  3. Internal controls must be put in place that address the unique risks recognized by the company’s risk assessment. OFAC does not have a specific software or hardware requirement regarding internal controls.
    1. Although OFAC does not specify required internal controls, it does provide recommended best practices. These include geolocation tools with IP address blocking controls, KYC procedures for both individuals and entities, transaction monitoring and investigation software that can review historically identified bad actors, the implementation of remedial measures upon internal discovery of weakness in sanction compliance, sanction screening and establishing risk indicators or red flags that require additional scrutiny when triggered.
    2. Additionally, information should be obtained upon the formation of each new customer relationship. A formal due diligence plan should be in place and operated sufficiently to alert the service provider to possible sanctions-related alarms. Customer data should be maintained and updated through the lifecycle of that customer relationship.
  4. To ensure an entity’s sanctions compliance program is effective and efficient, that entity should regularly test their compliance against independent objective testing and auditing functions.
  5. Proper training must be provided to a company’s workforce. For a company’s sanctions compliance program to be effective, its workforce must be properly outfitted with the hard and soft skills required to execute its compliance program. Although training programs may vary, OFAC training should be provided annually for all employees.

KEY TAKEAWAYS

As noted in OFAC’s press release issued simultaneously with the updated FAQ’s, “[t]hese actions are a part of the Biden Administration’s focused, integrated effort to counter the ransomware threat.” The Biden administration’s increased focus on regulatory and enforcement action in the virtual currency space highlights the importance for market participants and service providers to implement a robust compliance program. Cryptocurrency exchanges and other service providers must take special care in drafting and implementing their respective AML/KYC policies and in ensuring the existence of risk-based AML and sanctions compliance programs, which includes a periodic training program. When responding to inquiries from OFAC or other regulators, it will be critical to have documented evidence of the implementation of a risk-based AML/KYC program and proof that employees have been appropriately trained on all applicable policies, including a sanctions compliance policy.

Article By Joseph B. Evans, Edward B. Diskant, and Alexandra C. Scheibe of McDermott Will & Emery.

Ethan Heller, a law clerk in the firm’s New York office, also contributed to this article.

© 2021 McDermott Will & Emery
For the latest in Financial, Securities, and Banking legal news, read more at the National Law Review.

New Report Highlights Need for Coordinated and Consistent U.S. Policy to Address Possible Impacts to Financial Stability Due to Climate Change

“Climate change is an emerging threat to the financial stability of the United States.” So begins a recently issued Financial Stability Oversight Council (FSOC) Report, identifying climate change as a financial risk and threat to U.S. financial stability and highlighting a need for coordinated, stable, and clearly communicated policy objectives and actions in order to avoid a disorderly transition to a net-zero economy.

The FSOC’s members are the top regulators of the financial system in the United States, including the heads of the Federal Reserve, the Securities and Exchange Commission (SEC), and the Consumer Financial Protection Bureau. Their charge is to identify risks facing the country’s financial system and respond to them. This new Report supports steps being taken by various financial regulators in the U.S.

The Report suggests four steps necessary to facilitate an orderly transition to a net-zero economy.

  1. Regulators must develop and use better tools to help policymakers. “Council members recognize that the need for better data and tools cannot justify inaction, as climate-related financial risks will become more acute if not addressed promptly.” The FSOC Report highlights the tool of scenario analysis, “a forward-looking projection of risk outcomes that provides a structured approach for considering potential future risks associated with climate change.” The FSOC recommends the use of sector- and economy-wide scenario analysis as particularly important because of the interrelated and unpredictable development of climate impacts and technologies necessary to address them. Each of these technologies may have an unexpected impact on a part of the economy.
  2. Climate-related financial risk data and methodologies for filling gaps must be addressed.  The FSOC Report noted that its members lacked the ability to effectively access and use data that may be present in the financial system. The FSOC Report also noted potential risks to lenders, insurers, infrastructure, and fund managers caused by physical and transitional risks of climate change and the need to develop tools to better understand those risks.
  3. As has been highlighted by the environmental, social, and governance (ESG) movement, disclosure by companies of their climate-related risks is a key piece of data not only for investors but also for regulators and policymakers. Disclosure regimes that promote comparable, consistent, or decision-useful data and impacts of climate change are necessary, according to the Report, and also regimes that cover both public and private entities. The Report highlights various ongoing discussions on this topic, including possible regulations by the SEC.
  4. To assess and mitigate climate-related risks on the financial system, methods of analyzing the interrelated aspects of climate change are necessary. The Report details the developing thoughts around scenario analysis as a tool to help predict the many aspects of climate change on the financial system but notes that clearly defined objectives and planning are essential for decision-useful analysis.

Crypto Laundering: Bitcoin + Money Laundering

Bitcoin was a massive innovation to the world that allows transactions to be processed faster, makes them easier to use, lack third parties and intermediaries, and have stronger security. The technology underlying Bitcoin is the blockchain, which is the decentralized ledger where all Bitcoin transactions are stored.

At the same time, criminals are increasingly seeking to exploit the latest technology to their financial benefit. Bitcoin transactions actually have the ability to make money laundering easier for criminals because cryptocurrencies are conducted, transferred, and stored online and allow cybercriminals to move their funds instantly across borders.

This article explains the interconnection between Bitcoin and money laundering, warning signs, and how a lawyer can help you with your crypto issue.

Bitcoin as an Attractive Option for Laundering

One of the first questions many ask is why is Bitcoin such an attractive option for criminals seeking to launder money?

The most important answer is that laundering cryptocurrencies via online exchanges and then converting them to cash is much simpler than laundering bags of cash often across borders. Online transactions have no borders, and it obviates the need to physically move illegal money from place to place. Therefore, it is easy and practical.

Second, there is a certain degree of anonymity associated with Bitcoin transactions. While not 100% anonymous, these transactions are in fact pseudonymous. This means that the public Bitcoin addresses used for transactions are not registered in the names of individuals.

The transactions are stored publicly on the blockchain (the public decentralized ledger where all transactions are stored), but only the individual making the transaction has access to the account and Bitcoin wallet. Therefore, federal agencies will have a challenging time linking a particular Bitcoin transaction back to any one individual or entity. However, detection is not impossible.

To overcome this obstacle, criminals will use Bitcoin mixing services, which allow the individual to “mix” their Bitcoins with other users and jumble the connections between individuals’ addresses.

The goal is to make it practically impossible for anyone to detect the origin and destination addresses of those illegal Bitcoin transactions. This allows criminals to cash out without fear of ever being identified. In addition, many wallet providers and online crypto exchanges have few if not no anti-money laundering (“AML”) or Know Your Customer (“KYC”) regulations, which represents a very attractive option for cybercriminals.

Third, the lack of regulation or inconsistent regulation of the crypto sphere makes detection of large Bitcoin transactions more unlikely—both the initial Bitcoin transaction and when the criminals seek to “cash-out” and convert their Bitcoins to cash.

Traditional financial and banking options are very regulated both at the state and federal levels. On the other hand, cryptocurrencies are loosely regulated. This makes the use of cryptocurrencies attractive to criminals who believe they can evade regulation and scrutiny of various law enforcement agencies within the nation and abroad.

Warning Signs of Crypto Laundering

Crypto laundering is a crime. Despite the lack of federal guidance on this issue, many law enforcement agencies are relying on existing laws and traditional investigative tools to uncover instances of crypto laundering. Below are some warning signs of crypto laundering:

  • Transfer of crypto funds to wallets in unregulated or less regulated jurisdictions;
  • Multiple high-value transactions occurring within a short period of time;
  • Bitcoin or other transactions totaling amounts that are just under the amount that would trigger reporting requirements;
  • Immediately withdrawing cryptocurrency deposits;
  • New accounts funded with an amount that is immediately withdrawn;
  • Transactions with multiple cryptocurrencies on many accounts;
  • Deposits from unregulated jurisdictions or jurisdictions with poor AML and KYC regulations; and
  • One wallet that is linked to multiple credit card accounts under different individuals’ names or one wallet linked to multiple bank accounts.

The above warning signs should be considered by individuals seeking to do business with a firm dealing with cryptocurrencies, by law enforcement agencies investigating certain individuals and entities, and during AML reviews within crypto service providers.

In addition, in 2020, the Financial Action Task Force (“FATF”) released a report about red flag indicators for money laundering that is intended to assist crypto wallet and exchange companies as well as financial authorities.

How An Attorney Can Help Defend You Against Crypto Laundering Allegations

Federal agencies including the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) have been especially eager to investigate alleged instances of crypto laundering fraud. On June 29, 2021, in a DOJ investigation, “Doctor Bitcoin ” pleaded guilty to operating an illegal cash-to-cryptocurrency conversion business. This underscores the importance of retaining counsel experienced in defending against allegations of crypto laundering. Below are some examples of how an attorney can help you with your crypto issue:

  • Conducting fraud investigations involving cryptocurrencies;
  • Advising on Security Token Offerings (“STOs”) and Initial Coin Offerings (“ICOs”);
  • Valuing of cryptocurrencies and assets;
  • Assisting with purchasing property or other assets with cryptos;
  • Advising on AML and KYC regulations;
  • Checking on internal and external compliance;
  • Advising on wills, trusts, and inheritances of crypto assets and cryptocurrencies;
  • Drafting compliance documents or documents regarding coin issuances;
  • Advising on due diligence of customers;
  • Advising on identification and verification procedures involving crypto transactions; and
  • Advising on monitoring crypto transactions for compliance with applicable regulations, for suspicious activity, and for certain money laundering warning signs.

“The use of cryptocurrencies such as Bitcoin to facilitate online transactions has both advantages and disadvantages. While crypto transactions offer speed, ease in use, and low transaction costs, they can also facilitate elaborate money laundering schemes, illegal purchases, and ransomware attacks. Specifically, Bitcoin laundering is becoming a cost-effective and highly appealing option for cyber criminals aiming to convert illegally obtained cryptocurrencies into legitimate cash. While there are few laws regulating cryptocurrencies, many federal agencies will go after companies and individuals alleged to have engaged in fraudulent crypto transactions under already-existing statutes. Therefore, the consequences can be just as severe—fines and penalties, disgorgement orders, injunctions, and possibly jail time.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

Conclusion

Crypto laundering is becoming a serious problem for law enforcement agencies as cybercriminals continue to exploit new and emerging technologies for financial gain. Criminals are attracted to the cryptocurrency, Bitcoin, because it is easy and practical to move digitized money, because these transactions are very difficult to trace, and because there is a lack of consistent regulation regarding cryptocurrencies.

Identifying red flags are important safeguards for individuals, businesses, and law enforcement agencies to consider. In fact, law enforcement agencies have been especially zealous in investigating alleged instances of crypto laundering based on certain red flags.

This article was written by Dr. Nick Oberheiden of Oberheiden PC. For more articles relating to crypto laundering, please visit our finance page.

A Flurry of CFTC Actions Shock the Cryptocurrency Industry

The Commodity Futures Trading Commission (CFTC) sent shockwaves across the cryptocurrency industry when it issued a $1.25 million settlement order with Kraken, one of the industry’s largest market participants. The next day, the CFTC announced that it had charged each of 14 entities for offering cryptocurrency derivatives and margin trading without registering as a futures commission merchant (FCM). While the CFTC has issued regulatory guidance in the past and engaged in some regulatory enforcement activities, it has now established itself as a key regulator of the industry along with the US Securities and Exchange Commission (SEC), the US Department of Justice (DOJ) and the US Department of the Treasury (Treasury). Market participants should be aware that the CFTC will continue to take a more active role in regulation and enforcement of commodities and derivatives transactions moving forward.

The CFTC alleged that each of the defendants were acting as an unregistered FCM. Under Section 1a(28)(a) of the Commodity Exchange Act (the Act), 7 U.S.C. § 1(a)(28)(A), an FCM is any “individual, association, partnership, or trust that is engaged in soliciting or accepting orders for the purchase or sale of a commodity for future delivery; a security futures product; a swap . . . any commodity option authorized under section 6c of this title; or any leverage transaction authorized under section 23 of this title.” In order to be considered an FCM, that entity must also “accept[] money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom.” (See: 7 U.S.C. § 1(a)(28)(A)(II).) 7 U.S.C. § 6d(1), requires FCMs to be registered with the CFTC.

IN DEPTH

THE KRAKEN SETTLEMENT

On September 28, 2021, the CFTC issued an order, filing and settling charges against respondent Payward Ventures, Inc. d/b/a Kraken for offering margined retail commodity transactions in cryptocurrency—including Bitcoin—and failing to register as an FCM. Kraken is required to pay a $1.25 million civil monetary penalty and to cease and desist from further violations of the Act. The CFTC stated that, “This action is part of the CFTC’s broader effort to protect U.S. customers.”

The CFTC’s order finds that from approximately June 2020 to July 2021, Kraken violated Section 4(a) of the Act, 7 U.S.C. § 6(a)(2018) by offering to enter into, entering into, executing and/or confirming the execution of off-exchange retail commodity transactions with US customers who were not eligible contract participants or eligible commercial entities. The CFTC also found that Kraken operated as an unregistered FCM in violation of Section 4d(a)(1) of the Act, 7 U.S.C. § 6d(a)(1) (2018). According to the order, Kraken served as the sole margin provider and maintained physical and/or constructive custody of all assets purchased using margins for the duration of a customer’s open margined position.

Margined transactions worked as follows: The customer opened an individual account at Kraken and deposited cryptocurrency or fiat currency into the account. The customer then initiated a trade by selecting (1) the trading pair they wished to trade, (2) a purchase or sale transaction and (3) a margin option. All trades were placed on Kraken’s central limit order book and executed individually for each customer. If a customer purchased an asset using margin, Kraken supplied the cryptocurrency or national currency to pay the seller for the asset. If a customer sold an asset using margin, Kraken supplied the cryptocurrency or national currency due to the buyer. Trading on margin allowed the customer to establish a position but also created an obligation for the customer to repay Kraken at the time the margined position was closed. The customer’s position remained open until they submitted a closing trade, they repaid the margin or Kraken initiated a forced liquidation based on the occurrence of certain triggering events, including limitations on the duration of an open margin position and pre-set margin thresholds. Kraken required customers to exit their positions and repay the assets received to trade on margin within 28 days, however, customers could not transfer assets away from Kraken until satisfying their repayment obligation. If repayment was not made within 28 days, Kraken could unilaterally force the margin position to be liquidated or could also initiate a forced liquidation if the value of the collateral dipped below a certain threshold percentage of the total outstanding margin. As a result, actual delivery of the purchased assets failed to occur.

The CFTC asserted that these transactions were unlawful because they were required to take place on a designated contract market. Additionally, by soliciting and accepting orders for, and entering into, retail commodity transactions with customers and accepting money or property (or extending credit in lieu thereof) to margin these transactions, Kraken was operating as an unregistered FCM.

Coinciding with the release of the enforcement action against Kraken, CFTC Commissioner Dawn D. Sump issued a “concurring statement.” In it, she appeared to be calling upon the CFTC to adopt more specific rules governing the products that are the subject of the enforcement action. Commissioner Sump seemed to indicate that it would be helpful to cryptocurrency market participants if the CFTC clarified its position on the applicability of the Act, as well as registration requirements. The CFTC will likely issue guidance or rules to clarify its position on which cryptocurrency-related products trigger registration requirements.

CFTC CHARGES 14 CRYPTOCURRENCY ENTITIES

On September 29, 2021, the CFTC issued a press release and 14 complaints against cryptocurrency trading platforms. The CFTC is seeking a sanction “directing [the cryptocurrency platforms] to cease and desist from violating the provisions of the Act set forth herein.” Each of the platforms have 20 days to respond.

All of the complaints are somewhat similar in that the CFTC alleges that each of the cryptocurrency platforms “from at least May 2021 and through the present” have offered services to the public “including soliciting or accepting orders for binary options that are based off the value of a variety of assets including commodities such as foreign currencies and cryptocurrencies including Bitcoin, and accepting and holding customer money in connection with those purchases of binary options.”

The CFTC has taken the position that “binary options that are based on the price of an underlying commodity like forex or cryptocurrency are swaps and commodity options as used in the definition of an FCM.” (The CFTC has previously taken the position that Bitcoin and Ethereum constitute “commodities,” doing so in public statements and enforcement actions.) In a prominent enforcement action previously filed by the CFTC in the United States District Court for the Eastern District of New York, the court held that “virtual currency may be regulated by the CFTC as a commodity” and that it “falls well-within the common definition of ‘commodity’ as well as the CEA’s definition of commodities.” (See: CFTC v. McDonnell, et al., 287 F. Supp. 3d 213, 228 (E.D.N.Y. Mar. 6, 2018); CFTC v. McDonnell, et al., No. 18-cv-461, ECF No. 172 (E.D.N.Y. Aug. 23, 2018).) In the action the CFTC filed against BitMEX in October of 2020, it alleged that “digital assets, such as bitcoin, ether, and litecoin are ‘commodities’ as defined under Section 1a(9) of the Act, 7 U.S.C. § 1a(9). (See: CFTC v. HDR Global Trading Limited, et al., No. 20-cv-8132, ECF 1, ¶ 23 (S.D.N.Y. Oct. 1, 2020).)

The CFTC has previously taken the position that Bitcoin, Ethereum and Litecoin are considered commodities. However, in these recently filed complaints, the CFTC did not appear to limit the cryptocurrencies that would be considered “commodities” to just Bitcoin, Ethereum and Litecoin. Instead, the CFTC broadly referred to “commodities such as foreign currencies and cryptocurrencies including Bitcoin.” It remains to be seen which of the hundreds of cryptocurrencies on the market will be considered “commodities,” but it appears that the CFTC is not limiting its jurisdiction to just three. It is also an open question as to whether there are certain cryptocurrencies or cryptocurrency referencing financial products that the SEC and CFTC will determine are subject to the overlapping jurisdiction of both regulators, similar to mixed swaps under the derivatives rules.

The CFTC also singled out two of these cryptocurrency platforms, alleging that they issued false statements to the effect that it “is a registered FCM and RFED with the CFTC and member of the NFA.” The CFTC noted that neither of these entities were ever registered with the National Futures Association (NFA) and one of the NFA ID numbers listed “identifies an individual who was once registered with the CFTC but has been deceased since 2009.”

WHAT’S NEXT

While the SEC, Treasury and DOJ are often considered the most prominent federal regulators in the cryptocurrency space, this recent sweep by the CFTC is not the first time it has flexed its muscles. The CFTC went to trial and won in 2018, accusing an individual of operating a boiler room. In October 2020, the CFTC filed a case against popular cryptocurrency exchange BitMEX for failing to register as an FCM, among other counts. However, unlike those one-off enforcement actions, the recent actions targeting multiple market participants within two days is a big step forward for the CFTC. Cryptocurrency derivative trading has been rising in popularity over the last few years and it is unsurprising that the CFTC is taking a more active enforcement role.

It is expected that regulatory activity within the cryptocurrency space will increase from all US regulators, including the CFTC, SEC, Treasury and the Office of the Comptroller of the Currency, especially as cryptocurrency products are increasingly classified as financial products subject to regulation. While the CFTC and other regulators have issued some regulatory guidance, regulators appear to be taking a “regulatory guidance by enforcement action” strategy. Market participants will need to thoughtfully consider all relevant regulatory regimes in order to determine what compliance activities are necessary. As we describe, multiple classifications are possible.

© 2021 McDermott Will & Emery
For more on cryptocurrency litigation, visit the NLR Cybersecurity, Media & FCC section.

Agencies and Regulators Focus on AML Compliance for Cryptocurrency Industry

This year, regulators, supported by a slate of new legislation, have focused more of their efforts on AML violations and compliance deficiencies than ever before. As we have written about in the “AML Enforcement Continues to Trend in 2021” advisory, money laundering provisions in the National Defense Authorization Act for fiscal year 2021 (the NDAA) expanded the number of businesses required to report suspicious transactions, provided new tools to law enforcement to subpoena foreign banks, expanded the AML whistleblower program, and increased fines and penalties for companies who violate anti-money laundering provisions. The NDAA, consistent with Treasury regulations, also categorized cryptocurrencies as the same as fiat currencies for purposes of AML compliance.

In addition, as discussed in the “Businesses Must Prepare for Expansive AML Reporting of Beneficial Ownership Interests” advisory, the NDAA imposed new obligations on corporations, limited liability companies, and similar entities to report beneficial ownership information. Although the extent of that reporting has not yet been defined, the notice of proposed rulemaking issued by FinCEN raises serious concerns that the Treasury Department may require businesses to report beneficial ownership information for corporate affiliates, parents and subsidiaries; as well as to detail the entity’s relationship to the beneficial owner. Shortly after passage of the NDAA, Treasury Secretary Janet Yellen stressed that the Act “couldn’t have come at a better time,” and pledged to prioritize its implementation.

Money laundering in the cryptocurrency space has attracted increased attention from regulators and the IRS may soon have an additional tool at its disposal if H.R. 3684 (the bipartisan infrastructure bill) is signed into law. That bill includes AML provisions that would require stringent reporting of cryptocurrency transactions by brokers. If enacted, the IRS will be able to use these reports to identify large transfers of cryptocurrency assets, conduct money laundering investigations, and secure additional taxable income. Who qualifies as a “broker,” however, is still up for debate but some fear the term may be interpreted to encompass cryptocurrency miners, wallet providers and other software developers. According to some cryptocurrency experts, such an expansive reporting regime would prove unworkable for the industry. In response, an anonymous source from the Treasury Department told Bloomberg News that Treasury was already working on guidance to limit the scope of the term.

In addition to these legislative developments, regulators are already staking their claims over jurisdiction to conduct AML investigations in the cryptocurrency area. This month, SEC Chair Gary Gensler, in arguing that the SEC had broad authority over cryptocurrency, claimed that cryptocurrency was being used to “skirt our laws,” and likened the cryptocurrency space to “the Wild West . . . rife with fraud, scams, and abuse” — a sweeping allegation that received much backlash from not only cryptocurrency groups, but other regulators as well. CFTC Commissioner Brian Quintez, for example, tweeted in response: “Just so we’re all clear here, the SEC has no authority over pure commodities . . . [including] crypto assets.” Despite this disagreement, both regulatory agencies have collected millions of dollars in penalties from companies alleged to have violated AML laws or BSA reporting requirements. Just last week, a cryptocurrency exchange reached a $100 million settlement with FinCEN and the CFTC, stemming from allegations that the exchange did not conduct adequate due diligence and failed to report suspicious transactions.

With so many governmental entities focused on combatting money laundering, companies in the cryptocurrency space must stay abreast of these fast-moving developments. The combination of increased reporting obligations, additional law enforcement tools, and heightened penalties make it essential for cryptocurrency firms to institute strong compliance programs, update their AML manuals and policies, conduct regular self-assessments, and adequately train their employees. Companies should also expect additional regulations to be issued and new legislation to be enacted in the coming year. Stay tuned.

©2021 Katten Muchin Rosenman LLP

How to Report Spoofing and Earn an SEC Whistleblower Award

Spoofing is a form of market manipulation where traders artificially inflate the supply and demand of an asset to increase profits. Traders engaged in spoofing place a large number of orders to buy or sell a certain stock or asset without the intent to follow through on the orders. This deceptive trading practice leads other market participants to wrongly believe that there is pressure to act on that asset and “spoofs” other participants to place orders at artificially altered prices.

Spoofing affects prices because the artificial increase in activity on either the buy or sell side of an asset creates the perception that there is a shift in the number of investors wanting to buy or sell. Spoofers place false bids or offers with the intent to cancel before executing so that they can then follow-through on genuine orders at a more favorable price. Often, spoofers use automated trading and algorithms to achieve their goals.

The Dodd-Frank Act of 2010 prohibits spoofing, which it defines as “bidding or offering with the intent to cancel the bid or offer before execution.” 7 U.S.C. § 6c(a)(5)(C). Spoofing also violates SEC rules, including the market manipulation provisions of Section 9(a)(2) of the Securities Exchange Act of 1934.

Spoofing Enforcement Actions  

In the Matter of J.P. Morgan Securities LLC

On September 29, 2020, the U.S. Securities and Exchange Commission (“SEC”) announced charges against J.P. Morgan Securities LLC, a broker-dealer subsidiary of JPMorgan Chase & Co., for fraudulently engaging in manipulative trading of U.S. Treasury securities. According to the SEC’s order, certain traders on J.P. Morgan Securities’ Treasuries trading desk placed genuine orders to buy or sell a particular Treasury security, while nearly simultaneously placing spoofing orders, which the traders did not intend to execute, for the same series of Treasury security on the opposite side of the market. The spoofing orders were intended to create a false appearance of buy or sell interest, which would induce other market participants to trade against the genuine orders at prices that were more favorable to J.P. Morgan Securities than J.P. Morgan Securities otherwise would have been able to obtain.

JPMorgan Chase & Co. agreed to pay disgorgement of $10 million and a civil penalty of $25 million to settle the SEC’s action. In addition, the U.S. Department of Justice (“DOJ”) and the U.S. Commodity Futures Trading Commission (“CFTC”) brought parallel actions against JPMorgan Chase & Co. and certain of its affiliates for engaging in the manipulative trading. In total, the three actions resulted in monetary sanctions against JPMorgan Chase & Co. totaling $920 million, which included amounts for criminal restitution, forfeiture, disgorgement, penalties, and fines.

United States of America v. Edward Bases and John Pacilio

On August 5, 2021, a federal jury convicted Edward Bases and John Pacilio, two former Merrill Lynch traders, for engaging in a multi-year fraud scheme to manipulate the precious metals market. According to the U.S. Department of Justice’s (“DOJ”) press release announcing the action, the two traders fraudulently pushed market prices up or down by routinely placing large “spoof” orders in the precious metals futures markets that they did not intend to fill.

After manipulating the market, Bases and Pacilio executed trades at favorable prices for their own gain, and to the detriment of other traders. The DOJ’s Indictment detailed how Bases and Pacilio discussed their intent to “push” the market through spoofing in electronic chat conversations.

In the Matter of Nicholas Mejia Scrivener

The SEC recently charged a California day trader with spoofing, where he placed multiple orders to buy or sell a stock, sometimes at multiple price levels that he did not intend to execute. The SEC alleged that the purpose of the false orders was to create the appearance of inflated market interest and induce other actors to trade at artificial prices. The trader then completed genuine orders at manipulated prices and withdrew the false orders. The SEC found that the trader’s conduct violated Section 9(a)(2) of the Exchange Act of 1934, and the trader settled by consenting to a cease-and-desist order and paying in disgorgement, in interest, and a civil penalty.

SEC and CFTC Whistleblower Awards for Reporting Spoofing

Under the SEC Whistleblower Program and CFTC Whistleblower Program, a whistleblower who reports spoofing to the SEC or CFTC may be eligible for an award. These practices may constitute spoofing:

  • Placing buy or sell orders for a stock or asset without the intent to execute;
  • Attempting to entice other traders to act on a certain stock or asset to manipulate market prices and profitability;
  • Creating a false appearance of market interest to manipulate the price of a stock or asset;
  • Placing deceptively large buy or sell orders only to withdraw those orders once smaller, genuine orders on the other side of the market have been filled;
  • Using false orders to favorably affect prices of a stock or asset (to increase market prices if intending to sell or to decrease market prices if intending to buy) so that one can then receive more ideal prices for a genuine order.

If a whistleblower’s information leads the SEC or CFTC to a successful enforcement action with total monetary sanctions in excess of $1 million, a whistleblower may receive an award of between 10 and 30 percent of the total monetary sanctions collected.

Since 2012, the SEC has issued nearly $1 billion to whistleblowers and the CFTC has issued approximately $123 million to whistleblowers. The largest SEC whistleblower awards to date are $114 million and $50 million. The largest CFTC whistleblower awards to date are $45 million and $30 million.

How to Report Spoofing and Earn a Whistleblower Award

To report spoofing and qualify for a whistleblower award, the SEC and CFTC require whistleblowers or their attorneys report their tips online through their Tip, Complaint or Referral Portals or mail/fax Form TCRs to the whistleblower offices. Prior to submitting a tip, whistleblowers should consider scheduling a confidential consultation with a whistleblower attorney.

The path to receiving an award is lengthy and complex. Experienced whistleblower attorneys can provide critical guidance to whistleblowers throughout this process to increase the likelihood that they not only obtain, but maximize, their awards.

SEC and CFTC Whistleblower Protections for Disclosures About Spoofing

The SEC and CFTC Whistleblower Programs protect the confidentiality of whistleblowers and do not disclose information that might directly or indirectly reveal a whistleblower’s identity. Moreover, a whistleblower can submit an anonymous tip to the SEC and CFTC if represented by counsel. In certain circumstances, a whistleblower may remain anonymous, even to the SEC and CFTC, until an award determination. However, even at the time of an award, a whistleblower’s identity is not made available to the public.

© 2021 Zuckerman Law

Article by Jason Zuckerman, Matthew Stock, and Katherine Krems with Zuckerman Law.

For more articles on the SEC and whistleblower awards, follow the NLR Financial Securities & Banking section.