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The Securities and Exchange Commission brought charges against Xue Samuel Lee, the co-founder of HyperFund, and Brenda Indah Chunga, also known as “Bitcoin Beautee,” the fund’s top promoter, for securities violations.[1]  Additionally, the United States Attorney’s Office for the District of Maryland brought criminal charges against Lee for allegedly co-founding the fund,[2] and conspiracy charges against Chunga and Rodney Burton, a/k/a “Bitcoin Rodney,”[3] for their roles as alleged promoters of the fund.[4]  These three individuals face a maximum penalty of up to five years in prison.  The SEC alleges that for almost two years, from January 2020 until November 2022, Lee conducted a $1.7 billion Ponzi and pyramid scheme on a global scale. Continue Reading SEC and DOJ Charge Founder and Promoters of “HyperFund” with $1.7 Billion Crypto Pyramid and Ponzi Scheme

Last year, the Court in SEC v. Terraform Labs suggested, by denying the defendants’ motion to dismiss, that the sale of a digital asset to the public on a secondary market may constitute a security.[1]  Now, the Court has determined, as a matter of law, that crypto assets are securities. [2] 

Three days before the end of the year, the Court issued a summary judgment opinion determining that there is no genuine dispute that Terraform’s four crypto assets—UST,[3] LUNA, wLUNA, and MIR[4]—were securities because they are investment contracts.  The Supreme Court in Howey defined an investment contract as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promotor or a third party.” [5][6]  All four crypto assets satisfied the Howey test. Continue Reading Judge Rules That Terraform’s Crypto Assets Are Securities

Recently, the Securities and Exchange Commission brought fraud charges against Jonathan Larmore for allegedly looting $35 million from real estate funds he advised.   Larmore is a real estate investor, an investment adviser, and CEO of ArciTerra Companies LLC.[1][2]  The complaint alleges that they used the proceeds to pay personal expenses, including credit card bills, and to fund a “lavish lifestyle of private jets, yachts, and expensive residences.”  The complaint alleges violations of the antifraud provisions of the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934.Continue Reading SEC Charges Real Estate Fund Adviser with Misappropriating $35 Million and Later Manipulating the Market in a Fake Tender Offer to Acquire WeWork

Last week, the U.S. Securities and Exchange Commission brought five insider-trading cases against a slew of individuals. The U.S. Attorney’s Office for the Southern District of New York also announced parallel criminal charges against the defendants in four of the five cases. These cases contain examples of the classical theory and the misappropriation theory of insider trading.

These cases were the result of close coordination with the SDNY and SEC, and they appear to be the result of an enforcement sweep. Increasingly sophisticated data analytics and market surveillance make it highly likely that those who wish to exploit material nonpublic information will be caught, with severe consequences, including disgorgement, criminal restitution, civil penalties, and incarceration.Continue Reading SEC and DOJ Go On An Insider-Trading Enforcement Spree

Corporate officers and directors sometimes view having a Rule 10b5-1 trading plan as an impenetrable barrier to facing insider-trading charges.  But a recent case announced by the SEC demonstrates that such plans are not bulletproof.[1]  If an executive enters into such a plan while in possession of material nonpublic information, insider-trading charges could ensue.
Continue Reading SEC Charges Public Company Executives with Insider Trading Despite Trading Through Purported Rule 10b5-1 Trading Plans

On April 1, 2021, the Texas State Securities Board (TSSB) announced the entry of a Consent Order against an SEC registered investment adviser named Independent Financial Group, LLC (“Independent”). The TSSB’s action may represent a large shift in investment adviser regulation and enforcement considerations for SEC-registered investment advisers. (Emphasis on “may.”)
Continue Reading SEC Investment Advisers: Texas says “April Fools!” to Federal Preemption?

Capital raising through Special-Purpose Acquisition Companies (“SPACs”) has gone through the roof in the last two years.  Last year was by far the single highest deal value for SPACs, and the first quarter of 2021 has already surpassed last year’s total deal value.[1]  Given the explosion of SPAC transactions, often backed by celebrities, it is a safe bet that the SEC will increase its scrutiny of SPACs.

In fact, on March 25, 2021, Reuters reported that the SEC has requested voluntary information from Wall Street banks on SPAC deals.[2]  Whether this inquiry broadens into a full-scale industry sweep remains to be seen, but it is clear that the hotbed of SPAC activity has captured regulatory attention.  Also notable is that the plaintiffs’ bar has been filing lots of cases arising from SPAC transactions, which can be a harbinger of SEC inquiries.  For these reasons, it is important to understand the regulatory risks of these deals.Continue Reading SPACs in the Spotlight: Skyrocketing Deal Volume Invites Regulatory Scrutiny

As we discussed in our recent post “What to Expect from the SEC Under the Biden Administration,” market participants can expect a more vigorous SEC enforcement program under the new administration.  President Biden’s nominee to chair the SEC, Gary Gensler, was known as a tough enforcer while serving as chairman of the CFTC during the financial crisis.  If confirmed as SEC Chairman by the Senate, Mr. Gensler is sure to bring an assertive approach to SEC enforcement.
Continue Reading What Investment Advisers and Fund Managers can Expect from the SEC Under the Biden Administration

The dust has settled on the 2020 election, and the Biden administration has begun pressing forward with its policy objectives. Critical to achieving such objectives is the Democrats’ control of both the House of Representatives and the Senate, albeit by the narrowest of margins after the Democratic senatorial candidates won their run-off elections in Georgia. As a result of the Georgia elections, Vice President Harris will be able to cast the tie-breaking vote in the case of a deadlock in the Senate. What does the change in administrations mean for SEC enforcement?
Continue Reading What to Expect from the SEC Under the Biden Administration