The U.S. Department of Labor’s (the “DOL”) amendment to the qualified professional asset manager (“QPAM”) prohibited transaction class exemption 84-14 (the “Exemption”) went into effect on June 17, 2024. Current QPAMs must send a one-time email notice to the DOL no later than December 14, 2024, in order to rely on the Exemption (see below).
Continue Reading Update to the Qualified Professional Asset Manager Exemption (QPAM)
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
On Tuesday, August 29, 2023, Bitcoin once again loomed large over financial markets after the D.C. Circuit Court of Appeals vacated an SEC order that rejected Grayscale Investments’ (“Grayscale”) application to list a spot Bitcoin exchange-traded fund (“ETF”) on NYSE Arca. The price of Bitcoin initially jumped almost seven percent on the news. But as of this writing, the market has erased nearly all those gains.
With the increased prevalence of digital assets, the SEC received numerous applications to list and trade shares of digital assets as ETFs on various exchanges. As the most well-known digital asset, Bitcoin represents the focal point for many of these applications. The key distinction between these applications is whether the ETF is based on the spot or the future market.Continue Reading A Potential Big Win for Bitcoin: A Federal Court Overturned the SEC’s Refusal to List a Spot Bitcoin ETF
The issue of whether the sales of digital assets constitute investment contracts (and therefore securities) remains at the forefront of SEC regulatory issues. Yesterday, in SEC v. Terraform Labs, a federal judge in New York rejected a fellow judge’s recent ruling in SEC v. Ripple Labs[1] that XRP was not a security when sold to the public on secondary markets.
On Monday, U.S. District Judge Jed Rakoff denied Terraform Labs’ motion to dismiss an SEC enforcement action.[2] In that case, the SEC alleged that Terraform Labs and its founder, Do Kwon, defrauded investors and sold digital assets in unregistered securities offerings. In its motion to dismiss, Terraform Labs argued that purchasers of UST did not have an expectation of it being an investment. In allowing the SEC’s case to proceed against Terraform Labs and Kwon, Judge Rakoff declined to follow the recent ruling in SEC v. Ripple.Continue Reading Federal Court in Terraform Labs Rejects Ripple Decision
In a recent and highly anticipated decision, a court in the Southern District of New York held that Ripple’s cryptocurrency token – XRP – is not inherently a security. In a setback to the SEC, the court also held that certain sales of XRP to retail investors through blind “bid/ask” transactions[1] were not securities transactions when considering the economic realities and under the totality of the circumstances. SEC v. Ripple Labs, Inc., et al.[2]
The court delivered its decision on these “programmatic sales” of XRP to retail investors, as well as its decisions on “institutional” and other types of sales of XRP, when ruling on competing summary judgment motions. Even though the court’s rulings were limited to the transactions at issue and could be appealed, its decision undermines the SEC’s current position that it requires no additional authority from Congress to regulate both sales of tokens and cryptocurrency trading platforms. Continue Reading Ripple’s Legal Waves: Ripple Summary Judgment Ruling Could Have Wide-Ranging Impact
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
Recent Enforcement Action
The requirement that financial firms preserve books and records is nothing new. But how do such firms keep track of employees’ communications on applications like Signal or WhatsApp?
Continue Reading Financial Regulators Focus on Preservation of Ephemeral Messaging
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