Two recent enforcement actions by the U.S. Securities and Exchange Commission (SEC), including a recent settled action against Kraft Heinz Co. (“Kraft”), underscore the agency’s renewed and continuing focus on accounting and financial reporting misconduct.
Two weeks ago, the SEC announced its third and latest enforcement settlement through its data-driven EPS (Earnings Per Share) Initiative. The EPS Initiative, run by the SEC’s Enforcement Division, used data analytics to detect potential reporting violations. The EPS Initiative has resulted in two prior actions. On September 28, 2020, the SEC publicly disclosed the EPS Initiative with two settlements, as discussed previously in this blog here.
Continue reading “The SEC’s Renewed Focus on Accounting Misconduct”
Cryptocurrencies are one of the fastest growing asset types worldwide. Cryptocurrencies, as an asset class, total over $1.5 trillion in market capitalization. With the rapid growth of this asset type, SEC Chair Gary Gensler shared his views for the SEC in this area. At a recent conference, Chair Gensler continued to broadly characterize most digital assets as “investment contracts,” placing cryptocurrencies within the scope of the SEC’s enforcement powers. During his remarks at the Aspen Security Forum on August 3, Chair Gensler stated, “many of these tokens are offered and sold as securities” because they meet the definition of an “investment contract.” As established by the U.S. Supreme Court under the “Howey Test”, investment contracts are defined as agreements in which a person invests money in a common enterprise, expecting profits based on the efforts of others. Investment vehicles that satisfy the “Howey Test” definition for investment contracts are securities that fall within the jurisdiction of the SEC.
Chair Gensler further stated that the cryptocurrency area currently “lacks the typical investor protection guardrails” and that he has asked Congress for additional authority to “prevent transactions, products and platforms from falling between regulatory cracks.” Chair Gensler’s views appear supported by the SEC’s Division of Enforcement having brought 75 enforcement actions over the last decade. However, others are not convinced that the SEC has clearly defined jurisdiction.
Robinhood, “an introducing broker-dealer that provides commission-free trading to retail customers through its website and mobile applications,” recently agreed to pay a record-setting amount of $70 million — consisting of a $57 million fine and more than $12.5 million in restitution to 2,832 customers — to resolve a myriad of FINRA rule violations dating back to 2016. While the lengthy Letter of Acceptance, Waiver, and Consent No. 2020066971201 (“AWC”) reads like a final exam in a corporate compliance and securities regulation course, there are two key takeaways that merit particular emphasis. First, an overreliance on technology without sufficient safeguards or personal verification can create substantial liability. Second, making claims about new, nontraditional products being offered directly to customers can be deceptive or misleading and in violation of FINRA Rules 3110 and 2010, if FINRA determines the communications lack sufficient disclosures.
Continue reading “Robinhood’s $70 Million FINRA Penalty: Growing Pains, Reliance on Technology and Push to Offer New Products”
On July 13, 2021, the SEC announced charges against Stable Road Acquisition Company (“Stable Road”), its sponsor, SRC-NI, its CEO, Brian Kabot, Stable Road’s proposed merger target Momentus Inc.(“Momentus”), and Momentus’s founder and former CEO Mikhail Kokorich (“Kokorich”) for “misleading claims about Momentus’s technology and about national security risks associated with Kokorich.” All parties except Kokorich are settling with the SEC, paying total penalties of more than $8 million, amongst other remedies. The SEC’s litigation will proceed against Kokorich in the U.S. District Court for the District of Columbia. The Complaint seeks permanent injunctions, penalties, disgorgement plus prejudgment interest, and an officer-and-director bar against Kokorich.
Continue reading “SPAC Attack: The SEC Charges a SPAC for Failure to Launch”
In the spirit of our previous Holiday film blogs, we present for your viewing pleasure (and background research) the following Independence Day films for your (re)viewing pleasure. Both deserve renewed attention in light of:
- The SEC’s recent Solar Winds-Cybersecurity-related events, regarding disclosure of material weaknesses or material cyber security risks related to the Solar Winds compromise;
- The re-opening of offices and recent announcements of certain businesses explaining employees should be back in the office or else.
We offer the following Independence Day Weekend themed film streaming recommendations that relate to each of the above and therefore count as background research.
Continue reading ““Independence-Day” Malware and Managing the (Beach) Risks of Jaws”
Upcoming Changes to Rule 10b5-1:
The SEC is seeking to propose four key changes to executive stock trading plans under Rule 10b5-1 in October. Its Chairman, Gary Gensler, reported that the SEC is considering “freshen[ing] up Rule 10b5-1 after twenty years” to address insider trading concerns on June 7, 2021. Gensler’s comments come after a year of heightened insider trading reporting and the release of new research conducted by Stanford University and the Wharton School of the University of Pennsylvania finding that 10b5-1 plans have been used by executives to engage in “opportunistic, large-scale” sales of company stock. Gensler remarked the current plans under Rule 10b5-1 have led to a “real crack in our insider trading regime,” which he seeks to address in the upcoming months.
Continue reading “SEC Chairman, Gary Gensler, Seeks to “Freshen Up” Restrictions on Executive Stock Trading Plans under Rule 10b5-1”
On Tuesday, the U.S. Securities and Exchange Commission (“SEC”) announced that Gurbir Grewal will be the Director of the Division of Enforcement, effective July 26, 2021. Grewal has been the Attorney General of New Jersey since 2018.
Grewal’s appointment follows the previous appointment and abrupt resignation of Alex Oh for the same role. In contrast to Oh, Grewal has spent most of his career in government. Prior to his current role, Grewal was an Assistant United States Attorney in the Eastern District of New York and the District of New Jersey. From 2014 to 2016, Grewal led the Economic Crimes Unit for the District of New Jersey.
Continue reading “Chair Gensler Appoints NJ AG SEC Enforcement Director”
As publicly reported late last week, the Securities and Exchange Commission’s Division of Enforcement (SEC) sent voluntary requests for information to a range of public companies and investment firms seeking voluntary disclosure of information related to last year’s SolarWinds cyberattack. Specifically, the SEC is seeking information related to whether the companies and firms were exposed to the SolarWinds cyberattack and any remedial measures the companies and firms implemented in response.
SolarWinds, an IT, network, and systems software developer, disclosed in a filing with the SEC in December 2020 that a cyberattack had infiltrated its Orion monitoring product, which could allow the attacker to compromise the server on which the Orion product runs. SolarWinds disclosed that it believed that nearly 18,000 Orion customers downloaded the product containing the vulnerability and that it had notified all 33,000 users of the product that a cyberattack had taken place. The SolarWinds cyberattack was unprecedented in its scope and sophistication—including compromising nine U.S. federal agencies—leading the United States and other governments to blame the attack on an outside nation state actor.
Continue reading “SEC “Sweep” of Public Companies’ & Registrants’ Responses to the SolarWinds Cyberbreach”