Make no mistake about it. The big story for Securities Regulation Daily, and the securities world as a whole, during the month of September was the unprecedented Equifax data breach. More than 140 million Americans may have had their personal information compromised, and lawmakers wanted answers!
In data related news, the SEC utilized big data to ensnare a couple of investment advisors up to no good engaging in illegal cherry-picking schemes. But still, the SEC had some data problems of its own, as Chairman Jay Clayton disclosed that the commission’s EDGAR filing system was the victim of a cyberhack resulting in the disclosure of nonpublic information back in August, 2016.
During September, things were hopping over at the CFTC as well. In a groundbreaking enforcement action, the commission took the position that the cryptocurrency Bitcoin was deemed to be a "commodity" under the CEA, and hence, subject to the agency’s antifraud jurisdiction. In another notable development, the CFTC took enforcement action against long-time precious metals hawker, Monex, in what the agency’s enforcement director called "one of the biggest precious metals fraud cases in CFTC history."
The month also saw a couple of significant petitions for certiorari being filed with the Supreme Court which could impact the securities world. In Veleron Holding, B.V. v. Morgan Stanley, the high court is being asked to clarify the requirement for proof of a defendant's "awareness of a duty" in an insider trading context. Meanwhile, in China Agritech, Inc. v. Resh, the petitioner is seeking to determine whether American Pipe tolling rule applies to class action matters.
In September, the industry also saw T+2 settlement of securities take effect to the delight of many. And lastly during the month, we saw that unbridled greed is also alive and well in Silicon Valley as the CEO of a tech company was charged with insider trading which resulted in more than $2 million in illicit profits. He had stood to gain $30 million from the underlying transaction.
Welcome to the 4th quarter as Securities Regulation Daily makes its final descent into the close of 2017. As always, stay tuned.
1. PUBLIC COMPANY REPORTING AND DISCLOSURE
Equifax announces massive security breach, legislators demand action
More than 143 million Americans may have had their personal information compromised in a massive cybersecurity incident, announced Equifax Inc. According to the global information solutions company, criminals exploited a website application vulnerability to gain access to certain files from mid-May through July 2017, although the company has found no evidence of unauthorized activity on Equifax’s core consumer or commercial credit reporting databases. See our full coverage.
2. LEGISLATIVE ACTIVITY
Senate SEC oversight hearing focuses on EDGAR, Equifax breaches
Testifying before the Senate Banking Committee, SEC Chairman Jay Clayton fielded questions about the cybersecurity breaches at Equifax and at the SEC itself. In remarks leading off the SEC Oversight Hearing, committee chair Mike Crapo (R-Idaho) said that the upcoming consolidated audit trail makes it all the more important for the SEC to safeguard the data it collects. The ranking member, Sherrod Brown (D-Ohio), chastised the agency, and Clayton himself, for delaying disclosure of the 2016 EDGAR breach. "Of course this breach took place under your predecessor," Brown said, "but the disclosure, or lack thereof, is all yours." See our full coverage.
SEC uses data analysis to catch cherry-picked trades
The SEC charged two investment advisers with conducting illegal cherry-picking schemes. The SEC alleged that the advisers allocated profitable trades for their personal accounts to the detriment of their clients’ accounts. The charges arose from the SEC’s Division of Economic and Risk Analysis initiative to combat cherry picking, which used data analysis to uncover the schemes (In the Matter of Jeremy A. Licht, Release No. 34-81584; and In the Matter of Howarth Financial Services, LLC, Release No. 34-81585, September 12, 2017). See our full coverage.
4. SEC NEWS AND SPEECHES
SEC chairman reveals cyberattack on EDGAR system
SEC Chairman Jay Clayton released a statement in which he revealed that a 2016 cyberattack on the SEC’s EDGAR test filing system enabled a hacker to gain access to nonpublic information. The Commission patched the software vulnerability in August 2017 after learning that the attack may have provided an opportunity for illicit gains through trading. Clayton advised that the SEC does not believe the intrusion resulted in unauthorized access to personally identifiable information, or that it jeopardized operations or resulted in systemic risk. The investigation is ongoing and Clayton said the SEC is coordinating with the appropriate authorities. See our full coverage.
CFTC pursues its first action against alleged Bitcoin Ponzi operator
The CFTC has filed a civil enforcement action in the U.S. District Court in the Southern District of New York against defendants Nicholas Gelfman of Brooklyn, New York, and his company, Gelfman Blueprint, Inc. (GBI), a New York corporation. The complaint charges them with fraud, misappropriation, and issuing false account statements in connection with soliciting investments in the cryptocurrency Bitcoin (CFTC v. Gelfman, September 21, 2017). See our full coverage.
CFTC charges Monex entities in massive precious metals fraud
In what CFTC Enforcement Director James McDonald called one of the biggest precious metals fraud cases in CFTC history, three companies and two principals have been charged with defrauding thousands of retail customers nationwide out of hundreds of millions of dollars. According to the CFTC, the defendants deceptively pitched leveraged precious metals trades as safe, but more than 12,000 customer accounts have lost over $290 million over the course of almost six years. Many customers lost their life savings (CFTC v. Monex Deposit Company, September 6, 2017). See our full coverage.
7. SUPREME COURT DOCKET
Petition asks High Court to address 2d Circuit's 'awareness of duty' requirement
A new petition for certiorari asks the Supreme Court to clarify how scienter is demonstrated in insider trading claims brought under the misappropriation theory. The petitioner asserts that the Second Circuit's requirement for proof of a defendant's "awareness of a duty" burdens the plaintiff and negates established law that recklessness is sufficient to establish scienter (Veleron Holding, B.V. v. Morgan Stanley, September 5, 2017). See our full coverage.
8. SUPREME COURT DOCKET
Petition asks: Does American Pipe tolling also apply to class actions?
A petition for certiorari asks the Supreme Court to address whether American Pipe tolls not just individual actions, but also class actions. The Ninth Circuit construed American Pipe to toll the limitations period for class action plaintiffs who were unnamed class members in previously uncertified classes. Unlike the Ninth Circuit, at least six others have held that American Pipe applies only to individual actions. A new class action brought by previously absent class members would have been dismissed as untimely in these circuits, the petition asserts (China Agritech, Inc. v. Resh, September 21, 2017). See our full coverage.
9. CLEARANCE AND SETTLEMENT
Industry Steering Committee lauds T+2 as compliance date arrives
Securities firms will begin complying with the SEC’s regulation shortening the settlement cycle from T+3 days to T+2 days as of September 5, 2017. Previously, firms observed a five-day settlement cycle before the Commission set T+3 as the standard in the 1990s. The Commission adopted the T+2 standard in its Securities Transaction Settlement Cycle release in March while setting the effective date at May 30, and targeting September 5 as the rule’s compliance date. See our full coverage.
$30 million just wasn’t enough for former Silicon Valley CEO
The SEC has charged the former CEO of Silicon Valley-based Alliance Fiber Optic Products, Inc. (AFOP) with insider trading in company stock, which ultimately allegedly generated more than $2 million in illicit profits and losses avoided by trading on non-public information (SEC v. Chang, September 20, 2017). Insider trading. The complaint alleges that the former CEO, "by virtue of his leadership position at AFOP, acquired material nonpublic information about AFOP’s earnings results and financial performance, as well as the intended acquisition of AFOP by Corning, Inc." See our full coverage.
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