Charles H. Miller
The Securities and Exchange Commission has recently announced two new initiatives that will build on the Enforcement Division’s ongoing efforts to address cyber-based threats and protect retail investors.
First, a Cyber Unit will be created to target cyber-related misconduct, and second — a retail strategy task force will be established to implement initiatives that directly affect retail investors.
“When Stephanie and Steve approached me with these initiatives, I endorsed them wholeheartedly,” SEC Chairman Jay Clayton said in a statement. “They reflect the division’s continual efforts to pursue new forms of misconduct while keeping a watchful eye out for our Main Street investors.”
Cyber Unit
The Cyber Unit will focus the Enforcement Division’s cyber-related expertise on targeting such misconduct as:
- Market manipulation schemes involving false information spread through electronic and social media
- Hacking to obtain material nonpublic information
- Violations involving distributed ledger technology and initial coin offerings — it will “cover” Bitcoin, Ethereum and other cryptocurrencies.
- Misconduct perpetrated using the dark web
- Intrusions into retail brokerage accounts
- Cyber-related threats to trading platforms and other critical market infrastructure
The unit has been reportedly in the planning stages for months as a compliment to initiatives to implement an internal cybersecurity risk profile and create a cybersecurity working group to coordinate information sharing, risk monitoring, and incident response efforts throughout the agency.
“Cyber-related threats and misconduct are among the greatest risks facing investors and the securities industry,” Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, said in a statement. “The Cyber Unit will enhance our ability to detect and investigate cyber threats through increasing expertise in an area of critical national importance.”
The existing Enforcement Division already has a substantial expertise in the detection and pursuit of fraudulent conduct in an increasingly technological and data-driven landscape, and the Cyber Unit will consolidate and advance those efforts.
Robert A. Cohen, a former co-chief of the Market Abuse Unit, has been appointed Chief of the Cyber Unit.
Retail Strategy Task Force
The Retail Strategy Task Force on its end will develop proactive, targeted initiatives to identify misconduct impacting retail investors. It will apply the lessons learned from Enforcement Division’s previous cases and leverage data analytics and technology to identify large-scale misconduct affecting retail investors. The task force will include enforcement personnel from around the country and will work with staff across the SEC, including from the SEC’s National Exam Program and the Office of Investor Education and Advocacy.
“Protecting the welfare of the Main Street investor has long been a priority for the Commission,” Steven Peikin, Co-Director of the SEC’s Enforcement Division, said in a statement. “By dedicating additional resources and expertise to developing strategies to address misconduct that victimizes retail investors, the division will better protect our most vulnerable market participants.”
SEC files charges against two ICOs
We’re not sure whether this has anything to do with the mentioned two initiatives, but the SEC has already charged a businessman and two companies with defrauding investors in a pair of initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds.
The Commission alleges that Maksim Zaslavskiy and his companies have been selling unregistered securities, and the digital tokens or coins being peddled don’t really exist. According to the SEC’s complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) have been told they can expect sizeable returns from the companies’ operations when neither has any real operations.
REcoin was touted as “The First Ever Cryptocurrency Backed by Real Estate,” adding that the company had a “team of lawyers, professionals, brokers, and accountants” that would invest REcoin’s ICO proceeds into real estate when in fact — according to SEC — none had been hired or even consulted. Additionally, Zaslavskiy and REcoin allegedly misrepresented they had raised between $2 million and $4 million from investors when the actual amount is approximately $300,000.
The complaint doesn’t stop there; SEC further alleges that Zaslavskiy has carried his scheme over to Diamond Reserve Club, which purportedly invests in diamonds and obtains discounts with product retailers for individuals who purchase “memberships” in the company. Despite their representations to investors, the SEC alleges that Zaslavskiy and Diamond have not purchased any diamonds nor engaged in any business operations. Yet they allegedly continue to solicit investors and raise funds as though they have.
The SEC obtained an emergency court order to freeze the assets of Zaslavskiy and his companies.
Filed in federal district court in Brooklyn, N.Y., SEC’s complaint charges Zaslavskiy, REcoin, and Diamond with violations of the anti-fraud and registration provisions of the federal securities laws. The complaint seeks permanent injunctions and disgorgement plus interest and penalties. For Zaslavskiy, the SEC also seeks an officer-and-director bar and a bar from participating in any offering of digital securities.
The SEC’s investigation, which is continuing, has been conducted by Jorge Tenreiro, Pamela Sawhney and Valerie A. Szczepanik. The case is being supervised by Lara S. Mehraban.
SEC: Beware of ICOs
While ICOs will have their place in the modern economy, the SEC warns people to go easy with them. The Commission’s Office of Investor Education and Advocacy recently issued an investor alert warning about the risks of ICOs.
“Investors should be wary of companies touting ICOs as a way to generate outsized returns,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “As alleged in our complaint, Zaslavskiy lured investors with false promises of sizeable returns from novel technology.”
We support what SEC is doing and think that some order should be added to the ICOs which are currently in the wild west phase. That being said, we don’t support bans of any sort, just some sort of a mechanism that will assure investors there is a real company with a business plan behind every coin offering. And with SEC’s new initiatives, perhaps we get something like that.
