Tag Archives: SEC

SEC Sues Elon Musk In San Francisco Federal Court To Enforce Subpoena



The Securities and Exchange Commission on Thursday asked a San Francisco federal court to order Elon Musk to comply with the agency’s ongoing investigation of his 2022 takeover of Twitter, the social-media platform he has since renamed X, The Wall Street Journal reported.

Musk was scheduled to provide testimony to the SEC on Sept. 15 but failed to appear at the agency’s San Francisco office, the agency’s filing says. The SEC later offered to allow Musk to testify closer to his home in Texas, but the agency’s efforts “were met with Musk’s blanket refusal to appear for testimony,” the SEC wrote.

The agency is probing Musk’s purchase of Twitter stock and his disclosures of his investment in the company, the filing says. The Wall Street Journal reported in May 2022 that the securities regulators were investigating Musk’s late disclosure of his stake.

According to The Wall Street Journal, Musk responded to the SEC’s move Thursday. “A comprehensive overhaul of these agencies is sorely needed, along with a commission to take punitive action against those individuals who have abused their regulatory power for personal and political gain,” he wrote. “Can’t wait for this to happen.”

The U.S.Securities And Exchange Commission posted a Litigation Release titled: “Elon R. Musk”. From the release:

SEC Files Subpoena Enforcement Action Against Elon R. Musk Seeking an Order Compelling his Attendance for investigative Testimony

The Securities and Exchange Commission (“SEC”) announced the that it has filed an application seeking an order directing Elon Musk (“Musk”) to comply with an investigative enforcement action calling for his appearance for testimony, which Musk failed to comply.

If a person or entity refuses to comply with a subpoena issued by SEC enforcement staff pursuant to a formal order of investigation, the Commission may file a subpoena enforcement action in federal district court seeking an order compelling compliance.

According to the SEC staff’s filing in the U.S. District Court for the Northern District of California, the testimony subpoena to Musk relates to an ongoing investigation by the SEC regarding, among other things, potential violations of various provisions of the federal securities laws in connection with (a) Musk’s 2022 purchases of Twitter, Inc. (“Twitter”) stock, and (b) Musk’s 2022statements and SEC filings relating to Twitter. According to the filing, the SEC seeks Musk’s testimony to obtain information not already in the SEC’s possession that is relevant to its legitimate and lawful investigation.

According to the filing, Musk failed to appear for testimony as required by the investigative subpoena served by the SEC, despite: (1) agreeing to appear for testimony in a mutually agreed upon date in September 2023; (2) having been served with a subpoena in May 2023 requiring his appearance for testimony in the SEC’s San Francisco Regional Office on that mutually agreed upon date; (3) raising no objection to the subpoena from May 2023 until two days before his scheduled testimony date in September 2023, when Musk notified the SEC that he would not appear. According to the filing, Musk attempted to justify his refusal to comply with the subpoena by raising, for the first time, several spurious objections.

The SEC staff’s application seeks an order from the court directing Musk to comply with the subpoena. The application is subject to the courts’s ruling. The SEC staff is continuing its fact-finding investigation and, to date, has not concluded that any individual or entity has violated the federal securities laws.

In my opinion, the SEC is being serious about Musk appearing for testimony regarding the potential violations the SEC wrote about. It does not seem to me that Musk is interested in talking to the SEC at all. This could potentially pose some legal trouble for Musk.


SEC Charges Digital World SPAC For Misrepresentation To Investors



The Securities and Exchange Commission announced settled fraud charges against Digital World Acquisition Corporation (DWAC), a special purpose acquisition company (SPAC), for making material misrepresentations in forms filed with the SEC as part of DWAC’s initial public offering and proposed merger with Trump Media & Technology Group Corp. (TMTG). The Commission finds that DWAC misled investors and the SEC by failing to disclose that it had formulated a plan to acquire and was pursuing the acquisition of TMTG prior to DWAC’s IPO.

According to the SEC, the purpose of a SPAC is to acquire an operating business. As such, steps were taken by a SPAC in furtherance of a particular acquisition are important to investors. According to the SEC’s order, DWAC filed an amended Form S-1 in support of its IPO in early September 2021 that stated that neither DWAC nor its officer and directors had had any discussions with any potential target companies prior to the IPO.

But, as found in the SEC’s order, dating back to February 2021, an individual who would later become the DWAC’s CEO and Board Chairman and others involved with the DWAC, had extensive SPAC merger discussions with TMTG. The SEC’s order further finds that while DWAC’s CEO and Chairman initially pursued these discussions with TMTG on behalf of another SPAC, he created a plan in the spring and summer of 2021 to potentially sue DWAC to propose a merger with TMTG and used this plan to solicit certain pre-IPO investors.

The order also finds that DWAC failed to disclose that the CEO had a potential conflict of interest based on an agreement he had signed with TMTG. As a result, DWAC’s amended Form S-1 was materially false and misleading…

CNBC reported that a SPAC, also known as a blank-check company, is a shell company that debuts on the public market with the stated intent to acquire an existing private company. SPAC’s are often used as a way for private companies to go public without the time-consuming and expensive process of raising money through a traditional initial public offering.

CNN also reported that last month, federal prosecutors arrested three investors charges related to Digital World’s deal with Trump’s media company. According to the indictment, the investors allegedly made more than $22 million by illegally trading on knowledge that DWAC would purchase TMTG – before it was public knowledge.

If I’m understanding this correctly, the DWAC was caught doing things that the SEC considered to be fraud. The fraud charges have been settled. The next step appears to get the acquisition done before whatever deadline they need to meet.


SEC Charges Crypto Platform Bittrex For Operating Unregistered Exchange



The U.S. Securities and Exchange Commission (SEC) posted a press release “SEC Charges Crypto Asset Trading Platform Bittrex and its Former CEO for Operating an Unregistered Exchange, Broker, and Clearing Agency” From the press release:

“The Securities and Exchange Commission today charged crypto asset trading platform Bittrex, Inc., and its co-founder and former CEO William Shihara for operating an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Bittrex, Inc.’s foreign affiliate, Bittrex Global GmbH, for failing to register as a national securities exchange in connection with its operation of a single shared order book along with Bittrex.

Since at least 2014, Bittrex has held itself out as a platform that facilitated buying and selling of crypto assets that the SEC’s complaint alleges were offered and sold as securities. From 2017 through 2022, Bittrex earned at least $1.3 billion in revenues from, among other things, transaction fees from investors, including U.S. investors, while servicing them as a broker, exchange, and clearing agency without registering any of these activities with the Commission.

The complaint further alleges that Bittrex and Shihara, who was the company’s CEO from 2014 to 2019, coordinated with issuers who sought to have their crypto asset made available for trading on Bittrex’s platform to first delete from public channels certain “problematic statements” that Shihara believed would lead a regulator, such as the SEC, to investigate the crypto asset as the offering of a security.

For example, in an effort to avoid to avoid regulatory scrutiny, before Bittrex would make an asset available on its platform, Bittrex and Shihara instructed issuer-applicants to delete statements related to “price prediction[s]” “expectation of profit”, and other “investment terms.”…

…The SEC’s complaint, filed in the U.S. District Court for the Western District of Washington, alleges that Bittrex and Bittrex Global should have registered as an exchange because they brought together, using a shared order book, the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interacted, and the buyers and sellers entering such orders agreed to the terms of a trade.

The complaint further alleges that Bittrex should have registered as a clearing agency because it acted as an intermediary in making payment and deliveries upon matching sell and buy orders and maintained custody of customer assets. Finally, the complaint alleges that Bittrex should have registered as a broker because it regularly engaged in the business of effecting transactions for the accounts of others in crypto assets that were offered and sold as securities…”

The Wall Street Journal reported the Bittrex Inc. once ranked as the country’s biggest platform for trading digital assets. Its rocky history at home is coming to an end with a regulatory threat and a decision to leave the U.S. for good.

The Securities and Exchange Commission’s enforcement staff told Bittrex in March it would recommend that the agency sue the company over alleged violations of investor-protection laws, according to David Maria, the company’s general counsel.

According to The Wall Street Journal, Seattle-based Bittrex was already prepared to wind down its U.S. operations when it got the notice, Mr. Maria said, citing the difficulty of working with U.S. regulators that have taken enforcement action against over 100 crypto defendants in six years. The SEC declined to comment.

It seems to me that companies that buy and sell cryptocurrency should take some time to learn what the rules are in the United States about what they are allowed to do, and what they should not do. Those that don’t bother to register as an exchange seem to be facing trouble from the SEC.


SEC Reopens Comment Period To Amend Exchange Act Rule



The Securities and Exchange Commission posted a press release titled: “SEC Reopens Comment Period for Proposed Amendments to Exchange Act Rule 3b-16 and Provides Supplemental Information” on April 14, 2023. From the press release:

“The Securities and Exchange Commission today reopened the comment period and provided supplemental information on proposed amendments to the definition of “exchange” under Exchange Act Rule 3b-16. The Commission initially proposed the amendments in January 2022 and reopened the comment period in May of 2022. The reopened period closed on June 13, 2022.

The reopening release reiterated the applicability of existing rules to platforms that trade crypto asset securities, including so-called “De-Fi” systems, and provides supplemental information and economic analysis for systems that would be included the new, proposed exchange definition. The reopening release also requested information and public comment on crypto asset securities trading on such systems and certain aspects of the proposed amendments applicable to all securities.

“I believe this supplemental release will help address comments on the proposal from various market participants, particularly those in the crypto markets,” as SEC Chair Gary Gensler. “Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets. I welcome additional public comment on all aspects of the proposal in light of the information in this supplemental release.”

The public comment period will remain open for 30 days after publication of the reopening release in the Federal Register.”

Reuters reported that the U.S. Securities Exchange Commission met on Friday to open public comment again on its proposal to expand the definition of an “exchange,” clarifying that its existing rules on exchanges also apply to decentralized cryptocurrency platforms.

According to Reuters, the SEC voted 3-2 to take additional comments from the public after crypto firms criticized the plan as vague and aimed at roping in decentralized finance platforms, known as DeFi platforms, that would otherwise not be subject to the regulator’s oversight.

DeFi platforms allow users to lend, borrow, and safe in digital assets, bypassing the traditional gatekeepers of finance such as banks and exchanges, Reuters reported.

The officials estimated that about a dozen crypto firms would fall under the expanded definition, but declined to provide any more specifics about which firms.

Reuters also reported that Friday’s public vote to reopen the comment period for 30 days was unusual. Typically, the commission would decide behind-the-scenes if extending a public comment period is necessary.

The meeting underscored the ideological divide among the commissioners, with both Republican commissioners dissenting.

Based on all of this, it seems to me that the people most likely to comment about this are going to be those who run crypto currency DeFi platforms. It might also attract commenters who use those platforms.


Coinbase Warned By SEC Of Potential Securities Charges



The Securities and Exchange Commission issued crypto exchange Coinbase a Wells notice, warning the company that it identified potential violations of U.S. securities law, CNBC reported.

According to CNBC, Coinbase shares fell nearly 12% in extended trading after the news broke on Wednesday, adding to an 8.16% drop during regular trading hours.

“Based on discussions with the Staff, the Company believes these potential enforcement actions would relate to aspects of the Company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet,” Coinbase said in a regulatory filing. “The potential civil action may seek injunctive relief, disgorgement, and civil penalties.”

CNBC also reported that the SEC has ramped up its enforcement of the crypto industry, bearing down on companies and projects that the regulator alleges were hawking unregistered securities. Reports first surfaced of an SEC probe into Coinbase in mid-2022.

Coinbase posted some information on its website. Here is from the TL:DR (too long, didn’t read) section:

“Today, the SEC gave Coinbase a “Wells notice” regarding an undefined portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet after a cursory investigation. We are prepared for this disappointing development. We are confident in the legality of our assets and services, and if needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets. Rest assured, Coinbase products and services continue to operate as usual – today’s news does not require any changes to our current products or services.”

The Wall Street Journal reported that the Securities and Exchange Commission has told Coinbase Global Inc. that it plans to take enforcement action against the company, escalating its crackdown on digital-currency firms by targeting the biggest U.S. crypto exchange, Coinbase said Wednesday.

According to the Wall Street Journal, Coinbase said it received a letter from the SEC known as a Wells notice, in which regulators say they believe companies or individuals violated investor-protection laws. The notices aren’t final because the agency’s commissioners must authorize any lawsuits or enforcement settlements.

By warning Coinbase about a potential lawsuit, The Wall Street Journal reported, the SEC is setting its sights on one of the biggest names in crypto, a publicly traded company that has helped bring tens of millions of customers into the digital-currency markets since it was founded 2012.

A lawsuit would represent SEC Chair Gary Gensler’s biggest step to assert his agency’s jurisdiction over crypto. If Coinbase prevailed in a lawsuit, it would embolden the crypto industry’s claims that Mr. Gensler has overreached and that virtual currencies shouldn’t be subject to U.S. securities laws.

TechCrunch reported that in response to receiving a Wells notice from the FTC, Coinbase’s CEO Brian Armstrong struck a confident posture, tweeting that his company is “right on the law, confident in the facts, and welcome the opportunity for Coinbase (and by extension the broader crypto community) to get before a court.”

In a separate tweet, Armstrong wrote: “Two years ago the SEC reviewed our business in detail and approved Coinbase to go public. Our S1 clearly explained our asset listing process and included 57 references to staking. Coinbase runs a rigorous asset review process and has rejected more than 90% of assets that have applied to be listed on the platform.”

It is unclear to me exactly how this particular situation will end up. I suppose there will eventually be an announcement if something changes.


Activision Blizzard Pays SEC $35 Million To Settle Probe



CNBC reported that video game developer Activision Blizzard agreed to pay a $35 million settlement over charges it failed to maintain “adequate” controls for collecting and assessing reports of workplace misconduct and that it violated federal whistleblower protection rules, the Securities and Exchange Commission said Friday.

The SEC claimed workplace misconduct complaints were neither collected nor analyzed as expected by public disclosure regulations, CNBC reported. “Moreover, taking action to impede former employees from communicating directly with the Commission staff about a possible security law violation is not only bad corporate governance, it is illegal,” SEC director Jason Burt said.

The settlement is not an admission of wrongdoing but concludes a probe that focused on Activision Blizzard’s standards from 2018 to 2021.

The SEC included the following paragraph in its press release:

“The SEC’s order finds that Activision Blizzard failed to implement necessary controls to collect and review employee complaints about workplace misconduct, which left it without the means to determine whether larger issues existed that needed to be disclosed to investors,” said Jason Burt, Director of the SEC’s Denver Regional Office. “Moreover, taking action to impede former employees from communicating directly with the Commission staff about a possible securities law violation is not only bad corporate governance, it is illegal.”

The Wall Street Journal reported that female employees at Activision complained for years about alleged sexual assaults and mistreatment. The SEC’s probe examined what Activision’s management knew about the alleged incidents and how it addressed them internally, the Journal reported.

Activision’s system wasn’t designed to collect and analyze complaints about workplace misconduct across its separate business units, the SEC said in a settlement order. As a result, Activision’s management and directors often didn’t have information about employee complaints or incidents involving harassment, the SEC order said.

According to the Wall Street Journal, the settlement also said that Activision’s separation agreements with employees from 2016 to 2021 included an improper clause requiring ex-workers to tell the company if agencies such as the SEC contacted them about reports of misconduct. The SEC said that requirement violated the SEC’s whistleblower-protection rules, which seek to ensure that company insiders aren’t prevented from informing regulators about wrongdoing.

It is interesting to note that The Wall Street Journal reported that the $35 million fine is a significant penalty for an enforcement case focused on a company’s disclosure procedures. The SEC under Chair Gary Gentler and Enforcement Director Gurbir S. Grewal has ratcheted up penalties, saying fines need to be higher to effectively deter wrongdoing.

My hope is that the SEC’s order will result in Activision Blizzard to actually listening to employees who have been harassed or abused in the workplace and enact a significant penalty upon the person(s) who engaged in harassment or abuse. If not, I suppose the SEC can take additional action on the company.


U.S. SEC To Set Up Offices For Crypto Filings



The U.S. securities regulator will set up two new offices to deal with filings related to crypto assets and the life sciences sector, Reuters reported. According to Reuters, the “Office of Crypto Assets” and the “Office of Industrial Applications and Services” will join seven other existing offices under the Securities and Exchange Commission (SEC) department, which handles corporate disclosure findings.

The Securities And Exchange Commission (SEC) posted a press release titled: “SEC Division of Corporation Finance to Add Industry Offices Focused on Crypto Assets and Industrial Applications and Services”. From the press release (posted September 9, 2022):

The Securities and Exchange Commission today announced plans to add an Office of Crypto Assets and an Office of Industrial Applications and Services to the Division of Corporation Finance’s Disclosures Review Program (DRP). The DRP has long had offices to review company filings by issuers. The two new offices will join the seven existing offices that provide focused review of issuer filings and that are grouped by industry experts to further the Division’s work to promote capital formation and protect investors. The DRP anticipates the new offices to be established later this fall…

According to the press release, The Office of Crypto Assets will continue the work currently performed across the DRP to review filings involving crypto assets. Assessing companies and filings to one office will enable the DRP to better focus its resources and expertise to address the unique and evolving filing review issues related to crypto assets.

The Office of Industrial Applications and Services will be responsible for the non-pharma, non-biotech, and non-medical products companies currently assigned to the Office of Life Sciences. In recent years, the life sciences industry has experienced significant growth, which has added to the number of filings and companies assigned to that office. Transitioning a subset of these companies to a separate group will allow the DRP staff to build better specialized expertise.

Reuters reported that cryptocurrencies and other digital assets have soared in popularity over recent years and are getting increasingly intertwined with the regulated financial system, saddling policymakers with monitoring risks in a largely unregulated field. Allegations of money laundering against some crypto firms as well as consumer data violations in the United States, the biggest market for digital assets, have also affected demand.

In March of 2022, President Joe Biden signed an executive order calling on the government to examine the risks and benefits of cryptocurrencies, CNBC reported. According to CNBC, that order was signed by President Biden. The order called on federal agencies to take a unified approach to regulation and oversight of digital assets (according to a White House fact sheet).

Personally, I am not surprised that the U.S. federal government wants to put in place specific offices that can review filings of crypto assets. Cryptocurrency, after all, is a form of currency. As such, it appears to fall under rules similar to that of other types of currency or assets.