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• $1.1 billion for big banks using WhatsApp
• $23 million for Oracle’s second time caught out for foreign bribery 
• $20 million for Deloitte asking its Chinese audit clients to do their own audits 
• $1.25 million for Kim Kardashian’s touting of crypto tokens

Summaries of November’s NOCAs are below, and remember, once a NOCA is published, any whistleblower who provided information to the SEC on the case has 90 days to claim a whistleblower reward by filing a Form WB-APP. 

With over $1.4 billion in fines noticed in November, there is over $400 million in whistleblower rewards up for grabs this month. 

Major Banks Fined For WhatsApp Use 

The SEC settled charges with 15 banks for longstanding failures to maintain and preserve electronic communications. The banks were primarily charged because they had allowed employees to communicate about business using messaging apps, such as WhatsApp, which were not monitored or recorded. The firms involved were Barclays, BofA, Citigroup, Credit Suisse, Deustche Bank, Goldman Sachs, Morgan Stanley, UBC, Jeffries, Nomura and Cantor Fitzgerald. The firms paid a combined $1.1 billion penalty. 

Oracle

The SEC settled charges with Oracle for violations of the Foreign Corrupt Practices Act in Turkey and the UAE. The SEC alleged that Oracle had allowed subsidiaries to maintain ‘slush funds’ which were used to pay for foreign officials to attend conferences, however, in some instances, the funds were used to pay for family members or vacation trips to California. Oracle settled the charges by agreeing to pay $23 million. 

Deloitte 

The SEC settled charges with Deloitte in China for failing to comply with audit requirements. The SEC alleged that Deloitte’s China affiliate asked audit clients to conduct their own audit work. This created the appearance that Deloitte had conducted testing of financial statements when there was no evidence that this had in fact been done. As a result of the charges Deloitte agreed to pay a $20 million penalty. 

Kim Kardashian 

The SEC settled charges with Kim Kardashian for touting a crypto assed sold by EthereumMax. According to the SEC, Kim was paid $250,000 to publish a post on her Instagram about EMAX tokens, but failed to disclose that it was a paid post. Kim agreed to pay $1.25 million to settle the charges. 

Barclays Bank PLC

The SEC settled charges with Barclays for selling over $17 billion in unregistered securities. The SEC noted that the violation came about because of a failure to implement internal controls that tracked transactions which needed to be registered. As a result of the settlement, Barclays agreed to pay $361 million. 

Friedman LLP 

The SEC settled charges with accounting firm Friedman LLP for improper professional conduct. According to the SEC, Friedman failed to recognize red flags and respond to fraud risks in its audit of iFresh. (The SEC has separately charged iFresh with fraud). Friedman also failed to have procedures that would have detected numerous related party transactions conducted by iFresh. In order to settle the charges, Friedman has agreed to pay $1.5 million in penalties. 

RSM 

The SEC settled charges against audit firm RSM US LLP and three employees for professional misconduct in their audit of Revolution Lighting Technologies. According the SEC, RSM’s audit failed to adhere to proper standards, and in addition, there was a failure to plan, supervise and execute audits by senior employees. In order to settle the charges, RSM agreed to pay a $3.75 million penalty. 

Mattel 

The SEC settled charges against Mattel Inc for errors in its financial statements. According to the SEC, Mattel understated certain allowances and expenses because of a $109 million accounting error. To settle the charges, Mattel has agreed to pay a penalty of $3.5 million. In addition, the SEC is initiating litigation against a former audit partner at PwC to determine whether he engaged in improper conduct related to the allegations. 

Cemtrex 

The SEC settled proceedings against Cemtrex Inc for securities violations arising from allegations that the company had raised funds from investors which were used for unrelated business purposes. No fine was announced, but Cemtrex agreed to certain undertakings in the order regarding its compliance and public statements.   

Property Income Investors 

The SEC filed charges against Larry Brodman and several entities he controls for misusing millions of dollars of investor funds that were raised through fraudulent offerings. The charges are contested and the case is ongoing in the Southern District of Florida. 

UCB Financial Advisers 

The SEC obtained a freezing order against a Florida investment professional and UCB Financial Advisers for operating a “cherry picking” scheme. According to the SEC, after obtaining money from customers, the defendants placed trades and booked them to different accounts depending on whether they were profitable or not. If the trades were profitable, the defendants would book the trades to their own accounts, but if the trades were loss-making, they would book them to client accounts. As a result of this scheme the defendants generated $4.6 million in profit for themselves and cost clients $5 million in losses. The charges are contested and the case is ongoing.

Lev Parnas

Lev Parnas pled guilty to his role in an offering fraud scheme that raised over $2 million from investors. According to the SEC, Parnas and another individual raised money by telling investors that their funds would be used to develop products to help people affected by investment fraud. Instead, the money was largely used for personal expenses, jewelry, cars and casino trips. As part of parallel criminal proceedings, Parnas was fined ~$1.7 million for his role in the fraud. 

Bevil et al.

The SEC charged fifteen individuals who worked for Intertech Solutions in a cold-calling scheme. According to the SEC, the individuals called hundreds of prospective investors in order to raise over $7 million dollars for Intertech. However, the individuals failed to disclose that they were charging exorbitant commissions of up to 50% on investments. The charges are contested and the case is ongoing in federal courts in Nevada, Texas and Florida. 

Devito and Esposito 

The SEC filed fraud charges against two Florida residents, Joseph DeVito and Dean Esposito for acting as unregistered brokers who cold-called investors seeking to raise funds. Both DeVito and Esposito hid the fact that they were barred from the securities industry by the SEC. The charges are contested and the case is ongoing in federal court in Florida. 

Cetera Advisor Networks LLC 

Cetera Advisor Networks LLC, a registered investment advisor, has been added to a complaint involving failure to disclose conflicts of interests and undisclosed compensation in an ongoing action against an affiliate of Cetera. The charges are contested and the case is ongoing in Colorado. 

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Crypto scams are becoming increasingly hard to spot. With scammers using glossy websites and spoofed endorsements, even sharp investors can get caught out when trying to invest.  Even if you haven’t been a victim, but you know about crime or fraud involving crypto, you should still report it as you could earn you a whistleblower award for doing so. Here are the six things to do if you think you’ve witnessed crypto crime. (If it’s a major fraud, skip straight to number 6).  

  1. Preserve Your Records  

When reporting fraud, you may need to provide records of your transactions and communications. If you don’t preserve your records, it could mean that the authorities will not take you seriously, and you may miss out on having funds returned to you if you were a victim of the fraud. Preserving records means more than simply not deleting your emails and text messages.  In addition to having these on your mobile device, you should also make copies and have them stored in the cloud in case anything happens to your device. The same goes for transaction records. These might be visible in an online account, but you can never be sure when the company will remove them. Fraud investigations can take a long time, so it’s important you have a long-term plan for keeping these records safe.  

2. Contact the Company 

 But Never “Pay To Withdraw” If you get the feeling that something isn’t right with a crypto investment, you should immediately contact the company to ensure it’s not a misunderstanding. Not only should you contact them via email and phone, but also use social media platforms as these can let others know that you are having problems. In the event that the company responds and asks you to make a payment to withdraw your funds, under no circumstances should you pay them.  If a fraud or scam is being deployed, you are certain to lose more money. If the company is legitimate, you should be able to negotiate the release of your funds without further payments.   

 3. Seek Out Allies 

A lot of cryptocurrencies have active online communities that share news via Reddit, Discord, Telegram and other platforms. If you are having problems with a crypto investment, but aren’t sure if it’s a scam, you should reach out to others in the community to see if they’ve encountered similar issues. While communities can be a useful way to get information, beware of any advice you get that encourages you to pay more to withdraw your funds.  As we mentioned above, this advice should be ignored. The best way to use online communities is to share your concerns so that others are aware of potential issues, and build a network of people in similar circumstances so that you can collectively work to resolve or report the issues. If you are sure that something is a scam or fraud, you can also alert others using online review platforms such as Trustpilot.   

4. Report to Local Authorities  

As soon as you have determined that you have been the victim of a fraud or scam, you should contact your local authorities immediately. While your local authorities may not open an investigation on the spot, they will have the best information on what resources are available to you and can tell you about other agencies you should report to.  Often, cybercrime agencies wait until they have received a number of reports about a scam or fraud before they open an investigation, so even if the amount you lost was relatively small, it is important to report it to these agencies as it can help build momentum for an investigation.  

5. Consider Reporting to U.S. Authorities   

Depending on how big the fraud is, it could be useful to report the fraud to authorities in other countries as this can improve your chances of catching the perpetrators. When it comes to prosecuting crypto crime, the U.S. is the leader in the space.  Not only does the U.S. have an internet crime complaint center that you can make a complaint to, but it also has two other regulatory agencies (the SEC and the CFTC) that prosecute fraud and crime in the crypto space.  If you are a U.S. resident, there is a greater chance that U.S. authorities will act on your information, but even if you are not, there are no restrictions on non-U.S. individuals reporting to these agencies.   

6. Speak to an Attorney   

 If know of a major fraud or crime involving cryptocurrency, you should definitely speak with an attorney who specializes in reporting crypto fraud.  Attorneys can advise you on the best place to report, and can also report information on your behalf. Importantly, an attorney can advise you on whether you could be eligible for a whistleblower award. A whistleblower award is a payment you can get if you report fraud to certain U.S. regulators. This includes non-internet crime where cryptocurrency was involved, such as paying bribes or money laundering. The average SEC whistleblower award is over $4 million, so it is definitely worth your while speaking to an attorney. Most attorneys who report fraud work on a contingency fee basis, meaning that you don’t pay anything unless you receive a whistleblower award.

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Last year a digital currency based on the Netflix series ‘Squid Game’ soared in popularity among retail investors. The website promoting the coin was littered with grammatical errors and, while the site was only three weeks old, its promoters managed to raise $3 million from investors before they pulled out their funds and the price collapsed dramatically. Events like this have made cryptocurrency a prime target for regulators and there is no shortage of interested parties.  With both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) vying for the role as the new crypto-sheriff in town, we take a look at the issues that may decide the race to regulate crypto and give our prediction on who comes out as top dog (the SEC).  

1. The Case For The CFTC As The New Crypto Regulator   

The CFTC largely draws its power from the Commodity Exchange Act of 1934 and the Commodity Futures Trading Commission Act of 1974. These laws give the CFTC power to regulate the trading of “commodities.” Importantly, the CFTC considers Bitcoin and many other cryptocurrencies to be commodities, which gives the CFTC a seemingly good legal basis to claim the title of primary regulator. However, when it comes to the trading of commodities, the CFTC has varying powers depending on whether the trading occurs on the ‘spot’ or the ‘futures’ market. If you’re unfamiliar with these terms, here’s a brief overview:    

•  The ‘spot’ market is a market where commodities, like Bitcoin, are bought and sold for immediate (“on the spot”) delivery.  An example of a spot market for cryptocurrency would be a place where people can trade dollars for Bitcoin, with the Bitcoin being immediately delivered to a person’s online wallet or account. Most apps and websites which let consumers buy cryptocurrency would be considered spot markets and Coinbase is the most popular one in the U.S.   
• The ‘futures’ (or ‘derivatives’) market is a market where contracts for future delivery of commodities, like Bitcoin, are bought and sold. In this market, a person does not obtain a commodity at the time of the transaction, they obtain a contract for future delivery of the commodity. A good example of a futures market for cryptocurrency is the Bitcoin futures market operated by the Chicago Mercantile Exchange. In that market, contracts usually specify that the Bitcoin will be delivered in 6 months.   

In terms of regulation, the CFTC has limited authority to regulate the spot market and has admitted it can only intervene in the spot market to prevent fraud or manipulation. This means the CFTC cannot impose broad restrictions on who can participate in the spot market or rules regarding how trading occurs. On the other hand, when it comes to the futures market, the CFTC has broad power to regulate, including setting rules for the participants, the exchanges and the intermediaries in the market. Anyone who wants to trade Bitcoin futures in the U.S. is going to have to deal with CFTC regulation, but spot markets and their participants can largely avoid CFTC regulation if they steer clear of fraud and manipulation.   For main street investors, it’s more likely that they will be purchasing cryptocurrency through a spot market and as a result, their trading is less likely to be regulated by the CFTC. However, retail investors can still rely on the CFTC to step in when fraud and manipulation occurs, and the CFTC has already demonstrated that it’s not shy about bringing crypto enforcement actions. For example, in August 2021, the CFTC fined BitMEX $100 million for trading Bitcoin derivative products without Anti-Money Laundering (AML) or Know-Your-Customer (KYC) controls. The CFTC has also brought enforcement actions against My Big Coin Pay and Coin Drop Markets for fraud.  The CFTC model of crypto regulation is an attractive one for main street investors as it suggests that the CFTC won’t be focused on setting rules for their trading activity, but will still have the responsibility of prosecuting fraud and manipulation. For more sophisticated traders who trade futures, the CFTC is likely to be a much bigger part of their lives, as the CFTC has already set rules and regulations for crypto futures markets.     

 2. The Case For The SEC As The New Crypto Regulator  

As the CFTC regulates commodities, the SEC regulates “securities.” However, the SEC has admitted that neither Bitcoin or Ethereum are securities. This is important because Bitcoin and Ethereum are the two largest cryptocurrencies by market cap, and they act as a model for thousands of other cryptocurrencies. At first glance, you might think that the SEC will have a tough time convincing anyone it can regulate cryptocurrencies, but what the SEC lacks in legal authority, it makes up for in regulatory appetite.  As the SEC can’t claim that many cryptocurrencies are securities, the SEC has cleverly identified other aspects of the crypto ecosystem (“cryptosystem”) where the SEC has a much better argument that securities are involved.  Rather than regulating the trading of any single cryptocurrency, by regulating important areas of influence, the SEC may be able to exercise significant power over the use of cryptocurrency. To use an analogy; the SEC might not be able to act as the crypto-sheriff, but if it controls all the gun stores in the town, it can still wield a lot of power.   

 i. Initial Coin Offerings (ICOs)  

The best example of an area of influence the SEC has targeted is initial coin offerings (ICOs).  An ICO is where people purchase a cryptocurrency that has yet to be released or traded on an open market. Often ICOs are used to raise the capital needed to develop a cryptocurrency or the infrastructure it needs to operate. Just like an IPO for shares, there are contracts that govern who get coins and how many they get. These contracts give the SEC just enough room to argue that ICOs involve securities, and thus can be regulated by the SEC.     The SEC first claimed authority to regulate ICOs in 2018, and this claim has been reiterated earlier this year by the current SEC Chairman, Gary Gensler. While Bitcoin and Ethereum are long past their ICOs, there have been hundreds of ICOs in 2021, giving the SEC a bounty of opportunity to regulate how new cryptocurrency is marketed and sold to investors. This is a key area of influence as it allows the SEC to exercise control over all new entrants to the U.S. crypto market.    

 ii. Decentralized Finance (DeFi) 

 Another area of influence the SEC has claimed is Decentralized Finance (DeFi). DeFi is a system that allows people to borrow and lend cryptocurrency on decentralized platforms (i.e., platforms that are not controlled by any one entity or person). DeFi is seen as a key development in the cryptosystem as it allows people with cryptocurrency to access financial products that are similar to those offered by traditional banks. As DeFi involves lending, it is a great fit for the SEC’s regulatory power, as the definition of a “security” includes debt instruments (anything that allows you to lend or borrow). This gives the SEC an unimpeachable basis for asserting their authority in this area and the SEC has publicly stated that DeFi platforms come under their jurisdiction. While the SEC hasn’t issued specific rules for DeFi platforms yet, these are likely not far off.     

iii. Stablecoins and more   

In terms of wider regulation of the cryptosystem including stock-backed tokens and stablecoins, Chairman Gensler summed up the SEC’s position neatly in August: “It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These products are subject to the securities laws and must work within our securities regime.” In addition to this declaration, Gensler has openly asked Congress for more power to regulate cryptocurrencies, showing that if the SEC doesn’t already have the powers it needs, it’s going to go and get them.      

3. Why The SEC Will Win The Race To Regulate 

While the SEC’s legal basis for the role of crypto-regulator is shaky compared to the CFTC’s, the question of who is going to win the race to regulate is not going to be decided by legal text alone. More likely, the question will be influenced by strategic and industry dynamics, and these indicate that the SEC will prevail.  

i. The SEC’s Enforcement Appetite 

History tells us that a weak legal basis will not stop the SEC from trying, and succeeding, to prosecute crypto cases. This can be seen from the SEC’s prosecution of cases involving the Foreign Corrupt Practices Act (FCPA) which have been widely criticized as pushing the limits of jurisdiction and flat-out lacking a legal basis. The SEC’s approach to the FCPA is an ominous sign for anyone who thinks that the SEC will stand down from crypto regulation because there is doubt over their jurisdiction to prosecute. The SEC’s current lawsuit against Ripple is a good example of the SEC pushing its jurisdiction, and even if Ripple come out with a victory, that won’t be the last time the company crosses swords with the SEC given its plan to go public.    In addition to an insatiable appetite for enforcement (the SEC has already brought dozens of crypto enforcement actions, and has yet to lose a single case) the SEC has almost eight times the headcount and budget of the CFTC. The SEC in a much better position to investigate and bring complex enforcement actions without having to wait for Congress to provide the resources. The resource factor alone has given the SEC a significant head start on the CFTC and allowed the SEC to bring enforcement actions where the CFTC might have looked like the obvious candidate.   

ii. Companies Want To Be Regulated By the SEC  

Before you scoff at the suggestion that a company would want to be regulated by the SEC, remember that most companies dream of going public. Going public not only means access to capital, but also that the SEC gets far-reaching powers to regulate the behavior of the company, even the tweets of its CEO. While there are only a handful of public companies specializing in crypto, the many private companies who want to go public may think twice before making an enemy of the SEC by challenging their authority to regulate them.   

iii. When Not Invited, the SEC Gatecrashes   

Even if the CFTC is nominally crowned the primary crypto regulator, it won’t stop the SEC from muscling in any chance it gets. In other areas where regulators believed they had de facto exclusive jurisdiction, the SEC has gatecrashed the party. Take for example “economic sanctions”, which are issued and enforced by the Office of Foreign Asset Control (OFAC) with the assistance of the DOJ. In 2019, enforcing sanctions was a task exclusively thought to belong to OFAC and the DOJ. However, that changed when the SEC brought an enforcement action against Quad/Graphics Inc. for violations of OFAC sanctions (among other things). Not only was this a case where the SEC was moving in on another regulator’s turf, but also, the DOJ had already investigated Quad/Graphics and declined to bring charges. While both agencies use different legal standards, the SEC made a bold assertion of authority based solely on the fact that Quad/Graphics was a public company. If the enforcement of sanctions is anything to go by, any crypto regulator who is not the SEC may find the role a little cramped when it comes to overlapping jurisdiction.  

Conclusion 

In the race to regulate cryptocurrency there is certain to be some areas of overlapping authority, but strategy, resources and industry dynamics will determine who becomes the de facto crypto-regulator. As the SEC has the appetite, resources and industry dynamics in its favor, it won’t be long before it emerges the winner. As more crypto companies mature and seek access to capital markets, it is unavoidable that the SEC will become the defining regulator in this space.   

About the Author 

John Peterson is the Managing Attorney and founder of FBR, a law firm that focuses on representing FCPA whistleblowers. John is a New York whistleblower attorney who has worked for almost a decade on financial crime and regulatory cases around the globe. When working on cryptocurrency issues, John and FBR work with Elementus, the first institutional-grade crypto forensic solution.  

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