by T. GormanPosted on Posted in SECActions

Crypto assets have for years been a focus of many. Congress has made attempts at times to craft new regulations that would govern the assets. Those efforts failed. The SEC has stepped in, using long-standing court decisions on what constitutes a security, and at times existing regulations, to govern and regulate the assets. As the courts repeatedly recognized, those efforts were based on long standing, traditional notions of what constitutes a security under the federal securities laws. Numerous cases were brought and upheld the approach of the agency. One of those actions is SEC v. Payward, Inc. and Payward Ventures, Inc., Civil Action No. 3: 23-cv-06003 (N.D. Cal.)(“Kraken”) which alleged multiple violations of the securities law.

Yesterday the Commission stipulated to the dismissal of the Kraken case with no explanation. The initial complaint was a virtual litany of violations of the federal securities laws. According to the press release issued by the agency at the time the complaint was filed, the Kraken platform “Provided a marketplace that brings together the orders for securities of multiple buyers and sellers using established discretionary methods . . . Engages in the business of effecting securities transactions . . .Engages in the business of buying and selling securities for its own account. . . and . . .Serves as an intermediary in settling transactions in crypto asset securities by Kraken customers. . .” all without registration as required by the statutes. SEC Press Release dated Nov. 21, 2023 (issued when the agency filed the complaint dismissed above, “initial complaint”). The complaint goes on for about 90 pages detailing the wrongful conduct Defendants were alleged to have engaged in that harmed market and investors.

None of the issues cited in the initial complaint are addressed in the stipulation dismissing the Kraken action published yesterday by the agency. Rather, that stipulation states only that that “the Commission and the Defendants stipulate that the Litigation be dismissed with prejudice. . .” No other explanation is offered.

The Commission’s action yesterday makes it clear that the agency has vacated the space. This action was taken despite years of cases filed, litigated and resolved in favor of the agency based on long standing law applied to crypto assets, not novel ideas. Yet now the agency has vacated the space. Now the agency has left investors with no explanation for its actions and more importantly no protection. Now it has disregarded its obligation to protect investors without explanation. If this is the approach of the agency – leaving investors to fend for themselves – what is its purpose?

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by T. GormanPosted on Posted in SECActions

One focus of agency enforcement actions is the prevention of future violations and the protection of investors and markets. This can be accomplished in part by notice, that is, informing the public what specific conduct violates a statute or rule.

One key method to accomplish this is the complaint or Oder entered announcing the wrongful conduct while another can be at least a brief identification of that conduct in subsequent orders. Viewed in this context, the purpose for an agency like the Commission to publish detailed complaintst or Order is to give notice to the public of what specific type of conduct the agency views as wrongful. Integral to that process is a statement of the reasons the conduct violated the statutory sections and rules alleged to have been violated and the remedies imposed not just as penalties but to help forestall similar conduct in the future. Stated differently, the purpose of filing a detailed complaint or Order is to prevent a reoccurrence of the wrongful conduct in the future to protect the markets and the public.

While the detail need not be repeated in each subsequent order, the description should include at least an identification of the conduct. Yet the Commission’s most recent Order in a multi-million dollar action that went on for years wholly fails to identify the wrongful conduct in any meaningful way which resulted in significant financial sanctions. In the Matter of Citigroup Alternative Investments LLC and Citigroup Global Markets Inc., Adm. Pro. Proceedings, File Ni, 3-16757 (March 26, 2025).

The Order issued this week by the Commission in the action cited above is the concluding segment of a years long proceeding. It transfers to the Department of Treasury the remaining funds and discharges the fund administrator. According to the Order, the wrongful conduct violated Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(2) & (4) and the related rules. The Order then goes on to specify that a plan was adopted which included the creation of a plan of distribution for the funds were collected. Those funds amounted to $184,864,153.

While the sum collected and distributed is significant, the description of the wrongful conduct is not with the exception of the initial Order issued years ago. In this regard the current Order only states that “the Commission found that Respondents made material misstatements and omissions between 2002 and 2008 relating to both the offer and sale of securities in the two now defunct hedge funds.

The readers that trace the history of the proceedings back years learn, however, learns not just that there were misstatements but that the underlying conduct is based on the repetition of misleading statements and unauthorized investor trades for a period of six years tied in part from deficient internal controls. Those trades resulted in millions of dollars in damages by a well know and leading U.S. financial institution.

If the investing public is going to learn one of the key lessons from this action – they must carefully monitor their investments and not just rely on others – at least the nature of the wrongful conduct should be specified beyond “false statements” or similar vague statements which actually say nothing meaningful about what generated years of litigation. That kind of statement is wholly missing here.

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