On September 21, 2022, the Securities and Exchange Commission announced settled insider trading charges against the CEO and the former President and Chief Technology Officer of Cheetah Mobile Inc. (the “Company”), a China-based mobile internet company.  The executives allegedly possessed material nonpublic information (“MNPI”) when they set up a trading plan under Rule 10b5-1 of the Securities Exchange Act.
Continue Reading SEC Charges Company Executives with Insider Trading for Allegedly Setting Up 10b5-1 Trading Plan While in Possession of MNPI

On July 21, 2022, the Securities and Exchange Commission and the U.S. Attorney’s Office for the Southern District of New York charged Ishan Wahi, a former employee of the digital asset trading platform Coinbase (the “Company”), as well as his brother and friend, with engaging in insider trading ahead of certain of the Company’s digital asset listing announcements (i.e., announcements in which the Company publicly discloses the specific digital assets that it plans to make available for trading on its platform), which allegedly generally increase the value of the relevant digital assets.
Continue Reading SEC and DOJ Charge Employee of Digital Asset Trading Platform and His Associates With Alleged Insider Trading in Digital Assets

The last few weeks have seen a significant ramp-up of federal bank regulators’ focus on cryptocurrency companies and their disclosures regarding FDIC deposit insurance, signaling a potential spike in enforcement actions targeted at the crypto sector.
Continue Reading FDIC Issues Cease and Desist Letters to Companies for Crypto-Related Representations About Deposit Insurance

On August 1, 2022, Robinhood Crypto LLC (“RHC”) entered into a Consent Order with the New York Department of Financial Services (“DFS”) based on “serious deficiencies” related to anti-money laundering (“AML”), cybersecurity, and virtual currency that were identified in DFS’s examination of RHC covering the period from January to September 2019.
Continue Reading DFS Enters Consent Order with Robinhood Crypto for Deficiencies in AML, Cybersecurity, and Virtual Currency Compliance

On June 13, 2022, the Securities and Exchange Commission charged three Charles Schwab investment adviser subsidiaries—Charles Schwab & Co., Inc.; Charles Schwab Investment Advisory, Inc. (“CSIA”); and Schwab Wealth Investment Advisory, Inc. (“SWIA,” and together with Charles Schwab & Co., Inc. and CSIA, “Charles Schwab”)—with violations of the Investment Advisers Act of 1940 for alleged misconduct associated with its robo-advisor, Schwab Intelligent Portfolios (“SIP”).  Unlike most other robo-advisers, Charles Schwab did not charge an advisory fee for the SIP service.  However, Charles Schwab required its SIP clients to hold pre-set amounts of cash—rather than investing in equities under market conditions where equities were outperforming cash—that was then loaned out by Charles Schwab Bank at higher interest rates than it paid to the SIP clients, resulting in a profitable spread for Charles Schwab and the equivalent of a hidden fee for its clients, since holding cash lowered their returns.  Charles Schwab was ordered to pay almost $46 million in disgorgement, more than $5 million in prejudgment interest, and $135 million as a civil penalty.  The $187 million in total sanctions will be returned to investors.  Charles Schwab also agreed to an independent consultant to conduct a “comprehensive review” of its compliance policies, and agreed to provide ongoing cooperation to the SEC in an unusual provision—a sign that there may be additional charges yet to come.

Continue Reading SEC Brings Robo-Adviser Case Against Charles Schwab for Misleading Clients About Hidden Costs

On June 8, 2022, the SEC announced a notable settlement with national audit firm CohnReznick LLP, charging it with failure to uphold several professional standards during its 2017 audits of two public companies that had previously been sued by the SEC for accounting fraud.  In its order, the SEC specifically alleged that CohnReznick violated professional standards and contributed to materially misleading financial statements by, among other things, failing to exercise sufficient professional skepticism and accepting assertions from company management without sufficient supporting evidence.  The SEC fined CohnReznick $1.9 million, levied fines and suspensions against several of its audit partners, and imposed an independent consultant with a sweeping mandate to demand various audit-related and internal process reforms and veto new audit clients.  This action is consistent with the SEC’s repeated warnings that “gatekeepers” such as auditors are in the agency’s crosshairs.

Continue Reading SEC Imposes Penalties and Sweeping Independent Consultant on CohnReznick for Alleged Audit Failures in Case Underscoring SEC’s Focus on “Gatekeepers”

On June 7, 2022, the Securities and Exchange Commission announced that it had charged software company Synchronoss Technologies, Inc. and seven of its current and former employees in connection with an alleged long-running accounting fraud involving improper revenue recognition of more than $46 million across six quarters.   All of those implicated settled with the SEC and agreed to pay a range of penalties, except for the former CFO and controller, who will litigate against the SEC in New York federal court.  Synchronoss was ordered to pay a $12.5 million penalty.

Continue Reading SEC Accounting Enforcement Action Signals Heightened Focus on Individual Accountability and Puts Public Company Executives on Notice for Potential SOX 304 Reimbursement

On May 25, 2022, the U.S. Securities and Exchange Commission (“SEC”) proposed amendments to rules and related reporting forms under the Investment Advisers Act of 1940 (the “Advisers Act”) and the Investment Company Act of 1940 (the “Investment Company Act”) that are ostensibly intended to provide additional transparency regarding the use of environmental, social, and governance (“ESG”) factors by investment advisers and investment companies (the “Proposal,” available here), but which will also give SEC Examination and Enforcement staff additional tools to track and target advisers and funds pursuing an ESG strategy.
Continue Reading New ESG Rule Proposal Raises the Stakes under SEC’s New Marketing Rule

On March 30, 2022, the U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”)—formerly the Office of Compliance Inspections and Examinations—released its 2022 Examination Priorities (“2022 Priorities”).  The Division is undergoing extensive leadership changes, with the recent departures of several top officials.  Consistent with the aggressive agenda set by Chair Gensler for the SEC generally, the Division has returned to its pre-pandemic caseload, conducting over 3,000 exams in fiscal year 2021, issuing over 2,000 deficiency letters, and making 190 referrals to the Enforcement Division.  Despite the management changes, the 2022 Priorities generally retain perennial risk areas as the core focus, but include several new and emerging risk areas reflecting the policy goals espoused by Gensler in recent proposed rule releases and public statements.
Continue Reading SEC Division of Examinations Reinforces Gensler Initiatives in its 2022 Exam Priorities

The SEC and a consortium of 32 states recently announced a $100 million settlement with BlockFi Lending LLC over its crypto lending product, BlockFi Interest Accounts. The SEC alleged BlockFi had violated the securities laws by failing to register its interest-bearing crypto lending product as a security, failing to register itself as an investment company,