On Tuesday, September 14th, the Securities and Exchange Commission (“SEC”) announced its first enforcement action against an alternative data provider, charging the company App Annie Inc. with securities fraud. App Annie and Bertrand Schmitt, its co-founder and former CEO and Chairman, have agreed to pay more than $10 million in a settlement with the SEC on these charges. [1]

While this marks the SEC’s first enforcement action against an alternative data provider, it likely will not be its last, as the use of alternative data in the financial and investment sphere continues to rise. [2] Alternative data (“alt-data”) is data which goes beyond that of traditional corporate financial statements and helps guide investment strategies. [3] Examples of alt-data include mobile device data, credit card transactions, satellite imagery data, product reviews, and even social media activity. [4]

This type of data can be instrumental in making sound investment decisions when it is paired with traditional data from corporate sources, because it provides a broader view of a company’s financial viability. [4] However, it is notoriously difficult to aggregate and analyze given its vast breadth – it’s estimated that the world produces at least 2.5 quintillion bytes of such data daily. [4] This is where companies like App Annie come in.

In the midst of the COVID-19 pandemic, Ponzi schemes have continued to pose a serious threat to unsuspecting investors here in Florida and around the world. On August 9, 2021, the Securities and Exchange Commission (SEC) filed a complaint in federal court against Johanna Garcia, of Broward County, and two companies she owns, MJ Capital Funding, LLC and MJ Taxes and More, for an alleged Ponzi scheme. [1]

The complaint alleges that Garcia has been operating a Ponzi scheme in which she has taken upwards of $70 million from over 2,000 investors under the guise that the investments funded Merchant Cash Advances (MCAs) for small businesses in need. Instead, the complaint alleges, the investments are being used in a “classic Ponzi scheme fashion” not to fund MCAs, but to pay the “returns” of investors before them. [2]

While MJ Taxes has been in existence since 2016, MJ Capital Funding was formed in June 2020, after the COVID-19 pandemic had already taken hold. From June until October 2020, MJ Taxes solicited six-month investments which typically promised a 10% monthly return, extrapolated out to substantial 120% annual returns. MJ Capital took over in October 2020, continuing to advertise as a source for MCAs while promising investors large and consistent returns.

Should a Special Purpose Acquisition Company (“SPAC”) be classified as an investment company? This is the question currently plaguing the SPAC industry, creating a divisive split between a long list of America’s biggest law firms on one side, and two preeminent securities law professors interested in investor protection on the other.

Robert Jackson, a professor at NYU School of Law and former SEC Commissioner, and John Morley, a Yale Law School professor, recently filed three suits against high-profiles SPACs in New York federal court. The suits argue that each SPAC is operating as an unregistered investment company, and under the Investment Company Act of 1940 (the “Act”), compensation paid to the SPAC’s sponsors and directors was illegal and void under the Act. However, in the decades-long history of SPACs, these entities have never been classified as investment companies under the Act, nor has the SEC purported that they should.

At the center of this debate lie two secondary, though potentially even more important, questions: what is a SPAC, and what is a SPAC’s primary purpose? The answer to these questions determines whether SPACs should indeed be classified as investment companies under the Act, as Jackson and Morley contend, or whether SPACs may continue to operate independently of the Act, as the SPAC industry and a wide coalition of law firms believe.

Instances of fraudsters disguising themselves as investment advisers and brokers are on the rise, prompting the U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy (OIEA), the FBI Criminal Investigative Division, and FINRA, each to release investor alerts and warnings.

While these regulatory agencies have identified multiple concerning fraudulent schemes, each type is centered around impersonation of investment advisers – a particularly worrisome and dangerous trend. A recent example was reported by the Texas State Securities Board, which announced that a Texas fraudster created a website for Prestige Assets Mgnt LLC, a name which is almost identical to that of the registered investment adviser Prestige Asset Management LLC. [1]

The regulator alleges that while the website is phony and does not represent a licensed dealer or investment adviser, it was built to look authentic, and actually directed users to the registered firm’s office location and CRD number. [1]

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The recent announcement of securities fraud charges against Trevor Milton, the former CEO of Nikola Corporation, may prove to be the first in a line of similar cases involving electric vehicle (“EV”) companies, and more broadly, companies that go public via SPACs. This situation highlights the importance of careful investment decision making, particularly in the EV and other rapidly growing, highly complex industries.

At the heart of the civil and criminal complaints against Nikola are allegations that as its CEO, Trevor Milton, regularly spread false and misleading information about the progress of Nikola’s EV products and technologies. Nikola’s focus is on manufacturing low- and zero-emissions trucks, and the complaints allege in part that under Milton, Nikola published a promotional video of a prototype truck which did not actually work, but appeared to only because the truck was set in neutral and rolled down a hill.  [1]

Promotional videos like that one, along with Milton’s enthusiastic social media posts and numerous podcast and television appearances, all painted a picture of exciting and impressive forward progress at Nikola, which Federal prosecutors and SEC regulators allege was nothing more than an illusion. [2]

On the heels of the Financial Industry Regulatory Authority’s (“FINRA”) record-breaking financial penalty against app-based investing platform Robinhood, it’s a fitting time to consider recent trends within FINRA’s industry-wide arbitration process.

As an organization, FINRA’s main function is to protect investors by upholding the integrity of the market through careful oversight of brokers in the United States. In doing so, FINRA operates a dispute resolution forum for arbitration and/or mediation of both intra-industry and customer-industry disputes. FINRA is also authorized by the United States government to protect investor interests through diligent screening and analysis of the billions of market transactions that occur each day. [1]

Whether a dispute arises between industry actors or between customer(s) and an industry actor, FINRA facilitates a neutral dispute resolution process by providing unbiased, trained arbitrators or mediators to guide cases through to completion. While the FINRA dispute resolution process proceeds similarly to a case within the court system, FINRA cases typically resolve more quickly and efficiently than traditional cases do, and appeals on FINRA outcomes are generally not accepted.

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On June 30, 2021, FINRA ordered an approximately $70 Million financial penalty against Robinhood Financial LLC, the highest such penalty ever levied by the regulatory organization.[1] Through its investigation of the firm, FINRA charged Robinhood with numerous violations which had resulted in significant losses to their customers. While Robinhood neither confirmed nor denied the validity of FINRA’s charges, they ultimately agreed to settle with these massive sanctions. [1]

FINRA noted three major violations from its investigation into Robinhood’s conduct and operations as a stock-trading app, each of which merited its own penalties.

First, FINRA found that Robinhood has pervasively and negligently provided false or misleading information to its customers. [1] This false information was circulated in spite of Robinhood’s core mission to “de-mystify finance for all” and “democratize finance,” and ranged from misrepresenting customer account balances and buying power, to erroneous communication about customers facing margin calls. [2]

In light of the ever-expanding role of digital technology in daily life, along with a string of recent high-profile cyberattacks, it is fitting that the Securities and Exchange Commission (“SEC”) has included cybersecurity risks on their 2021 regulatory agenda. The SEC last provided cybersecurity guidance in 2018, though critics argue that the 2018 Guidance was insufficient and merely reiterated the SEC’s formal guidance from 2011. [1] However, given recent executive-branch interest in cybersecurity issues, it is predicted that cybersecurity rules set forth in 2021 will offer more actionable and concrete protective measures for investors.  [1]

As a vast swath of sensitive, personal data is shared in the digital space, and as businesses and the government rely increasingly on complex computing systems to maintain their operations, cyber risks have multiplied exponentially. Cyber attackers target sensitive personal data in an effort to compromise a business, a business’s clients, or the public at large, often while demanding a ransom.

So far in 2021, numerous cyberattacks have taken place. Most notably, the Colonial Pipeline was hacked in May, resulting in gasoline shortages across the Southern United States, and in June, a cyberattack on a large meat manufacturer halted a quarter of all beef operations in the United States for two days. [2] Countless other large- and small-scale cyberattacks occur regularly, amplifying the need for investor protection from such future occurrences.

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