While it may be difficult to verify first-hand how secure your stockbroker keeps your personal information, a recent order from the Securities and Exchange Commission (SEC) shows that even the largest stockbrokers are prone to customer data breaches.

On September 20, 2022, the SEC fined financial services giant Morgan Stanley Smith Barney (“MSSB”) $35 million for failing to adequately protect its customer’s records and personal identifying information (“PII”). [1] The fine was entered via a settlement between the SEC and MSSB, through which MSSB has agreed to pay a civil penalty for the SEC’s charges without admitting to nor denying the violations. [2]

MSSB is a subsidiary of Morgan Stanley and focuses on wealth management services for clients ranging from individuals to large corporations. [3] More specifically, MSSB is the broker-dealer designation for the group more commonly known as Morgan Stanley Wealth Management.  [3] During the second quarter of 2022, Morgan Stanley Wealth Management recorded $5.7 billion in net revenues. [4]

Signaling the potential future of cryptocurrency regulation in the United States, Gary Gensler, the Chairman for the Securities and Exchange Commission (SEC), shared his perspective that the majority of crypto tokens are indeed securities under U.S. law while presenting at the SEC Speaks event in early September. [1]

Along with the sharing his viewpoint that the majority of crypto tokens and cryptocurrency intermediaries are subject to federal securities laws and regulations, Gensler also shared a quote from the first SEC Chairman, Joseph Kennedy: “No honest business need fear the SEC.” [1] Gensler’s repeated reference to this quote supported his overarching message that regulatory oversight of crypto tokens and intermediaries should be viewed as a positive for the market rather than a negative.

In first speaking on crypto tokens themselves, Gensler noted that the purchase and sale of these tokens are subject to federal securities laws so long as the tokens meet the statutory definition of a security. Gensler cited Congressional purpose and history as well as the Supreme Court’s “Howey Test” in support of his view. [1]

On September 2nd, 2022, the United States Department of Justice (DOJ) announced that Mark Schena, the president of a Silicon-Valley medical technology company, was convicted by federal jury for his role in a $77 million fraudulent Covid-19 and allergy testing scheme. [1]

The jury convicted Schena of three counts of securities fraud, two counts of payment of kickbacks, one count of conspiracy to pay kickbacks, two counts of health care fraud, and one count of conspiracy to commit health care fraud and conspiracy to commit wire fraud. [1] While he won’t be sentenced until early 2023, Schena faces a maximum of 20 years for each count of securities fraud alone. [1]

While this case draws quite a few parallels to the early-2022 trial and eventual conviction of Elizabeth Holmes, the founder of Theranos, it has thus far drawn far less media attention. [2] Still, Schena’s conviction provides another important glimpse into the dangers investors may face when dealing with alleged cutting edge or “revolutionary” technologies.

In response to a recent proliferation of fraudulent investment schemes perpetrated over social media platforms, the Securities and Exchange Commission (SEC) released an Investor Alert covering “Social Media and Investment Fraud” this week. [1]

The Investor Alert, released by the SEC’s Office of Investor Education and Advocacy, highlights the unique dangers investors face when evaluating investment prospects and making investment decisions via social media platforms or over the internet. In particular, the alert warns investors that investment information portrayed on social media may be “inaccurate, incomplete, or misleading.” [1]

Furthermore, the alert cautions that the broad-reaching and low-cost nature of social media can create “false impression of consensus or legitimacy” of investment prospects, creating the illusion that far more people are making the investment than truly are. [1]

On August 1, 2022, the Securities and Exchange Commission (SEC) charged eleven individuals in connection with a cryptocurrency Ponzi and pyramid scheme. [1] The alleged scheme was perpetrated through a website called Forsage, which operates via smart contracts over the blockchain.

The eleven defendants include Forsage’s four founders as well as several “promoters” of the Forsage scheme. [2] The SEC’s complaint notes that to date, more than $300 million worth of transactions have occurred via Forsage smart contracts, despite the fact that the retail investors powering this scheme have received no good or service of value in return for their “investments.” [2]

Forsage is a classic pyramid scheme in that those at the top – namely the founders and promoters charged by the SEC – stood to gain the most wealth, especially as others joined the scheme after them. In fact, a recent scholarly report on the scheme found that more than 88% of Forsage users incurred net losses on their investments with the platform, with those at the top generating massive gains. [3]

Per a federal court ruling on August 11, 2022, Robinhood Markets Inc, the app-based online stock trading platform, must face market manipulation claims brought by a class of its investors. [1]

The ruling by Judge Cecilia Altonaga of the U.S. District Court for the Southern District of Florida denied Robinhood’s motion to dismiss shareholder allegations of market manipulation. The allegations stem from Robinhood’s actions in the wake of the meme stock frenzy of early 2021. [1] In the lawsuit, Robinhood shareholders allege that Robinhood engaged in tactics aimed at artificially lowering the prices of nine stocks at the center of the frenzy. These stocks included GameStop, Bed Bath & Beyond, and AMC. [1]

The meme stock frenzy took place in January 2021 when social media users stirred extraordinary investment interest in several unexpected stocks. The outpour of interest in these stocks was not founded on each stock’s actual performance, but rather on the prospect of triggering a short squeeze on the stocks.

The theft of an estimated $190 million in cryptocurrency this week from a blockchain bridge, Nomad, is just the latest in a string of similar heists targeting the crypto sector. Crypto investors are encouraged to remain wary of this and similar threats to their crypto assets as they make investment decisions.

Increasingly, crypto thieves are setting their sights on blockchain “bridges,” which facilitate the transfer of cryptocurrencies between separate blockchains. [1]  Once a blockchain bridge is breached, hackers and thieves have the ability to steal massive sums of crypto tokens from their rightful owners.

Blockchain bridges have been built to solve one of the crypto sector’s critical flaws – a lack of interoperability between different cryptocurrencies. Bridges allow crypto users to transfer their assets from one cryptocurrency to another without the need to engage in the transaction-heavy process of selling off their initial tokens to purchase new tokens of a different cryptocurrency. [1]

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Cryptocurrency proponents tout the technology’s potentially “transformative” nature and its position as an arguably more stable store of value when compared with fiat money. [1] Yet SEC Chairman Gary Gensler cautioned crypto investors against an overly rosy view of the technology during a speech at the Penn Law Capital Markets Association Annual Conference this week. Instead, Gensler advocated for investor caution, along with a much broader regulatory and enforcement role for the SEC in cryptocurrency markets. [2]

Before sharing his view of the SEC’s role in crypto markets, Chairman Gensler first compared the technology to that of the dotcom bubble in 2000 and subprime lenders leading up to the 2008 financial crisis. His message: the flurry of attention on crypto and related innovations does little to vouch for its long-term viability or success. Instead, as was borne out in 2000 and again in 2008, cryptocurrency could indeed be a technology destined for failure.

The SEC’s role then, in Gensler’s view, is to protect investors from the potential financial blowback of such a failure. While Gensler lauded the spirit of entrepreneurship common in the United States, he also argued that the SEC should approach crypto regulation in a “technology neutral” way. In so doing, the SEC could carry out their mission to protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets, while still allowing crypto markets to flourish.

On Wednesday, March 30th, the Securities and Exchange Commission (SEC) announced newly proposed rules and rule amendments governing Special Purpose Acquisition Companies (SPACs), shell companies, and the projections that these companies make. The aggregate proposed rule is aimed at heightening investor protections for those who choose to invest in SPACs and shell companies, where such investor protections are currently quite slim.

Understanding the new rules necessitates a working understanding of SPACs themselves. SPACs are a form of “blank-check” company, in which capital is raised by investors through an Initial Public Offering (IPO). [2] SPAC IPOs differ greatly from traditional IPOs, however, in that at the time of a SPAC IPO, the SPAC has no physical operations of its own. [2]  Instead, post-IPO, a SPAC is granted a two year term during which it must acquire or merge with an existing company, thereby taking that company public without ever going through the traditional, and often costly, IPO process. [2]

New SPAC IPOs have been on a meteoric rise since 2020. In 2019, just 59 SPAC IPOs occurred, while 2020 saw 247 and 2021 saw a record 613 SPAC IPOs. [2] These 613 SPAC IPOs in 2021 represented over $160 billion of capital raised. [2]

The Securities and Exchange Commission’s much-anticipated rules on climate-related disclosures are finally here. [1] On Monday, March 21, 2022, the federal securities regulator announced the release of a proposed rule, broadly referred by the SEC as “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” [2] The proposed rule comes to the delight of activist investors and others concerned about climate change impacts, while industry actors may fear the increased costs of the proposed mandatory disclosures.

The SEC has proposed rules which would require those registered with the SEC to disclose specific information regarding their climate-related financial risks and climate-related financial metrics. [2] This information would be disclosed to the SEC through an entity’s typical registration statements or annual reports, which already contain many other required disclosures. [2]

Importantly, the draft rules require companies registered with the SEC to disclose both their direct and indirect greenhouse gas emissions. These emissions include three discrete categories – Scope 1, Scope 2, and Scope 3. [3] Scope 1 greenhouse gas emissions are those emitted directly by the company through its operations, while Scope 2 emissions are the “indirect” emissions stemming from a company’s energy usage, such as through electricity generation. [4]

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