Articles Posted in Stock Fraud

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 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 the span of the last two months, a digital piece of art sold for nearly $70 million, Jack Dorsey, CEO of Twitter, sold his first tweet for $2.8 million, and a digital Lebron James basketball card went for $208,000. What do these three massive sales have in common? Each transaction was for a non-fungible token (NFT), and together, they signal rapidly growing interest in the cryptographic asset marketplace.

Starting with the basics, what is a non-fungible token?

An NFT is a type of digital, cryptographic asset which exists on blockchain. Fungibility refers to interchangeability – assets like dollars, gold, and even Bitcoin, are fungible, because each unit is worth the exact same amount, and is thus readily interchangeable. On the other hand, each unit of a non-fungible asset has its own unique value and thus is not readily interchangeable – think of assets like property, artwork, and other collectibles. [1]

This week’s unprecedented winter storm in Texas this is the latest reminder of intensifying weather events across the globe, and the damage left in its wake opens up important questions about whether our financial systems are prepared to withstand the impacts of climate change. One of the most important functions of regulatory bodies like the SEC is to protect the market from systemic risks, and there is a widening consensus that climate change is one systemic risk for which the SEC must prepare.

As defined by SEC Commissioner Allison Lee during her keynote speech at the PLI’s Annual Institute on Securities Regulation in November 2020, a systemic risk is “characterized by the following features: (1) ‘shock amplification’ or the notion that a given shock to the financial system may be magnified by certain forces and propagate widely throughout; (2) that propagation causes an impairment to all or major parts of the financial system; and (3) that impairment in turn causes spillover affects to the real economy.” [1]

Put more simply, a systemic risk is one with the potential to result in the downturn, or even collapse, of an entire market system. The ongoing COVID-19 pandemic is one recent example of such a risk, as we continue to see its economic impacts across every sector of the market. During her speech, Lee noted that although the SEC is not in a position to regulate and slow the actual drivers of climate change, it can – and should – address climate risks through standardization of the environmental, social, and governance (ESG) disclosures that financial institutions make.

As they begin to move into the mainstream, it has become clear that cryptocurrencies pose a unique set of regulatory and legal challenges for investors and regulation agencies alike. In the past week alone, two high-profile securities fraud cases tied to cryptocurrency have come to light, and the total number of enforcement actions by the SEC on similar schemes has risen sharply over the past five years. In 2016, the SEC filed only one “Digital Assets/Initial Coin Offerings” enforcement action – in 2020, they filed 23.

The first cryptocurrency, Bitcoin, was introduced in 2009, and it has since been joined by over 1,900 competitors. Cryptocurrencies operate in a decentralized, purely digital block-chain network. Within the network, a supply cap on “coins” exists, and coin production is left in the hands of collective members of the system through a process known as “mining.” In Bitcoin’s case, there can only ever be 21 million coins mined, of which over 18 million have been mined thus far. Cryptocurrencies like Bitcoin derive their value largely from their limited supply, overall market demand, the cost to produce a bitcoin via mining, and competition from other cryptocurrencies.

Recently, Bitcoin’s price has been on the rise, stirring up a good deal of interest from prospective investors. As of February 6, 2021, one bitcoin is worth $39,255.90 –up about 300% year over year, and 34% year to date. But an investment in Bitcoin, or other cryptocurrencies like it, is unique in its risks. Experts caution that because cryptocurrency is a relatively new technology, and is not yet well understood by the public, prospective investors are at an increased risk of falling victim to fraudulent schemes.

It has been a tumultuous week in the investment world, with rallies among a gaggle of unlikely stocks, spurred on by a group of even more unlikely investors – retail investors who have banded together on the popular social media site, Reddit.

As has been widely reported this week, when Reddit retail investors discovered that hedge fund managers were widely shorting GameStop, AMC, and others, they urged fellow users to begin buying up these stocks. This frenzy of investment activity resulted in a short squeeze, sending GameStop’s stock price soaring, causing hedge funds to incur huge losses on their short positions, and placing popular online trading platforms in a precarious financial situation.  GameStop shares closed the week of January 25, 2021 up 400% in spite of market volatility and restrictions, and without any material change to the prospects of company.

But how did we get here?

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