Risk & Compliance

Tuesday Regulatory Update: The Winds of Fraud

Swap fraud; wind turbine con; holding firm on LIBOR switch; and more.
Vincent RyanJuly 14, 2020

On Monday, the Securities and Exchange Commission charged California-based app developer Abra and a related company in the Philippines for offering and selling security-based swaps to retail investors without registration. It also failed to transact those swaps on a registered national exchange.

According to the SEC’s order, Abra developed and owns an app that enabled users to bet on price movements of U.S.-listed equity securities. Using the app, individuals were able to enter into contracts that provided synthetic exposure to price movements of stocks and exchange-traded fund (ETF) shares trading in the United States. This was done through blockchain-based financial transactions with Abra or with related company Plutus Technologies Philippines.

The order found that Abra told users they could choose securities whose performance they wanted to mirror, and the value of their contract would go up or down the same amount as the price of the underlying security.  The order further finds that these contracts were security-based swaps subject to U.S. securities laws.

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The order finds that Abra marketed its app to retail investors, yet Abra took no steps to determine whether users who downloaded the app were “eligible contract participants” as defined by the securities laws. According to the order, Abra stopped offering contracts in February 2019, after conversations with SEC staff, but resumed the business in May 2019, this time attempting to limit the offers and sales to non-U.S. people. Although Abra moved certain operations outside the U.S., the order finds that its employees in California designed and marketed the swap contracts, and screened and approved users who would be allowed to buy the contracts. The order further finds that Abra’s U.S.-based employees effected thousands of stock and ETF purchases in the U.S. to hedge the contracts.

Without admitting or denying the findings in the order, Abra and Plutus Technologies agreed to a cease-and-desist order and to pay a combined penalty of $150,000.

Reporting Sick and Family Leave

The Internal Revenue Service and the Treasury Department provided guidance to employers requiring them to report the amount of qualified sick and family leave wages they have paid to their employees under the Families First Coronavirus Response Act on Form W-2.

In Notice 2020-54, the IRS said that employers will be required to report these amounts either on form W-2, Box 14, or in a statement provided with a W-2. The guidance gives employers some optional language they can use in the form W-2 instructions for employees.

The wage amount that employers must report on Form W-2 will offer self-employed individuals who are also employees the information they need to determine the amount of any sick and family leave equivalent credits they can claim in their self-employed capacities.

Regulator Tells Banks Not to Close Branches

The acting head of the Office of the Comptroller of the Currency, Brian Brooks, warned U.S. banks from using COVID-19 as a cover to shut down unprofitable bank branches. “With branches temporarily shut due to coronavirus and customers using more online services, bankers have privately said they hope the pandemic will help them to accelerate branch closures,” wrote The Financial Times, which interviewed Brooks.

“I think the idea of, ‘we’ll just go ahead and let branches abandon our cities’ — I think we’d regret that on the back end of this,” Brooks told the FT.

In the United States, banks have to give 90 days notice if they plan to shut down a branch and provide a rationale for the decision. The number of U.S. bank branches has fallen by about 6% since 2010.

Chinese Regulator Makes Strong Anti-Fraud Statement

A regulator that oversees China’s banking, securities, and insurance watchdogs has called for zero tolerance and a stronger crackdown on fraud, to ward off an impending U.S. legislation that will target Chinese companies for failure to submit an audit to an American oversight board.

The Financial Stability and Development Committee (FSDC), which is headed by Vice-Premier Liu He, set out seven measures to eliminate fraudulent activity in mainland capital markets.

In a statement released on Sunday, the committee acknowledged that serious accounting fraud had taken place in several instances recently due to “shortcomings in China’s financial system design and the subsequent low cost of committing a crime.” It continued: “Fraudulent issuance, financial fraud, and other criminal acts are the cancer of the capital market.”

Winds of Fraud

The Securities and Exchange Commission on Tuesday announced charges against Thunderbird Power, an Arizona-based company claiming to be developing a wind turbine technology, and three individuals for defrauding investors out of more than $1.9 million in the unregistered offer and sale of Thunderbird stock.

According to the SEC’s complaint, Thunderbird’s CEO Richard Hinds (of Arizona), former Thunderbird president Anthony Goldstein (of Canada), and consultant John Alexander “Lex” van Arem (of Canada) orchestrated the fraudulent offering and were responsible for numerous false and misleading statements in offering materials, press releases, and a YouTube video regarding the status of the wind turbine technology, purported validation of the technology by a nationally known firm, and Thunderbird’s use of investor proceeds.

The complaint further alleges that Goldstein and van Arem retained a national network of sales agents to email and cold call prospective investors. According to the complaint, Hinds, Goldstein, and van Arem misappropriated nearly $850,000, representing more than 40% of investor funds, to enrich themselves and pay the sales agents to seek out more unsuspecting investors.

Shift From LIBOR Won’t Be Delayed

New York Fed President John Williams said on Monday that officials will follow through with plans to discontinue a key benchmark for rates in financial markets at the start of 2022. Some financial institutions were hoping for a respite from the deadline to end the use of the London interbank offered rate (Libor).

The scandal-ridden London interbank offered rate, or Libor, was set to be replaced by SOFR, or secured overnight financing rate. SOFR is published by the New York Fed and provides a reference rate system to replace the former lending benchmark.