The Capital Commitment

Proskauer on Private Equity Litigation

Mt. Gox Debacle Showcases Cryptocurrency Litigation Concerns

The theft of millions of bitcoins and related failure of cryptocurrency exchange Mt. Gox—recently written about in the Wall Street Journal—provides a perfect example of how cryptocurrency-related issues can blossom into one of our Top Ten Regulatory and Litigation Risks.  The WSJ article chronicles the journey of Kim Nilsson—one of the victims of the $400 million bitcoin theft from Mt. Gox in 2014—as he investigates and eventually uncovers the identity of the hacker who stole his bitcoins.  During his investigation, Mr. Nilsson discovered another concern—one potentially ripe for dispute:

Mt. Gox had been concealing bitcoin thefts that occurred as far back as 2011 and had been insolvent since at least 2012—two years before it filed for bankruptcy.

Historically, investors and other transferees could be subject to clawback actions where they profited from “false profits,” which had been paid using proceeds from other harmed investors, during periods of insolvency—as demonstrated in Madoff and other frauds.  Given that Mt. Gox was reportedly insolvent years before its bankruptcy petition in 2014, this may spell trouble for investors that cashed out at values above their initial investment cost during the undisclosed period of bitcoin thefts.   In essence, investors who cashed out during the period of insolvency may have received more money than they were entitled to receive, depending on the applicable law.

Mt. Gox should serve as a warning to investors in cryptocurrencies, as fraud and insolvency involving cryptocurrency-related investments or businesses is unlikely to diminish.  Myriad complex issues will arise with respect to the applicable law and the rights and duties of those involved.  The good news is that in the U.S., the law adapts to new circumstances using historical concepts.  The bad news is that the evolutionary process can be rocky and difficult to predict, making it difficult to risk-weight outcomes.  Thoughtful participants in these sectors should assume that Mt. Gox foreshadows a larger trend of fraudulent conduct and resultant litigation, given cryptocurrencies’ meteoric rise and potentially rapid declines.  More specifically, fund managers and others involved in cryptocurrency-related investments should keep in mind clawback actions, and be prepared for disputes.

SEC Enforcement Co-Director Gives Guidance for Wells Process, Part 2

On June 4, we posted a summary of SEC Enforcement Co-Director Steven Peikin observations during his recent keynote address at the New York City Bar Association’s 7th Annual White Collar Crime Institute.  Co-Director Peikin imparted a few suggested “do’s and don’ts” for effective communication with the SEC during the Wells process.  Although Co-Director Peikin’s suggestions should serve as helpful guides to defense counsel, we believe a few of the observations bear further consideration.

Read our full summary of his observations on our Corporate Defense and Disputes blog.

SEC Enforcement Co-Director Gives Guidance for Wells Process

During his recent keynote address at the New York City Bar Association’s 7th Annual White Collar Crime Institute, SEC Enforcement Co-Director Steven Peikin imparted a few suggested “do’s and don’ts” for effective communication with the SEC during the Wells process—typically the last opportunity to address potential charges prior to the authorization of a SEC enforcement proceeding.

Read our full summary of his observations on our Corporate Defense and Disputes blog.

Unicorns: The Tale Continues

Potential disputes involving unicorns have been a hot topic for the last several years.  We predicted that would continue this year in in our webinar and related blog post: The Top Ten Regulatory and Litigation Risks for Private Funds in 2018.  In April, the Regional Director of the SEC’s San Francisco office, Jina Choi, confirmed this in her comments during a San Francisco Federal Bar Association panel.  Specifically, Ms. Choi discussed the SEC’s actions against Zenefits, Credit Karma, and Theranos, and reiterated the SEC’s continued commitment to monitoring suspected investor fraud in privately-held companies.  Ms. Choi also highlighted the settlement remedies in Zenefits and Theranos, including specifically that both settlement agreements required the company and individual officers at the company to pay penalties.

We expect to see the SEC continue to focus on unicorns in future investigations and proceedings. Private companies should prepare for increased scrutiny of their investor disclosures, particularly those related to and affecting the company’s valuation.  In addition, they should ensure their disclosures comply with Rule 701(e) of the Securities Act when granting stock options to employees, as the SEC noted in the Credit Karma settlement.  Finally, SEC actions may spark parallel private actions by investors against the company.

Voluntary Remediation and the SEC: Six Key Elements and Three Potential Pitfalls

A recent settled SEC order, In re Arlington Capital Management, Inc. and Joseph F. LoPresti, highlights the potential benefits of voluntarily taking steps to remediate conduct or practices that could run afoul of the SEC’s rules and standards. If done correctly, voluntary remediation can result in meaningful reductions in the sanctions sought by the SEC. But if done incorrectly, remediation can result in wasted time and money – and possibly make matters worse. This post will explore the elements of an effective voluntary remediation plan, as shown by the remediation in Arlington, as well as some of the potential pitfalls of ineffective remediation.

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Regulatory Scrutiny of the ICO Market – What Fund Managers Should Know

Last week, former CFTC Chairman Gary Gensler explained in remarks at M.I.T. that he believes the second and third most widely used virtual currencies—Ether and Ripple—may have been issued and traded in violation of securities regulations. This comes on the heels of a crackdown on cryptocurrency-related securities by the SEC, which is particularly focused on initial coin offerings (ICOs). For fund managers, we believe the increased regulatory pressure will be felt in some expected, and some not-so-expected, ways.  Continue Reading

SEC Settles with Private Equity Fund Adviser over Alleged Conflicts of Interest

As a sign that the SEC is continuing to actively pursue private equity fund advisers, on April 24, 2018, the SEC announced a settlement with private equity fund adviser WCAS Management Corporation (WCAS) related to allegations of undisclosed conflicts of interest. The specific conflicts resulted from an allegedly undisclosed contractual arrangement whereby a portion of fees received by a group purchasing organization (GPO) for services it provided to WCAS funds’ portfolio companies would be paid to WCAS. In settlement of the allegations, WCAS agreed to disgorgement of $688,819.78 and a civil monetary penalty of $90,000, as well as a cease and desist and censure.

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