On Friday, the WSJ published an article detailing how companies are monetizing smartphone location data by selling it to hedge fund clients. The data vendor featured in the WSJ article obtains geolocation data from about 1,000 apps that fund managers use to predict trends involving public companies. However, as we’ve noted, the use of alternative data collection for investment research purposes may give rise to a host of potential issues under relevant laws. Continue Reading
Former SDNY U.S. Attorney Preet Bharara and SEC Commissioner Jackson recently announced, via NY Times op-ed, the creation of the Bharara Task Force on Insider Trading. Based on the premise that U.S. insider trading laws are unclear and hopelessly out of date, the task force intends to propose new insider trading reforms to help clarify the laws and protect American investors.
Jackson and Bharara recognize that individuals facing liability should have more clarity about what the law is. For those of us who regularly advise fund managers on compliance with insider trading rules, more clarity would be a welcome development.
Fund managers take note – after over a year of warning, this month the SEC announced a pair of settlement orders with respect to registration requirements for a fund and broker dealer operating in the crypto and digital assets space. It was the agency’s first ever enforcement actions applying the investment company and broker-dealer registration provisions of the securities laws to businesses involved in digital securities. As we’ve written on Proskauer’s Blockchain and the Law blog, we expect to see the SEC continue to expand its oversight of digital assets as securities. Continue Reading
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.
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.
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.
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.