Securities Fraud Lawyers Blog

SEC Targets $300 Million Crypto-Based Pyramid and Ponzi Scheme

Published on: August 29, 2022 | by Savage Villoch Law, PLLC

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]

Robinhood Must Defend Against Market Manipulation Claims

Published on: August 15, 2022 | by Savage Villoch Law, PLLC

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.

$190 Million Heist Illustrates Unique Crypto Security Risks

Published on: August 10, 2022 | by Savage Villoch Law, PLLC

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]

SEC Chairman Gensler Advocates for Cryptocurrency Market Regulation

Published on: April 13, 2022 | by Savage Villoch Law, PLLC

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.

SEC Sets its Sights on SPACs With Newly Proposed Disclosure Rules

Published on: April 4, 2022 | by Savage Villoch Law, PLLC

On Wednesday, March 30^th, 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]

Climate-Related Risks: SEC Releases Proposed Disclosure Rules

Published on: March 28, 2022 | by Savage Villoch Law, PLLC

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]

“The Tinder Swindler” – A Cautionary Tale for Financial Management

Published on: March 14, 2022 | by Savage Villoch Law, PLLC

With the recent release of the Netflix true crime documentary, “The Tinder Swindler,” public attention to a unique form of financial fraud is growing, as is the number of lawsuits filed against the film’s subject, Simon Leviev.

The documentary chronicles the experiences of three innocent victims of the so-called “Tinder Swindler.” [1] These women each met Leviev over online dating platforms, and as their individual relationships grew, each woman faced widespread deception, collectively costing them millions of dollars. [2] In fact, not even Leviev’s name was genuine – although Simon Leviev is currently the perpetrator’s legal name, he was born Shimon Hayut, and only changed his name in an effort to prop up his fraudulent schemes by posing as the son of a powerful diamond tycoon. [1]

Leviev’s schemes operated in an established pattern, wherein each victim provided the financial means necessary to support Leviev’s lavish lifestyle, thus allowing him to attract new victims. Leviev posed as the son of the mega-rich diamond tycoon, Lev Leviev, on Tinder, setting the bait for his unsuspecting victims. Once he matched with a potential victim, Leviev’s deception began. First, Leviev flaunted his supposed wealth by inviting victims for trips on private planes, to expensive clubs, and to five star hotels across the globe. [4]

Boiler Room Scheme Defrauds Victims of More Than $8.4 Million

Published on: February 21, 2022 | by Savage Villoch Law, PLLC

Early this month, the United States Department of Justice (DOJ) announced the indictment of five defendants, each of whom have been charged in connection with an $8.4 million “boiler room” and money laundering scheme. [1] In addition to the DOJ’s criminal indictment of the group, the Securities and Exchange Commission also filed a civil case seeking injunctions and civil penalties. [2]

“Boiler room” operations are fraudulent schemes in which high-pressure, coercive sales tactics are used to induce clients into purchasing stocks or other investments. [3] Often, these operations consist of groups of salespeople working from offices in foreign countries who cold-call clients in an attempt to defraud them. [3] The salespeople involved in boiler room schemes are rarely licensed brokers, and the stocks they purport to sell may not exist at all. [3]

In the instant case, the DOJ alleges that the defendants conspired to commit securities fraud when they engaged in a boiler room scheme involving fake investment firms and shell companies used to mislead investors. [1] The alleged scheme operated from approximately June 2019 until August 2021, and defrauded English-speaking investors across the globe of more than $8 million. [4]

New Subpoena Highlights SEC’s Continued Focus On Tesla, Elon Musk

Published on: February 14, 2022 | by Savage Villoch Law, PLLC

Electric automaker, Tesla, and its CEO, Elon Musk, made headlines once again this week in connection with a 2018 Twitter post. The tweet in question, posted by Elon Musk, read simply: “Am considering taking Tesla private at $420. Funding secured.”[1]

At the time the tweet was posted in 2018, the SEC swiftly charged both Tesla and Musk with securities fraud, over which the parties eventually settled. [1] Now more than three years later, the public has learned of a new subpoena from the SEC relating to the tweet, though the subpoena’s impact and strategic aim are still to be seen.

As evidenced by this series of events, Tesla and the SEC share a turbulent, history. Following the 2018 “funding secured” tweet, the SEC alleged that Musk violated Section 10(b) of the Securities Exchange Act of 1934 along with rule 10b-5.[2] These allegations were based upon the SEC’s contention that the tweet constituted a materially false and misleading statement because despite Musk’s confident tone, he had neither discussed nor confirmed the terms of such a deal with any potential funding source. [2]

SEC’s Efforts to Stretch 10b-5 Insider Trading Liability Survives Motion to Dismiss

Published on: February 7, 2022 | by Savage Villoch Law, PLLC

The SEC is attempting to broaden the scope of liability under federal insider trading laws, and it just secured its first incremental victory along the way.

The win comes as a newly formulated legal theory offered by the SEC survived a motion to dismiss in SEC v. Panuwat, a case proceeding in the U.S. District Court for the Northern District of California.[1] The SEC’s legal theory states that the practice of “shadow trading” constitutes a violation of federal securities law, namely Section 10(b) of the Exchange Act and Rule 10b-5.[1]

“Shadow trading” occurs when a person with a connection to one publicly held company uses material, nonpublic information (MNPI) they have gained from their connection with that company to inform their trading decisions in a separate publicly held company. Typically, this separate company is economically connected in some way to the company for which the person possesses MNPI. [2]