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Government Enforcement Exposed - "The GEE"
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19 Jul 2018 Cryptocurrencies — An Overview of the Legal Landscape, The Risks of Investing, and the Future of the Markets – Part 2

In my blog post yesterday, I gave an overview of the legal landscape of cryptocurrencies. Today’s post focuses on the biggest risks for people who want to trade cryptocurrency as well as a peek into what the future of this market looks like.   Trace Schmeltz recently spoke with Business First about crypto currencies and crime, taking a look at the legal side of bitcoins and other cryptos.   What are the biggest risks for people who want to trade cryptocurrency?   The most significant risks, each of which is discussed in turn below, are price manipulation and the lack of transparent pricing, fraud scams like so-called pump and dump schemes, cybersecurity issues and other custody problems, potential counter-party concerns, and liquidity issues.   Price…

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18 Jul 2018 Cryptocurrencies — An Overview of the Legal Landscape, The Risks of Investing, and the Future of the Markets – Part 1

In this two-part blog series, I will be giving an overview of the legal landscape of cryptocurrencies, touch on the biggest risks for those who want to trade cryptocurrency, as well as a look into what the future of this market looks like.   The current legal and regulatory environment for cryptocurrencies   Much has been said about the legal uncertainty around cryptocurrency.  Really, understanding what laws apply is quite simple.  Complying with multiple states’ laws is more difficult, of course.  As set out in the U.S. Commodity Futures Trading Commission’s (CFTC) “Backgrounder on Oversight of and Approach to Virtual Currency Futures Markets”:   US law does not provide for direct, comprehensive Federal oversight of underlying Bitcoin or virtual currency spot markets. As a result,…

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19 Feb 2018 Cybersecurity: CFTC Brings Enforcement Action For Faulty IT System

  This past week, the Commodity Futures Trading Commission (CFTC) settled an enforcement action in which it had alleged that futures commission merchant AMP Global Clearing LLC violated 17 C.F.R. 166.3 (duty of supervision) by failing to diligently supervise implementation of a critical component of its information systems security program (ISSP).  As a result, AMP suffered a cybersecurity breach that led to loss of nearly 100,000 files, including customers’ personal identifying information.  As a result of the settlement, AMP paid a $100,000 fine and, undoubtedly, faces significant other expenses in dealing with the customers for whom it lost private information.  AMP will also have to provide written verification to the CFTC of its efforts to strengthen its network security and ensure compliance with its ISSP….

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09 Nov 2017 SEC Scrutiny Brings Sanity to Hot ICO Market

  Initial coin offerings (ICO) originally became popular because they appeared to hold the promise of easy access to capital, in exchange for a virtual token with some desirable function. For example, Playkey—an online gaming company—is presently raising money by selling tokens that will allow holders to access high powered computer systems for gaming. ICOs have raised more than $3 billion in 2017.   The tokens from these offerings can appreciate in value either because they are limited in number or because they are tied to the growth of the issuer’s enterprise. The Securities and Exchange Commission (SEC) has deemed the later kind of token to be a security. Accordingly, any entity seeking to offer tokens reflecting the value of the enterprise needs to follow…

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25 Sep 2017 Who’s Watching the Watchdog? SEC Deals With Its Own Data Breach

  On Sept. 20, SEC Chairman John Clayton announced that Wall Street’s watchdog, the Securities and Exchange Commission (SEC), was the victim of a cyber hack in 2016. In what ironically amounts to the SEC’s first significant disclosure of its own cybersecurity risks, Clayton stated: “In certain cases, threat actors have managed to access or misuse our systems.” According to Clayton, “[i]n August 2017, the Commission learned that an incident previously detected in 2016 may have provided the basis for illicit gain through trading.”   Hackers apparently exploited a weakness in the SEC’s Electronic Data Gathering, Analysis and Retrieving (EDGAR) system. EDGAR houses financial records for all of the companies listed on stock exchanges in the United States – including domestic and foreign securities issuers and…

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27 Apr 2017 The Yates Memo – DOJ Issues Questions and Answers: Question 6

  *This is the seventh in a series of blog posts that examines seven FAQs issued by the DOJ in response to questions raised by the Yates Memo. The sixth of these questions addresses whether companies should enter into joint defense agreements.   Question: Can a cooperating company enter into a joint defense agreement with individuals’ counsel?   As mentioned in a previous post about the Yates Memo, the Department of Justice (DOJ) has certainly cast a pall on joint defense agreements (JDA) in potential criminal investigations. The DOJ’s guidance seems to indicate that any corporation interested in obtaining cooperation credit in the form of a reduced penalty or a deferred prosecution agreement must carefully consider whether entering into a JDA could stymie the corporation’s ability to…

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10 Mar 2016 Watch What You Write, Watch What You Say

  While market manipulation cases typically involve circumstantial evidence, prosecutors are finding more sophisticated ways to get defendants’ direct statements into evidence. In market fraud cases, government prosecutors are required to prove a defendant’s state of mind (the criminal intent component of a case). Historically, they have done so based on what the defendant did under specific circumstances—something referred to as “circumstantial evidence.” For example, an insider trading case may turn on the circumstance that a corporate insider had earnings information on the date she sold large quantities of corporate stock. Or, a market manipulation case may turn on the trades a defendant entered into after receiving a specific phone call.   Another significant component of such cases is the defendant’s own notes and comments….

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27 Oct 2015 Update from the Coscia Trial

Yesterday, the United States began its prosecution of Michael Coscia of Panther Energy Trading LLC for allegedly engaging in “the crime of spoofing,” as prosecutors framed it. We have blogged about this case before (here and here) and discussed it in the media in the following outlets: Bloomberg News, Wall Street Journal Law Blog, Crain’s Chicago Business and the Chicago Tribune.   In his opening statement, Assistant United States Attorney Renato Mariotti tried to make high frequency trading rudimentary, understandable, and impactful for the jurors. He used very basic analogies and explanations, in order to build a simple case. According to Mariotti, Coscia manipulated markets by using two trading programs—“Flash Trader” and “Quote Trader”—to make it appear there was more supply or demand in the…

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08 Oct 2015 Regulation S-P Violation: Are You Prepared For A Cyber-Security Breach?

On Sept. 22, 2015, the Securities and Exchange Commission (SEC) announced the first violation by a registered investment advisor of the so-called Safeguards Rule (Regulation S-P) pertaining to the protection of personally identifiable information from cyber-attack.  This is the first instance of the SEC enforcing Regulation S-P against an investment advisor.   The Regulation, broadly speaking, requires broker-dealers, investment advisers and other financial firms to protect confidential customer information from unauthorized release to unaffiliated third parties. Included in Regulation S-P is the “Safeguard Rule” (Rule 30(a)), which requires financial institutions to, among other things, adopt written policies and procedures reasonably designed to protect customer information against cyber-attacks.  This raises the question:  Are you prepared for a cyber-attack (and the attendant liability)?   In its findings,…

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05 Jun 2015 CFTC and CME Collaborate to Chase Alleged Spoofers

The Commodity Futures Trading Commission’s (CFTC) ongoing use of its new anti-spoofing authority (Section 4c(a)(5)(C) of the Commodity Exchange Act) demonstrates a heightened awareness by exchanges of efforts by market participants to rapidly enter and cancel trades in order to manipulate market prices. In May 2015, the CFTC filed a complaint (Complaint) in the Southern District of New York against two traders who allegedly engaged in spoofing by layering trades in the Gold and Silver futures on the Commodity Exchange, Inc. (COMEX). The case is noteworthy for several reasons.   The Complaint alleges that defendants Heet Khara and Nasim Salim “entered orders or layered multiple orders to encourage market participants to trade opposite … smaller orders on the opposite side of the book.”  Once the…

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