AUSTIN – State securities regulation has always been something of a whack-a-mole endeavor, but today’s moles have gotten quite clever.
They promote blockchain mining with stock video footage to show teams of employees working on warehoused servers that simply don’t exist. They lay traps on social media leveraging conservative political views to bond with potential investors. One promoter even appropriated a headshot of Supreme Court Justice Ruth Bader Ginsburg from a law school publication to make it look like she was a company consultant.
As older Texans become more comfortable with smartphones and online interactions, scammers use websites like Craigslist and Facebook to troll for victims, said Joseph Rotunda, director of enforcement for the Texas State Securities Board.
“The biggest concern to me is that as more and more senior citizens and retirees are taking to social media, there’s a bull’s-eye on them from perpetrators able to leverage the power of social media and multilevel marketing to perpetrate their crimes,” said Rotunda.
Rotunda spoke to The Texas Lawbook on Monday as securities regulators and industry participants from throughout North America held their annual meeting, which launched the second century of the North American Securities Administrators Association.
Technology and evolving products such as cryptocurrency are forcing securities regulators to expand their legal analysis beyond routine scams involving securities and promissory notes. Rotunda wrote a 70-page report exploring how securities laws apply to cryptocurrency.
“Legal analysis is now more important than ever,” said Rotunda, who also has worked as a prosecutor for Travis County.
“The jurisdictional analysis, structures of transactions and how we approached our work was fairly standard and routine up until technology really started expanding to our base of investors. Cryptocurrency brought a whole realm of different ideas on how to structure products and whether our traditional securities analysis applied,” he said.
Earlier this year, Texas obtained the first cryptocurrency enforcement action by a state regulator resulting in payment of a fine and restitution. The order required Utah-based companies to contact Texas investors with a rescission offer for the full amount of the investment minus any profits that were paid. The order also determined that two of the companies’ cryptocurrency-mining investment offerings are securities under Texas law.
“No matter the industry or new technology involved, the Securities Board will take swift action against investment offerings that are in violation of the Securities Act,” Commissioner Travis Iles said at the time.
Rotunda’s team also has made good use of a 2017 Texas law designed to prevent financial exploitation of vulnerable adults, defined as a person 65 or older or having a cognitive disability. The law requires securities dealers or investment advisors to report suspected financial exploitation to the securities commissioner and Department of Family and Protective Services.
One such report this year alerted regulators to the plight of an 80-year-old Dallas woman who had been persuaded to liquidate $850,000 in her retirement accounts and transfer the money to invest in precious metals in a self-directed Individual Retirement Account. Under a July 1 agreed order with Metals.com, the woman and other Texas investors will be offered a full refund.
A registered firm where the woman was a client reported the suspect transaction because it believed the woman did not understand the investment opportunity. According to a Securities Board news release, Metals.com’s sales pitch focused on the supposed stability of precious metals as an investment compared with stocks and bonds.
“The Metals.com, some of the oil and gas cases, [and] cryptocurrency have really forced us to look at the structure of these offerings. They are being structured very, very differently now,” said Rotunda.
The Securities Board’s May 1 emergency order alleged that the Metals.com executives and employees named in the order acted as unregistered investment-adviser representatives because they were compensated for advice related to investing in or selling stocks, bonds and other securities. In the agreed order, the securities commissioner found that the company provided investment advice. The rescission offer requires Metals.com to offer a full refund of the initial money invested, not the current value of an investor’s holdings.
Texas has coordinated with regulators in other states, which conducted investigations and brought enforcement actions against Metals.com. Action taken by the Alabama Securities Commission prevented $200,000 from leaving a 77-year-old Birmingham investor’s accounts.
Shamoil Shipchandler, a Jones Day partner who represented Metals.com in its Texas settlement, said some of the Securities Board’s statements about the company are “unfair and fundamentally inaccurate.”
“As reflected in the resolution of its administrative action, the TSSB set aside the inflammatory allegations of its initial order and entered an agreed order in which it made specific findings that Metals.com trains its employees on legal compliance and does not permit cold calling or targeting elderly individuals. Most importantly, the TSSB dismissed all fraud allegations against Metals.com,” Shipchandler said.
Also Monday, Iles moderated a panel that included regulators and a financial industry representative discussing when the target of a securities investigation should get credit for cooperation.
Christopher Gerold, chief of the New Jersey Bureau of Securities, said answering a subpoena or otherwise following the law is not going to get a firm extra credit. Providing regulators with data in a usable format and agreeing to pay restitution might, he said.
Gould advised firms to be proactive once they get the first notice of an investigation and to conduct an internal investigation.
“It’s very troubling when they didn’t look at something internally and can exacerbate the situation when it comes time to settle or litigate,” he said. “Giving information without us having to ask and going above and beyond the initial request – that is credit for cooperation.”