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SEC Assembles Cyber Unit to Target Cyber-Related Misconduct

By Jeffrey A. Rinde, Megan J. Penick and Alexandra Levin Kramer

The Securities and Exchange Commission announced last month that its Enforcement Division has formed a Cyber Unit to tackle cyber-based threats and protect investors.1 According to the SEC’s press release, the Cyber Unit will focus on cyber-related misconduct including:

  • market manipulation schemes involving false information spread through electronic and social media
  • hacking to obtain material non-public information
  • violations involving distributed ledger technology and initial coin offerings
  • misconduct perpetrated using the dark web
  • intrusions into retail brokerage accounts
  • cyber-related threats to trading platforms and other critical market infrastructure

The SEC reported that the Cyber Unit has been in the planning stages for months and that it was time to create a specific unit focused on detecting and investigating cyber threats.

At the same time, the SEC announced it has formed a Retail Strategy Task Force designed to develop “proactive, targeted initiatives to identify misconduct impacting retail investors.”2 The Retail Strategy Task Force will target fraud affecting retail investors including the sale of unsuitable unstructured products to microcap pump and dump schemes.

SEC Enforcement Actions Against Two Initial Coin Offerings

On Friday, the SEC brought an enforcement action against Maksim Zaslavskiy and his two companies, REcoin Group Foundation and DRC World (aka Diamond Reserve Club), charging them with defrauding investors through selling unregistered securities in two fake initial coin offerings (or ICOs).3  REcoin purported to be a blockchain-based real estate investment company, while DRC World, a diamond membership club, allegedly issued fake tokens to investors and promised high returns without actually having any real operations, according to the SEC’s complaint.4  The SEC’s director of the New York regional office, Andrew Calamari, stated, “Investors should be wary of companies touting ICOs as a way to generate outsize returns.” The SEC has sought a temporary restraining order and preliminary injunction against the defendants to freeze the personal assets of Zaslavskiy and his two companies, and has sought to prohibit them from participating in any unregistered sale of securities in violation of Section 10(b) of the Securities Act of 1933, as amended, and Sections 5(a) and 5(c) of the Securities Act, among other things.

South Korea’s Financial Regulator Prohibits Participation in ICOs

South Korea’s Financial Services Commission (or FSC) on Friday announced a ban on raising money through all forms of virtual currency.  This ban follows a “wave of recent arrests and closures of companies involved with marketing fake cryptocurrencies” in South Korea.5 Friday’s ban in South Korea follows China issuing a similar ban on investing in cryptocurrencies last month, signaling that regulators are looking to protect investors from fraudulent offerings while this new form of offering, and the related rules surrounding it, develops.

CKR Law will continue to monitor ongoing developments in US Securities law, cybersecurity law and the developing market in Blockchain technology.   Should you have any questions or desire further insight concerning any of these areas, feel free to contact our lawyers, including our securities lawyers, Partners Jeffrey A. Rinde (jrinde@ckrlaw.com) and Megan J. Penick (mpenick@ckrlaw.com), and the head of CKR’s Blockchain Task Force, Alexandra Levin Kramer (akramer@ckrlaw.com), at (212) 259-7300.

DISCLAIMER: This article is not intended to provide legal or tax advice, and no legal, tax or business decision should be made based on its contents. This legal update may be considered attorney advertising in some jurisdictions.

 



1See SEC press release, dated September 25, 2017 at https://www.sec.gov/news/press-release/2017-176.

2Ibid.

3See  SEC press release, dated September 29, 2017 at https://www.sec.gov/news/press-release/2017-185-0.

4To review the SEC’s complaint in full, see Securities and Exchange vs. REcoin Group Foundation, et al. at https://www.sec.gov/litigation/complaints/2017/comp-pr2017-185.pdf.

5O’Leary, Rachel, “South Korean Regulator Issues ICO Ban,” September 29, 2017, at https://www.coindesk.com/south-korean-regulator-issues-ico-ban/.