Thursday, October 11, 2018

ICOs, senior fraud drive increase in state actions against unregistered persons

By John M. Jascob, J.D., LL.M.

Reversing a two-year trend, state securities regulators have reported that more enforcement actions were taken in 2017 against unregistered persons than registered members of the securities industry. In its annual enforcement report, NASAA attributes the rise to an increased focus on fraudulent initial coin offerings (ICOs) and cryptocurrencies and the growing adoption of state provisions based on NASAA’s Model Act to Protect Vulnerable Adults from Financial Exploitation.

“The results from this year’s enforcement survey demonstrate that state securities regulators continue to play a critical role in protecting investors and holding securities law violators responsible for the damage that they cause to individual investors specifically and to the integrity of our capital markets in general,” said NASAA President Michael S. Pieciak in a news release.

The report, which was based on responses from 51 U.S. jurisdictions, notes that state regulators received 7,988 complaints and initiated 4,790 investigations in 2017. The states pursued 2,105 enforcement actions last year, of which 1,682 were administrative in nature, 255 were criminal, and 116 were civil. These efforts led to more than $486 million in restitution, fines of $79 million, and criminal relief of 1,985 years, including incarceration and probation.

Crypto-assets. The report notes that enforcement personnel began to increasingly focus their efforts on cryptocurrencies as the price of Bitcoin increased to nearly $20,000 in December 2017 and the market capitalization of all cryptocurrencies reached more than $500 billion. Texas conducted the first state enforcement action against a promoter of cryptocurrency investments when it secured an emergency action, on December 20, 2017, against Dubai-based USI-Tech Limited. Another promoter, BitConnect, claimed a market capitalization of more than $2.5 billion before Texas and North Carolina regulators entered emergency orders to stop BitConnect's cryptocurrency lending program. BitConnect’s market capitalization subsequently plummeted, falling more than 98.5 percent before its cryptocurrencies were delisted from public exchanges.

Senior fraud. The report also states that seniors remain a primary target of fraudsters, with NASAA's U.S. member jurisdictions bringing formal enforcement actions involving more than 1,100 senior victims in 2017. NASAA members identified the offer and sale of unregistered securities as the scheme used most often to victimize seniors and other vulnerable adults.

According to the report, 18 states have now passed a version of the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation, which mandates reporting to a state securities regulator and state adult protective services agency when an agent reasonably believes that financial exploitation of an eligible adult has been attempted or has occurred. States that have adopted the NASAA Model Act or similar statutes have thus far received more than 500 reports of potential senior financial abuse.