Chairman Clayton Provides Update on Review of 2016 Cyber Intrusion Involving EDGAR System

SEC Chairman Jay Clayton today provided an update on the status of the agency’s review and investigation of the 2016 intrusion into the EDGAR system.  In addition to updating previous disclosures, today’s announcement also includes additional information on the agency’s efforts to strengthen its cybersecurity risk profile going forward.

The ongoing staff investigation of the 2016 intrusion has now determined that an EDGAR test filing accessed by third parties as a result of that intrusion contained the names, dates of birth and social security numbers of two individuals.  This determination is based on forensic data analysis conducted since the agency’s Sept. 20th disclosure of the intrusion which relied on the latest information available at that time.

Chairman Clayton was informed by staff of this new information this past Friday, and staff are reaching out to the two individuals to notify them and offer to provide them with identity theft protection and monitoring services.  Should the agency’s review uncover additional such individuals whose sensitive information may have been accessed, the staff will contact them and offer them identity protection and monitoring as well.

“The 2016 intrusion and its ramifications concern me deeply.  I am focused on getting to the bottom of the matter and, importantly, lifting our cybersecurity efforts moving forward,” said Chairman Clayton.  “While our review and remediation efforts are ongoing and may take substantial time to complete, I believe it is important to provide new information regarding the scope of the 2016 intrusion and provide an update on the steps we are taking to assess and improve the cybersecurity risk profile of our EDGAR system and of the agency’s systems more broadly.”

The agency’s efforts going forward are organized into five principal work streams:

1)    The review of the 2016 EDGAR intrusion by the Office of Inspector General.  Staff have been instructed to provide their full cooperation with this effort

2)    The investigation by the Division of Enforcement into the potential illicit trading resulting from the 2016 EDGAR intrusion

3)    A focused review of and, as necessary or appropriate, uplift of the EDGAR system. The EDGAR system has been undergoing modernization efforts.  The agency has added, and expects to continue to add, additional resources to these efforts, which are expected to include outside consultants, and will increase the focus on cybersecurity matters

4)    The more general assessment and uplift of the agency’s cybersecurity risk profile and efforts that were initiated shortly after the Chairman’s arrival at the Commission this past May, including, without limitation, the identification and review of all systems, current and planned (e.g., the Consolidated Audit Trail or CAT), that hold market sensitive data or personally identifiable information

5)    The agency’s internal review of the 2016 EDGAR intrusion to determine, among other things, the procedures followed in response to the intrusion. This review is being overseen by the Office of the General Counsel and has an interdisciplinary investigative team that includes personnel from regional offices and will involve outside technology consultants

Each of these efforts is moving forward and, as is the nature of matters of this type, will require substantial time and effort to complete.  Chairman Clayton has pledged to keep Congress informed of the ultimate findings and conclusions of the agency’s internal review into the 2016 intrusion.

Looking forward, and to further the efforts discussed above, Chairman Clayton has authorized the immediate hiring of additional staff and outside technology consultants to aid in the agency’s efforts to protect the security of its network, systems and data.  Chairman Clayton also has directed the staff to take a number of steps designed to strengthen the agency’s cybersecurity risk profile, with an initial focus on EDGAR.  This effort includes assessing the types of data the SEC takes in through the EDGAR system, and whether EDGAR is the appropriate mechanism to obtain that data.  Another part of this effort includes reviewing the security systems, processes and controls in place to protect data submitted through EDGAR. 

The staff also will conduct similar reviews of other systems in use at the SEC, assessing the types of data the agency keeps and the related security systems, processes and controls.  The staff also will work to enhance escalation protocols for cybersecurity incidents in order to enable greater agency-wide visibility and understanding of potential cyber vulnerabilities and attacks. 

More broadly, the agency is evaluating its cybersecurity risk governance structure, which has included the establishment of a senior-level cybersecurity working group and may include additional enhancements to promote the management and oversight of cybersecurity across the SEC’s divisions and offices.

Other initiatives resulting from the general cybersecurity assessment Chairman Clayton initiated in May are ongoing or will commence shortly.  These include internal, Commission-level incident response exercises and continued interaction on cybersecurity efforts with other government agencies and committees, including the Department of Homeland Security, the Government Accountability Office and the Financial and Banking Information Infrastructure Committee.

This update also is being included as part of Chairman Clayton’s written testimony submitted to the U.S. House of Representatives Committee on Financial Services in connection with the Committee’s upcoming hearing titled “Examining the SEC’s Agenda, Operations, and Budget.”  

Chairman Clayton Provides Update on Review of 2016 Cyber Intrusion Involving EDGAR System

SEC Chairman Jay Clayton today provided an update on the status of the agency’s review and investigation of the 2016 intrusion into the EDGAR system.  In addition to updating previous disclosures, today’s announcement also includes additional informati…

SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds

The Securities and Exchange Commission today charged a businessman and two companies with defrauding investors in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds.

The SEC alleges that Maksim Zaslavskiy and his companies have been selling unregistered securities, and the digital tokens or coins being peddled don’t really exist. According to the SEC’s complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) have been told they can expect sizeable returns from the companies’ operations when neither has any real operations.

Zaslavskiy allegedly touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate.”  Alleged misstatements to REcoin investors included that the company had a “team of lawyers, professionals, brokers, and accountants” that would invest REcoin’s ICO proceeds into real estate when in fact none had been hired or even consulted. Zaslavskiy and REcoin allegedly misrepresented they had raised between $2 million and $4 million from investors when the actual amount is approximately $300,000.

According to the SEC’s complaint, Zaslavskiy carried his scheme over to Diamond Reserve Club, which purportedly invests in diamonds and obtains discounts with product retailers for individuals who purchase “memberships” in the company. Despite their representations to investors, the SEC alleges that Zaslavskiy and Diamond have not purchased any diamonds nor engaged in any business operations. Yet they allegedly continue to solicit investors and raise funds as though they have.

The SEC obtained an emergency court order to freeze the assets of Zaslavskiy and his companies.

The SEC’s Office of Investor Education and Advocacy recently issued an investor alert warning about the risks of ICOs.

“Investors should be wary of companies touting ICOs as a way to generate outsized returns,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “As alleged in our complaint, Zaslavskiy lured investors with false promises of sizeable returns from novel technology.”

The SEC’s complaint, filed in federal district court in Brooklyn, N.Y., charges Zaslavskiy, REcoin, and Diamond with violations of the anti-fraud and registration provisions of the federal securities laws. The complaint seeks permanent injunctions and disgorgement plus interest and penalties. For Zaslavskiy, the SEC also seeks an officer-and-director bar and a bar from participating in any offering of digital securities.

The SEC’s investigation, which is continuing, has been conducted by Jorge Tenreiro, Pamela Sawhney and Valerie A. Szczepanik. The case is being supervised by Lara S. Mehraban. The SEC encourages victims of the alleged fraud to contact Ms. Szczepanik at (212) 336-1100.

SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds

The Securities and Exchange Commission today charged a businessman and two companies with defrauding investors in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds.

The SEC alleges that Maksim Zaslavskiy and his companies have been selling unregistered securities, and the digital tokens or coins being peddled don’t really exist. According to the SEC’s complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) have been told they can expect sizeable returns from the companies’ operations when neither has any real operations.

Zaslavskiy allegedly touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate.”  Alleged misstatements to REcoin investors included that the company had a “team of lawyers, professionals, brokers, and accountants” that would invest REcoin’s ICO proceeds into real estate when in fact none had been hired or even consulted. Zaslavskiy and REcoin allegedly misrepresented they had raised between $2 million and $4 million from investors when the actual amount is approximately $300,000.

According to the SEC’s complaint, Zaslavskiy carried his scheme over to Diamond Reserve Club, which purportedly invests in diamonds and obtains discounts with product retailers for individuals who purchase “memberships” in the company. Despite their representations to investors, the SEC alleges that Zaslavskiy and Diamond have not purchased any diamonds nor engaged in any business operations. Yet they allegedly continue to solicit investors and raise funds as though they have.

The SEC obtained an emergency court order to freeze the assets of Zaslavskiy and his companies.

The SEC’s Office of Investor Education and Advocacy recently issued an investor alert warning about the risks of ICOs.

“Investors should be wary of companies touting ICOs as a way to generate outsized returns,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “As alleged in our complaint, Zaslavskiy lured investors with false promises of sizeable returns from novel technology.”

The SEC’s complaint, filed in federal district court in Brooklyn, N.Y., charges Zaslavskiy, REcoin, and Diamond with violations of the anti-fraud and registration provisions of the federal securities laws. The complaint seeks permanent injunctions and disgorgement plus interest and penalties. For Zaslavskiy, the SEC also seeks an officer-and-director bar and a bar from participating in any offering of digital securities.

The SEC’s investigation, which is continuing, has been conducted by Jorge Tenreiro, Pamela Sawhney and Valerie A. Szczepanik. The case is being supervised by Lara S. Mehraban. The SEC encourages victims of the alleged fraud to contact Ms. Szczepanik at (212) 336-1100.

SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds

The Securities and Exchange Commission today charged a businessman and two companies with defrauding investors in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds.

The SEC alleges that Mak…

Former Corporate Insider, Middleman Tipper, and Six Traders Charged With Insider Trading

The Securities and Exchange Commission today charged a former executive at Life Time Fitness Inc., a middleman tipper, and six traders with insider trading ahead of the announcement that the company would be purchased and taken private.

In a complaint filed in U.S. District Court in the Northern District of Illinois, the SEC alleges that Shane P. Fleming, a former vice president of sales at Life Time Fitness, learned of the merger discussions on or before Feb. 23, 2015 and tipped his friend and business partner Bret J. Beshey with the understanding that Beshey would use the information to make a profit and split those profits with Fleming.  The SEC alleges that rather than trade in his own name, Beshey tipped his friends Christopher M. Bonvissuto and Peter A. Kourtis with the understanding that both men would kick back a portion of their trading proceeds to Beshey.  According to the SEC’s complaint, Kourtis tipped his friends Alexander T. Carlucci, Dimitri A. Kandalepas, Austin C. Mansur, and Eric L. Weller, and asked Carlucci, Mansur, and Weller to give him a portion of any profits they made from trading on the information, which they agreed to do.

The SEC alleges that the six traders purchased a total of approximately 2,000 highly speculative out-of-the-money call options for Life Time Fitness shares and sold those options for profits of approximately $866,209 shortly after a newspaper reported that Life Time Fitness was in advanced merger discussions with two private equity firms.  According to the SEC’s complaint, Bonvissuto and Kourtis shared a portion of their profits with Beshey, who gave approximately $10,000 in cash to Fleming.  The SEC also alleges that Carlucci and Mansur paid cash kickbacks to Kourtis, and that Weller gave Kourtis at least 10 pounds of marijuana as a kickback.

“Beshey allegedly tried to mask his role in this scheme by recruiting others to trade on inside information rather than trading himself,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “Through our ever-evolving investigative tools, we were able to thwart Beshey’s efforts at concealment by uncovering trading by his immediate and downstream tippees and tracing those trades back to him.”

In a parallel action, the U.S. Attorney’s Office for the Northern District of Illinois today announced criminal charges against all eight defendants.

The SEC’s complaint charges Fleming, Beshey, Bonvissuto, Kourtis, Carlucci, Kandalepas, Mansur, and Weller with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The SEC is seeking disgorgement of ill-gotten gains plus interest and penalties as well as permanent injunctions against all eight defendants.  The SEC also is seeking an officer-and-director bar against Fleming.

The SEC’s investigation was conducted by Andrew McFall, David Makol, and John Rymas of the Market Abuse Unit.  The case was supervised by Kathryn Pyszka, Robert Cohen, and Mr. Sansone.  The SEC’s litigation will be led by Daniel Hayes and Mr. McFall.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Illinois, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

Former Corporate Insider, Middleman Tipper, and Six Traders Charged With Insider Trading

The Securities and Exchange Commission today charged a former executive at Life Time Fitness Inc., a middleman tipper, and six traders with insider trading ahead of the announcement that the company would be purchased and taken private.

In a complaint filed in U.S. District Court in the Northern District of Illinois, the SEC alleges that Shane P. Fleming, a former vice president of sales at Life Time Fitness, learned of the merger discussions on or before Feb. 23, 2015 and tipped his friend and business partner Bret J. Beshey with the understanding that Beshey would use the information to make a profit and split those profits with Fleming.  The SEC alleges that rather than trade in his own name, Beshey tipped his friends Christopher M. Bonvissuto and Peter A. Kourtis with the understanding that both men would kick back a portion of their trading proceeds to Beshey.  According to the SEC’s complaint, Kourtis tipped his friends Alexander T. Carlucci, Dimitri A. Kandalepas, Austin C. Mansur, and Eric L. Weller, and asked Carlucci, Mansur, and Weller to give him a portion of any profits they made from trading on the information, which they agreed to do.

The SEC alleges that the six traders purchased a total of approximately 2,000 highly speculative out-of-the-money call options for Life Time Fitness shares and sold those options for profits of approximately $866,209 shortly after a newspaper reported that Life Time Fitness was in advanced merger discussions with two private equity firms.  According to the SEC’s complaint, Bonvissuto and Kourtis shared a portion of their profits with Beshey, who gave approximately $10,000 in cash to Fleming.  The SEC also alleges that Carlucci and Mansur paid cash kickbacks to Kourtis, and that Weller gave Kourtis at least 10 pounds of marijuana as a kickback.

“Beshey allegedly tried to mask his role in this scheme by recruiting others to trade on inside information rather than trading himself,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “Through our ever-evolving investigative tools, we were able to thwart Beshey’s efforts at concealment by uncovering trading by his immediate and downstream tippees and tracing those trades back to him.”

In a parallel action, the U.S. Attorney’s Office for the Northern District of Illinois today announced criminal charges against all eight defendants.

The SEC’s complaint charges Fleming, Beshey, Bonvissuto, Kourtis, Carlucci, Kandalepas, Mansur, and Weller with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The SEC is seeking disgorgement of ill-gotten gains plus interest and penalties as well as permanent injunctions against all eight defendants.  The SEC also is seeking an officer-and-director bar against Fleming.

The SEC’s investigation was conducted by Andrew McFall, David Makol, and John Rymas of the Market Abuse Unit.  The case was supervised by Kathryn Pyszka, Robert Cohen, and Mr. Sansone.  The SEC’s litigation will be led by Daniel Hayes and Mr. McFall.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Illinois, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

Former Corporate Insider, Middleman Tipper, and Six Traders Charged With Insider Trading

The Securities and Exchange Commission today charged a former executive at Life Time Fitness Inc., a middleman tipper, and six traders with insider trading ahead of the announcement that the company would be purchased and taken private.

In a complaint…

Fee Rate Advisory #2 for Fiscal Year 2018

When fiscal year 2018 starts on Oct. 1, 2017, the Securities and Exchange Commission will be operating under a short-term continuing resolution, and thus will not have received a regular appropriation for FY 2018. 

Accordingly, the fees paid under Section 31 of the Securities Exchange Act will remain at their current rate until 60 days after the date of enactment of a regular appropriation for the SEC.

The SEC is required to publish a revised fee rate 30 days after the date of enactment of a new fiscal year appropriation, and the new rate takes effect 60 days after the date of enactment.  Until then, the Section 31 fee rate will remain at the current rate of $23.10 per million for securities transactions, and the assessment on round turn transactions in security futures will remain at $0.0042 per transaction.

For questions on Section 31 fees, please contact the Office of Interpretation and Guidance in the SEC’s Division of Trading and Markets at (202) 551-5777 or by e-mail at tradingandmarkets@sec.gov.

The Commission will issue further notices on its website as appropriate to keep the public informed of developments relating to the effective dates of the fee rates under Section 31. 

Fee Rate Advisory #2 for Fiscal Year 2018

When fiscal year 2018 starts on Oct. 1, 2017, the Securities and Exchange Commission will be operating under a short-term continuing resolution, and thus will not have received a regular appropriation for FY 2018. 

Accordingly, the fees paid under Sec…

Barred Broker Charged in Real Estate Investment Scheme

The Securities and Exchange Commission today charged a former broker, his company, and his business partner in an alleged real estate investment scheme utilizing high-pressure sales tactics to pilfer $6 million from retirees and other investors while using the proceeds to fund the broker’s lavish lifestyle and start e-cigarette businesses.

The SEC alleges that Leonard Vincent Lombardo, who once worked at Stratton Oakmont and has long since been barred from the brokerage industry by the Financial Industry Regulatory Authority for multiple violations, operated the scheme from behind the scenes at his Long Island-based company The Leonard Vincent Group (TLVG) with assistance from its CFO Brian Hudlin. 

According to the SEC’s complaint, more than 100 investors were defrauded with false claims that their money would be invested in distressed real estate, and some were told their investments had increased by more than 50 percent in a matter of months when in fact there were no actual earnings on their investments.  Lombardo allegedly invested only a small fraction of investor money in real estate and used the bulk of it for separate business ventures into the cigarette industry and personal expenses such as car payments on his BMW and Mercedes, marina fees on his boat, and visits to tanning salons.

“As alleged in our complaint, retirees entrusted their money to TVLG believing they were investing in high-return real estate investments, not electronic cigarettes or trips to the tanning salon,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “This is another case involving a fraudster trying to look the part of a wealthy financial advisor while doing nothing more than trying to separate people from their hard-earned money.”

The SEC received complaints from investors about how their investments were being handled, and the agency identified the perpetrators and gathered evidence to hold them accountable.  The SEC encourages investors to alert the agency by filing complaints when they suspect illegal conduct, and proactively check the background of anyone selling them investments before handing over any money, including by doing a simple search on the SEC’s investor.gov website. 

“Investors should be suspicious anytime they are guaranteed high investment returns,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “High investment returns typically involve high risk, and cannot be guaranteed.”

TLVG, Lombardo, and Hudlin have agreed to settlements that are subject to court approval.  TLVG and Lombardo agreed to pay disgorgement of $5,878,729.41.  Lombardo has pled guilty in a parallel criminal case brought by the U.S. Attorney’s Office for the Eastern District of New York.  Without admitting or denying the SEC’s allegations, Hudlin agreed to pay a $40,000 penalty. 

The SEC’s investigation was conducted by Prashant Yerramalli, Desiree Marmita, Kerri Palen and Sheldon L. Pollock in the SEC’s New York office.  Paul Gizzi served as the senior trial counsel, and the case is being supervised by Lara S. Mehraban.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York, the Federal Bureau of Investigation, and the Pennsylvania Department of Banking and Securities.

Barred Broker Charged in Real Estate Investment Scheme

The Securities and Exchange Commission today charged a former broker, his company, and his business partner in an alleged real estate investment scheme utilizing high-pressure sales tactics to pilfer $6 million from retirees and other investors while u…