Since 1972, the Securities and Exchange Commission has generally allowed companies and individuals to settle civil enforcement investigations without admitting to the SEC’s allegations, provided that the settling party also does not deny them. See 17 CFR 202.5(e) . “[I]t is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur.”

In 2025, U.S. Court of Appeals for the Ninth Circuit rejected a challenge to the SEC’s practice of settling cases only if the defendant agrees not to deny the SEC’s allegations against them. There have been First Amendment claims, but they haven’t stood up.

That looks likely to change.  The SEC filed with Office of Information and Regulatory Affairs for review of final rule titled “Rescission of Policy Regarding Denials in Settlements of Enforcement Actions.” I think we can read the tea leaves on what the rule is likely to do even though we haven’t seen a copy of it.

The question is what will the SEC do going forward to enforcement. Maybe it will force admission of guilt and the facts stated in the enforcement action. It would seem silly to settle an enforcement action, get the money and allow the defendant to then deny any guilt. We don’t get to hear the defendants side of the story. Maybe now we will.

Sources:

• The SEC’s New Approach to Neither-Admit-Nor-Deny Policy May Not Be So New After All December 2021
• Appeals Court Denies Challenge to SEC Rule Requiring Settling Parties not to Deny Liability
• SEC Moves Toward Rescinding “No-Deny” Settlement Policy
• SEC Enforcement: “Gag Rule” Looks to be On the Way Out
• Rescission of Policy Regarding Denials in Settlements of Enforcement Actions filed with OIRA

As private fund compliance officers shake off the work of the most recent Form PF, I decided to finally take a look at what the Securities and Exchange Commission and Commodity Futures Trading Commission are thinking about changing to Form PF. On April 20, the SEC and CFTC proposed amendments to Form PF and its filing requirements.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandated that the SEC and the CFTC jointly promulgate rules to establish the form and content of private fund reports. Dodd-Frank gave broad parameters on what had to be reported in what is now Form PF. The first set of reforms came two years, but were delayed until October of this year.

What’s on tap for a potential change?

Minimum filing requirements. The SEC and CFTC are proposing to raise the filing threshold for all filers, from $150 million in private fund assets under management to $1 billion. The estimate is that it will eliminate the filing requirement for almost half of the current filers.

Large Hedge Funds. The SEC and CFTC are raise the definition of large hedge fund advisers from $1.5 billion in hedge fund assets under management to $10 billion. That estimate for that is that two-thirds of the current crop of large hedge funds will no longer be “large.”

There are a whole host of other changes. Most of which don’t appear to affect my reporting requirements so I haven’t taken a closer look.

You’ve got 60 days to submit comments.

Sources:

• SEC and CFTC Jointly Propose Amendments to Reduce Private Fund Reporting Burdens
• Proposed Rule
• Fact Sheet
• Submit Public Comment
• SEC and CFTC Propose Form PF Amendments to Eliminate and Streamline Filing Requirements for Smaller Investment Advisers by Ryan Swan and Scott Gluck

Compute power is all the rage with AI companies demanding more and more to run their extensive systems. How about investing directly in the chipsets? You could just buy shares in Nvidia.

Aaron Verdugo and his wholly owned entities, Verdugo Enterprizes, LLC dba BDaaSWorx and BDaaS Inc. had another way for investors to get in on the compute power demand. They would sell the chipsets directly to investors. The investors can then earn money directly from those buying compute power.

Of course, as with Mr. Howey and his orange groves, Verdugo could do the work for the investors of installing, housing and maintaining the chipsets, and contract with those looking for compute power.

The SEC alleged that “Investors were fully reliant on the Defendants to operate the data center, manage and maintain the chipset units, and generate the promised returns. As noted in BDX’s written sales presentations and on its website, the BDX Power Program promised investors “passive income,” that they could make money while they slept, and that their participation in the program required zero hours from them.”

That combination of a physical asset and required management services gets you right into the Howey test of whether what is being sold is a security.

• Investors invested money
• Investor money was pooled with other investors’ funds.
• Investors expected profits.
• Investors collectively relied on the efforts and expertise of Verdugo.

That would make it an unregistered securities offering.

Of course, it was worse than that. Verdugo did not actually have any of the compute power customers. So there was no income coming in.

Verdugo stole investor money and put it to personal use.

Verdugo settled with the SEC for disgorgement of $5,537,678 with prejudgment interest of $844,531, and a $236,000 fine.

Sources:

• SEC Obtains Final Consent Judgment as to Texas Executive and His Entities Charged in Alleged Fraudulent Offering
• SEC Complaint

Ugh.

Prosecutors filed charges against 30 people who allegedly participated in an insider trading scheme that involved several major corporate law firms. The defendants include corporate attorneys, who allegedly exploited confidential information from nearly 30 merger and acquisition deals. Charges were filed by the Department of Justice and the Securities and Exchange Commission.

At the center of the scheme, prosecutors identified Nicolo Nourafchan, of Los Angeles who worked at Sidley Austin, Latham & Watkins, Cleary Gottlieb, and Goodwin Procter. Gabriel Gershowitz, who is now a cooperating witness, worked at Willkie Farr & Gallagher in New York.

As items of disclosure I used to work at one of those firms and Mrs. Compliance Building currently works at one. The firms are each identified as a “Victim Law Firm” in the indictment. Six law farms are identified as victims in the indictment.

According to the indictment, Mr. Nourafchan took advantage of the document management system at the victim law firms. He dug around in documents for the matters and found tradeable information. Those document management systems (at least the good ones) log who accesses the documents. It’s easy to piece together Mr. Nourafchan’s log to see him looking at a bunch of documents in matters on which he is not staffed.

It’s the classic push-pull of information governance. You restrict document access to a small group of people that should have access. Then you run smack into trouble as the deal staffs up and trigger IT resources for control rights as the matter’s staffing grows. Even if they fall good practice and use code names, a smart person can dig around enough to enough information to piece things together.

I’m sure all the firms have strict policies on the misuse of material non-public information. I’m sure Mr. Nourafchan knew that. I’m sure all of the victim law firms cooperated with the investigation.

Policies are likely in place. Procedures are in place. Training is in place. At some point you need to rely on your employees to not act like criminals. In this case, Mr. Nourafchan acted like a criminal (allegedly).

Sources:

• Thirty Individuals Charged in Global Insider Trading Scheme Netting Tens of Millions in Illicit Profits DOJ Press Release
• First indictment 
• Second indictment 
• SEC Charges 21 Individuals with Alleged Wide-Reaching Insider Trading Scheme
• SEC Complaint
• Former Biglaw Attorney Allegedly Turned His Résumé Into A Decade-Long Insider Trading Operation by Kathryn Rubino in Above The Law
• Dozens charged in global insider trading ring that profited off deals involving Mass. tech companies, corporate law firm by Camilo Fonseca in The Boston Globe
• Former Willkie Farr lawyer turns cooperating witness in insider trading probe by Nate Raymond for Reuters

The Securities and Exchange Commission issued a proposed rule and form amendments that would give public companies the option of filing semiannual reports instead of quarterly reports to meet their reporting obligations under the federal securities laws. For those in the private space, that generates a yawn. Private companies are likely to keep reporting quarterly because that is what investors required and what is contractually required.

President Trump mentioned semi annual reporting in September 2025. Chairman Paul Atkins jumped as told and made it part of his “Make IPOs Great Again” agenda. (ugh). I guess that less reporting could be an incentive for a company to go public. IPOs are largely financing mechanisms, allowing existing capital to be replaced by permanent capital and creating liquidity for shareholders. I don’t think the pace of reporting is likely to be a substantive part of that equation.

I assume that the rule will pass and likely quickly. What company will be the first? What CEO will be the first to jump on MIGA bandwagon and proclaim that the company will supply less information to investors? Tesla? SpaceX?

You’ve got 60 days to Submit Public Comment

Sources:

• SEC Proposes Amendments to Permit Optional Semiannual Reporting by Public Companies
• SEC Proposed Rule
• Fact Sheet
• SEC Unveils Semi-Annual Reporting Proposal by Matt Kelly in Radical Compliance 
• Statement on Proposing Release for Semiannual Reporting by Chair Atkins
• Statement on Proposing Semiannual Reporting by Commissioner Uyeda
• Quarterly Questions: Statement on the Proposed Amendments to Allow Semiannual Reporting by Commissioner Peirce
• End Quarterly Earnings Reports? Here’s the Debate By Nicola M White and Lydia Beyoud in Bloomberg
• SEC Unveils Plan to Let Companies Move to Semiannual Reports by Lydia Beyoud in Bloomberg

Early this year when the US invaded Venezuela and captured Venezuelan leader Nicolás Maduro there was a series of well timed trades on the Polymarket prediction market. “Predictios” purchases of $32,000 were placed from December 27 to January 2, just before the US military effort.

Was it insider trading?

No. Polymarket trades are not securities. They are considered commodities.

Was it insider trading under the CFTC rules? The insider trading rules at the CFTC work a little different. End users make some of the general commodities trades. They have insider knowledge and must be able to trade.

Let’s go back to the movie Trading Places, with Eddie Murphy and Dan Aykroyd. [Spoiler Alert] In the movie, Murphy and Aykroyd steal the government reports on the orange harvest predictions and make FU money. In 2011, under then-CFTC Chairman Gary Gensler, the CFTC as part of Dodd-Frank passed Rule 180.1 with the purpose to prevent insider trading. It’s seldomly used.

There is broad consensus that it prohibits trading on stolen information or information that is subject to specific confidentiality requirements, or stolen government information (As in Trading Places).

Gannon Ken Van Dyke, a special forces soldier, was charged with unlawful use of confidential government information for personal gain, theft of nonpublic government information, commodities fraud, wire fraud, and making an unlawful monetary transaction. 

As a government employee he falls squarely into the lap of the Eddie Murphy’s exploits. He also apparently signed non-disclosure agreements regarding the classified information which would make the trades based on a breach.

This could be an interesting test of the prosecution of insider trading in the commodities markets. I doubt it will go very far to test the constraints of these relatively untested laws.

Sources:

• A $400,000 profit on Maduro’s capture raises insider trading questions on Polymarket by Bobby Allyn for NPR
• Soldier Charged With Using Classified Data to Bet on Maduro By Patricia Hurtado and Bob Van Voris
• U.S. Soldier Charged With Using Classified Information To Profit From Prediction Market Bets DOJ Press Release
• The other life of US soldier accused of betting on Maduro’s removal by Sheila Flynn and Nardine Saad for BBC
• The ‘Eddie Murphy Rule’ Earns Its Moniker: The CFTC Brings a Classic Insider Trading Case
• Planet Money Episode 471: The Eddie Murphy Rule
• CFTC Rule 180.1
• Polymarket Insider Trading Charges Illustrate DOJ and CFTC Prediction Markets Enforcement Strategy

The prediction market platforms, Kalshi and Polymarkets have exploded this year. In some cases, for bad reasons: Federal prosecutors are exploring whether prediction market bets trip insider trading laws.

The markets are not supposed to be taking predictions on the movements of securities. That would make them a derivative of a security and subject to the Securities and Exchange Commission’s regulatory framework. Therefore, they don’t have to be monitored under a registered investment adviser’s supervision. The prediction market account shouldn’t meet the standard that requires reporting under 204A-1.

There is sill the possibility of trading in a prediction market on Material Non-Public Information in a way that doesn’t involve a security. An employee could bet on some corporate event they learn about through the investment adviser that would move the stock. Look at Kalshi in the Apple App store. It’s listed as a “finance” app.

For instance, Kalshi currently has a bet on when SpaceX will officially announce and IPO, before June 1 (currently 0.23) and before July 1 (currently 0.76). There are people at investment banks, affiliated with a registered investment adviser or broker-dealer who know that answer.

There are a lot of company performance bets that you can make on the prediction markets. If you have MNPI on that performance you could make some cash. This might even be a more direct way to make money on MNPI than stock trades. One bet on Kalshi is the number of Uber trips in Q1. That may or may not move the stock price. Other factors could come along.

But… Is that trade on Uber trips using MNPI securities fraud? Or wire fraud? Maybe its outside the scope of SEC jurisdiction and securities laws.

What to do?

Monitor? I’m not aware of any feeds to be able to track activity. I suppose you could ask for some form of account statements. The platforms are not really set up for compliance.

Block access?

Its fairly easy to set up a URL block on your firm’s network. That sends a sign. Of course, that doesn’t stop them from making the “predictions” on personal devices.

Ban your employees from using prediction markets?

Possible. The US Senate just did that.

Certifications?

For sure. Maybe not as part of your 204A Code of Ethics, but a separate policy.

Sources:

• Prediction Markets and Your Compliance Program – Conflicts of Interest and Reputational Risks by Lisa H. Bebchick, Amy Jane Longo, Sean Seelinger, Kathryn Daniels of Ropes & Gray
• Exclusive: Federal prosecutors are exploring whether prediction market bets trip insider trading laws
• Senate bans senators from prediction market trading by Jordain Carney

Would you invest in a company that beat the S&P 500 with 19% returns over the last five years? Sounds interesting, sure…

But what if the chart of performance looked like this:

That is a really straight line. Just one little flat period in December 2022.

No, thank you. That’s a fraud.

I saw this chart in a Bloomberg story on David Choi and his Mars FX US hedge fund collapse. As of February of 2024 the Mars FX fund had raised over $330 million according to its Form D filing. MArs FX claimed the money was running through a partner called Tech RealFX. Mars FX blames TRFX. TRFX blames Mars FX. There’s no clear answer of what happened in the story, public statements, or lawsuits.

What is clear is that no investment returns chart should look like that chart. That’s a Madoff looking chart where the returns just go up and to the right with no dips.

Sources:

• Hedge Fund Collapse Sparks Global Hunt for Almost $600 Million by David Voreacos, Sabrina Willmer, and Jonathan Randles in Bloomberg
• Mars FX Form D

It caught my by surprise that the Securities and Exchange Commission brought a case against a crypto-crap company this week. After the SEC published its “clarification” on the application of federal securities laws to crypto assets I thought we wouldn’t see a crypto case for a long time.

I guess the SEC found the actions of Bitcoin Latinum to be too egregious even for the SEC’s now relaxed view on crypto. From my headline, if you are hiring a marketing company for its “Mega-Shilling” marketing package with “500-700 original posts/conversation daily” on Telegram and Twitter I think your product is all marketing.

The first mistake according to the SEC in its complaint is that the Bitcoin Latinum platform said that its offering was a security offering in its “Simple Agreement for Future Tokens” offering documents. It called itself an “issuer” and its purchasers were “investors.”

What was this crypto-crap supposed to do?

Bitcoin Latinum is a fully insured asset-backed cryptocurrency based on the Bitcoin ecosystem. Developed by Monsoon Blockchain Corporation on behalf of Bitcoin Latinum Foundation, LTNM is a greener, faster, and more secure version of Bitcoin, capable of managing massive crypto transactions while being highly efficient in terms of cost and scalability. As a revolutionary new Bitcoin blockchain-based token, LTNM focuses on disrupting high-growth industries like Media, Gaming, Telecommunications, and Cloud Computing.

According to the SEC, it didn’t do any of that.

Perhaps the final reason for bringing the case is that the sponsors looted the funds raised for the platform for personal uses: $4 million Miami condo, $2.8 million Park City house, $1.4 million in personal credit card charges, and a $160,000 horse.

The SEC has apparently not completely abandoned its enforcement against crypto scams.

Sources:

• SEC Charges Bitcoin Latinum Founder and Affiliated Companies with Allegedly Defrauding Investors in $16 Million Securities Offering
• SEC Complaint
• SEC Clarifies the Application of Federal Securities Laws to Crypto Assets
• Next-generation Cryptocurrency Bitcoin Latinum (LTNM) Continues Expansion Strategy with Eigth Listing on Hotbit Exchange

The other half of the Securities and Exchange Commission budget request for 2027 is a report on its performance in fiscal year 2025.

How did the SEC perform in enforcement actions?

The SEC was off its game. The 85% metric was the lowest in years. I believe this number might dip some more with the voluntary dismissal of so many crypto-related enforcement actions this year.

How about examinations?

FY2025 exceeded the plan for examinations of investment advisers. I was kind of stunned to see FY2026 and FY2027 planning to reduce the percentage of examinations.

Lots of other metrics to be found in second half of the report.

Sources:

• SEC’s Fiscal Year 2027 congressional budget justification annual performance plan
• The Downsizing of the SEC