SEC Charges Prager Metis with Negligence in FTX Audit, Failure to Understand Crypto Asset Markets

Audit Firm Prager Metis Settles SEC Charges for Negligence in FTX Audits and for Violating Auditor Independence Requirements

The Securities and Exchange Commission today announced that Prager Metis CPAs, LLC (Prager) and its California professional services firm, Prager Metis CPAs LLP, (collectively, the Prager Entities) agreed to pay $1.95 million to resolve two actions alleging misconduct in its audits of the now-defunct crypto asset trading platform, FTX, and auditor independence violations. In one of the actions, the SEC alleges that Prager misrepresented its compliance with auditing standards regarding FTX.

According to the SEC’s complaint, from February 2021 to April 2022, Prager issued two audit reports for FTX that falsely misrepresented that the audits complied with Generally Accepted Auditing Standards (GAAS). The SEC alleges that Prager failed to follow GAAS and its own policies and procedures by, among other deficiencies, not adequately assessing whether it had the competency and resources to undertake the audit of FTX. According to the complaint, this quality control failure led to Prager failing to comply with GAAS in multiple aspects of the audit—most significantly by failing to understand the increased risk stemming from the relationship between FTX and Alameda Research LLC, a crypto hedge fund controlled by FTX’s CEO.

SEC Charges Multiple Individuals and Entities in Relationship Investment Scams

The Securities and Exchange Commission today charged five entities and three individuals in connection with two relationship investment scams involving fake crypto asset trading platforms NanoBit and CoinW6, respectively. The SEC’s two complaints allege that the defendants solicited investors via social media apps, lied to them to gain their trust and confidence, and then stole their money. These charges are the SEC’s first enforcement actions alleging these types of scams.

“Relationship investment scams, including those involving crypto asset investments, pose a risk of catastrophic harm to retail investors, and the threat is increasing rapidly as these scams become more popular with fraudsters,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement….

The SEC’s complaint in SEC v. NanoBit Limited et al. alleges that, from approximately October 2023 to at least June 2024, scheme participants impersonated financial industry professionals in WhatsApp groups to build investors’ trust and then solicited their investments through the supposed NanoBit crypto asset trading platform. To persuade investors that the platform was safe, NanoBit allegedly falsely claimed that its affiliate, NanobitUS Securities, was an SEC-registered broker. The supposed financial professionals then touted fake initial coin offerings as a way for the investors to make substantial returns. As alleged, however, the NanoBit platform was fake, and investors’ funds in fact went to scheme participants who wired more than $2 million to bank accounts in Hong Kong and misappropriated hundreds of thousands of dollars’ worth of investors’ crypto assets.

SEC Charges 12 Municipal Advisors With Recordkeeping Violations

The Securities and Exchange Commission today announced charges against 12 municipal advisors for failures by the firms and their personnel to maintain and preserve certain electronic communications.

The firms agreed to pay combined civil penalties of more than $1.3 million to settle the SEC’s charges. The firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, have begun implementing improvements to their compliance policies and procedures to address these violations, and agreed to pay the following civil penalties….

Caroline Ellison, Star Witness in FTX Case, Should Receive Lenient Sentence, Prosecutors Signal

Caroline Ellison, a close colleague of the disgraced cryptocurrency mogul Sam Bankman-Fried, provided “extraordinary cooperation” to the government, federal prosecutors said on Tuesday, signaling that she should receive a lenient sentence for her role in the sweeping fraud that led to the collapse of the FTX crypto exchange.

Ms. Ellison, 29, who was also Mr. Bankman-Fried’s on-and-off girlfriend, pleaded guilty to fraud shortly after FTX collapsed in November 2022, alongside two other members of his inner circle. In a court filing this month, Ms. Ellison’s defense lawyers asked the judge overseeing the case, Lewis A. Kaplan, to sentence her to three years of supervised release, with no prison time.

In the government’s filing on Tuesday, prosecutors did not recommend a specific sentence to the judge but pointed out that her cooperation was “not only substantial, but exemplary.”

SEC turns to litigation to address rulemaking failures

After a final thwarting of the SEC’s efforts to govern the private funds industry, the agency has moved to forgo rulemaking in favor of litigation.

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“We are already starting to see the SEC, in examinations, pressing more on the types of issues that the private fund adviser rule changes would have addressed, basically trying to build up a case that those rules were important,” said Aaron Schlaphoff, a former SEC regulator and a partner in the investment funds group at law firm Paul Weiss.

On Sept. 3, for example, the agency announced a settlement with Florida-based Galois Capital Management, a cryptocurrency-focused private fund charged with misleading investors about the notice period required for redemptions, a form of preferential treatment that the original rule changes would have addressed.