SEC and DOJ Charge Individuals with $1.7 Billion Crypto Pyramid Scheme and Fraud

SEC Charges Founder of $1.7 Billion “HyperFund” Crypto Pyramid Scheme and Top Promoter with Fraud

The Securities and Exchange Commission today charged Xue Lee (aka Sam Lee) and Brenda Chunga (aka Bitcoin Beautee) for their involvement in a fraudulent crypto asset pyramid scheme known as HyperFund that raised more than $1.7 billion from investors worldwide.

According to the SEC’s complaint, from June 2020 through early 2022, Lee and Chunga promoted HyperFund “membership” packages, which they claimed guaranteed investors high returns, including from HyperFund’s supposed crypto asset mining operations and associations with a Fortune 500 company. As the complaint alleges, however, Lee and Chunga knew or were reckless in not knowing that HyperFund was a pyramid scheme and had no real source of revenue other than funds received from investors. In 2022, the HyperFund scheme collapsed and investors were no longer able to make withdrawals.

Private-Fund Lobbyists Get Set for High-Stakes SEC Court Fight

Regulators and the private-equity industry are gearing up for a trial that could determine the government’s ability to set rules for buyout funds, with some business interests hoping the case could loosen regulators’ hold on Wall Street.

On Feb. 5, a three-judge panel for the Fifth Circuit Court of Appeals is set to hear oral arguments in a challenge private-fund lobbyists mounted against tough new Securities and Exchange Commission rules. The provisions, finalized last August after months of contentious discussion, require private-equity firms to tell investors much more about the fees they charge, and prohibit some activities the regulator considers unfair and conflicted.

Linklaters Secures Rare Dismissal of DOJ Insider Trading Charges Against Ramkumar Rayapureddy Two Weeks Before Trial

Linklaters’ U.S. Litigation, Arbitration, and Investigations practice has successfully defended Ramkumar Rayapureddy against insider trading charges brought by the Department of Justice (“DOJ”) in the Western District of Pennsylvania. In a nearly unprecedented event, the DOJ dismissed all charges with prejudice just two weeks before trial as a result of Linklaters’ defense.

In November 2022, the DOJ charged Mr. Rayapureddy with one count of conspiracy to commit securities fraud and three counts of securities fraud for his alleged role in an insider trading scheme involving the securities of Mylan, one of the predecessor entities that combined to form Viatris Inc. (“Viatris”). The indictment alleged that Mr. Rayapureddy conspired with his former colleague, Dayakar Mallu, by providing Mr. Mallu with the relevant material, non-public information necessary to conduct the illegal trades.

Insider Abstention and Rule 10b5-1 Plans

The issue of “insider abstention”—insiders who decide not to trade based on MNPI—has long bedeviled insider trading law and policy. Insider abstention is typically undetectable and unknowable, raising insurmountable issues of proof, while the general requirement that fraud be “in connection with the purchase or sale of a security” imposes a rigid legal barrier. But Rule 10b5-1 plans stand on a different evidentiary footing: they are written plans, communicated to third parties, creating a clear record of intent. The only real question is whether legal liability can attach in the absence of an actual purchase or sale of a security.

Traditionally, the answer to this question has been no. The SEC staff has stated on a few occasions that cancellation of a Rule 10b5-1 plan would not in itself lead to liability under Rule 10b-5 because terminating a plan would not meet the “in connection with” requirement. However, Rule 10b-5 is not the only statutory provision that has been used to prosecute insider trading. The SEC has frequently prosecuted insider trading under Section 17(a) of the Securities Act, a provision that applies not only to the “sale” of securities but extends more broadly to “offers” to sell securities. And criminal authorities have increasingly been prosecuting in sider trading under mail and wire fraud statutes that do not have an “in connection with” requirement at all. These other statutory provisions could provide a basis for insider trading liability in the context of a cancelled or terminated Rule 10b5-1 plan.

2023 Silicon Valley 150: Corporate Governance Report

Our 2023 Silicon Valley 150 Corporate Governance Report reviews the corporate governance practices and disclosures of the Valley’s largest public companies. This report uses the Lonergan SV150, which ranks the top 150 public companies with headquarters in Silicon Valley by annual sales. We noted the following key conclusions from our survey of SV150 corporate governance:

Virtual meetings are here to stay. Following the practice started during the COVID-19 pandemic, approximately 89% of the SV150 opted to hold a virtual meeting in 2023 rather than a physical one.

ESG/CSR disclosure in the proxy statement and on websites continued to remain strong throughout the SV150, with 84% of the top 100 companies having such disclosure in their proxies and 93% of the top 100 companies having such disclosure on their website.

A Debate About The Foreign Extortion Prevention Act

A few years ago, Tom Firestone and I had a debate about certain aspects of the Foreign Extortion Prevention Act (“FEPA”) after he wrote an article proposing the criminalization of demand side bribery. (See here and here).

Now that FEPA has passed, we thought that it would be a good idea to discuss what its passage means and how it is likely to be implemented. Below are some key questions about FEPA and our respective answers.

UK: The Economic Crime and Corporate Transparency Act 2023 — A Questionable Christmas Present

On 26th December 2023, the attribution rules relating to corporate criminal responsibility for economic crimes were extended to senior managers under The Economic Crime and Corporate Transparency Act 2023 (ECTA). So, who are senior managers for this purpose, and should they be worried? ECTA also introduces a new corporate offence of failure to prevent fraud which will come into force when the Government publishes relevant guidance (expected early 2024). What are the implications of this for companies and their employees?