eComms Surveillance & Compliance for Financial Services
The Financial Industry Regulatory Authority (FINRA) just announced that it will begin conducting an investigation into retail communications by broker-dealers regarding products and services in the cryptocurrency markets. Some analysts are being bold enough to call this move by the regulatory authorities a “sweep.”
Perhaps that is the accurate way to describe this latest activity by the authorities in a quest for compliance. All year, efforts to drive compliance have been revved up. Since 2022 began, Wall Street banks have been fined more than $2 billion. Most of the transgressions relate to non-compliance around e-communications including the usage of personal devices, communicating business matters on unapproved channels like WhatsApp, and improper archiving of e-comms messages. The SEC filed 9% more enforcement actions in 2022 than it did the year prior. With this “fast and furious” pace to enforce compliance after showing leniency during the early COVID years, it’s hardly surprising that the authorities are coming after crypto next.
After all, just look at what’s happened in the crypto markets this past year. “Roller coaster” and “high drama” are two descriptions that immediately come to mind. Earlier in the year, the “Crypto Couple,” Ilya Lichtenstein and Heather Morgan, were charged with attempting to launder $4.5 billion in assets stolen from Bitcoin back in 2016: the sliver lining is that the Feds have recovered $3.6 billion of the stolen assets. In July 2022, the missing CryptoQueen was placed on the FBI’s Top 10 Most Wanted list. On October 3, mega influencer Kim Kardashian was charged by the SEC and fined $1 million for touting EthereumMax. Then FTX, one of the world’s largest crypto exchanges, was exposed for its $8 billion shortfall, which triggered its bankruptcy. Bitcoin (BTC), ether (ETH), and most other cryptocurrencies have been in free fall ever since as the FTX scandal continues to have a massive ripple effect.
FTX began to unravel after a somewhat obscure (now mainstream) publication, CoinDesk, published a document that they had received which showcased the firm’s financial instability. Sam Bankman-Fried, aka SBF, who was at the helm of FTX and a notorious Tweeter, suddenly went silent after the news broke. FTX imploded shortly after CoinDesk exposed their second big scoop: Binance, FTX’s primary competitor, was not going to buy out the beleaguered FTX in a “rescue plan” as proposed.
Within less than a week, SBF resigned from FTX in disgrace, declared bankruptcy, and his personal wealth of $26 billion plummeted 94% – the biggest one-day loss in history. Bankruptcy proceedings that began on November 11 triggered an incessant storm of cyberattacks on FTX and “billions of assets” are now reportedly unaccounted for or missing. Today, he’s apparently hiding in his $40 million penthouse in the Bahamas where “drugs, sex, polyamory, and poker fraud” were supposedly part of the FTX culture and is now the subject of titillating headlines. Despite all the resulting crypto chaos he’s caused and the billions in missing assets, he’s slated to speak November 30 at the New York Times DealBook Summit which has left many people scratching their heads.
Caroline Ellison, aged 28, the purported mathematics mastermind behind FTX and ex-girlfriend of SBF, is missing but facing increasing scrutiny for her role in the firm’s collapse and “shady” balance sheets. She has been mercilessly dubbed “Queen Caroline” and “Fake Charity Nerd Girl” but has a shockingly scant digital footprint. There are very few social media posts, interviews, or other communications attributed to her.
Losses in cryptocurrency have been so prevalent of late that Forbes even posted an article November 4, 2022 instructing people how to record their losses on their taxes and the Department of Justice recently hired a Victim Coordinator. One could criticize FINRA’s announced investigation into broker-dealer activities in the crypto products and services arena as long overdue. Arguably even too late.
As far back as 2015, Dr. Ruja Ignatova, the charming chameleon now known as the CryptoQueen and Queen of Crypto, attempted to incite a “financial revolution.” That should have been the first clue for authorities to pick up on that crypto needed a bit more regulation. Later, in 2019, the Securities and Exchange Commission (SEC) charged her (in absentia) with eight counts of money laundering plus wires and securities fraud. But that was after she had already masterminded OneCoin and scammed more than one million people out of $4 billion with the largest Ponzi scheme in history.
So, what does all this crypto chaos mean and what’s next with FINRA’s retail communications investigation? A series of lawsuits against FTX advisors, executives, and institutional investors is likely to happen next. In the interim, FINRA has offered clarification on what it’s investigating: any written communication shared with 25 or more retail investors within a 30-day period. To make it crystal clear, FINRA stated that this includes all digital, social media, video, SMS, website postings, and other forms of communication. And they’re not just targeting broker-dealers – all their affiliates are also included in the sweep.
All dealer-brokers are obliged to FINRA to provide the date of each communication, the case number if/when it was filed with FINRA’s Advertising Regulation Department, documentation that shows if/when that communication was approved by a principal of the firm and identifies each crypto asset that communication references. Compliance policies, manuals, supervisory communications approval procedures, contracts, and written agreements with affiliates, plus any information related to how the affiliates’ customers would be communicated with. What FINRA is tapping into is how common customers, common agreements, and common distribution channels are jointly used by the broker-dealer and affiliate. And, more specifically, FINRA is investigating whether it is clear to the consumers which entity is sending that communication.
Here’s the scary part: FINRA has urged everyone to be “thoughtful in their response” regarding this exam request. That sounds a tad ominous. Currently, FINRA has defined the “relevant period” as July 1-September 30, 2022. And that sounds a lot like “tip of the iceberg.” Make no mistake – the regulatory authorities are fishing for more than sport – they’re fishing for fraudsters, firms of all sizes who are non-compliant with their communications, and for any nefarious schemes that are victimizing consumers.