New York Securities Fraud Lawyers Blog

AI, Oh My – SEC Announces First Ever “AI Washing” Enforcement Actions

May 9, 2024 | Adam G. Schreck

On March 18, 2024, the Securities and Exchange Commission (the SEC) announced that it had settled charges against two registered investment advisers (RIAs) related to false and misleading representations about each RIA’s alleged use of artificial intelligence (AI) in effecting financial services, conduct which the SEC coined as “AI Washing.” In total, the SEC collected $400,000 in civil penalties from the firms, with Delphia (USA) Inc. (Delphia) agreeing to pay $225,000 and Global Predictions Inc. (Global Predictions) agreeing to pay $175,000. As AI increasingly takes over the mainstream in the coming years, investors must remain attentive to the representations RIAs and broker-dealers make about utilizing AI in the financial services they offer to public investors.

Delphia is primarily in the business of offering robo-advisory services to retail investors. “Robo-advisors” are typically algorithm driven platforms that offer investors automated investment advice based on data provided to the platform by the investor with very little, if any, human interaction. In touting its robo-advisory services to the public, Delphia represented that investor data was actively utilized to “train” and “power” its proprietary algorithms that was capable of making investment predictions up to “two years into the future.” In reality, the SEC found that Delphia never successfully implemented its investor data-driven algorithms and misrepresented its AI capabilities to the public. Notably, Delphia was also investigated by the SEC for identical conduct in 2021. If you are being investigated by the SEC, you need skilled Regulatory Lawyers in New York, like Malecki Law, to get you through the investigation.

Global Predictions offers retail investors non-discretionary investment advice, namely portfolio allocation recommendations, through its proprietary investment application PortfolioPilot and the use of proprietary algorithms. Global Predictions represented to the public that it was the “first regulated AI financial advisor” and that it actively utilized AI capabilities in the services offered to investors. After its investigation, the SEC determined that Global Predictions made false and misleading representations on its Form ADV, press releases, website, social media accounts, and paid testimonials about the company’s AI capabilities which Global Predictions was unable to substantiate. The SEC also determined that Global Predictions violated the SEC’s Amended Marketing Rule and failed to implement policies and procedures related to achieve compliance with the same. If you have made investment decisions based on AI-related misrepresentations made to you by your investment adviser or stockbroker, you should consult an experienced, AI-Securities Fraud Attorney, like the ones at New York’s Malecki Law.

Robinhood Crypto Received a SEC Wells Notice Regarding Alleged Unregistered Sale of Securities

May 8, 2024 | Jacqueline Candella

On May 6, 2024, Robinhood announced that its crypto unit (Robinhood Crypto) received a Wells Notice from the SEC on May 4, 2024. According to MarketWatch, Robinhood’s stock price dropped more than 9% following the public disclosure of the Wells Notice.

Robinhood further disclosed that the Wells Notice was related to an investigation that was previously disclosed at the end of February, due to receipt of subpoenas related to its crypto operations. If your company received a Wells Notice or a subpoena, you should retain a SEC Regulatory Defense law firm, like Malecki Law in New York, to communicate directly with the SEC on your behalf.

According to CNBC, Robinhood’s disclosure of receipt of the Wells Notice further indicated that the SEC believes it violated both Sections 15(a) and 17A of the Securities Exchange Act of 1934. More specifically, it appears that the SEC believes digital assets offered on the Robinhood Crypto platform qualify as securities, and therefore should have been registered with the SEC. However, it is unclear which digital assets are in question, or if the SEC is simply targeting all digital assets offered on the platform.

Unauthorized Electronic Transfers Claims Under the UCC and EFTA

April 23, 2024 | Jacqueline Candella

Did you notice electronic funds transferred out of your bank account? Did you authorize these transfers? If your answers are yes and no, respectively, you need to reach out to an Unauthorized Electronic Funds Transfers lawyer in New York, like the lawyers at Malecki Law, to review your circumstances.

A threshold determination is whether the account at issue is a consumer account or a commercial/business account. This is because the law generally treats these types of accounts differently. There are two potential avenues for recourse, the Electronic Funds Transfer Act (EFTA) for consumer accounts and Article 4A under the Uniform Commercial Code (UCC) for commercial accounts. Notably, the UCC generally does not apply to scenarios which the EFTA governs. See § 4A-108. Relationship to Electronic Fund Transfer Act for more. You need to have a law firm well-equipped to analyze which law may govern, such as an Unauthorized Electronic Funds Transfers law firm like Malecki Law in New York.

Claims Under the EFTA

NYSBA’s Current State of Crypto Cases Panel

April 16, 2024 | Jacqueline Candella

On Wednesday, April 17, 2024, Malecki Law’s Jenice L. Malecki, Esq., will participate in a virtual panel organized by the New York State Bar Association (NYSBA). This is a joint effort by the NYSBA’s Commercial and Federal Litigation Section’s Securities Arbitration Committee and the Dispute Resolution Sections’ Securities Disputes Committee. Ms. Malecki will speak alongside her colleagues in the industry, Howard Fischer, and Joe Wojciechowski. If you incurred investment losses due to crypto-based products, you need to consult with a Crypto-Based Investment attorney in New York, like the lawyers at Malecki law.

The panel is called “The Current State of Crypto Cases: What Theories Are Being Developed to Support claims Relating to Crypto Losses?” It will begin at 12:00 p.m. EST and end at 1:00 p.m. EST. The panel will focus on liability related to crypto recommendations and broker-dealers. It is free to attend, please click here to register.

Ms. Malecki is looking forward to discussing her first-hand experiences with broker-dealer liability as it relates to crypto-based investment recommendations. Malecki Law has recently settled with a large crypto-based broker-dealer, where Ms. Malecki had the opportunity to learn more about broker-dealer liability in the context of crypto losses. Further, Ms. Malecki enjoys speaking on panels and sharing information with other lawyers in the industry, in an effort to protect investors like yourself. Did your broker recommend that you invest in crypto-based investments? Were those investment recommendations in your best interest? You should reach out to a Crypto-Based Investment law firm, like Malecki Law in New York.

Pending Ethereum Spot ETF Applications – Will the SEC Approve or Deny Them?

March 26, 2024 | Jacqueline Candella

On January 10, 2024, the Securities and Exchange Commission (SEC) approved eleven applications for the first ever Bitcoin Spot exchange-traded funds (ETFs), which have been publicly listed and subsequently trading in the secondary market since their approval. This was the first time that the marketplace had seen an attempt to make crypto-based securities available to a regular retail investor, like yourself. Click here for the related Malecki Law firm blog post [to link to Adam’s general blog about the approval]. If your broker has recommended that you purchase Bitcoin Spot ETFs, you may need to consult with a Crypto-Based Securities lawyer in New York, like the lawyers at Malecki Law, to determine whether that investment recommendation was made in your best interest.

The SEC’s approval of the Bitcoin Spot ETFs may have opened the door for similar Spot ETFs tied to other cryptocurrencies. The SEC’s second round of ETF reviews is currently underway, as there are at least eight issuers with pending applications for Ethereum Spot ETFs, including Fidelity, BlackRock, Invesco with Galaxy, Grayscale, Hashdex, 21 Shares with ARK, VanEck, and Franklin Templeton. These ETFs would work in the same practical sense as the Bitcoin Spot ETFs, except, they would be tied to the cryptocurrency Ethereum rather than Bitcoin. If your financial advisor is recommending that you invest in Ethereum Spot ETFs, if they are approved by the SEC, you should consult with a lawyer from Malecki Law, a Crypto-Based Securities law firm in New York, to see if your advisor is making investment recommendations in your best interest, as required by Regulation Best Interest.

Bitcoin and Ethereum generally maintain the largest market capitalizations for cryptocurrencies, Bitcoin being number one and Ethereum being number two. As of March 26, 2024, Bitcoin had a market capitalization of over $1.3 trillion while Ethereum had a market cap over $425 billion. Based on this, it would make sense for Ethereum Spot ETFs to follow Bitcoin Spot ETFs. However, there may be less optimism for Ethereum. Noelle Acheson, a crypto researcher, author, and host of the Markets Daily podcast, indicated that there is a “conceptual problem for Ether that didn’t apply to bitcoin.” At the same time, others in the industry maintain the belief that Ethereum Spot ETFs make sense (click here for a related Nasdaq article). Did your broker recommend that you invest in crypto-based securities? Did your broker obtain important investor profile information, like your risk tolerance and liquidity needs, before making such a recommendation? If the answer is no, you should speak with a lawyer at a Crypto-Based Securities law firm, like the lawyers at Malecki Law in New York, to review your situation.

Malecki Law Files a Public Comment in Response to FINRA’s Latest Proposal to Modify Rule 3240 to Strengthen the General Prohibition on Borrowing and Lending Arrangements Between Brokers and Their Customers

February 22, 2024 | Jacqueline Candella

FINRA has recently proposed changes to its Rule 3240, which allows for scenarios where brokers can borrow from or lend to their clients. FINRA’s rule proposal would strengthen and clarify the general prohibition against these types of arrangements and would narrow the exceptions that fall under the prohibition. In its request for comments, the SEC cited Malecki Law’s previous comment addressed to FINRA, dated February 14, 2022 (see Footnote 32 on page 23).

The current comment period closed last week, on February 12, 2024. Malecki Law submitted its public comment on the proposal last week, along with three other organizations. If your broker requests that you lend them money or borrow money from them, you may need to contact a Securities Fraud law firm in New York, like Malecki Law, to analyze whether that arrangement is allowed under FINRA Rule 3240.

This is not the first time FINRA attempted to make Rule 3240 more stringent. FINRA made a similar proposal in December 2021, and that comment period ended on February 14, 2022. Malecki Law also submitted on public comment on that proposal. Click here for the related Malecki Law firm blog post and click here for the related Regulatory Notice 21-43.

Crypto ETFs by a Little Bit – BitWise is up Next

January 14, 2024 | Malecki Law Team

On Wednesday, January 10, 2024, for the first time in U.S. history, the Securities and Exchange Commission (SEC) approved the listing and trading of spot bitcoin exchange-traded funds (ETFs). Among those includes the Bitwise Bitcoin ETF (BITB)—the first spot bitcoin ETF issued by Bitwise Asset Management. Less than two months later, on Friday March 8, 2024, the price of Bitcoin, the largest cryptocurrency by market capitalization, reached an all-time high of more than $70,000. With the inflated price of Bitcoin and its newfound accessibility that BITB provides, there is a crucial question that every investor should have on their mind: is investing in BITB in my best interest? The purchase of these investments, according to Regulation Best Interest, should only be made by an investment recommendation if it is in your best interest after diligent consideration by your financial professional. A Crypto-Securities law firm in New York, like Malecki Law, can help you determine whether Regulation Best Interest was violated.

As demonstrated by its name, an ETF is a pooled investment security that has attributes similar to both a stock and a mutual fund. “Exchange-traded” refers to the security’s ability to be traded on the market like a stock, while “fund” refers to its ability to consist of a diverse allocation of assets like a mutual fund. The concept of Bitcoin ETFs is not new to the world of securities, for example, Bitcoin futures ETFs, or ETFs that invest in Bitcoin Futures contracts (time-limited agreements to buy or sell Bitcoin at some point in the future), have been around since 2021. However, Bitcoin futures ETFs have unappealing features like “roll premiums,” which are costs incurred when selling expiring contracts and buying new ones. Additionally, futures contracts do not accurately track the spot prices of Bitcoin, meaning the immediate or current price of Bitcoin, so returns may never be as high as spot market prices. You may need a Crypto-Securities attorney in New York, like the lawyers at Malecki Law, to analyze your crypto-based investments to determine your potential losses.

On the other hand, spot Bitcoin ETFs do in fact provide investors with the spot price of Bitcoin and do not rely on futures contracts. Spot Bitcoin ETFs hold Bitcoin as its underlying asset, meaning the ETF actually holds an equivalent amount of Bitcoin to back every share of the ETF that is sold. These shares, which are priced to reflect the spot price of Bitcoin, can be traded on traditional stock exchanges. Therefore, purchasing shares of a spot bitcoin ETF is a relatively easy way for investors to gain Bitcoin exposure to his or her investment portfolio.

Grayscale may have won its ETF battle with the SEC, but can it win the war between crypto and the U.S. financial system?

January 12, 2024 | Malecki Law Team

Grayscale led the fight at the Securities and Exchange Commission (“SEC”) for approval of spot bitcoin-exchange traded funds (“ETFs”). The battle began in 2022 after the SEC rejected Grayscale’s application to convert its bitcoin trust into a spot bitcoin exchange-traded fund because spot markets are unregulated and susceptible to fraud and market manipulation. Any Crypto-based attorney will tell you that the SEC has a long way to go in regulating these new products.

In June 2023, the SEC approved the first ever leveraged bitcoin futures ETF, which gave Greyscale the ammunition it needed to march into battle with the SEC to get its own bitcoin spot-based ETF approved. Greyscale argued that, by denying bitcoin spot-based ETFs, the regulator was treating similar bitcoin investment products differently. Rather than raising the white flag, Grayscale further argued that distinguishing between bitcoin futures and bitcoin spot markets is flawed because the two are interrelated in that bitcoin futures prices closely tracked bitcoin spot markets. Unlike a futures-based ETF, spot-based ETFs own actual bitcoins and are stored in a digital vault managed by registered custodians. Futures-based ETFs replicate bitcoin prices using futures contracts.

Grayscale experienced a major victory on August 29, 2023, when a federal court ruled that the SEC’s decision to approve two bitcoin futures funds while rejecting Grayscale’s application to turn its bitcoin trust into a bitcoin spot ETF was [“arbitrary and capricious”]. Further, the court found that the SEC’s denial was in violation of federal administrative law because the SEC failed to explain its inconsistent treatment of similar products.

Crypto ETFs In Your Traditional Brokerage Account… What Could Go Wrong?

January 10, 2024 | Adam G. Schreck

On January 10, 2024, the Securities and Exchange Commission (“SEC”) released a statement announcing the approval of the listing and trading of spot bitcoin exchange-traded product shares on national securities exchanges. This move by the SEC comes after years of heated debate between financial professionals, regulators, members of Congress, and the general public over the regulation of cryptocurrencies and other digital assets. The SEC’s approval of crypto ETFs signals the first step in the widespread adoption of cryptocurrencies in traditional investment portfolios, but are the necessary guardrails in place to ensure investors are protected?

In the statement, the SEC noted that sponsors of crypto ETFs are required to provide investors with full and fair disclosures about the products being offered, similar to the requirements on sponsors of traditional investment products. Further, the SEC explained that the standards for recommending and selling traditional investment products, like Regulation Best Interest and fiduciary duties, will also apply to the recommendation and sale of crypto ETFs as well. While these requirements represent a solid foundation for the protection of investors, the experienced Securities Crypto Fraud Law attorneys at Malecki Law feel investors are still at risk when investing in crypto ETFs and digital asset private placements. Malecki Law has represented some, if not the first, crypto-related securities investors successfully in FINRA arbitration.

Exchange Traded Funds, or ETFs, are funds that trade on national securities exchanges, generally track a basket of securities, and sometimes viewed as safer investments because they are inherently diversified. However, cryptocurrencies, like Bitcoin, have a remarkably brief history compared to traditional investment products, like stocks, bonds, or ETFs. Cryptocurrencies are known to be extremely volatile, meaning they can experience large price swings in a short period of time, and have, in part, been historically used for nefarious purposes, such as money laundering and illicit online purchases. While being on an exchange may “seem” regulated, the underlying asset, Bitcoin, is still largely unregulated, subject to fraud risk, and can be volatile to the point of no return. Investors must stay hyper vigilant about the risks associated with crypto ETFs that are recommended and sold to them. These ETFs are highly speculative. If you have suffered investment losses in crypto ETFs or cryptocurrency-related private placements, the New York City Securities Digital Asset Fraud Attorneys at Malecki Law may be able to help you recover your losses.

Slow Progress for Women in the Financial Services Industry

November 27, 2023 | Malecki Law Team

In recent years, discussions about the gender pay gap have risen to the surface in a litany of industries and in just about every corner of the country. For far too long, women have earned less than their male counterparts, despite having the same, or better, job titles, backgrounds, and experience levels. In his article for Investment News, titled “’Murky disparity’ stalls progress,” Bruce Kelly explored the issue of gender pay disparities specifically as it relates to women working in the financial services industry.

According to the article, women only make up about 20% of financial advisors nationwide, and only about a third of the seats on the boards of S&P 500 companies are held by women. Jenice Malecki, the female founder of the New York-based securities law firm, Malecki Law, was quoted in the article, stating there are still plenty of pay disparities between employees of different genders at various firms. Ms. Malecki explained that she still gets contacted by women regarding their struggle with the glass ceiling they encounter in their employment and pay discrepancies. She added that, while some improvements have been made regarding pay disparities at the largest firms, those issues remain at firms that have smaller offices in various parts of the country. Smaller firms and satellite offices for larger firms generally operate with less oversight and supervision than their larger counterparts, allowing gender pay disparities to persist. If you are a female financial service professional and have suffered from unfair treatment at the hands of your employer, you should consult an experienced securities law attorney, like the ones at Malecki Law.

Another added layer to the pay disparity dilemma is the issue of transparency. Because of the lack of transparency, employees are unaware whether they are getting compensated equally as their peers. Few employees take the risk of complaining about this issue for various reasons, such as fear of retaliation or the loss of their job, so the lack of transparency remains, leading to the natural result of unequal pay. As Ms. Malecki explained in the article, many employees are not willing to challenge this unequal system, and as a result, numerous concealed disparities persist.