Pastore’s Managing Partner Leads Discussion with Congressman Jim Himes

On September 23, the Connecticut Crypto Forum (the “Forum”) held an event at the University of Connecticut at Stamford. The Forum connects large and sophisticated capital pools with leading players and thinkers across the crypto, defi and Web 3.0 markets to strengthen investor knowledge, understanding and skill. Pastore LLC is proudly a Founder and Sponsor of the Connecticut Crypto Forum. The Forum’s September 23 event was an invite-only session.

In the first half of the event, a panel of speakers discussed the current maturity of the crypto and blockchain markets.  The panel addressed the current challenges facing the evolving asset class and concluded that crypto/blockchain assets are still “metaphorically” in their teenage years. The asset class still is characterized by volatility. Moreover, the panelists noted the time of hyper valuation of projects in the industry is over. What follows now is a time of acquisitions. Many companies and projects will likely fail, but the ones with worthwhile technology that lack sufficient cashflows to continue operation will likely be consolidated within larger players and ultimately be poised to make the industry more efficient. However, the panelists agreed that the industry’s best days are ahead of it.

During the second half of the event, Pastore LLC’s Managing Partner, Christopher Kelly, led a discussion with Congressman Jim Himes, an emerging leader in the crypto/blockchain industry on Capitol Hill. Congressman Himes noted the significant attention that crypto and blockchain assets have received in Congress. He noted that he is working with other members of Congress on legislation concerning the industry.

When a member of the crowd asked what should businesses do considering the lack of legal and regulatory clarity surrounding crypto assets, Mr. Kelly gave a poignant response: Don’t be afraid, be transparent and work with counsel to navigate the murky regulatory waters. Pastore, as a thought leader in the field, is positioned to help businesses and individuals plan a path forward despite the uncertainty.

 

SEC Proposes Change to Cybersecurity Reporting Requirements for Public Companies

With the threat of irrevocable reputational harm and damage to consumer trust brought on by data breaches to public companies, the United States Security and Exchange Commission (“SEC”) recently proposed new cybersecurity reporting requirements. In March, SEC Chair Gary Gensler noted these new amendments will, “strengthen investors’ ability to evaluate public companies’ cybersecurity practices and incident reporting.”[1] If the proposed amendments pass, it would impose new requirements on board of directors, including management reporting, organization, and board composition.[2]

The proposals aim to promote incident disclosure and increase risk management, strategy, and governance disclosure of data breaches.[3] One amendment would require a company to notify shareholders and the SEC within four business days when a material cybersecurity incident occurs.[4] The SEC would also require standardized disclosure of a company’s cybersecurity risk management and strategy, management’s role in implementing cybersecurity policies, and the board of directors’ cybersecurity expertise.[5]

As the SEC signals the necessity of new disclosure policies, companies should assess their current cyber reporting practices and procedures. The proposals aim to bridge the gap between business executives and security executives to ensure cybersecurity is included in their everyday business conversations and reporting practices.[6] In preparation of these proposals, companies can educate their board on their policies and procedures regarding cyber security risks. It is no longer the sole job of the chief information security officer to translate technology risk to business risk.[7]

[1] SEC Proposes Rules on Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies, SEC (Mar. 9, 2022), https://www.sec.gov/news/press-release/2022-39

[2] Id.

[3]  Public Company Cybersecurity, Proposed Rules, https://www.sec.gov/files/33-11038-fact-sheet.pdf (last visited Sep. 22, 2022).

[4] Id.

[5] Id.

[6] Insight Report, World Economic Forum Global Cybersecurity Outlook (January 2022), https://www3.weforum.org/docs/WEF_Global_Cybersecurity_Outlook_2022.pdf.

[7] Bob Ackerman, New SEC Cybersecurity Reporting Requirements: Three Things Companies Need To Do Now, Forbes (May 25, 2022) https://www.forbes.com/sites/forbesfinancecouncil/2022/05/25/new-sec-cybersecurity-reporting-requirements-three-things-companies-need-to-do-now/?sh=2d78e01e6f05.

New York State Department of Financial Services Issues Consent Order Against Robinhood Crypto, LLC

As interest in cryptocurrencies (“crypto”) continues to rise, businesses and investors are left wondering what regulations they must follow. While a broad regulatory framework is still nonexistent for the crypto industry, the New York State Department of Financial Services (“DFS”) recently imposed a $30 million fine on Robinhood Crypto, LLC (“Robinhood”), a wholly-owned crypto trading unit of Robinhood Markets Incorporated, for failing to comply with New York anti-money laundering (“AML”) and cybersecurity regulations.[1] This is the first time DFS has taken enforcement action against a crypto company. In making the announcement, the Superintendent of DFS, Adrienne Harris, stated, “[a]ll virtual currency companies licensed in New York State are subject to the same anti-money laundering, consumer protection, and cybersecurity regulations as traditional financial services companies.”[2] Superintendent Harris made it clear that while this may be the first such action against a crypto company, it will not be the last.[3] DFS expects crypto companies to invest in compliance programs like traditional financial institutions.

In the DFS Consent Order, DFS took issue with several aspects of Robinhood’s compliance program[4] Specifically, Robinhood failed to devote sufficient funds and resources to its compliance program,[5] its Chief Compliance Officer lacked “commensurate experience to oversee a compliance program such as [Robinhood’s]” and did not participate adequately in the implementation of Robinhood’s automate software compliance program, [6] and Robinhood overly relied on the compliance program of its parent and affiliate despite those compliance programs were not compliant with New York State’s regulations.[7] Moreover, Robinhood failed to adequately evaluate “potentially suspicious transactions in order to determine whether a [Suspicious Activity Report] should be filed.”[8] DFS noted that as of October 26, 2020, Robinhood had a backlog of 4,378 potentially suspicious transaction alerts.[9]

While Robinhood may have had a compliance program on paper, DFS made it clear that it is focused on the execution of such programs. One thing is clear: the DFS Consent Order indicates that regulatory and enforcement agencies are starting to take action against the crypto industry. Common sense, sound legal advice, and diligence will help any business or investor navigate this market as state and federal agencies begin to enforce traditional financial services regulations on the industry.

[1] In the Matter of Robinhood Crypto, LLC, Dep’t of Fin. Servs. (Aug. 1, 2022), https://www.dfs.ny.gov/system/files/documents/2022/08/ea20220801_robinhood.pdf.

[2] DFS Superintendent Harris Announces $30 Million Penalty on Robinhood Crypto for Significant Anti-Money Laundering, Cybersecurity & Consumer Protection Violations, Dep’t of Fin. Servs., https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202208021 (last visited Sept. 19, 2022).

[3] Id.

[4] Id.

[5] Id. at ¶¶ 36-41.

[6] Id. at ¶ 36.

[7] Id. at ¶ 6.

[8] Id. at ¶ 37.

[9] Id.

Pastore Files Appeal in New York’s First Department Appellate Division

Recently, Pastore LLC perfected its appeal in New York’s First Department Appellate Division. Pastore LLC represents a celebrity chef in the matter, which involves a contract dispute dealing with election of remedies issues. The chef is well known and has high-end restaurants in New York and Las Vegas, and the issue in the case involves some of his historical publicity. Ultimately, the matter involves sophisticated contractual provisions, and thus the chef hired Pastore LLC to handle these contractual agreements.

Tokenized Assets: What are They and how are They Regulated?

As the decentralized world of blockchain continues to grow, tokenized assets have caught the eye of investors and regulators alike. Tokenized assets may be fungible or non-fungible. Fungible tokenized assets are interchangeable and indistinguishable such as Bitcoin and other cryptocurrencies (“Crypto”). Non-fungible tokens (“NFTs”) are unique tokens that are non-divisible and cannot be replaced because each token has a unique value.[1] Tokenized assets result from taking a tangible asset (such as real estate, paintings, and precious metals) or an intangible asset (such as a digital picture or a YouTube video) and converting the asset ownership into a digital token on a blockchain.[2] This process is known as tokenization.[3] By taking a real-world asset and making a digital representation, it creates a broader investor base, geographic reach, and a reduction in transaction times.[4] Moreover, placing the digital token on a blockchain ensures no single authority can erase your ownership in the tokenized asset.[5]

While tokenized assets can allow for a broader base of investors, like the Crypto market, the NFT market lacks clear regulations from the regulatory agencies such as the U.S. Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”).[6] Moreover, state regulatory bodies have yet to issue guidance on the tokenized asset market.[7]

The current legal framework was not designed to regulate and guide the creation and trade of digital assets.[8] Moreover, the question of what category an NFT falls into depends on the particular asset that was tokenized.[9] For example, the CFTC has stated that renewable energy credits and emission allowances are commodities as defined by the Commodity Exchange Act.[10] However, the SEC has stated that depending on the facts and circumstances of a given NFT, it might be considered an investment contract under the Howey test, which would cause the NFT to be regulated under the Securities Act of 1933 and Securities Exchange Act of 1934.[11] The legal uncertainty within the NFT market led SEC Commissioner Hester Peirce to recently state that guidelines would help provide the public with an understanding of how the SEC is approaching these issues.[12] The lack of a clear regulatory framework has made investors susceptible to fraud, and it allows for bad actors to avoid domestic and international anti-money laundering laws.[13]

Additionally, there is no standardized set of rights that accompanies an NFT since the seller determines what rights follow the NFT.[14] Therefore, sellers and buyers alike should understand the limitations that a transfer, assignment, or license may have on the NFT.

While tokenized assets allow for quick cross-border investment and increased liquidity of real-world assets, investors are left without a clear regulatory framework and, at times, not knowing what rights follow the purchase of an NFT. As the decentralized world of blockchain continues to grow, it is imperative that investors and businesses use common sense, sound legal advice, and diligence to navigate this market. Given the lack of legal certainty, attorney legal opinions on these assets will likely immunize any reasonable use.

[1] Tokenization: Opening Illiquid Assets to Investors, BNY Mellon (June 2019), https://www.bnymellon.com/us/en/insights/all-insights/tokenization-opening-illiquid-assets-to-investors.html.

[2]Id.

[3]Id.

[4]Id.

[5] What is asset tokenization?, Hedera, https://hedera.com/learning/what-is-asset-tokenization#:~:text=Asset%20tokenization%20is%20the%20process,either%20digital%20or%20physical%20assets.&text=Asset%20tokenization%20could%20convert%20ownership,0.0002%25)%20of%20the%20property (last visited Feb. 3, 2022).

[6] William de Sierra-Pambley, Tokenization: Opportunity and Regulation, Finding a Balance, Sheppard Mullin (Oct. 18, 2021), https://www.jdsupra.com/legalnews/tokenization-opportunity-and-regulation-5158893/.

[7]Id.

[8]NFTs: Key U.S. Legal Considerations for an Emerging Asset Class, Jones Day (April 2021), https://www.jonesday.com/en/insights/2021/04/nfts-key-us-legal-considerations-for-an-emerging-asset-class.

[9]Id.

[10]Id.

[11]Id.

[12] Sarah Wynn, SEC’s Peirce says agency guidance on nonfungible tokens needed, Roll Call (Jan. 25, 2022), https://rollcall.com/2022/01/25/secs-peirce-says-agency-guidance-on-nonfungible-tokens-needed/.

[13]NFTs: Key U.S. Legal Considerations for an Emerging Asset Class, supra note 11.

[14]Id.

Examiner’s Report Supports Pastore’s Client’s Claims Involving a High-End Westchester Development

Pastore LLC represents a large creditor and owner of a construction management company in a bankruptcy matter in the Southern District of New York where a billionaire filed bankruptcy to avoid liability to his business partner, Pastore LLC’s client, concerning high-end developments in Westchester and Connecticut. Pastore LLC with co-counsel made a motion to have an examiner review the company’s finances. The examiner’s report indicated that he owes millions back to the bankruptcy estate.

Pastore Brings Claims to Thwart Violations of Securities Laws by Broker-Dealers

Pastore LLC has brought claims to thwart violations of securities laws by broker-dealers to funnel money away from a rightful beneficiary to a wrongdoer. The scheme, as alleged in the federal complaint, conducted by the broker-dealers led to violations of their supervisory responsibilities under the Securities Exchange Act of 1934 (the “Exchange Act”) and the Investment Advisers Act of 1940 (the “Advisers Act”) as well as multiple FINRA rules. Moreover, FINRA and the SEC have previously fined these broker-dealers for conducting similar schemes. A recent article regarding this matter can be found here.

S.D.N.Y. Grants Pastore’s Motion for Alternative Service Against International Cryptocurrency Corporation

Pastore LLC represents a financial services company in a cryptocurrency contract dispute with a Uruguay joint-stock company with its principal place of business in Sao Paulo, Brazil. In an effort to effectuate service of process against the Uruguayan company, Pastore LLC filed a Motion for Alternative Service with the United States District Court for the Southern District of New York (the “S.D.N.Y.”). In an order that recognized the steps Pastore LLC had taken to comply with the standards of service of process on an international corporation, the S.D.N.Y. granted the Motion for Alternative Service and has allowed Pastore LLC to effectuate service of process via e-mail. The matter involves the trading of a carbon credit crypto coin on the Gemini exchange, as a result of Pastore’s client’s relationship with the well-known founders of the exchange. A recent article regarding this matter can be found here.

Stablecoins: What are They?

A little-known area of the growing cryptocurrency market is stablecoins. Stablecoins, a type of cryptocurrency, are not mined through an open network like Bitcoin and Ethereum.[1] Instead, stablecoins derive their value from another asset.[2] Most stablecoins are pegged to a national currency.[3] For example, the USD Coin is a stablecoin that is pegged to the U.S. dollar.[4] Therefore, one USD Coin is always worth one U.S. dollar.[5] By deriving their value from a national currency, stablecoins avoid the volatility that is usually associated with cryptocurrencies.[6] Like other cryptocurrencies, stablecoins are stored in digital wallets.[7]

While Treasury Secretary Janet Yellen has recognized the potential benefits of stablecoins such as “supporting beneficial payment options,” there are no regulations in place to monitor stablecoin reserves. [8] Government regulators are concerned about the implications of a relatively stable cryptocurrency that allows investors to avoid anti-money laundering (“AML”) regulations. [9] Recently, the President’s Working Group on Financial Markets (“PWG”), consisting of Treasury Secretary Janet Yellen, the chairpersons of the Board of Governors of the Federal Reserve, Securities and Exchange Commission, and Commodity Futures Trading Commission, issued a report recommending Congress to pass legislation to regulate the stablecoin market.[10]

The legislation recommended by the PWG report would limit the issuance of stablecoins to insured depository institutions and establish a federal framework to regulate other parties in stablecoin arrangements, such as the party that facilitates the transfer of stablecoins between individuals and the entity that stores the stablecoins.[11] While the PWG believes the proposed legislation should be passed urgently, it recommends in the meantime that agencies use their current authority to address the risks posed by the unregulated stablecoin market.[12] Moreover, the PWG recommends that international AML standards should be implemented to prevent the use of stablecoins by illicit actors.[13]

While stablecoins are still operating in an unregulated environment, one thing is clear: the market is only continuing to grow, and the SEC and other government agencies are taking notice of the unregulated area. Common sense, sound legal advice, and diligence will help any business or investor navigate this market despite the uncertainty surrounding stablecoins.

[1] Julian Dossett, Stablecoins: What they are, how they work and how to buy them, CNET (Dec. 6, 2021), https://www.cnet.com/personal-finance/crypto/stablecoins-what-they-are-how-they-work-and-how-to-buy-them/.

[2]Id.

[3] Kathryn G. Wellman; Neil T. Bloomfield, President’s working group report calls for stablecoin regulation, Reuters (Dec. 2, 2021), https://www.reuters.com/legal/transactional/presidents-working-group-report-calls-stablecoin-regulation-2021-12-02/.

[4] What is USD Coin? Coinbase, https://www.coinbase.com/usdc (last visited Dec. 28, 2021).

[5]Id.

[6] Wellman; Bloomfield, note 3.

[7] Dossett, note 1.

[8] Felicia Hou, Stablecoins are taking over the crypto world hot topic for Congress—here’s what they are and the fastest-rising ones to keep an eye on, Fortune (Dec. 8, 2021), https://fortune.com/2021/12/08/stablecoins-cryptocurrency-congress/ (quoting Janet Yellen.

[9] Wellman & Bloomfield, note 3.

[10] Id.

[11] President’s Working Grp. on Fin. Mkts., the Fed. Deposit Ins. Corp., & the Off. of the Comptroller of the Currency, Report on Stablecoins (Nov. 2021).

[12] Id.

[13] Id.

Second Circuit Affirms Jury Verdict Win for Pastore’s Hedge Fund Clients

The Second Circuit Affirms Jury Verdict Win for Pastore’s Hedge Fund Clients in Multimillion-dollar Securities Fraud Case Brought by Billionaire Family Office

On November 15, 2021, the Second Circuit affirmed a jury verdict obtained by Pastore in a federal securities fraud case. This concluded a contentious, multi-year litigation, defeating claims of fraudulent inducement and securities fraud brought against two hedge fund executives by a billionaire family office special purpose investment vehicle. The billionaire family office, the heirs to and founders of a well-known apparel store, had invested in the fund’s General Partner limited liability company.

In 2018, The United States District Court for the District of Connecticut granted a summary judgment in favor of the defendants. The summary judgment was subsequently appealed up to the United States Court of Appeals for the Second Circuit, before being remanded back to, and concluding with, a jury trial in the United States District Court for the District of Connecticut. Pastore LLC was hired for the trial. After two weeks of evidence and 7 hours of jury deliberation, Pastore LLC was able to secure a favorable jury verdict for the clients. The jury had found in favor of the defense on a federal securities claim.

Then, the billionaire family office appealed the jury verdict to the Second Circuit and argued that it was entitled to a new trial because, it alleged, the district court’s abuse of discretion had a prejudicial impact on the jury’s verdict. Among other alleged errors, the billionaire family office alleged that evidence concerning a billion-dollar company investment agreement with one of the world’s largest private equity funds should be excluded. The Second Circuit stated, “the district court instructed the jury ‘the entity that holds an interest in a security suffers an economic loss if the investment experiences a decline in value.’ App’x 559. In other words, the district court instructed the jury that it should find that…suffered an economic loss if it determined that…owned the investment interest in…, regardless of the source of investment funds, and that this investment declined in value.”