Both the US Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have nailed California-based Abra along with a connected Philipino company in the Philippines with fines of $150,000 each for offering and selling security-based swaps to retail investors without registration and for failing to transact those swaps on a registered national exchange.
“Businesses cannot ignore the registration requirements designed to provide investors with the information necessary to evaluate securities transactions,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.
“Further, businesses that structure and effect security-based swaps may not evade the federal securities laws merely by transacting primarily with non-U.S. retail investors and setting up a foreign entity to act as a counterparty, while conducting crucial parts of their business in the United States.”
The CFTC laid charges against respondents Plutus Financial, Inc. d/b/a Abra of California, and Plutus Technologies Philippines Corp. d/b/a Abra International of the Philippines for entering into illegal off-exchange swaps in digital assets and foreign currency with U.S. and overseas customers and registration violations. The case was brought in connection with the Division of Enforcement’s Digital Asset Task Force.
The CFTC order requires the respondents to pay a $150,000 civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act (CEA), as charged. The parallel enforcement action from the Securities and Exchange Commission (SEC) announced a settlement with the respondents arising from similar misconduct.
The CFTC’s order finds that from approximately December 2017 to October 2019, the respondents accepted orders for and entered into thousands of digital asset and foreign currency-based contracts via a mobile phone application.
These contracts, which constituted swaps under the CEA, enabled customers to enter into financial transactions, with the respondents acting as the counterparty, to gain exposure to price movements of over seventy-five digital assets.
By entering into these contracts via their app, respondents violated Section 2(e) of the CEA, which makes it unlawful for any person, other than an eligible contract participant, to enter into a swap unless the swap is entered into on, or subject to the rules of, a board of trade designated as a contract market. Additionally, in soliciting and accepting orders for these contracts, the respondents illegally operated as an unregistered futures commission merchant.
“This case underscores, once again, that the Commission will continue working with our regulatory partners to ensure the integrity of our markets, including those involving digital assets,” said CFTC Director of Enforcement James McDonald. “Rooting out misconduct is essential to furthering the responsible development of these innovative financial products.”
According to the SEC’s order, Abra developed and owns an app that enabled users to bet on price movements of U.S.-listed equity securities.
Using the app, individuals were able to enter into contracts that provide synthetic exposure to price movements of stocks and exchange-traded fund (ETF) shares trading in the U.S. through blockchain-based financial transactions with Abra or with related company Plutus Technologies Philippines Corp.
The order finds that Abra told users they could choose securities whose performance they wanted to mirror, and the value of their contract would go up or down the same amount as the price of the underlying security. The order further finds that these contracts were security-based swaps subject to U.S. securities laws.
As described in the order, in February 2019 Abra started offering the contracts to investors in the U.S. and abroad. The order finds that Abra marketed its app to retail investors, yet Abra took no steps to determine whether users who downloaded the app were “eligible contract participants” as defined by the securities laws. According to the order, Abra stopped offering contracts in February 2019, after conversations with SEC staff, but resumed the business in May 2019, this time attempting to limit the offers and sales to non-U.S. people.
Although Abra moved certain operations outside the U.S., the order finds that its employees in California designed and marketed the swap contracts, and screened and approved users who would be allowed to buy the contracts. The order further finds that Abra’s U.S.-based employees affected thousands of stock and ETF purchases in the U.S. to hedge the contracts.
The SEC’s order found that Abra and Plutus Technologies violated federal securities law provisions concerning unregistered offers and sales of security-based swaps and requiring that certain swap transactions occur on a registered national exchange. Without admitting or denying the findings in the order, Abra and Plutus Tech agreed to a cease-and-desist order and to pay a combined penalty of $150,000. In a parallel action, the Commodity Futures Trading Commission announced a settlement with Abra and Plutus Technologies arising from similar conduct.