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The U.S. Securities and Exchange Commission penalized two money managers for what it says were bogus claims about their use of artificial intelligence, marking the beginning of a fresh crackdown by Wall Street’s main regulator, Bloomberg News reported. The SEC said Monday that Delphia (USA) Inc. and Global Predictions Inc. both made “false and misleading statements” about their purported use of the technology. Global Predictions said that it had clarified how it uses AI in its marketing materials, and that it “cooperated fully with the inquiry and is pleased to put this behind us.” A lawyer for Delphia didn’t immediately respond to a request for comment. The SEC’s enforcement chief, Gurbir Grewal, said at a conference in Orlando, Florida, that the cases were only the start of the regulator’s action against misuse of AI. “We’re looking for misstatements, we’re looking for breaches of fiduciary duties by advisers,” Grewal said. In addition to allegations of so-called AI-washing, the regulator is looking for instances where the technology is used in market manipulation. The SEC is also on the lookout for conflicts of interest and has a team of people spread across the SEC’s enforcement and examination units looking into AI use.

Trade groups representing the private fund management industry sued the U.S. Securities and Exchange Commission (SEC) on Monday over a rule requiring firms that routinely deal in government bonds and other securities to register as broker-dealers, Reuters reported. The SEC adopted the rule last month to enforce stricter oversight and risk management controls on proprietary traders and other firms that it says have become important sources of liquidity in the U.S. Treasury market. The groups say that the rule is confusing and could capture investors that regularly trade securities but which are not dealers. As such, they allege it violates the Administrative Procedure Act, a federal law which requires regulators to act within their authority, justify new rules and take on board feedback. The National Association of Private Fund Managers (NAPFM), MFA, and the Alternative Investment Management Association (AIMA) filed the lawsuit asking the U.S. District Court for the Northern District of Texas in Fort Worth to vacate the rule, they said in a statement. "The Dealer Rule is indeterminate and leaves certain market participants uncertain of their need to comply with the dealer regulatory framework," said Bryan Corbett, president and CEO of MFA. "Alternative asset managers are not dealers. They are customers of dealers," he said. The SEC rule is part of a push by regulators to improve the resilience of the U.S. government bond market at times of stress. The SEC introduced another major rule last year that will force more Treasury trades through clearing houses. The broker-dealer rule, which was first proposed in March 2022, would apply to trading firms that either routinely express interest in trading at the best available prices on both sides of the market, or mainly derive revenue by trading the spread on government bonds, or from incentives offered by trading venues. The final rule scrapped certain criteria that investors had said were too broad and could inadvertently capture market participants such as corporations, insurers and pensions.

The Securities and Exchange Commission (SEC) charged 17 people for their alleged roles in a $300 million Ponzi scheme that targeted more than 40,000 predominantly Latino investors, according to a complaint filed yesterday in federal court in Houston, The Hill reported. The complaint follows the SEC’s emergency action in September 2022 that halted the company accused of carrying out the scheme, CryptoFX, and charged the two alleged main actors involved, Mauricio Chavez and Giorgio Benvenuto. Since 2022, the SEC has continued the investigation to identify more individuals involved in the alleged scheme. “We allege that CryptoFX was a $300 million Ponzi scheme that targeted Latino investors with promises of financial freedom and life-altering wealth from ‘risk free’ and ‘guaranteed’ crypto and foreign exchange investments,” Gurbir Grewal, director of the SEC’s division of enforcement, said in a statement. According to the complaint, filed in the Southern District of Texas, the 17 defendants acted as “leaders” of the CryptoFX network. They allegedly raised $300 million from predominantly Latino investors and promised returns of 15 to 100 percent on their investments. The SEC alleges that the defendants mostly did not use the funds for trading purposes, as they claimed to investors. The defendants instead used the funds to pay off supposed returns to other investors, to pay themselves commissions and bonuses and to “fund their own lifestyles,” according to the SEC’s complaint.

The Securities and Exchange Commission can proceed with its suit accusing Gemini Trust Co. and bankrupt cryptocurrency lender Genesis Global Capital of illegally offering unregistered securities through their interest-paying Gemini Earn product, Bloomberg News reported. U.S. District Judge Edgardo Ramos in New York yesterday denied a request to throw out civil claims the SEC filed in January 2023. The agency is seeking an order barring Gemini and Genesis from selling unregistered securities, requiring them to give up money they illegally earned from the program plus civil penalties. Earn allowed customers to lend their cryptocurrency to collect interest. The defendants argue that the transactions are loan agreements that don’t constitute securities under U.S. law. Ramos said that according to the SEC’s complaint, Earn met the U.S. Supreme Court’s test for a security because customers were investing in a common enterprise and had a reasonable expectation of profit. Therefore, the SEC “plausibly alleges that defendants offered and sold unregistered securities through the Gemini Earn program,” the judge said. That same test has been used by other judges to determine whether digital assets themselves are securities, though courts have reached different conclusions. Genesis filed for bankruptcy soon after the SEC filed suit. Gemini Trust Co., the crypto exchange founded by twins Cameron and Tyler Winklevoss, last month agreed to return at least $1.1 billion to customers through the Genesis bankruptcy as part of a settlement with the state of New York. Wednesday’s ruling allows both sides to go forward with pretrial evidence-gathering. The companies may try again to have the case thrown out once they have exchanged records and taken pretrial deposition testimony from witnesses.

SEC Chair Gary Gensler offered new warnings about cryptocurrencies as bitcoin (BTC-USD) surged to a new all-time high Friday, saying in an interview with Yahoo Finance that "the whole field is rife with abuses and fraud." Investors, he added, should be aware that bitcoin is a "highly speculative, volatile underlying asset." His comments came minutes after the world's largest cryptocurrency reached another record high, climbing above $69,000 on Friday. Earlier this week it exceeded a previous high last set during a 2021 boom, reinforcing a remarkable comeback following a 2022 crash that created huge losses for investors. The new frenzy is being driven by demand from a series of spot bitcoin exchange-traded funds that started trading in January after receiving approvals from the SEC. Gensler voted in favor of those ETFs. On Friday he said of that decision, "I thought it was the most straightforward path forward."

Bankrupt electric vehicle manufacturer Lordstown Motors Corp. agreed to pay $25.5 million to settle US Securities and Exchange Commission allegations that the firm exaggerated the demand for its electric pickup truck, Bloomberg News reported. The automaker made misleading statements about its pre-orders for the truck, called the Endurance, and misrepresented how quickly it could deliver the trucks, according to the SEC. The firm rose to prominence after former US President Donald Trump hailed it for saving auto-maker jobs. A lawyer for the Lordstown, Ohio-based company declined to comment. The automaker didn’t admit to or deny the SEC’s findings as part of the settlement. “In a highly competitive race to deliver the first mass-produced electric pickup truck to the U.S. market, Lordstown oversold true demand for the Endurance,” Mark Cave, an associate director of enforcement at the SEC, said in a statement. The company filed for bankruptcy in June 2023 and later sold the last of its assets to the company’s founder, Steve Burns. Nasdaq delisted the company’s shares last July. The $25.5 million fine will be deemed satisfied through payments the company plans to make to settle two class-action lawsuits.

Terraform Labs Pte. transferred nearly $122 million to its lawyers just before it filed for bankruptcy and used some of the money to cover legal expenses for criminally charged co-founder Do Kwon, according to the US Securities and Exchange Commission (SEC), Bloomberg Law reported. The SEC is challenging cash transfers to Terraform’s top law firm, Dentons US, that occurred in the three months before the company filed for bankruptcy in January, court papers show. The firm behind the now-collapsed TerraUSD stablecoin said it filed chapter 11 because it can’t afford penalties sought by federal regulators. Although the SEC said that it doesn’t oppose the company paying legitimate legal expenses, the “amount of funds at issue is extraordinary,” according to the regulator. Terraform transferred $166 million to Dentons in the full year before its chapter 11 filing, more than $5 million of which helped Do Kwon cover legal bills. The SEC alleges that the size and timing of the transfers are suspicious and that Terraform Labs must provide more documentation on them, saying that the company transferred $122 million into “an opaque slush fund for its lawyers.” The SEC argued that Judge Brendan Linehan Shannon, who is overseeing Terraform Labs’ bankruptcy, should deny the company’s request to retain Dentons unless the law firm returns $81 million, which roughly represents the amount of money that hadn’t been spent as of Feb. 13. Judge Shannon is expected to hear arguments on the dispute at a March 5 court hearing in Wilmington, Del.

The Securities and Exchange Commission is scrutinizing internal communications by OpenAI Chief Executive Sam Altman as part of an investigation into whether the company’s investors were misled, the Wall Street Journal reported. The regulator, whose probe hasn’t previously been reported, has been seeking internal records from current and former OpenAI officials and directors, and sent a subpoena to OpenAI in December, according to people familiar with the matter. That followed the OpenAI board’s decision in November to fire Altman as CEO and oust him from the board. At the time, directors said Altman hadn’t been “consistently candid in his communications,” but didn’t elaborate. Altman returned as CEO less than two weeks later as part of a deal that also entailed a reconstituted board, which he hasn’t joined. SEC officials based in New York are conducting the investigation and have asked that some senior OpenAI officials preserve internal documents. Some of the people familiar with the investigation described it as a predictable response to the former OpenAI board’s claim in its November statement. One of the people said that the SEC hasn’t pointed to any specific statement or communication by Altman that it has deemed misleading. The SEC’s civil investigation has been percolating in the background as OpenAI officials pitched investors as part of its recently closed tender offer, which valued the AI juggernaut behind viral chatbot ChatGPT at more than $80 billion.

The co-founder of a now-bankrupt advertising software firm posted phony, bullish statements about the company with a pseudonymous social media account to drive up its share price, the Securities and Exchange Commission alleged Tuesday, Bloomberg News reported. Paul Pereira, who served as chief executive officer of Alfi from 2018 to 2022, used an account on Stocktwits to mislead investors about the company’s financials, according to a lawsuit from the regulator filed in federal court in Miami. He also used the account, which he created in May 2021 with the name “uptix12,” to disparage users who criticized Alfi, the SEC alleged. A darling of the meme stock boom, the Miami Beach, Florida-based Alfi had planned to use facial recognition to target individualized ads to people as they walked through an airport or use a ride share. But the technology drew pushback from US officials, and major advertising revenue failed to materialize. In one instance, uptix12 claimed that Alfi had $100 million in revenue lined up for 2021, and $500 million for the next year, the SEC said. At the time of that post, Alfi had, at most, $4.3 million of revenue in inventory, according to the SEC.

A Texas cryptocurrency company and an industry group sued the U.S. Securities and Exchange Commission on Wednesday, saying the regulator has overstepped its authority and asking a judge to rule that digital assets traded on exchanges are not securities, Reuters reported. Fort Worth-based crypto company Lejilex and lobbying group Crypto Freedom Alliance of Texas (CFAT) claim the SEC has asserted jurisdiction over the industry without a "clear statutory mandate." Lejilex says it seeks to run a cryptocurrency platform called Legit.Exchange. The company formed last year said it plans to list digital assets including those the SEC has deemed securities in lawsuits against Coinbase, the largest cryptocurrency exchange in the U.S., and Binance, the world's largest crypto exchange. Lejilex wants the court to rule that listing pre-existing tokens will not violate securities laws. Both Coinbase and Binance have denied the SEC's allegations. CFAT asked the court to block the SEC from suing its members, and said the agency's assertion of jurisdiction over digital assets has made it harder to convince Texas lawmakers to embrace "sensible policies." The group launched last year and counts Coinbase and venture capital firm Andreessen Horowitz's a16z crypto fund as members.