Month: July 2013

The SEC Tries to Make an International Case on Insider Trading

red flags

The BHP – Potash merger in 2010 was a bit leaky. The SEC has an ongoing investigation into suspicious trading ahead of the the August 17, 210 public announcement of BHP Billiton’s acquisition of Potash Corporation. The latest SEC points the SEC’s accusatory finger at two Spanish citizens.

At first I though the SEC had merely re-published an old story. In August of 2010, the SEC brought a case against two citizens. The SEC alleged that Juan Jose Fernandez Garcia and Luis Martin Caro Sanchez had material, non-public information and purchased hundreds of “out-of-the-money” call option contracts for stock in Potash in the days leading up to the public announcement. Mr. Garcia, a former employee of the an adviser to the merger gave up and disgorged his illicit windfall. Mr. Sanchez fought and the SEC failed to find the smoking gun that turned the suspicious trade into insider trading.

The latest case pits the SEC against Cedric Cañas Maillard, who served as an executive advisor to Banco Santander’s CEO, and his close personal friend Julio Marín Ugedo.

The SEC alleges that Cañas purchased 30,000 Potash Contracts-for-Difference, a highly leveraged derivative, from August 9 to August 13 based on material, non-public information he learned about BHP’s offer to acquire Potash. Cañas liquidated his entire CFD position in Potash following the August 17 public announcement for an illicit profit of $917,239.44. Cañas also communicated frequently with Marín that month, and Marín has admitted that he and Cañas discussed investing in Potash prior to his purchase of 1,393 shares of Potash common stock through two Spain-based brokerage accounts. By trading Potash stock based on material, non-public information, Marín generated net trading profits of $43,566 (a 28.47 percent return) in just one week.

Clearly, these are suspicious trades. .

What caught my eye was a jurisdictional question. This is an area I’m a bit fuzzy on.

Neither Cañas and Marín are citizens of the United States. Neither lives in the United States. According to the SEC complaint, both travel frequently to the United States and Cañas lived periodically in the United States prior to 2008.

Cañas made his bet using Contracts-for-Difference, a highly leveraged derivative, equivalent to 30,000 shares of Potash. The Contracts-for-Difference are not traded in the United States and Cañas used a Luxemborg based trading account at Internaxx.

I’m missing the nexus to the United States that would give the SEC jurisdiction.

The SEC complaint crafts an argument that Internaxx needed to purchase shares of Potash on a US exchange to hedge its risk against the Contracts-for-Difference. That seems very shaky to me from a jurisdictional perspective.

The SEC has an easy case on the inside information aspect because Banco Santander already conducted an internal investigation, found trading in violation of its policy, and fired Cañas.

The Marín case is easier to make. He opened a foreign account, but purchased Potash stock directly. That puts his trades on the NYSE and within the grasp of the SEC.

The SEC still needs to prove the use of inside information by Marín. That will be a tough battle.

According to the SEC complaint, the trades have lots of red flags and stink of insider trading. The Cañas case caught my eye because I don’t see how a US regulator can jump overseas and bring an enforcement action when there does not seem to be a substantial US nexus.

Maybe a reader knows more about the international jurisdiction of the SEC and can pipe in with some thoughts on what the SEC can do over the border.

References:

 

SEC Compliance Outreach Program

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In May attended the SEC Compliance Outreach program hosted by the Securities and Exchange Commission’s Boston office. That was supposed to be the first in a new series from the SEC. The SEC just announced a few other program dates and locations. I highly recommend attending.

From the SEC:

The SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Division of Enforcement’s Asset Management Unit (AMU) are jointly sponsoring the regional seminars for investment companies and investment advisers. The seminars highlight areas of focus for compliance professionals. They provide an opportunity for the SEC staff to identify common issues found in related examinations or investigations and discuss industry practices, including how compliance professionals have addressed such matters.

The Compliance Outreach Program was created to promote open communication on mutual fund, investment adviser, and broker-dealer compliance issues. The program, formerly known as the CCOutreach Program, was redesigned in 2011 to include all senior officers, not just CCOs, underscoring the importance of compliance throughout a firm’s business operations.

The series of regional seminars kicked off in Boston on May 16 with panel discussions on the priorities for the SEC’s National Examination Program, current topics in money management regulation, and OCIE’s process for assessing risks and selecting firms for examination.

The remaining seminars:

• Chicago – August 28: This seminar will present an overview of the examination process, including how registrants are selected for examination and the most commonly identified deficiencies. There also will be three discussion panels on traded and non-traded real estate investment trusts, on investment companies with special emphasis on alternative investment funds and money market funds, and on current enforcement actions in the investment management industry. Lastly, there will be a breakout session focusing on custody and compliance for small advisers. Register for this event.

• New York – September 13: This seminar will be most relevant to newly registered investment advisers, to dual registrants and to investment advisers affiliated broker-dealers. The topics most relevant to newly registered advisers will include the SEC’s examination process, priorities, risk surveillance, and examination selection process. In addition, the staff will discuss Form PF and other filing requirements and recent industry and regulatory developments. The topics most applicable to dual registrants or advisers with affiliated broker-dealers will address the staff’s coordinated examination process, common examination findings, and controls that some firms use to address conflicts of interest. Register for this event.

• Atlanta – September 25: This seminar will discuss the importance of enterprise risk management and effective compliance and will identify key issues noted during examinations, including conflicts of interests and issues associated with fees, such as undisclosed remuneration, miscalculation, and layering. Additional discussion topics include the changing demographics of SEC-registered investment advisers and key examination program initiatives to address such changes. Register for this event.

• San Francisco – November 6: This seminar will feature an overview of the SEC’s examination processes and procedures and a discussion of OCIE and AMU priorities. Emphasis also will be placed on valuation issues, including best practices for valuing assets by private and registered investment funds. Register for this event.

If registrations exceed capacity at an event location, investment company and investment adviser CCOs will be given priority based on the order in which their registration requests were received. Information regarding these seminars was also provided in SEC Press Release 2013-127 (see http://www.sec.gov/news/press/2013/2013-127.htm). For more information, contact: [email protected].

The Fall of Sam Israel

octopus sam israel guy lawson

Sam Israel is a scumbag. He is a liar and a cheat. He admits so in Octopus by Guy Lawson. Israel was the nefarious trader behind the Bayou Funds, one of biggest hedge fund ponzi schemes, at least until Bernie Madoff finally fell to Earth.

Lawson met with Israel while Israel was in prison. He want to write about Israel’s fraud at the Bayou Fund. Lawson found him to be devious, defiant, impossible to not like.

Israel started as a trader, not an investor. He made his money on the short movements of stocks. He made his big money by cheating. He would front run client trades. He would trade on inside information.

Then he decided he want to be his own boss, so he started the Bayou Fund. But he was not successful. Rather than disclose this to investors, he rebated a big chunk of brokerage fees to show a good return. He figured he could make it up in the next trade.

Then he missed again. Again, he didn’t want to admit his shortcomings so he chose the path of deceit. But now the amount was too much to fix with creative bookkeeping. He turned to a complete fabrication of financial results. Israel called this “The Problem.”

He kept trading to try to fix The Problem. He thought the next trade could make enough to fix The Problem. But it kept getting bigger as his actual results continued to be well below the result he was telling investors.

Then Israel ran into a shadowy figure that told him about a secret market for prime government bonds sold at huge discounts. He could get enormously wealthy by trading in the secret market. Israel thought he had found a solution to The Problem.

The publisher was nice enough to send me a copy of the book. It caught my eye because it offered an insight into the mind of a fraudulent fund manager and the machinations of a ponzi scheme. It’s a twisted mind. The tale of trying to fix The Problem is even more twisted.

Compliance Bricks and Mortar for July 26

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These are some of the compliance-related stories that recently caught my attention.

Crowd-funding, private-placement ads get special focus in the Bay State by Mark Schoeff Jr. in Investment News

Massachusetts’ top securities regulator today launched a special unit to monitor crowdfunding websites and to keep track of private-placement advertising, two new fundraising methods authorized by a federal law passed more than a year ago.

The SEC’s Top Cop Is Cashing In as a Wall Street Lawyer, and You Should Feel OK About It by Matthew Yglesias in Slate.com

And here’s where I think it’s important to step in with the realization that the news media has, for various professional and economic reasons, a tendency toward a systematic negativity bias. Imagine a scenario in which S.E.C. lawyers had a really hard time getting private sector jobs and almost invariably ended up needing to take a pay cut to obtain a position outside of the government. Then we’d get lots of stories about overpaid and incompetent federal bureaucrats, living high on posh government salaries (S.E.C. lawyers don’t earn much compared to top private sector attorneys, but they definitely earn more than the average American) despite a lack of viable skills or job prospects.

SEC Charges City of Miami, Budget Director with Fraud by Thomas O. Gorman in SEC Actions

The SEC brought another action centered on the municipal bond market. This case, against the City of Miami and its former Budget Director, not only accuses the defendants of fraud in connection with three bond offerings, but also of violating a prior consent decree which is a first for the agency. SEC v. City of Miami, Florida, Civil Action No. 1:13-cv-22600 (S.D. Fla. Filed July 19, 2013).

SEC Charges Texas Man With Running Bitcoin-Denominated Ponzi Scheme

The SEC alleges that Trendon T. Shavers, who is the founder and operator of Bitcoin Savings and Trust (BTCST), offered and sold Bitcoin-denominated investments through the Internet using the monikers “Pirate” and “pirateat40.” Shavers raised at least 700,000 Bitcoin in BTCST investments, which amounted to more than $4.5 million based on the average price of Bitcoin in 2011 and 2012 when the investments were offered and sold. Today the value of 700,000 Bitcoin exceeds $60 million.

Advertising Securities As Safe – A “No, No” In California by Keith Paul Bishop in California Corporate & Securities Law

The Commissioner has adopted Rule 260.302 setting forth the general standard for advertisements. One of these standards addresses the temptation (which is particularly strong amongst fraudsters) to advertise securities as “safe”:

An advertisement should not contain any statement or inference that an investment in the security is safe, or that continuation of earnings or dividends is assured, or that failure, loss, or default is impossible or unlikely.

SEC Rules Will Clip the Wings of Angel Investors by David Verrill in the Wall Street Journal

No angel investor I know would show their finances to an entrepreneur or other issuer of a private security. Third-party verification also is costly, invasive and burdensome. This financial information in the hands of an issuer is subject to far more potential for fraud and abuse than could ever emerge from self-certification.

Update: SEC Charges Real Estate Executives with Investment Fraud But Fails to State a Claim

cay clubs 1

The Securities and Exchange Commission brought charges against Cay Clubs Resorts and Marinas and several of its executives for defrauding investors. The case originally caught my eye because it involved real estate and would likely play a role in my continuing quest to figure out what’s a security.

The first ruling came out and it was bad for the SEC. A Florida court said the SEC failed to prove its case.  (SEC v. Graham, Case No. 13-10011 (S.D. Fla. Ruling issued July 10, 2013).

In order for the SEC to bring a claim against Defendants for violation of the Securities Act, the SEC must allege enough facts to establish that the subject transactions are investment contracts. Under the Eleventh Circuit’s interpretation of the three-prong test set forth by the U.S. Supreme Court in SEC v. W.J. Howey Co. (328 U.S. 293 (1946)), the Plaintiff must show that there was an investment, that it was a common enterprise, and that the buyer lacked control over profitability of the investment. See Alumni v. Development Resources Group, LLC, 445 Fed. Appx. 288 (1 1th Cir. 201 1); see also Bamert v. Pulte Home Corp. , 445 Fed. Appx. 256 (11th Cir. 201 ).

The court ruled that the purchase agreement is at the heart of the control analysis. The SEC didn’t file a copy of the purchase agreement on the record and did not include adequate factual allegations concerning the contents of the purchase agreement.

The case was dismissed without prejudice. So if the SEC can dig up a copy of the purchase agreement, the SEC can try again.

The SEC’s complaint stated that the defendants “offered investors the opportunity to purchase undervalued condominium units and obtain an immediate 15 percent return through a two-year leaseback agreement with Cay Clubs.”

Investors were also told that their units would appreciate after being renovated by Cay Clubs. Cay Clubs even managed to find lenders who would provide 100% mortgage financing.

During the leaseback, purchasers were restricted from using their units. They could only use the units for 14 days per year. Cay Clubs owned the common areas and controlled access to the units. Cay Clubs had a right of first refusal on the sale of a unit. Cay Clubs controlled the renovation of the resorts and the units. Under the master leasing program, Cay Clubs would rent out the units, with 65% going to the unit owner.

 

Resources:

Should I Ask for Your Help?

blawg 100

The ABA Journal is working on their annual Blawg 100 list. They think it’s a good idea to smash law blog into blawg.

Visit the Blawg 100 Amici nomination page and fill in a few boxes. Due date is August 9.

The reason for this story is whether to put Compliance Building forward as a nominee.

Since this is a compliance blog, I of course turn to the rules first:

[P]lease keep these criteria in mind when submitting Blawg 100 amici:

1. We’re primarily interested in blogs in which the author is recognizable as someone working in a legal field or studying law in the vast majority of his or her posts.
2. The blog should be written with an audience of legal professionals or law students in mind.
3. The majority of the blog’s content should be unique to the blog and not cross-posted or cut and pasted from other publications.
4. We are not interested in blogs that more or less exist to promote the author’s products and services.

Let’s start from the bottom. Compliance Building is not a promotional platform. I have no products or services to sell.

Number 3 is not a problem. The content of Compliance Building is unique. It may not be interesting all of the time. It may not appeal to a broad audience. But it’s not just cut and paste from other publications.

Number 2 is a where there is a disconnect. I’m a lawyer, but not all compliance professionals are lawyers. A large portion of the stories include some legal analysis and discussion. The main purpose of Compliance Building is to keep track of all of the things I need to know to be a compliance professional in the real estate private equity industry. That includes lots of statutes and regulations. That includes the learning from enforcement actions brought by the SEC and other regulators. But it also includes non-legal analysis and the business side of compliance.

Number 1 is a similar problem. Am I working in the legal field? A large portion of my current writing is focused on the new and changing legal requirements that have been imposed on real estate private equity fund managers. One of the big challenges is keeping up to date on the regulatory changes. I use Compliance Building to help me keep up to date with those changes. Hopefully, it also helps keep you up to date.

If Compliance Building is useful to you and you think it meets the criteria, then feel free to nominate it. Visit the Blawg 100 Amici nomination page and fill in a fewboxes. Due date is August 9.

I’m working on nominations for a few of my favorite law blogs.

 

Compliance, the Tour de France, and Doping

tour de france

One of the biggest challenges with any compliance program is proving effectiveness. It’s really hard to prove that you prevented a bad thing from happening. You may be able to detect bad things when they occur. But most policies and procedures cannot prove they capture 100% of the bad things. Cycling is a case in point.

The disgraced cyclist Lance Armstrong never failed one of this tests for doping. There were hundreds of tests and none of them proved he was cheating. It turns out the tests failed. Armstrong was doping. He was a liar. He cheated.

On Sunday, Chris Froome of Team Sky crossed the Champs Elysees as the winner of the 100th edition of the Tour de France. He dominated his contenders since the first mountain stage, finishing atop Ax-Trois-Domaines well ahead of his rivals.

Was he too dominant? Was he doping?

He passed the tests. Tests which are much more likely to detect illegal substances than years ago.

Froome is stuck in the position of trying to prove he is clean and did not break the rules. How to you prove that you didn’t break a rule?

Cycling fans, like me and Tom Fox, have been heartbroken to learn that some of our favorite riders were breaking the rules. That makes it hard to have 100% faith in Chris Froome.

It’s not a lack of faith in him; it’s a lack of faith in the testing system. Clearly, the testing regime failed to detect nearly a decade of cheaters. Armstrong’s titles did not fall to the next placed riders during those years, because nearly all of those who stood beside him on the podium were found to also be cheaters.

In looking at a compliance program, do you have faith that it is catching all the cheaters and deterring possible cheaters? Do the regulators and leaders of your firm have faith in your systems? Can you prove compliance? Or merely show that you haven’t caught anyone cheating?

 References:

The New Rule 506(d) and Bad Actors

baD BOYS

At its latest meeting, the Securities and Exchange Commission approve the rule that lifted the ban on general solicitation and advertising for certain private placements. The SEC also adopted the new rule that disqualifies felons and other bad actors from participating in certain securities offerings. The first rule was mandated by the JOBS Act. The “bad actor” rule was mandated by Dodd-Frank.

The bad actor rule makes private placements a bit harder and will require private funds and companies to do more homework in connection with the fundraising. That’s because an issuer cannot rely on the Rule 506 exemption if the issuer or any other person covered by the rule had a “bad actor disqualification.”

I think the starting point is who is covered by the rule. The rule applies to

  • The issuer, including its predecessors and affiliates
  • Directors, executive officers, general partners, and managing members of the issuer
  • Any other officer participating in the offering
  • Anyone who holds 20% or more of the outstanding voting equity securities
  • Investment managers and principals of pooled investment funds
  • Any general partner or managing member, director, executive officer or other officer participating in the offering of a fund sponsor
  • Solicitors paid to sell the securities investors as well as the general partners, directors, officers, managing members or other officer participating in the offering

For fund managers registered with the SEC the employees affected are a narrower group than those in Item 11 on Form ADV. That part of the Form ADV disclosure applies to all employees, other than employees performing only clerical, administrative, support or similar functions. Plus the Form ADV includes all of the officers, partners, directors, and certain affiliates.

The big difference is the 20% threshold for ownership in the company. For startups, that would likely pull some angel investors into the “actor” category.

It’s not clear what to do if the 20% investor is an entity. The rule does not seem to cover that circumstance. I suppose that if Bernie Madoff set up Scumbag Bernie Investor LLC to invest in the fund that would be a mere facade to hide his ownership. If the entity has multiple owners and officers it seems that a single “bad actor” inside the investor should not taint the whole entity.

The other fuzzy item is “officers participating in the offering.” The SEC had declined to merely use job title as the defining line. That would have included everyone who had the title of vice president.

Participation in an offering would have to be more than transitory or incidental involvement, and could include activities such as participation or involvement in due diligence activities, involvement in the preparation of disclosure documents, and communication with the issuer, prospective investors or other offering participants.

I’m not sure how I feel about that guidance. A lot of people end up reviewing the Private Placement Memorandum.

Of those relevant actors to determine if they were bad, they need to have been involved in a “disqualifying event” which includes:

  • Criminal convictions in connection with financial fraud.
  • Subject to an order of judgement that limits involvement in the securities industry.
  • Subject to an order of judgement that limits involvement in the banking industry
  • Subject to an order of judgement from the CFTC.
  • Subject to a US Postal Service false representation order.

The actual list is much more convoluted, long, and unwieldy. That means putting together a questionnaire will be difficult. For private fund adviser, it does not match up squarely with the Form ADV disclosures and is not as clearly written as the Form ADV disclosures.

The default would be to put together a questionnaire and just use the text of Rule 505(d). I’m not sure it’s comprehensible by a non-lawyer. Actually, I’m not sure it’s easily comprehensible by a lawyer. I just added it to my questionnaire for Form ADV, making it extend to four pages.

The next question is how much diligence you need to conduct to determine if one of your “actors” is a “bad actor”? The rule requires the issuer to exercise “reasonable care.” Which in “light of the circumstances, the issuer made a factual inquiry into whether a disqualification exists.”

That’s the kind of fuzziness that keeps a compliance officer up at night.

Fortunately, the SEC offers some color to the “reasonable care” in the release.

For example, we anticipate that issuers will have an in-depth knowledge of their own executive officers and other officers participating in securities offerings gained through the hiring process and in the course of the employment relationship, and in such circumstances, further steps may not be required in connection with a particular offering.

So the questionnaire approach should work for employees, unless you have some suspicion that an employee has been up to no good.

What about for investors?

Factual inquiry by means of questionnaires or certifications, perhaps accompanied by contractual representations, covenants and undertakings, may be sufficient in some circumstances, particularly if there is no information or other indicators suggesting bad actor involvement.

That’s enough to let me fall asleep at night. Maybe I’ll need just a little bourbon to take the edge off.

Sources:

Compliance Bricks and Mortar for July 19

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These are some of the compliance-related stories that recently caught my attention.

Why is the ACA making a big deal about the SEC proposed ruling? by Dan Rosen

Simply put, the proposed SEC ruling is (a) trying to fix a problem that doesn’t exist; (b) will increase risk in our early-stage deals by adding a dimension of regulatory risk that isn’t there now; (c) will increase the cost and time for getting deals done; and (d) violates the Congressional intent of the JOBS Act, which recognized that using angel investment to create more jobs in startup companies was good for the US.

Finra’s lobbying expenses drop over last year but still dwarfs adviser groups by Mark Schoeff Jr. in Investment News

The Wall Street regulator of broker-dealers has decreased its spending on lobbying federal lawmakers substantially over the past year, in part because it’s not pushing for legislation that would allow it to expand its reach to investment advisers.

Hedge fund advertising by William Carleton

Here, a week after the big SEC open meeting (click here to run a rebroadcast of the live blogging Joe Wallin and I did during the meeting webcast), we are still thinking through the implications of how the proposed rules will impact startups, angels and venture capitalists. But it probably make sense to get educated enough on the hedge fund advertising critique that we can start to make some distinctions between Reg D filing requirements for funds, and proposed filing requirements for individual issuers.

Snapchat: The New Way to Tell Everyone that “Blue Horseshoe Loves Anacott Steel” by Bruce Carton

Frankly, I’m a little disappointed that I didn’t figure this angle out on my own, given (a) the amount of time I spend writing about insider trading, and (b) the fact that I have two teenagers actively using Snapchat, but hey, better late than never. This morning, the Daily Intelligencer reports, CNBC’s Jim Cramer asked Preet Bharara, the U.S. Attorney for the SDNY, if Snapchat can be used to share insider trading tips without leaving a trail. Bharara’s response: “I don’t even know what you’re talking about.”

What to Make of the New Rule 509

509

While I was waiting to see what surprises the Securities and Exchange Commission had included in the rule lifting the ban on general solicitation and advertising for private placements, the SEC slipped in an unexpected surprise. The SEC is proposing a new Rule 509.

Rule 509 would require disclosures on “any written communication that constitutes a general solicitation or general advertising.”

(1) The securities may be sold only to “accredited investors,” which for natural persons are investors who meet certain minimum annual income or net worth thresholds;

(2) The securities are being offered in reliance on an exemption from the registration requirements of the Securities Act and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act;

(3) The Commission has not passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials;

(4) The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities;

(5) Investing in securities involves risk, and investors should be able to bear the loss of their investment.

(6) For private funds: the securities offered are not subject to the protections of the Investment Company Act.

These are not a big deal by themselves. I already have some variation of these lined up for pitchbooks and marketing materials. Given that we have no better definition of what constitutes “general solicitation and advertising” I expect we’ll see these in all materials.

The other requirement is a disclosure for performance data used by private funds.

  • the performance data represents past performance.
  • past performance does not guarantee future results.
  • current performance may be lower or higher than the performance data presented.
  • the private fund is not required by law to follow any standard methodology when calculating and representing performance data.
  • the performance of the private fund may not be directly comparable to the performance of other funds.
  • a telephone number or a website where an investor may obtain current performance data.

Again, I don’t think any of these are a big deal. I think that private fund managers will merely need to adjust their disclosures pages to include this information.

The new Rule 509 also requires that performance data must be of the most practicable date and you must disclose the period for which performance is presented.

The mutual fund industry was concerned about the advertising for hedge funds alongside the highly regulated advertising for mutual funds. Clearly, the SEC is trying to level the playing field.  Mutual funds are limited in what they can do. I suspect they were concerned that hedge funds would be able to make more wild claims and not have to spew out the legal disclaimers that take up a big chunk of mutual fund advertising.

Lastly, if the performance presentation does not include the deduction of fees and expenses, the private fund must disclose that the presentation does not reflect the deduction of fees and expenses and that if such fees and expenses had been deducted, performance may be lower than presented.

I suspect this one is designed to scoop up the venture capital funds that managed to escape the investment adviser registration requirement under Dodd-Frank. Funds with registered fund managers already have to present net returns.

Rule 509 is merely proposed so it could be changed. But I doubt we will see any changes. The SEC will want to keep a tight lid on private fund advertising. I expect this rule will be ready to go shortly after advertising is permitted.

I don’t find anything particularly objectionable in Rule 509. The SEC clearly states in the release that failure to comply will not result in loss of the 506(c) offering.

However, a failure to comply that results in a enforcement action could lead to a ban under the new Rule 507(a). It’s not a footfault; it requires an action by the SEC or the courts. I suspect a examiner seeing a mistake will not blow up the private placement unless the examiner refers it to enforcement and enforcement decides to bring charges.

The other hook is a proposed change to Rule 156 under the Securities Act that would make it apply to private funds. More that later.