S&P Dow Jones Indices Charged for Failures Relating to Volatility Index

The SEC announced settled charges against S&P Dow Jones Indices LLC for failures relating to a previously undisclosed quality control feature of one of its volatility-related indices, which led S&P DJI to publish and disseminate stale index values during a period of unprecedented volatility.
 
 
The SEC’s order finds that the S&P 500 VIX Short Term Futures Index ER (Index) published by S&P DJI was intended to calculate values based on real-time prices of certain CBOE Volatility Index (VIX) futures contracts.  According to the order, S&P DJI licenses the Index to, among others, issuers that use it to offer securities, including the issuer of the inverse exchange-traded note called XIV, and the license agreement requires S&P DJI’s approval of the description of the index in offering documents.  On Monday, Feb. 5, 2018, the VIX experienced a spike of 115%, but the Index remained static during certain intervals between 4:00 p.m. and 5:08 p.m. that day.  According to the SEC’s order, this was due to an undisclosed “Auto Hold” feature, which is triggered if an index value breaches certain thresholds, at which point the immediately prior index value continues to be reported.  The SEC found that XIV’s issuer derived information about the Index from S&P DJI’s public disclosures about the Index, but the Auto Hold feature had never been publicly disclosed.  The SEC’s order finds that S&P DJI personnel did not release the Auto Hold for the Index during the referenced intervals, as they had the ability to do, resulting in the publication and dissemination of stale and static Index values, rather than values based on the real-time prices of certain VIX futures contracts.
 
 
The SEC’s order finds that, because the Index was the primary input for the calculation of the XIV ETN’s indicative value, the ETN’s indicative values published to the market during the same intervals were similarly static and, as a result, the indicative values being reported in real-time were higher than they would have been if the Auto Hold had not been triggered.  While the Auto Hold was in place freezing the values being published to the market, XIV’s indicative value breached a key metric, which provided XIV’s issuer the right to accelerate all outstanding notes.  According to the SEC’s order, XIV, therefore, had an economic value that was substantially lower than what had been publicly reported and was at risk of being accelerated by its issuer.
 
 
 
“Index providers like S&P DJI play a crucial role in the financial markets,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “When index providers license their indices for the issuance of securities, as S&P DJI did here, they must ensure that the disclosure of critical features of their products, as well as the publication of real-time values, are accurate.”
 
 
 
The SEC’s order charges S&P DJI with violating Section 17(a)(3) of the Securities Act.  Without admitting or denying the SEC’s findings, S&P DJI agreed to a cease-and-desist order and to pay a $9 million penalty.
 

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SEC Approves Registration of First Security-Based Swap Data Repository; Sets the First Compliance Date for Regulation SBSR

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SEC Charges Spot Tech House and Executives in $100 Million Fraud

The SEC has charged Israeli-based Spot Tech House Ltd., formerly known as Spot Option Ltd., and two of its former top executives, Malhaz Pinhas Patarkazishvili (also known as Pini Peter) and Ran Amiran, with deceiving U.S. investors out of more than $100 million through fraudulent and unregistered online sales of risky securities known as binary options.

According to the SEC’s complaint, Spot Option – under the control of Patarkazishvili, the company’s founder and former chief executive officer, and Amiran, the company’s former president – defrauded retail investors worldwide through a scheme involving the sale of online binary options. Binary options are securities whose payouts are contingent on the outcome of a yes/no proposition, typically whether an underlying asset will be above or below a specified price at the time the option expires. 

The SEC has previously charged several entities and individuals in connection with their involvement in the sale of binary options using the Spot Option platform, including in the SEC v. Banc de Binary, SEC v. Beserglik, and SEC v. Senderov cases.

The SEC alleges that the defendants developed nearly all of the products and services necessary to offer and sell binary options through the internet, including a proprietary trading platform, and that they licensed these products and services to entities they called “white label partners,” who directly marketed the binary options. 

According to the complaint, Spot Option instructed its white label partners to aggressively market the binary options as highly profitable investments for retail investors. As alleged, investors were not told that the defendants’ white label partners were the counter-parties on all investor trades, and thus profited when the investors lost money. To ensure sufficient investor losses and make the scheme profitable, Spot Option allegedly, among other tactics, instructed its partners to permit investors to withdraw only a portion of the monies the investors deposited, devised a manipulative payout structure for binary options trades, and designed its trading platform to increase the probability that investors’ trades would expire worthless. According to the complaint, the defendants’ deceptive business practices caused U.S. and foreign investors to lose a substantial portion of the money they deposited to their trading accounts. The defendants allegedly made millions of dollars as a result.

“Through our action against Spot Option and its executives, which follows a series of actions against others who allegedly used Spot Option’s binary options platform to victimize investors, we demonstrate our commitment to holding those at the top accountable,” said Melissa R. Hodgman, Acting Director of the SEC’s Division of Enforcement. “As these binary options cases show, investors should be on their guard whenever they see high-pressure sales tactics and too-good-to-be-true promises of returns or performance.”

“Spot Option’s trading platform allegedly supported a worldwide binary options fraud,” said Jennifer S. Leete, Associate Director in the SEC’s Enforcement Division. “This action shows that the SEC will work with its foreign regulatory partners to pursue international actors who defraud U.S. investors.”

The SEC’s complaint, filed in federal district court in Nevada, charges Spot Option with violating the anti-fraud and registration provisions of the federal securities laws, and Malhaz Pinhas Patarkazishvili and Ran Amiran with violating the registration provisions of the federal securities laws and with controlling Spot Option in its violations of the anti-fraud provisions of the federal securities laws. The complaint seeks disgorgement of ill-gotten gains, prejudgment interest, financial penalties, and permanent injunctions against all three defendants.

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