Maine Office of Securities Enforcement Update

The Maine Office of Securities enforces Maine’s securities laws, licenses broker-dealers, broker-dealer agents, investment advisers, and investment adviser representatives, and reviews registration statements and exemption filings for securities issuers offering to sell securities in Maine. Under the Maine Uniform Securities Act, the Office enjoys broad civil and criminal enforcement authority.

The Office’s recent enforcement actions show that its priorities are in line with those of the North American Securities Administrators Association (NASAA) Working Group, as the Office has targeted its enforcement efforts on digital assets/cryptocurrency-related activities of broker-dealers, investment advisers, and financial services firms.

The Office also remains focused on promissory note fraud, unlicensed broker-dealers and investment advisers, the sale of unregistered securities, and the sale of securities to vulnerable adults.  As a member of the NASAA Working Group, we expect the Office’s enforcement trends to follow those of the NASAA. Below is a summary of the Office’s recent enforcement activity.

State of Maine v. Nelson Cowand

After being named in a criminal complaint filed in November 2021, Nelson P. Cowand was indicted by a Cumberland County grand jury in April 2022 for alleged securities fraud and theft by deception. The indictment, for which the Office served as the investigating agency, alleges that Mr. Cowand sold purported convertible promissory notes to several individuals by falsely representing that the funds would be used for a drug testing laboratory business that had been certified by the relevant accrediting agency.

According to the indictment, this was false, as was Mr. Cowand’s claim that he had invested $400,000 of his own funds into the business. Mr. Cowand pled not guilty. The criminal case, after repeated continuances, is ongoing; Mr. Cowand has filed a motion to suppress evidence and a motion to dismiss on statute of limitations grounds. (These motions and related briefing are sealed).

Multistate efforts to address cryptocurrency-based products

Acting Maine Securities Administrator Judith Shaw is a member the NASAA Working Group, and their priorities are reflected in the Office’s own enforcement activities. In connection with multistate investigations conducted by NASAA members, Maine entered into two recent consent orders dealing with lending products related to cryptocurrencies.

In June 2022, the Office signed a consent order with BlockFi Lending LLC in connection with BlockFi’s offer and sale of interest-bearing digital asset accounts called BlockFi Interest Accounts, or BIAs. Through BIAs, investors lent digital assets to BlockFi in exchange for a variable monthly interest payment, paid in cryptocurrency.

Though BlockFi told investors that its institutional loans were “typically” overcollateralized, only a small minority were, according to the consent order. At the end of 2021, BlockFi held nearly $12 million in BIA investor assets from Maine residents. According to the consent order, BIAs were securities under the Maine Uniform Securities Act, which BlockFi did not register, and which it sold without being licensed as a broker-dealer or agent. In 2022, BlockFi entered into parallel consent orders with each state and with the SEC, paying a total of $100 million.

BlockFi neither admitted nor denied the findings of fact and conclusions of law in Maine’s consent order. It agreed to pay a civil fine of $943,396 to Maine in four payments through 2024. However, in November 2022, BlockFi filed for Chapter 11 bankruptcy, a victim of turmoil in the crypto markets and of its exposure to cryptocurrency exchange FTX. The current status of BlockFi’s unpaid obligations to Maine is unclear.

In February 2023, Nexo Capital, Inc. reached a settlement related to its offer and sale of interest-bearing digital asset accounts called “Earned Interest Product,” or EIP. Nexo provides crypto-based financial services to retail and institutional customers, including trading, borrowing, and lending services.

Through its EIP, Nexo offered investors interest on crypto assets that were loaned to Nexo. The interest rate offered depended on the length of the loan and the type of crypto loaned, among other factors. The NASAA Working Group found that Nexo failed to disclose material information related to EIP interest generation, Nexo’s regulatory compliance, and Nexo’s financial stability.

As of July 2022, there were 273 Maine EIP accounts with a total value of around $3.7 million. According to the Maine consent order, Nexo’s offer and sale of the EIP were subject to the Maine Uniform Securities Act, and Nexo offered and sold securities that were not registered. (Nexo neither admitted nor denied the findings of fact and conclusions of law in the consent order.)

In the consent order with Maine, Nexo agreed to stop offering or selling EIP to new investors in Maine, stop accepting further investments or funds in the EIP by current Maine investors, and pay a total of $424,538 in the form of a civil fine and funds for investor education. The Nexo consent order was entered in parallel with consent orders with each of the states, through which Nexo paid $22.5 million in total.

Multistate settlement with Robinhood

In May 2023, the Office entered into a consent order with Robinhood Financial LLC, a well-known broker-dealer that offers securities trading to retail customers through its mobile app. The settlement was part of a larger, multistate settlement negotiated by NASAA earlier this year in which Robinhood paid $10.2 million to various state securities administrators for various operational and technical failures.

According to the Maine consent order, Robinhood, a licensed broker-dealer in Maine since 2014, violated the Maine Uniform Securities Act in several ways over the past several years, largely as a result of failing to scale up its systems and controls to match the explosive growth in user numbers. The consent order described inadequacies in Robinhood’s customer identification system, significant platform outages that left customers unable to execute trades, and inadequate customer response systems and customer support, among other issues. Robinhood, which had over 40,000 Maine customers in 2020, neither admitted nor denied the findings in the consent order and agreed to make a payment of $200,000.

Order to cease and desist and denying exemptions against Educational Empowerment Corporation

In June 2023, the Office issued a summary order requiring a Texas-based company doing business as “Educational Empowerment Corporation” and its chief executive to stop offering unregistered securities representing investments in an online faith-based algebra class for homeschoolers.

According to the order, the products, called “charms,” were offered through the company’s website and promised returns between 2,093% and 3,242%. The company first claimed it was exempt from securities registration in Maine as a nonprofit, though it failed to provide evidence of that claim. The company next claimed that it was offering only to “accredited investors,” though the Office found that the company was unable to rely on this exception to the securities registration requirement. The Office scheduled a hearing for September 14, 2023 on whether the June summary order should be made final, modified, or vacated.

This enforcement action appears to have no connection to Maine, other than the respondent company’s use of a website accessible to users in Maine (and elsewhere). With this action, Maine appears to be the second state, after Vermont, to initiate enforcement action against Educational Empowerment Corporation and its executive.

Actions against unlicensed broker-dealers and investment advisers

In 2023, the Office has already entered into two consent agreements with broker-dealers and individual broker-dealer agents, and two additional consent agreements with investment advisers and investment adviser representatives that were not licensed in Maine.

In the two consent agreements involving investment advisers, the investment adviser representatives relocated to Maine from out of state and continued to provide investment advisory services before they were licensed in Maine. Though one case involved an unlicensed period of only eight days, and the other case involved an unlicensed period of only 16 days, both investment advisors agreed to disgorge all investment advisory fees received during those periods ($15,799 in one case and $5,982 in the other). In addition, both the investment adviser representative and the investment advisor paid small civil fines.

Similarly, in the two consent agreements involving broker-dealers, the broker-dealer and its agent effected securities transactions for a small number of Maine retail clients. In the first case, only two transactions for a single Maine client were involved. In the second, four clients and a total of 34 securities transactions were involved over the course of more than four years.

In each case, the broker-dealer neither admitted nor denied that their conduct violated Maine’s securities laws, but disgorged the compensation it earned from effecting the transactions for Maine customers and paid a small civil fine.

These types of small enforcement actions for serving clients in Maine without proper licenses—which likely result from inattention on the part of the financial institution—have long been a staple of the Office. The fact that four such actions were concluded in the first half of 2023 serves as an important reminder for broker-dealers and investment advisers to ensure that they are properly licensed in Maine.

In August 2023, the Office also entered into several small consent agreements with broker-dealers for their failure to conduct on-site (rather than virtual) inspections of their Maine branch offices. The Office takes the position that its rules require broker-dealers to conduct on-site branch office inspections of Maine branch offices. Each broker-dealer, without admitting or denying the allegations, paid a small civil fine.

The Office’s enforcement priorities for the remainder of 2023 are likely to include traditional concerns such as suitability of investment adviser recommendations, protection of vulnerable adults, and fraudulent promissory note schemes, as well as trending areas such as cryptocurrencies and other digital assets. We expect the Office to continue to negotiate consent orders in conjunction with NASAA enforcement actions.

If you or your firm have questions about the above or any matters involving enforcement or regulatory actions by state securities regulators, the SEC, or self-regulatory organizations such as FINRA, please contact authors Kyle Noonan or Mark Rosen.