The SEC is suing crypto giant Binance, here’s all the details - The Verge
source link: https://www.theverge.com/2023/6/5/23749596/sec-binance-lawsuit-crypto-exchange-allegations
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The SEC’s case against Binance, a live reading by Liz Lopatto
By Richard Lawler, a senior editor following news across tech, culture, policy, and entertainment. He joined The Verge in 2021 after several years covering news at Engadget.
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So the SEC is suing Binance, and let me tell you: I love a dang legal document. Please join me on this stupid journey as I live blog my favorite direct quotes from the complaint.
The best thing about any legal case, from my perspective, is the hot goss. I grew up in a small town where gossip was a contact sport, and I have discovered that government lawyers get much better, juicier gossip than I do because they have more extensive discovery methods. Crypto communicates in group chats, which means they’ve probably written some very stupid things at Binance. In fact, I know that already because there were some very stupid things in the CFTC complaint about Binance.
Given the previous history with Binance’s legal complaints, I am very excited. The quotes last time were great. As I wrote then:
Now to be clear, I don’t think Binance is the only entity ever to decide that skirting US law to acquire more customers — after all, US pharma companies have been making billion-dollar settlements over that exact same “biz decision.” But I do think explicitly writing that you are deliberately doing that is a real clown move. A government body can’t hold you accountable for conversations they can’t hear; they can, however, throw anything you put in writing back in your face. And mens rea matters — you can’t call something an oopsily doopsily mistakey-wakey if you’re also saying in a written record that it’s a business decision.
Can the SEC pull out hilarious new things we did not see from the CFTC? Let’s find out.
TODAY, 6:17 PM UTC
Okay I’ve hit the prayers for relief.And I gotta say, the CFTC has the spicier quotes! Still, this was an enlightening read, in that the corporate shenanigans alleged here are yikes yikes yikes. Yikes!
BNB appears to be down about 10 percent on the news, as of this writing.
TODAY, 6:11 PM UTC
Some other securities, according to the SEC!SOL, ADA, MATIC, FIL,ATOM, SAND, MANA, ALGO, AXS, and COTI
Yikesarooney. Binance is not the only exchange that lists many of these. Guess that’s a warning shot?
TODAY, 6:08 PM UTC
BUSD is a security?I was not entirely surprised to see BNB as an unregistered security — lots of reasons why! — but BUSD is theoretically at least a stablecoin. And yet:
From September 2019 through February 2023, Binance offered and sold BUSD to U.S. investors as part of a profit-earning scheme within the Binance ecosystem, touting returns for investors from simply buying BUSD or deploying it in Binance profit-generating programs.
Since its inception, BUSD has been offered and sold as an investment contract and, therefore, as a security.
TODAY, 6:03 PM UTC
Hahahahah whatSigma Chain also engaged in wash trading on or around the time when BAM Trading made at least 65 new crypto assets, including crypto asset securities, available for trading on the Binance.US Platform. Between January 1, 2022 and June 23, 2022 alone, Sigma Chain accounts engaged in wash trading in 48 of 51 newly listed crypto assets.
TODAY, 6:01 PM UTC
Not only did wash trading occur on Binance.US, it was done by one of Zhao’s companies.Yikes!
Much of this wash trading occurred through numerous accounts affiliated with Sigma Chain, anentity owned and controlled by Zhao and operated by Binance employees at Zhao’s direction.
Sorry what?
. On June 23, 2020, for example, in discussing a drop in trading volume from market makers on the Binance.US Platform, BAM CEO A asked the BAM Trading’s Sales Director to “pull [Sigma Chain’s] data to hold them accountable too . . . they should be consistent too – we can ask for more volume but they’ve been up to 50% for us before.”
Sorry, what?
Wash trading between Sigma Chain’s accounts occurred from the launch of the Binance.US Platform in 2019 through at least June 23, 2022. This wash trading activity corrupted the Binance.US Platform’s reported trading volume in a strategic pattern that coincided with at least three critical periods for crypto asset investors and the Equity Investors: (1) the Binance.US Platform’s launch in September 2019; (2) BAM Trading’s making available certain new crypto asset securities for trading on the Binance.US Platform; and (3) the months leading up to BAM Trading’s seed funding round starting in September 2021.
Whoa is right:
On January 6, 2021, the Sales Director messaged BAM CEO A and other BAM Trading employees “fyi these are ALL sigma chain,” and then listed 20 account numbers. Another BAM Trading employee responded, “whoa.”
TODAY, 5:55 PM UTC
Just made a noise that scared my cat.From May 2020 to February 2022, Alameda Research, the trading firm associated with FTX founder Sam Bankman-Fried, was often the OTC Desk’s only counterparty vis-à-vis BAM Trading customers.
TODAY, 5:53 PM UTC
“[W]hat became clear to me at a certain point was CZ was the CEO of BAM Trading, not me.”So after the first CEO tried to get some independence, Changpeng Zhao replaced her with CEO B.
BAM CEO B tried to implement plans to migrate those functions and control ofthe crypto assets from Binance to BAM Trading and into the United States, but Zhao quickly overruled him, causing BAM CEO B to resign approximately three months into his tenure.
Okay!
TODAY, 5:51 PM UTC
“Project 1776 is for our independence.”So while the BAM CEO was trying to get some independence from Binance, a “news article” (probably this one!) dropped with details of Project Tai Chi.
As BAM CEO A explained to the Binance CFO shortly after the article was released, BAM Trading employees “lost a lot of trust with the article” and “the entire team feels like they’ve been duped into being a puppet.”
TODAY, 5:48 PM UTC
Okay but what was the name of the yacht?For example, by 2021, at least $145 million was transferred from BAM Trading to a Sigma Chain account, and another $45 million of funds were transferred from BAM Trading’s Trust Company B account to the Sigma Chain account. From this account,Sigma Chain spent $11 million to purchase a yacht.
TODAY, 5:47 PM UTC
Ahhhh and now we have conflicts of interest!So Sigma Chain was a market maker on Binance.US because it was Binance’s “own,” the complaint claims Zhao said. Merit Peak was also a market maker controlled by Zhao. “Sigma Chain’s and Merit Peak’s activity on the Binance.US Platform, and their undisclosed relationship with Zhao and Binance, have involved and continue to present conflicts between Zhao’s financial interests and those of Binance.US Platform’s customers,” the complaint says.
Also, one of the CEOs of BAM Trading didn’t like it:
“To the extent that these two liquidity providers were significant sources of liquidity, meaning that our customers couldn’t, you know, clear orders without the presence of those makers on our platform, I thought that was a real problem. It suggested that the company was, in fact, heavily dependent on CZ, not just as a control person but also as an economic counterparty and that is problematic, so I thought we needed to look into deplatforming them.”
Here’s that chart again lolTODAY, 5:39 PM UTC
Shrieking, wailing, gnashing my teeth.“BAM Trading did not even implement a formal policy concerning its crypto assets custody and operations until May 15, 2023.” Today is June 5, 2023. For the record. FYI.
TODAY, 5:38 PM UTC
Auditors on BAM Trading: “This makes it very difficult to ensure the Company is fully collateralized at specific points in time.”This is from the third letter an audit firm sent BAM Trading about its various deficiencies. I am sorry I am losing it how on earth did this go on so long.
TODAY, 5:34 PM UTC
dkfjghaeklrgjherktjhekrterjtherkIn addition to controlling BAM Trading bank accounts that held customer funds,at least through December 2022, Binance was the designated custodian for crypto assets deposited, held, traded, and/or accrued on the Binance.US Platform, as expressly recognized in the SLAs. Internal communications indicate that BAM Trading and Binance understood that “.com is the custodian .us uses” and “CZ control[s] the wallet.”
Guys I do not love the banking system but I definitely love it better than whatever the fuck this is.
TODAY, 5:33 PM UTC
“haha [I’m] on a wild goose chase to make sure we have knowledge of where $17M is moving around.”ohhhh my goddddd
Similarly, in December 2020, Binance transferred $17 million from BAM Trading’s bank accounts to Merit Peak. After learning of the transfer, BAM CEO A asked Binance employees about the transaction and eventually learned that the transfer related to Merit Peak’s trading on the Binance.US Platform. BAM CEO A responded, “thanks – helpful. Just had to get explanation anytime someone breaking our limits with massive withdraw[als] I have to ask – where you get that kind of money? And where is it going? . . . haha [I’m] on a wild goose chase to make sure we have knowledge of where $17M is moving around.”
Hahahahaha and people still have money on Binance ohhhhh my godddddd
TODAY, 5:31 PM UTC
What a job!Binance’s finance team could make transfers without BAM Trading’s knowledge, the complaint claims. At one point, the BAM CEO had to go ask what was up:
For example, in June 2020, when Trust Company B alerted BAM CEO A that BAM Trading’s internal transfers had increased from approximately $10 million per day to $1.5 billion per day, BAM CEO A had no knowledge of such transfers, was unable to verify them because she lacked appropriate account access, and, as a result, had to ask Binance (a purportedly separate and 43 distinct company) about the transfer of billions of dollars in BAM Trading’s own account.
TODAY, 5:28 PM UTC
Oh, by the way: the BAM CEOs are singing like birds.That’s right, there are two of them testifying under oath to the SEC:
As BAM CEO A testified, there was “significant opacity” with respect to the Binance.US Platform’s trading data, and she “did not get answers from CZ on why or how or what we would need to do to be able to bring the data over” to the United States. She “wanted custody of the data and ability to interact with the raw data in real-time, as to my directions, not waiting on someone else’s approvals,” but she never received it.
Nor did the situation change when BAM CEO A’s successor (“BAM CEO B”) assumed the role in May 2021. BAM CEO B testified to SEC staff that the “level of ... connection” between Binance and BAM Trading was a “problem” and that he had concluded that BAM Trading “need[ed] to migrate the technology to full [BAM Trading] control.”
TODAY, 5:25 PM UTC
Here’s a fun corporate ownership flowchart.The point here is that Zhao directly controlled Binance US, including hiring the first CEO of BAM Trading. This CEO, unnamed in the documents, took direct orders from Zhao and called Binance the “mothership.”
Also:
Zhao gave final signoff on various decisions relating to the Binance.US Platform’s trading services, including customer account opening processes, development of the front-end access, and creating a reserve to cover ACH deposits.
Oh boy! We love a complicated corporate structure, don’t we folks.TODAY, 5:17 PM UTC
BNB, unfortunately, does not stand for “bed n breakfast” here.When it came to the BNB token, it seems Binance was anticipating regulatory action:
In an internal chat in September 2019, the Binance CFO and the Binance CCO agreed that “CZ [wa]s willing to take the legal risk in listing BNB, if [they could] find a way to quantify it.” They further quantified the legal risk of listing BNB on the Binance.US Platform as “$10 mm in legal fees and settlements,” contrasted to the fact that BNB’s price could “go up 20%.” And, referring to the SEC’s June 2019 enforcement action in SEC v. Kik Interactive for the unregistered offer and sale of crypto assets as investment contracts under Howey, they noted that if a “Kik wells notice happens to BNB, BNB price can go down significantly.” The two also discussed that they would “start prepping everything” for a subpoena and Wells notice, including a “War chest.”
TODAY, 5:05 PM UTC
I am getting the impression that Changpeng Zhao has written some memos he may regret.Besides the VPN thing, the complaint alleges that Zaho himself “Zhao directed Binance to encourage certain U.S.-based VIP customers to circumvent the new KYC restrictions by submitting updated KYC information that omitted any U.S. nexus.”
Here’s what he said in a weekly meeting:
We don’t want to lose all the VIPs which actually contribute to quite a large number of volume. So ideally we would help them facilitate registering companies or moving the trading volume offshore in some way—in a way that we can accept without them being labeled completely U.S. to us.
TODAY, 5:01 PM UTC
I’d tell you to take a shot every time this report mentions VPNs, but I suspect if you do, you will die of alcohol poisoning.Anyway, VPNs were a major part of the CFTC complaint, and now here we see another person advising in writing that VPNs were a strategic asset for Binance:
The Binance Consultant also recommended that Binance take steps to “reduce the attractiveness of enforcement” by U.S. regulators concerning the Binance.com Platform. This included publicly “restrict[ing] US persons’ access to the main Binance site” while privately encouraging U.S. customers to bypass these restrictions through the “strategic treatment” of virtual private networks (“VPNs”) that would disguise their locations and thereby “minimize [the] economic impact” of Binance’s public proclamations that it was prohibiting U.S investors on the platform.
TODAY, 4:55 PM UTC
A significant portion of the allegation so far is about project “Tai Chi.”The SEC alleges this was a deliberate strategy to evade regulatory enforcement, and has been reported on. Anyway, a consultant who operated a US crypto trading firm (👀) made some suggestions:
the Binance Consultant recommended steps to “insulate Binance from US Enforcement.” Those steps included having “[k]ey Binance personnel continue to operate from non-US locations to avoid enforcement risk” and ensuring that “[c]ryptocurrency wallets and key servers continue to be hosted at non-US locations to avoid asset forfeiture.”
TODAY, 4:50 PM UTC
“We are operating as a fking unlicensed securities exchange in the USA bro.”The SEC complaint against Binance is coming in hot, ladies, gentlemen and dirtbags! That’s the chief compliance officer, in 2018.
Here’s a free writing tip: say “fucking” or do not say “fucking” but don’t do “fking” or “f*cking.” Have the courage of your fucking convictions!
TODAY, 3:43 PM UTC
The SEC is suing Binance, the world’s largest crypto exchange
Illustration by Alex Castro / The VergeBinance, the world’s largest crypto exchange, operated illegally in the US, the US Securities and Exchange Commission alleges in a new lawsuit. Changpeng Zhao, the exchange’s founder, was named in the suit as well.
Read Article >“Defendants have enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk,” the suit begins. It alleges that Binance and Zhao illegally solicited investors, engaged in multiple unregistered investment schemes, and “defrauded equity, retail, and institutional investors about purported surveillance and controls over manipulative trading on the Binance.US Platform, which were in fact virtually nonexistent.”
Mar 27
Binance really loved telling people to use VPNs, allegedly
Nick Barclay / The VergeSo I read through the CFTC complaint against the world’s largest cryptocurrency exchange, Binance, and it seems like the lawyers are having fun with this one. For instance: “Binance’s decision to prioritize commercial success over compliance with US law has been, as Lim paraphrased Zhao’s position on the matter, a ‘biz decision.’” I never get tired of reading these complaints.
Read Article >Now to be clear, I don’t think Binance is the only entity ever to decide that skirting US law to acquire more customers — after all, US pharma companies have been making billion-dollar settlements over that exact same “biz decision.” But I do think explicitly writing that you are deliberately doing that is a real clown move. A government body can’t hold you accountable for conversations they can’t hear; they can, however, throw anything you put in writing back in your face. And mens rea matters — you can’t call something an oopsily doopsily mistakey-wakey if you’re also saying in a written record that it’s a business decision.
Feb 16
Binance had “secret access” to a bank account owned by a partner, and transferred money to a firm affiliated with Binance CEO Changpeng Zhao.Binance.US’s executives were concerned by the outflows because the transfers were taking place without their knowledge, according to messages reviewed by Reuters. The CEO of Binance.US at the time, Catherine Coley, wrote to a Binance finance executive in late 2020 asking for an explanation for the transfers, calling them “unexpected” and saying “no one mentioned them.”
Fine and normal, we haven’t had any recent cryptocurrency issues with secret transfers, have we?
Pagination
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