After Bankman-Fried Conviction, SDNY Warns: "We Have Enough Handcuffs for All of You"

Statement Of U.S. Attorney Damian Williams On The Conviction Of Samuel Bankman-Fried

“Sam Bankman-Fried perpetrated one of the biggest financial frauds in American history – a multibillion-dollar scheme designed to make him the King of Crypto – but while the cryptocurrency industry might be new and the players like Sam Bankman-Fried might be new, this kind of corruption is as old as time. This case has always been about lying, cheating, and stealing, and we have no patience for it.

When I became U.S. Attorney, I promised we would be relentless in rooting out corruption in our financial markets. This is what relentless looks like. This case moved at lightning speed – that was not a coincidence, that was a choice. This case is also a warning to every fraudster who thinks they’re untouchable, that their crimes are too complex for us to catch, that they are too powerful to prosecute, or that they are clever enough to talk their way out of it if caught. Those folks should think again, and cut it out. And if they don’t, I promise we’ll have enough handcuffs for all of them.

After Sam Bankman-Fried Guilty Verdict, What’s Next for Caroline Ellison, Others

Ellison, Wang and Singh will likely get no or very little prison time for their testimony, several criminal defense lawyers who’ve followed the case said. That compares to the decades in prison Bankman-Fried possibly faces when he’s sentenced in March.

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If they do get some jail time, it will likely be relatively short, and there’s a good chance they’ll serve it at a minimum security camp holding only non-violent offenders, said Justin Paperny, a former UBS Group AG broker who previously served 18 months for fraud.

But even if they avoid jail, Ellison, Wang and Singh are likely to face other forms of punishment. The government could force the three to return money they made from fraud and pay restitution to their victims. Given that the government says FTX customers lost billions, that could be a substantial burden. Fastow was ordered to surrender $20 million over his role in Enron’s $60 billion collapse.

SEC Charges Royal Bank of Canada with Internal Accounting Controls Violations

The Securities and Exchange Commission today announced that Canada’s largest bank, Royal Bank of Canada, will pay a $6 million penalty to settle charges that it violated the books and records and internal accounting controls provisions of the securities laws relating to its accounting for its costs of internally developed software.

The SEC’s order finds that, from 2008 through 2020, Royal Bank of Canada’s accounting controls failed to ensure that the firm accurately accounted for its internally developed software project costs. The order finds that, for a portion of its internally developed software projects, Royal Bank of Canada applied a single rate to determine how much of those projects’ costs to capitalize, but it lacked a reliable method for determining the appropriate rate to apply, in part because it could not adequately differentiate between capitalizable and noncapitalizable costs. This resulted in, among other things, the bank using the same capitalization rate each year without a sufficient basis and capitalizing certain costs that were ineligible under the appropriate accounting methodology.

SEC Charges President/CCO of Prophecy Asset Management Advisory Firm with Multi-Year Fraud

The Securities and Exchange Commission today charged John Hughes, president and chief compliance officer of registered investment adviser Prophecy Asset Management LP, for his involvement in a multi-year fraud that concealed losses of hundreds of millions of dollars from investors.

Prophecy Asset Management advised multiple hedge funds and reported more than $500 million in assets under management. The SEC’s complaint alleges that Hughes and his associates at Prophecy Asset Management misled the funds’ investors, auditors, and administrator about the funds’ trading practices, risk, and performance – all while collecting more than $15 million in fees.

According to the SEC’s complaint, Hughes led investors to believe that their investments were protected from loss, telling them the funds’ capital was shared among dozens of sub-advisers who traded in liquid securities and posted cash collateral to offset any trading losses they incurred. In reality, most of the funds’ capital went to one sub-adviser, who incurred massive trading losses that far exceeded the cash collateral he had contributed. In addition, Hughes caused the funds to invest in highly illiquid investments, which also resulted in substantial losses to the funds. Hughes concealed these losses by fabricating documents and engaging in a series of sham transactions to cover-up the true financial condition of the funds. The complaint also alleges that Hughes deceived investors about the diversification and trading strategies in two other funds. By 2020, after losses in funds that Prophecy Asset Management managed amounted to more than $350 million, Hughes and Prophecy Asset Management indefinitely suspended redemptions by investors.

New hedge fund is hiring journalists to not do journalism

Despite the involvement of media vets, including on the founding team and in its investor ranks, this is not a journalistic endeavor. Specifically, the “researchers” will not be speaking with sources inside of companies for the sake of discovering non-public information and then trading on such knowledge, because that would be a clear violation of securities regulations.

Instead, Hunterbrook researchers will need to rely on publicly available information, which likely means the new ranks will be stuffed full of open-source, big data journalists and individuals on the ground in geographies with relatively little traditional media coverage. Not sure if they’ll also employ AI, but would be stunned if they didn’t.

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One reason a story could publish without a trade is that the researcher uncovered non-public information (i.e., acted like a journalist).

WhatsApp-ening? The SEC’s “Off-Channel” Communications Sweep

One recent enforcement trend has been especially impactful to the bottom line, resulting in the SEC and the Commodity Futures Trading Commission (CFTC) penalizing registered entities more than $2 billion in less than two years for a common practice. What is this deeply troubling behavior? Securities or commodities fraud? Try again. Deceptive practices that harm customers or their investments? Nope. Still stumped? Individual employees of registered broker-dealers and investment advisers had been using WhatsApp, text messages and iMessages, and personal email such as Gmail to send business-related messages.

Levity aside, regulators are as serious as a heart attack about rules requiring brokers and advisers to preserve business-related messages. In this post, I’ll take stock of the recent enforcement actions in this space, offer some thoughts for industry participants, and note where insurance can be helpful. I’ll also discuss broader implications that these cases may have for public companies outside of the financial services industry. If you are reading this on your phone, please finish the article before sending your next self-destructing message.

SEC’s Peirce questions if crypto court fights are best use of resources

Peirce, for her part, said Monday she doesn’t know if fighting these cases is the best use of resources for the commission.

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“You don’t gamble when you go into the courtroom. You have to be very confident that you have a strong legal case going in, so I do worry that some of the things that we’re doing in the crypto space could have adverse effects on the rest of the agency’s work, both in terms of taking resources away from important work, but also in terms of setting precedents that are that are not [what we should set],” she said.

Rather than regulating by enforcement, she said, “Isn’t it better if, as we see things developing … why don’t we go ahead and help people by thinking through some of the issues ahead of time? And I think that would give people who are really just trying to build the technology … it would allow them to just kind of do their thing, understanding the general parameters. I think it’s just a much more efficient way to regulate rather than trying to do this through enforcement.”

Will “expert” allegations become the next big thing in securities litigation?

Over 25 years ago, Congress enacted heightened pleading standards for securities fraud claims to deter strike suits. A recent opinion from a divided 9th U.S. Circuit Court of Appeals panel held that plaintiffs satisfied those standards by relying on a retained expert who provided a post-hoc review of allegedly misleading statements.

The decision, E. Ohman J:Or Fonder AB v. NVIDIA Corp., 81 F.4th 918 (9th Cir. 2023), raises an interesting question: Can plaintiffs just hire an expert to survive a motion to dismiss a securities fraud complaint? The NVIDIA decision suggests the answer is “no,” even while sustaining the complaint before it, but as a dissenting opinion points out, the NVIDIA decision could lead to a gradual erosion of the pleading standards if courts do not test each expert’s submission for reliability and contemporaneous evidence of fraud.

SafeMoon

Anyway SafeMoon’s trick was that if you sold your SafeMoon tokens, the SafeMoon protocol would take a 10% “tax.” Thus buying was good and selling was bad, which kept a floor on the price. (For a while.) Half of the 10% tax was used to pay the yield on the other tokens: If you sell your tokens, you pay 10%; if you hold your tokens, you get half of the money that the sellers pay. This creates a further incentive to hold, and the yield that makes the whole thing attractive. This was called “reflection”; SafeMoon’s whitepaper said:

“[T]he reflect mechanism encourages holders to hang onto their tokens to garner higher kick-backs which are based upon a percentages [sic] carried out and dependent upon the total tokens held by the owner. In theory, with the manual burn function … even a small holder at the beginning could potentially walk away with big money at the end of the token’s lifespan.”

The other half of the 10% tax was allegedly stolen by the developers, which is why they are in jail now.