"Why Coinbase Will Lose Its Battle With the SEC"

Why Coinbase Will Lose Its Battle With the SEC (Wells Notice Edition)

Rather than respond to the Wells Notice privately, as most companies would do, Coinbase, as per usual, instead immediately went into full offensive mode and laid out their defenses on Twitter and elsewhere in an attempt to rally the mob, and publicly shame the SEC into backing off. For whatever reason, Coinbase believes a Twitter rant against the SEC (who will never respond, unless it is with a lawsuit) is the best way to do battle against a Wells Notice.

Not only are Coinbase’s arguments weak, misguided and more akin to public relations than legal positions, but Coinbase’s arguments are also proven failures of crypto-mumbo-jumbo and ludicrous jaundiced rhetoric.

Leading with their four typical talking points, Coinbase asserts: 1) The SEC approved our business and is now going back on their word; 2) We met with the SEC and the SEC would not work with us; 3) We need regulatory clarity because the SEC is stifling innovation; and 4) This is another instance of the destructive SEC practice of regulation by enforcement.

The SEC Is Coming for CoinbaseOn the other hand I think that the SEC’s response is straightforward and obvious:

1. There absolutely are existing, reasonably clear rules about how you register securities.

2. Yes, you’re right, it’s impossible for crypto tokens to follow those rules.

3. Oh well! Guess that means crypto exchanges are illegal.

The position of Coinbase — and of the crypto industry more broadly — is “look, SEC, if you want to have a flourishing system of legally compliant, safe, trustworthy crypto assets, you will need to work with us a little bit to write new rules,” and the position of the SEC is “no, we don’t want that, we want all of you to go away forever.” If Bernie Madoff came to the SEC and said “if you want a higher class of more trustworthy Ponzi schemes, you will need to write a few new rules adapting the disclosure regime to Ponzi schemes,” the SEC would have said “no we absolutely do not want that, we want much less Ponzi scheming, and we certainly do not want to give our approval to Ponzi schemes by writing rules for them.” One gets the sense the attitude to crypto is similar.

Do Kwon TerraUSD Creator Arrested in Montenegro, Charged With Fraud

Terraform Labs co-founder Do Kwon, who presided over a more than $40 billion cryptocurrency implosion last year, was arrested in Montenegro and charged with fraud by US prosecutors.

The developments came just over a month after the US Securities and Exchange Commission sued the 31-year-old as well as Terraform Labs. It is unclear whether his arrest was at the request of US authorities. He also faces an arrest warrant in South Korea on securities-law violations.

Kwon was detained in Podgorica along with Hon Chang Joon while trying to fly to Dubai using falsified Costa Rican traveling documents, Montenegro’s Interior Ministry said in a statement Thursday.

Accounting-Fraud Indicator Signals Coming Economic TroubleUnless you study accounting, you have likely never come across the M-Score, which is the number underlying both the Enron episode and the economywide concern now. The “M” is for manipulation, and uses a company’s financial statements to determine whether it is engaging in manipulation.

Since the 1990s, the metric has been used to identify red flags at individual companies. Now Messod D. Beneish, a professor of accounting at Indiana University who developed the M-Score in the 1990s, and several co-authors have calculated an aggregate score for nearly 2,000 companies. It shows a disturbing pattern in the historical data: The probability of manipulation usually rises rapidly in the quarters before the economy tips into recession.

“We think this is a measure of misinformation in the economy,” said Dr. Beneish. The new aggregate measure was published in a December paper, and the latest data—compiled in March and shared with The Wall Street Journal—shows that the collective probability of fraud across major companies is the highest in over 40 years.

Block Stock Drops on Hindenburg Short Report It Vows to Fight

Block, formerly known as Square Inc., intends to work with the Securities and Exchange Commission “and explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash App business today,” the company said in a statement. “We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors. We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs and controls.”

Chief Risk Officer: The Most Thankless Job in Banking

James Lam had just been hired by a new financial division of GE Capital when he walked into his boss’s office with a problem: He was ordering business cards and had no idea what to put on them. Since his position didn’t really exist, it also didn’t have a title, so he was given permission to invent one. He called himself a chief risk officer.

Thirty years later, as he followed the spectacular implosion of Silicon Valley Bank, there were few people more qualified than Mr. Lam to ask two simple questions.

1. Where was the chief risk officer?2. Wait, the bank didn’t have a chief risk officer?“

Any strong chief risk officer could have and should have prevented what happened at Silicon Valley Bank,” he said.

Redwire Must Face Investors’ ‘Tone at the Top’ Securities Suit

Redwire Corp. investors can move forward with a relatively novel securities fraud suit alleging some senior officers set a problematic tone about the space tech company’s internal controls.

Investors argue that Redwire was plagued by a “tone at the top problem,” referring to management’s attitude toward internal controls and ethics. Investors said they would’ve realized that investing in Redwire was risky if they had known about the problem.

SEC Charges Three Sales Agents at StraightPath Venture Partners With Fraud and Unregistered Broker ActivityThe Securities and Exchange Commission today charged Scott Hollender, Gabriel Migliano, Jr., and Frank Vecchio for selling interests in shares of pre-IPO companies on behalf of StraightPath Venture Partners LLC, despite not being registered broker-dealers, and for misleading investors about the fees associated with those investments. The Commission previously charged StraightPath Venture Partners, StraightPath Management LLC, and its four principals in May 2022 in connection with a $410 million fraud.

The SEC complaint alleges that, between November 2017 and November 2021, Hollender, Migliano, and Vecchio actively solicited investments for interests in funds that were set up as series LLCs, each of which purported to acquire shares of a single pre-IPO company. The defendants allegedly provided investors with marketing materials, advised investors on the supposed merits of the investments, and received transaction-based compensation, all hallmarks of a broker, despite not being registered as brokers. As alleged in the complaint, defendants collectively solicited at least $13 million in investments from at least 115 investors, and, even though each of the defendants received upfront commissions of approximately 10 percent on investments they successfully solicited, the defendants falsely told investors that there were no upfront fees associated with their investments. According to the complaint, the defendants collectively received at least approximately $3.7 million in transaction-based compensation.

The Gap In SEC Individual FCPA Enforcement Actions Is Now 2.5 Years

The last individual FCPA enforcement action by the SEC occurred in October 2020 (a gap that is now approximately 2.5 years).

This 2.5 gap is the most significant gap in individual FCPA enforcement by the SEC in nearly a decade and is approaching the longest gap in approximately 20 years. (See here).

Since October 2020 there have been 13 corporate SEC FCPA enforcement actions and none of them have involved related actions against individuals.

Not one.