Coinbase's Novel Defense to SEC: "But You Let Us Go Public!"

Coinbase Tries Novel Defense in SEC Fight

Coinbase went public in April 2021 after clearing a six-month review. SEC staff bored into its financial reporting and disclosures as well as the company’s belief that its menu of cryptocurrencies shouldn’t be treated as securities, which the SEC regulates. Coinbase’s lawyers argue that by clearing the review, regulators signaled that they “did not think Coinbase’s core business was unlawful.”

But the going-public process isn’t designed to judge whether risks to a company’s future should stop it from selling shares to investors, according to securities lawyers. Other companies whose business models were illegal at the federal or local level have been able to go public, including cannabis firms, gaming businesses and ride-sharing companies. The SEC’s review solely examines how companies disclose those risks to investors in their regulated filings, lawyers said.

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Coinbase says its predicament is different from other companies facing legal hazards because “securities law is the SEC’s core competency,” its lawyers wrote last week in their rebuttal letter to the agency. The SEC sent Coinbase an investigative subpoena in December 2020, according to the company’s regulatory filings, when it was in the thick of the agency’s review process.

Senators Open Probe Into KPMG’s Relationships With Failed Banks

Two senators are looking into KPMG’s relationship with three recently failed banks, asking the firm for a wide range of documents for their initial inquiry.

Sens. Richard Blumenthal (D-Conn.) and Ron Johnson (R-Wis.) sent a letter to KPMG CEO Paul Knopp Wednesday asking for “all communications,” records “referring or relating to” the firm’s audits and advisory work, and a “complete list of all advisory work” between KPMG and Silicon Valley Bank, Signature Bank, and First Republic Bank.

New York AG Proposes Landmark Crypto Law, Citing ‘Dysfunction’

New York Attorney General Letitia James proposed a state law to tighten rules over cryptocurrency companies in her latest swing at an industry she claims is suffering from “rampant fraud and dysfunction.”

Under her proposal, New York would require independent public audits of crypto exchanges and bar people from owning both brokerages and tokens to prevent conflicts of interest. In a statement Friday, James called her proposal “the strongest and most comprehensive set of regulations on cryptocurrency in the nation.”

UBS Whistleblower Case Creates Avenue to Upend Retaliation Test

Whistleblowers across various industries potentially face a heightened standard for proving retaliation now that the US Supreme Court is on course to clarify the burden-shifting framework in a case involving a former UBS employee.

The justices agreed earlier this week to hear a former UBS Securities LLC research strategist’s whistleblower case, the crux of which turns on whether the Sarbanes-Oxley Act requires him to show that the bank fired him with retaliatory intent, not just that the protected disclosure was a contributing factor to the decision.

First Republic Bank Will Be Missed…For Its Free Umbrellas

Ed Beardsworth got a tall box in the mail about two years ago. Inside was a sturdy umbrella with a First Republic Bank logo on it.

The gift, showered upon him for opening his accounts, put a pep in his step. Carrying it around “makes me feel like a proper Englishman,” said Mr. Beardsworth, who lives in Palo Alto, Calif.

Now, with First Republic effectively dead, Mr. Beardsworth is coming to see his umbrella not as just a device to keep him dry but as a piece of history. “Like Pan Am swag,” he said.

U.S. bankers urge SEC to probe short sales, reduce ‘abusive’ trading

The American Bankers Association on Thursday urged federal regulators to investigate a spate of significant short sales of publicly traded banking equities that it said were “disconnected from the underlying financial realities.”

In a letter to U.S. Securities and Exchange Commission Chair Gary Gensler, the lobby group said it had also observed “extensive social media engagement” about the health of various banks that was out of step with general industry conditions.

SEC Charges Advisory Firm and Part-Owner for Breach of Fiduciary Duty in Connection with Use of Leveraged ETFs

The Securities and Exchange Commission today announced settled charges against Fargo, North Dakota-based investment adviser Classic Asset Management LLC (CAM) and indirect part-owner and investment adviser representative Douglas G. Schmitz for breach of fiduciary duty in connection with the use of leveraged exchange traded funds (ETFs) in discretionary client accounts.

According to the SEC’s order, from at least 2017 through December 2020, CAM and Schmitz invested advisory clients in leveraged ETFs for extended periods of time, often in significant concentrations, despite warnings in the funds’ prospectuses that the products carried unique risks, were designed to be held for no more than a single trading day, and required frequent monitoring. The order finds that CAM and Schmitz misunderstood these fundamental characteristics of the leveraged ETFs and thus lacked a reasonable belief that the leveraged ETFs were in their clients’ best interests. Further, according to the order, CAM and Schmitz failed to appropriately monitor the performance of these products and, consequently, did not evaluate whether the leveraged ETFs were in their clients’ best interests throughout the holding period. The order also finds that CAM failed to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act.