Crypto Bankruptcies Result in "$700 Million Bonanza" for Lawyers, Consultants

A $700 Million Bonanza for the Winners of Crypto’s Collapse: Lawyers

Lawyers, accountants, consultants, cryptocurrency analysts and other professionals have racked up more than $700 million in fees since last year from the bankruptcies of five major crypto firms, including the digital currency exchange FTX, according to a New York Times analysis of court records. That sum is likely to grow significantly as the cases unfold over the coming months.

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Among the biggest winners from the five cases are two major law firms. Sullivan & Cromwell, which is managing FTX’s bankruptcy, has charged more than $110 million in legal fees and recorded over $500,000 in expenses. Kirkland & Ellis has billed $101 million for its work on three of the crypto bankruptcies, with $2.5 million in expenses, according to The Time’s analysis.

SEC Charges Internet Message Board User in Alleged Market Manipulation Scheme

On September 1, 2023, the Securities and Exchange Commission charged Jeremy Koski, a resident of Hawaii, with securities fraud in connection with his manipulation of the trading market for structured equity securities backed by certain J.C. Penney Company, Inc. debentures (“JCP Debentures”), which trade over the counter under the symbol COTRP. The Commission alleges that Koski fabricated and anonymously posted fake documents on internet message boards under different usernames in order to boost the trading price of COTRP and increase the value of his large position in the stock.

As alleged in the SEC’s complaint, in May 2021, Koski posted fake notices on U.S. Bank letterhead falsely stating that the JCP Debentures would be redeemed early at their full value, causing a 75% spike in the price of COTRP. In September and November 2021, Koski also allegedly fabricated and disseminated phony COTRP press releases purporting to announce that “COTRP will be the first publicly traded security fund to convert to a cryptocurrency,” and that this “cryptocurrency conversion” would “allow the fund to recover the face value of $25 as it opens up to a new world of digitized currency.” As alleged, Koski knew that these statements were false.

The SEC Is About To Rock Your World

No one is clear on how the new rules will be enforced. In the event of a breach, the SEC will likely carefully review a firm’s earlier annual self-assessment of cybersecurity risks and the steps taken by management to address them. Additionally, although the proposed rules do not dictate specifically what a firm should do for protection—in no small part because such prescriptions would quickly become obsolete— the regulators also will likely closely examine whether the firm has followed the industry’s “best practices” on cybersecurity.

What that means precisely remains unclear. It clearly involves spending a lot more money on cybersecurity. The largest and most equipped firms will likely set the bar for the SEC’s expectations. Smaller entities will need to rely on scalable solutions and be better at informing clients. Moreover, like technology, these standards are never static and will evolve as more firms are breached and as threats change, forcing wealth managers to spend even more.

The SEC has not yet taken a position that industry participants must absolutely appoint a chief information security officer, also called a CISO, to manage cybersecurity risks, but this requirement would be consistent with its past practices….

Law firms become latest battleground in US diversity fight

The architect of the Supreme Court victory against affirmative action at US universities is now targeting recruitment practices at the nation’s largest law firms, in a strategic ploy that could pave the way for broader challenges to corporate America’s diversity and inclusion schemes.

Edward Blum, a conservative campaigner who in June won a decades-long battle to end racially-conscious admissions at US colleges, has already sued global firms Perkins Coie and Morrison Foerster, arguing that prestigious fellowships designed to attract “historically under-represented” applicants are illegal. He told the Financial Times he was gearing up to potentially file lawsuits against similar firms “over the next few weeks”.

Allen Stanford Denied Bid for Compassionate Release Once Again

Releasing convicted fraudster Allen Stanford from prison after he’s served only 13 years of his 110-year sentence would be entirely inconsistent with federal sentencing policy, according to Judge David Hittner in Houston.

Hittner, a judge for the US District Court for the Southern District of Texas, had already denied Stanford’s latest bid for compassionate release in a July 25 order, but was directed to explain his reasoning after Stanford appealed.

Meme Stock Influencers Lose Bid to Dismiss Pump-And-Dump Charges

Seven social media influencers accused of orchestrating a $114 million pump-dump-scheme lost their bids to dismiss securities fraud charges, after a federal court in Houston said their allegedly fraudulent statements weren’t protected speech.

“The First Amendment has never been a shield to fraud,” the US District Court for the Southern District of Texas said.

The defendants argued that predictions and opinions aren’t actionable. But a prediction or opinion made in bad faith in furtherance of a conspiracy can be, Judge Andrew S. Hanen said.

Binance’s Head of Product Mayur Kamat Departs

Binance has seen another senior executive depart the company, with Global Product Lead Mayur Kamat heading for the door after almost a year and a half at the cryptocurrency exchange.

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Kamat’s departure follows those of Chief Strategy Officer Patrick Hillmann, Senior Director of Investigations Matthew Price and SVP for Compliance Steven Christie, who left the company in early July. Leon Foong, head of Asia-Pacific, resigned last week, Bloomberg reported Aug. 31.

Their departures were linked to the way founder Changpeng “CZ” Zhao responded to the investigation of Binance by the U.S. Department of Justice, according to reports. CZ described the reports as “FUD” (fear, uncertainty and doubt).

SEC’s First Foray Into NFTs Stirs Fears of More Enforcement

The Securities and Exchange Commission last week said it settled with Impact Theory LLC over charges the company conducted an unregistered securities offering when it sold almost $30 million worth of NFTs.

The SEC has been aggressive in its efforts to police crypto markets. The action against Impact Theory, the agency’s first over NFTs, widens the SEC’s sweep over products it views as securities. Industry attorneys expect the SEC to bring more NFT enforcement actions soon.

“I think what the SEC is trying to do is build out the guide rails of how the rules apply to NFTs by simply dropping enforcement actions, rather than going through customary regulatory procedures,” said Andy Lee, an attorney at Foley & Lardner LLP who helps to lead the firm’s Digital Assets, Web3, & NFT practice area. “I think you’re going to see more in the next couple months.”

What to Watch in the World of D&O

Every year after Labor Day, I take a step back to survey the most important current trends and developments in the world of Directors’ and Officers’ liability and insurance. This year’s review is set out below. As the following discussion shows, this is a particularly interesting time in the world of D&O.