"Crypto got Rakoff’d"

Crypto got Rakoff’d

Rakoff is without doubt the most respected judge in the country when it comes to complex securities matters. His resume would fill a book, and he has written five of those.

He didn’t like the reasoning in the Ripple case and had the opportunity to express that opinion when denying a motion to dismiss the SEC’s fraud case against Terraform Labs and its founder Do Hyeong Kwon (you remember him — the Terra and Luna algorithmic stablecoin promoter — and the crater he left behind before they jailed him in Montenegro?).

Judge Rakoff’s decision disposed of many of the usual defences ginned up by counsel in crypto cases — lack of personal jurisdiction, the “Major Questions Doctrine,” the Due Process Clause, and the Administrative Procedure Act. But it’s Judge Rakoff’s gentle defenestration of the Ripple court’s rationale that’s worth quoting at length, as his writing is as clear as his reasoning.

SEC Chairman Gary Gensler Discusses the Risks to Finance in AI

Gary Gensler would like to talk about something other than crypto. After two years of battling an industry that he says is riddled with scams and fraud, the head of the US Securities and Exchange Commission is focused on a different technology that has all of finance buzzing: artificial intelligence.

Unlike digital coins and nonfungible tokens, AI warrants the hype, according to Wall Street’s top regulator. “This is the most transformative technology of this generation,” Gensler says. “There’s a ‘there’ there—we can get to crypto later. We’re taking so much of what we humans do on a daily basis and automating it.”

SEC Awards More Than $104 Million to Seven Whistleblowers

The Securities and Exchange Commission today announced awards of more than $104 million to seven individuals whose information and assistance led to a successful SEC enforcement action and related actions brought by another agency. Today’s combined award is the fourth largest in the SEC’s whistleblower program’s history.

The seven whistleblowers were composed of two sets of joint claimants and three single claimants, and each provided information that either prompted the opening of or significantly contributed to an SEC investigation. The seven individuals’ assistance to the staff included providing documents supporting the allegations of misconduct, sitting for interviews, and identifying potential witnesses.

Terra and Ripple Cases Won’t Be Crypto’s Only Rude Awakening

Three weeks ago, it seemed to crypto enthusiasts like the clouds were parting, if only just a bit. A July 13 decision by US District Judge Analisa Torres in a case brought by the SEC found that the token XRP was a security when initially sold to institutional investors by its creator Ripple Labs, but not when sold to retail on the secondary market. Crypto rejoiced, XRP rallied and shares of Coinbase — itself a target of the SEC — had their best day in over a year.

Then crypto learned the hard way that judges don’t always agree. In an SEC case on Monday against Terraform Labs and its co-founder Do Kwon (accused by the agency of defrauding investors who lost at least $40 billion when the project blew up), US District Judge Jed Rakoff explicitly rejected Torres’s reasoning for retail investors, saying it depends on how tokens are marketed. Cue ire and clenched fists, along with XRP and Coinbase giving up some gains.

SEC Obtains Emergency Relief to Halt Utah-Based Company’s Crypto Asset Fraud Scheme Involving 18 Defendants

The Securities and Exchange Commission today announced that it obtained a temporary asset freeze, restraining order, and other emergency relief against Digital Licensing Inc., a Draper, Utah based entity doing business as “DEBT Box,” as well as the company’s four principals, Jason Anderson, his brother Jacob Anderson, Schad Brannon, and Roydon Nelson, and 13 other defendants in connection with a fraudulent scheme to sell crypto asset securities to hundreds of U.S. investors that raised approximately $50 million and unspecified amounts of Bitcoin and Ether.

The SEC’s complaint, unsealed yesterday in the U.S. District Court for the District of Utah, charges the defendants in an ongoing scheme that began in March 2021 to sell unregistered securities they call “node licenses.” In hundreds of online videos and social media posts, as well as at investor events, the defendants told investors that the node licenses would generate various crypto asset tokens through crypto mining activity and that revenue-generating businesses in a variety of sectors would drive the value of the various tokens DEBT Box mined, resulting in exorbitant gains for investors. In reality, as alleged, the node licenses were a sham intended to obscure the fact that the total supply of each token was created by DEBT Box instantaneously using code on a blockchain.

U.S. Justice Dept worries about Binance customers weigh on probe

U.S. Department of Justice officials are considering fraud charges against crypto exchange Binance, but are concerned about the cost to consumers, according to people familiar with the matter.

Federal prosecutors worry that if they indict Binance, it could cause a run on the exchange similar to the one that befell now bankrupt platform FTX, causing consumers to lose their money and potentially spurring a panic in the crypto markets, the people said.

Prosecutors are considering other options, such as fines and deferred or non-prosecution agreements, according to the people….

The Moon Emoji Is Securities Fraud

What? The idea here is that the moon emoji represents not just optimism about the stock, not “mere puffery,” but that it represents “an expert insider’s direction to buy or hold.” That is a lot of weight to put on that little emoji. I wonder if some portfolio manager at a big hedge fund loaded up on Bed Bath stock after this tweet, and then the stock tanked and she got called into her boss’s office to explain herself, and she was like “no I had an expert insider direction to buy this stock” and the boss was like “you did?” and she was like “well there’s this moon emoji tweet.” A moon emoji is not really “an expert insider’s direction to buy or hold.” It is just sometimes, “in the meme stock ‘subculture,’” perceived that way.

SEC Charges Electric Vehicle Company and Former CEO and CFO for Misconduct Related to SPAC Transaction

The Securities and Exchange Commission today announced settled charges against Canoo Inc., a company that designs and produces electric vehicles, its former Chief Executive Officer, Ulrich Kranz, and its former Chief Financial Officer, Paul Balciunas, for making inaccurate revenue projections. The SEC also charged Canoo and Kranz with misconduct related to nearly $1 million in undisclosed executive compensation.

The SEC’s complaint against Kranz and Balciunas, filed in federal district court in California, alleges that from August 2020 until March 2021, during which time Canoo became publicly listed through a transaction with a special purpose acquisition company (SPAC), Canoo’s public financial projections were materially inaccurate. According to the complaint, Canoo projected revenue of $120 million for 2021 and $250 million for 2022, in connection with the provision of engineering services to other companies; these projections were allegedly unreasonable because, as Kranz and Balciunas should have known, the two projects on which Canoo based nearly all of its projected revenue were no longer active or feasible. The complaint further alleges that in November 2019, Kranz entered into an agreement with two individuals who were significant investors in Canoo to receive up to $1 million in compensation related to his work at Canoo, and in October 2020, Kranz received over $900,000 from these two individuals. According to the complaint, this undisclosed arrangement caused Canoo to make inaccurate executive compensation disclosures from September 2020 until April 2021.

Wachtell taps outside law firm in Musk fight over $90 mln Twitter fee

Elite law firm Wachtell, Lipton, Rosen & Katz has turned to a law firm that has previously represented Elon Musk’s Tesla to fight Musk’s lawsuit over $90 million in legal fees Wachtell earned in forcing the billionaire to consummate his buyout of Twitter.

Two Morrison & Foerster partners, Jordan Eth and Ragesh Tangri, were identified as representing Wachtell in court papers filed in San Francisco Superior Court last week by Musk’s attorneys.

US seeks to set aside convictions in KPMG audit scandal

Two people found guilty in a corruption scandal involving KPMG and the US audit regulator are set to have their convictions dropped, after prosecutors conceded they had misinterpreted the law.

David Middendorf, a former KPMG managing partner for audit quality, and Jeffrey Wada, who worked at the Public Company Accounting Oversight Board, were convicted of fraud over claims that Wada passed confidential information to KPMG to help the firm prepare for PCAOB audit inspections, in the hope of being given a job at the Big Four firm.

Liquidity and Interest Income Concerns Draw Securities Suit Against Bank

Earlier this year, challenges arising from rising interest rates, as well as concerns surrounding liquidity and other issues, led to three of the largest banking failures in U.S. history. The three that failed were not the only banks facing challenges in the rising interest rate environment, and while there have been no further failures since May, questions from the turbulence earlier this year remain for many banks. Now, in a sign that these kinds of challenges and questions can lead to securities litigation even in the absence of bank failure, a plaintiff shareholder has filed a securities class action lawsuit against KeyCorp (the bank holding company of KeyBank) after questions about the bank’s liquidity and interest rate income in a rising interest rate environment caused a drop in the company’s share price. A copy of the August 4, 2023, complaint filed against Key can be found here.