D.C. Circuit Holds SEC's Denial of Grayscale’s Bitcoin ETF was Arbitrary and Capricious

Grayscale’s Court Win Over SEC Lifts Hopes for Bitcoin ETF Approval

A federal appeals court ruled Tuesday that the Securities and Exchange Commission must reconsider the crypto asset manager Grayscale Investments’ application to launch the first bitcoin exchange-traded fund, the latest setback for SEC Chair Gary Gensler’s efforts to regulate the upstart industry.

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“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” Circuit Judge Neomi Rao wrote on behalf of the court, noting that the SEC has approved bitcoin futures ETFs. The ruling was unanimous in a three-judge panel. Rao was appointed by President Donald Trump, while the other two judges were appointed by Democratic presidents.

SEC’s Secret Binance Court Filing Has Observers Bracing for Bad News

A new secret court filing related to Binance, the crypto exchange that already faces U.S. accusations of wrongdoing, has some wondering whether more bad news is about to hit the industry giant.

On Monday, in the court docket for its case against Binance, the Securities and Exchange Commission submitted a sealed motion, which lets it file sensitive or confidential information without revealing the contents publicly.

The motion included more than 35 exhibits, a declaration from Jennifer Farer (an SEC trial attorney) and a proposed order.

A spokesperson for Binance did not immediately respond to a request for comment by CoinDesk.

Grayscale Can Be a Bitcoin ETF

One possible interpretation of this case is that the SEC’s decision to block spot Bitcoin ETFs was unusually egregious, and a court fixed that, and there are no broader implications for anything. And that’s possible, because the spot Bitcoin ETF decision really was weird. But another possible interpretation is that the modern SEC has become more aggressive about regulating the crypto industry, and the broader financial industry, in a lot of different areas, while the crypto and financial industries have become more aggressive about fighting back and the modern US courts have become more aggressive about second-guessing the SEC. The SEC has gotten used to its decisions being, for all practical purposes, the law, and that might not be right anymore.

SEC Charges Archipelago Trading Services with Failing to File Suspicious Activity Reports

The Securities and Exchange Commission today announced charges against Archipelago Trading Services Inc. (ATSI) for failing to file hundreds of legally required reports of suspicious financial transactions, known as Suspicious Activity Reports (SARs), between August 2012 and September 2020. The charges were related to transactions in over-the-counter (OTC) securities executed on ATSI’s alternative trading system (ATS). ATSI, a Chicago-based broker-dealer, has agreed to pay $1.5 million to settle the charges.

According to the SEC’s order, ATSI’s sole line of business is to operate an OTC equity securities ATS, known as Global OTC, which is used by broker-dealers to execute trades in OTC securities. Global OTC plays a significant role in executing trades of microcap and penny stock securities, which are not listed on any national exchange and tend to be high-risk securities. Despite thousands of high-risk microcap and penny stock securities transactions executed daily on Global OTC, the SEC order found that ATSI failed to establish an anti-money laundering surveillance program for its transactions until September 2020. ATSI therefore failed to surveil transactions executed on Global OTC for possible red flags regarding suspicious manipulative trading activity, including possible spoofing, layering, wash trading, and pre-arranged trading. As a result, the SEC’s order found, ATSI failed to file at least 461 SARs, most of which involved microcap or penny stock securities.

SEC Charges Citigroup Global Markets Inc. with Recordkeeping Failures concerning Underwriting Expenses

The Securities and Exchange Commission today announced settled cease-and-desist proceedings against broker-dealer Citigroup Global Markets Inc. (CGMI) for willfully violating recordkeeping requirements concerning expenses that the firm incurred in connection with its underwriting business.

Recordkeeping requirements of the federal securities laws require broker-dealers to make and keep current certain books and records, including ledgers or other records reflecting all assets and liabilities. The SEC’s order finds that, from at least 2009 through May 2019, CGMI used an unsubstantiated and unverified method to calculate and record indirect expenses associated with its work as an underwriter. According to the SEC’s order, CGMI calculated an indirect expense amount based on a fixed percentage of the underwriting fee for each deal where it was engaged as a lead underwriter and then, using fixed “allocation grids,” divided that amount into specific categories of expenses. The order finds that, upon calculating these indirect expenses through this unsubstantiated method, CGMI recorded the amounts in its general ledger. According to the order, for at least a decade, CGMI did not know the basis of this indirect expense calculation method and conducted no review or similar process to verify that this method was reasonable.

SEC Defends Administrative Judges in Initial Supreme Court Briefby CoinDesk

Administrative law judges should be able to adjudicate enforcement proceedings in which the government seeks civil penalties for securities violations, the Securities and Exchange Commission said in its opening brief before the US Supreme Court.

The Fifth Circuit’s ruling against the use of ALJs rests on a misunderstanding of legislative power, and Congress didn’t violate the constitution by allowing the SEC to use in-house judges for such proceedings, the agency said on Monday.

Hedge fund manager George Jarkesy and his advisory firm Patriot28 LLC allegedly violated securities laws by misrepresenting auditing practices and investment strategies to investors.

Goldman Sachs to Pay $5.5 Million Over Audio Recording Failures During Pandemic

Goldman Sachs agreed to pay about $5.5 million to settle allegations it failed to record and retain mobile device calls made by its traders at the onset of the Covid-19 pandemic, in violation of record-keeping rules and a previous settlement agreement.

The civil fine, announced by the Commodity Futures Trading Commission on Tuesday, was the latest settlement against Goldman in relation to record-keeping failures. Goldman last September agreed to pay a total of about $200 million to the Securities and Exchange Commission and CFTC over admissions its traders used banned messaging apps, such as WhatsApp, to discuss business, in violation of record-keeping rules.

The SEC’s First NFT Enforcement Action: SEC v. Impact Theory

Takeaways

— With the SEC engaged in high profile litigation across the country regarding the status of digital assets as securities, this case marks the first time the SEC has extended its jurisdictional reach further into the NFT space. This is not surprising, given remarks from Chair Gary Gensler last year, which indicated that the SEC’s broad reading of the Howey test could bring a numbers of NFTs into the SEC’s purview.

— The settlement shows that the SEC is paying close attention to statements and representations made to investors, including through social media sites, regarding how the NFT issuer intends to use proceeds from NFT sales. As a media and entertainment company, Impact Theory’s business may function differently than traditional NFT marketplaces, which could explain why the SEC identified several public statements made by the company….