Does FTX Validate Chair Gensler's Crypto Skepticism?

FTX’s Collapse Validates Gary Gensler’s Crypto Skepticism

You might think that Armstrong would be sending a thank-you note to Gensler for keeping him and his customers out of an incredibly risky business. Instead, Armstrong is leading a brigade that’s seeking, against all logic, to pin the blame for FTX on Gensler. The reasoning, which Armstrong laid out in a tweetstorm and a handful of media appearances, is that Gensler created a “lack of regulatory clarity” by saying that many crypto tokens were in effect illegal unregistered securities (in speeches, and, of course, in a lawsuit that alleged insider trading by a former Coinbase executive). This, according to the logic of Armstrong and crypto luminaries such as investor Katie Haun who have echoed the argument, pushed speculators to offshore exchanges, depriving law-abiding American exchanges like Coinbase of potential profit streams and the US of this awesome new financial innovation. (Fortune reached a similar conclusion, declaring “Gary Gensler blew it again,” just months after its cover asked if Bankman-Fried was “The Next Warren Buffett?”)

All of which is nuts. If anything, what happened with FTX vindicates the position of Gensler and other crypto skeptics. The lesson of the current crisis isn’t that you should be able to trade your savings account for a high-risk banking product without FDIC insurance, or that you should be able to use your 401(k) to buy Axie Infinity tokens, or that you should save for college by borrowing up to 20 times your savings to buy crypto futures. The lesson, as the antimonopoly researcher Matt Stoller has argued, is that Gensler and others were right to oppose these so-called innovations, and that we should listen to arguments that portray crypto as inevitable and/or empowering with extreme skepticism.

Welcome to the SEC’s Hotel California

And what about the remaining in-house cases that were forced to reboot after the Supreme Court’s Lucia decision? Most are at least six years old by now. Nearly all were fully relitigated and briefed on appeal to the SEC commissioners well over a year ago—some of them two or three years ago. But the last time the commissioners decided any of them was more than two years ago.

Since then, the SEC has obstinately refused to decide any of these cases, thereby indefinitely blocking litigants from appealing to real courts. Call it the SEC’s version of the Hotel California: The accused can check out but never leave.

FTX Collapse Puts Auditors in Crosshairs of Clients, Regulators

A lawsuit against FTX’s auditors highlights potential legal risks the audit firms face for vetting the failed cryptocurrency exchange’s books.

Prager Metis CPAs LLC and Armanino LLP were “willfully blind” to a pattern of “racketeering” at FTX, a customer who allegedly lost $20,000 said in a Nov. 23 lawsuit in San Francisco federal court. The suit is expected to be the first of many as investors and regulators pore over the wreckage of the company to assign blame for billions of missing customer and creditor dollars.

As the gatekeepers of the company’s financials, the auditors could be an easy target for customers and regulators alike, in part because they naturally draw attention when client companies implode.

Further FTX FlailingAPerhaps no one in the history of finance has been more predisposed to gamble on redemption than Sam Bankman-Fried, but his lawyers disagreed. The New York Times reports:

“As the crisis unfolded, a group of FTX lawyers and executives moved to strip authority from Mr. Bankman-Fried and urged the company’s top leaders to prepare for bankruptcy. For days, Mr. Bankman-Fried ignored their warnings and clung to power, seemingly convinced that he could save the firm, despite mounting evidence to the contrary….”

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That checks out: The risk-neutral traders wanted to keep trying; the lawyer did not. I have to say that the likelihood of a rescue on Nov. 10 struck me as … very very close to 0% … but then I was trained as a lawyer and did not quit my job to move to an island and start a crypto exchange. Nor did I quit my job to become a top lawyer for someone who had done that! Seems stressful.

SEC Obtains Final Judgment Against Former Owner of California Film Distribution Company Charged with Defrauding Publicly Traded Fund

On November 25, 2022, the United States District Court for the Southern District of New York entered a final consent judgment against William Sadleir, the former Beverly Hills owner of a defunct film distribution company accused of defrauding a publicly traded fund out of at least $13.8 million.

The SEC’s complaint, filed on May 22, 2020, alleged that BlackRock Multi-Sector Income Trust (BIT), a registered closed-end management investment company, invested approximately $75 million in Aviron Group LLC, a film distribution company Sadleir founded, owned, and operated. The complaint alleged that Sadleir represented that the investments would be used to support the company’s distribution of films. Contrary to these representations, Sadleir allegedly used a sham company as a vehicle to fraudulently divert and misappropriate BIT funds and issued fake invoices seeking additional BIT funds for services that were never provided. Sadleir allegedly used the funds to pay personal expenses, including his purchase, furnishing, and renovation of a Beverly Hills mansion. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York filed criminal charges against Sadleir in connection with similar conduct. United States v. William Sadleir, No. 20-cr-0320 (S.D.N.Y. filed May 22, 2020).

BlockFi Most Likely to Pay SEC First, Crypto Lawyer Says

The Securities and Exchange Commission will most likely to be the first to get paid in the lineup of creditors crypto exchange BlockFi owes money to, Sasha Hodder, founder of Hodder Law, a firm that specializes in crypto law, said Tuesday.

Hodder told CoinDesk TV’s “First Mover” the regulator is “in line, in front of retail creditors.”

“The customers are really at the bottom of the list here,” Hodder said, saying it is far-fetched that they will get their money back.

BlockFi, which has an estimated $257 million cash on hand, owes the SEC $30 million. In February, the crypto lender reached a $50 million settlement with the agency for failing to register the offering and sale of its crypto lending product. It also agreed to pay another $50 million to states that had filed similar charges. About $30 million of the SEC’s fine is unpaid.

Prosecutors Seeking Arrest Warrant for Terraform Labs’ Daniel Shin: Yonhap

South Korean newswire service Yonhap is reporting that prosecutors are seeking an arrest warrant for Daniel Shin, co-founder of Terraform Labs.

Yonhap says prosecutors are charging Shin with taking illegal profits as he sold $105 million of LUNA at a market high without informing investors. He’s also being charged with violating the Electronic Financial Transaction Act for using customer data from Chai, a separate firm he managed, to promote Luna.