SEC Alleges Terraform Labs Siphoned $166 Million Into "Opaque Slush Fund for its Lawyers"

SEC goes after bankrupt Terraform Labs’ $166 mln ‘slush fund’ for Dentons

The U.S. Securities & Exchange Commission has argued that Terraform Labs should not be allowed to hire law firm Dentons or pay litigation costs for employees during its bankruptcy, taking aim at a $166 million retainer payment to Terraform’s lawyers.

The SEC said that Terraform had sent $166 million to Dentons since the start of 2023, and that those transfers may have been intended to avoid paying a future judgment in the SEC’s lawsuit accusing Terraform of defrauding its investors.

The money has been “siphoned” into an “opaque slush fund for its lawyers,” to the detriment of the investors and creditors who will seek to be repaid in Terraform’s bankruptcy, the SEC said.

Judges Start at the Beginning After Leaving Bench for Big Law

Abdul Kallon has a resume that plenty of his partners at Perkins Coie would love to have: He was a federal judge for a dozen years.

But since leaving the bench last year and rejoining private practice, Kallon has found that he needs his partners’ help to succeed at something he’s not done for over a decade: “business development.” Building a book of business takes time, even for a former federal judge.

Most of Kallon’s contacts from a previous stint in private practice are useless toward that end, he said, having either retired or moved into new roles. He didn’t do marketing as a federal judge. He was cloistered away from most of the legal profession, isolating himself to avoid the perception of bias.

Even if he brings a rare skillset to clients’ disputes—a personal understanding of how judges might view their case plus his own trial chops—he is, for now, largely reliant on his partners to bring him into cases or introduce him to clients.

Sam Bankman-Fried Seeks Lenient Sentence and to Appeal Conviction

Since last summer, he has been housed at the Metropolitan Detention Center in Brooklyn, where he has spent much of his time working on the case, a person with knowledge of the matter said. Mr. Bankman-Fried has also shared crypto market tips with the guards, the person said, recommending investments in the digital coin Solana.

SEC Investigating Whether OpenAI Investors Were Misled

The Securities and Exchange Commission is scrutinizing internal communications by OpenAI Chief Executive Sam Altman as part of an investigation into whether the company’s investors were misled.

The regulator, whose probe hasn’t previously been reported, has been seeking internal records from current and former OpenAI officials and directors, and sent a subpoena to OpenAI in December, according to people familiar with the matter. That followed the OpenAI board’s decision in November to fire Altman as CEO and oust him from the board. At the time, directors said Altman hadn’t been “consistently candid in his communications,” but didn’t elaborate.

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SEC officials based in New York are conducting the investigation and have asked that some senior OpenAI officials preserve internal documents.

But for crypto industry watchers, it’s not an unfamiliar tale.

Largely as a result of an influx of new actions in the fiscal fourth quarter, new SEC accounting and auditing enforcement actions increased in FY 2023 (which ended September 30, 2023) according to a new Cornerstone Research report. The number of new accounting and auditing enforcement actions increased by 22% in FY 2023, compared to the 8% increase in the overall number of enforcement actions during the fiscal year. While the number of accounting and auditing enforcement actions increased in FY 2023, aggregate monetary settlements in accounting and enforcement actions decreased 7% during the fiscal year.

Unabomber Prosecutor Robert J. Cleary to Lead New FTX Investigation

The US Justice Department’s bankruptcy unit has picked a former federal prosecutor who led the government’s case against the Unabomber to conduct a new outside investigation of FTX and its bankruptcy law firm.

Robert J. Cleary has been picked as an examiner to lead the inquiry by the Office of the US Trustee, an arm of the Justice Department that monitors corporate bankruptcies. Cleary is being asked to review potential conflicts of interest involving FTX’s bankruptcy law firm Sullivan & Cromwell, according to a Tuesday court filing.

Politicians Urge SEC to Leave Robinhood-Style Trading Apps Alone

A bipartisan group of members of Congress is urging the Securities and Exchange Commission to dump its proposal to restrict the use of advanced analytics and artificial intelligence by firms such as Robinhood Markets.

In a Tuesday letter to SEC Chair Gary Gensler, 20 members of the House of Representatives described the agency’s proposed rule as overly broad and warned that it could limit access to even the simplest investing tools, such as web-based retirement calculators.

“This rule would harm historically underserved, low- and moderate-income retirement savers and investors who rely on low-cost brokerage services and self-directed investment tools,” said the letter, whose lead signers were Reps. Ritchie Torres (D., N.Y.) and Ann Wagner (R., Mo.). Most of the signatories were Republicans.

Winklevoss’s Gemini to Return $1.1 Billion to Customers in NY Settlement

Gemini Trust Co., the crypto exchange founded by twin entrepreneurs Cameron and Tyler Winklevoss, will return at least $1.1 billion to customers though the Genesis Global Capital bankruptcy as part of settlement with the New York Department of Financial Services.

The New York-based firm will also pay a $37 million fine for various compliance failures to the New York Department of Financial Services, Superintendent Adrienne A. Harris said in a statement Wednesday.

Orgs Face Major SEC Penalties for Failing to Disclose Breaches

All of that is leading to a broad rethinking of the role of the CISO, says Ken Fishkin, senior manager of information security — essentially the acting CISO — for law firm Lowenstein Sandler LLP.

“A lot of people are very nervous about being in a position like mine now because of this responsibility,” he says. “It’s a company issue, definitely not just CISO issue. Everybody will be very leery about vetting statements — why should I say this? — without having legal give it their blessing … because they are so worried about having charges against them for making a statement.”

The worries will add up to additional costs for businesses. Because of the additional liability, companies will have to have more comprehensive Directors and Officers (D&O) liability insurance that not only covers the legal expenses for a CISO to defend themselves, but also for their expenses during an investigation.

Businesses who will not pay to support and protect their CISO may find themselves unable to hire for the position, while conversely, CISOs may have trouble finding supportive companies, says Josh Salmanson, senior vice president of technology solutions at Telos Corp., a cyber risk management firm.