SEC Sues Genesis and Gemini for Unregistered Offer and Sale of Crypto Asset Securities

SEC Charges Genesis and Gemini for the Unregistered Offer and Sale of Crypto Asset Securities through the Gemini Earn Lending Program

The Securities and Exchange Commission today charged Genesis Global Capital, LLC and Gemini Trust Company, LLC for the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program. Through this unregistered offering, Genesis and Gemini raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors. Investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.

According to the complaint, in December 2020, Genesis, part of a subsidiary of Digital Currency Group, entered into an agreement with Gemini to offer Gemini customers, including retail investors in the United States, an opportunity to loan their crypto assets to Genesis in exchange for Genesis’ promise to pay interest. Beginning in February 2021, Genesis and Gemini began offering the Gemini Earn program to retail investors, whereby Gemini Earn investors tendered their crypto assets to Genesis, with Gemini acting as the agent to facilitate the transaction. Gemini deducted an agent fee, sometimes as high as 4.29 percent, from the returns Genesis paid to Gemini Earn investors. As alleged in the complaint, Genesis then exercised its discretion in how to use investors’ crypto assets to generate revenue and pay interest to Gemini Earn investors.

Musk bets big on beating shareholders at ‘funding secured’ trial

Elon Musk is set to become the rare CEO to fight a securities class action at trial next week, where he will defend his 2018 tweet announcing he had “funding secured” to take Tesla Inc private.

Musk is essentially doubling down after suffering an initial setback last year, when the judge in San Francisco federal court ruled that his tweet was “false” and “reckless.” As a result, the jury will need to determine only if the statements impacted Tesla’s share prices, if Musk acted knowingly, and the amount of any damages.

“Everything is lined up for a plaintiffs’ win here,” said Minor Myers, who teaches corporate law at the University of Connecticut. Judge Edward Chen’s ruling in May means that shareholders are “starting with runners on base,” he said.

Victimizing a Victim Twice: The SEC’s Attack on Covington & Burling

SEC Request No. 3(b) seeks documents sufficient to identify “[t]he nature of the suspected unauthorized activity Concerning the client,” including “when the activity took place” and “the amount of information . . . viewed.” While Covington disclosed the dates of the unauthorized activity and the number and types of files breached in response to another part of the request, Covington cannot take the further step of connecting those files to any individual client. People engage lawyers for their most serious and sensitive matters, and they expect their lawyers to hold all information provided, including the mere fact of their representation, in the strictest confidence.

That client identities are somehow considered unprotected information is perhaps the weakest of all of the SEC’s arguments. Whether Covington communicated with a client about a cyber-attack is not relevant – a client’s identity and the existence of an attorney-client relationship is every bit as privileged as the legal advice provided to that client.

SEC Enforcement Record Stems From More Penalties, Not More Cases

The record-setting penalties that the SEC issued in 2022 will be used as precedent by commission lawyers when determining the size of penalties in 2023 and future years. The SEC may well also feel pressure to beat its 2022 results, despite cautioning in its press release that it does not expect to “set new [records] each year.”

However, the SEC received a $210 million boost in its FY 2023 budget that will, among other things, fund new hiring in the enforcement division. It will naturally be pressured to show taxpayers that this was a wise investment.

While companies will presumably, and should, respond to the SEC’s banner year in 2022 by making additional investments in compliance, those improvements will take time to have any effect. There is no such thing as a perfect compliance program, and shortcomings are inevitable, especially given how complicated our financial system has become.

But when mistakes are made, companies will pay dearly for them.

Coinbase Legal, Compliance Ranks Thinned as Part of 20% Cutback

Coinbase Global Inc.’s 20% workforce cut includes at least two dozen legal and compliance staff as the largest US digital-asset exchange copes with a crypto slump.

A dozen people in “risk and compliance” and eight in “legal and policy” had their names listed on an online platform Coinbase set up to help laid off employees find jobs. Five of those listed were lawyers, and three other Coinbase in-house attorneys said on social media they were also let go by the company.

SEC Charges Los Angeles Individual with Perpetrating a $47 Million Affinity Fraud Targeting Members of the Orthodox Jewish Community

The Securities and Exchange Commission announced today that it filed charges against Yossi Engel for perpetrating a $47 million affinity fraud from December 2018 to January 2020, targeting at least 29 members of the Orthodox Jewish community.

The SEC’s complaint alleges that Engel, through his company, iWitness Tech, LLC, initially induced members of the Orthodox community to invest by falsely telling them that he would use their funds to purchase and install security camera equipment. In the second iteration of his scheme, Engel allegedly promised to use investor funds to purchase a property in Israel that he would then develop and sell. As alleged, both of these claims were false: rather than use investor money to purchase cameras or develop property, Engel misappropriated the funds by spending investor money for his personal benefit and making Ponzi-like payments to earlier investors in an attempt to keep the scheme going.

Two Advisor Credentialing Organizations Have Their Say on Crypto

After federal regulators including the Securities and Exchange Commission and the Department of Labor as well as Finra, the largest independent industry regulator, perhaps no one speaks louder on advisor best practices and compliance than the Certified Financial Planner Board of Standards (CFP Board) and the Chartered Financial Analyst Institute (CFA Institute).

Each has recently made major announcements regarding cryptocurrency investing and advice. Y

The CFP Board issued guidelines in November in a “Notice to CFP Professionals Regarding Financial Advice About Cryptocurrency-Related Assets,” which will govern how holders of the CFP certification should handle working with clients on digital asset investing and planning.

In the CFA Institute’s case, it comes in the form of “Cryptoassets: Beyond the Hype,” a report oriented towards investment professionals and financial analysts, which was released this week.

Sam Bankman-Fried Denies Stealing FTX Funds in New Online Post

Sam Bankman-Fried, the disgraced former chief of FTX, denied stashing away billions of dollars and gave his take on what happened to his bankrupt crypto exchange in a lengthy new post on Substack published Thursday.

He denied stealing funds and claimed FTX and sister company Alameda Research collapsed because of the crypto market meltdown and inadequate hedging on Alameda’s part.

“I didn’t steal funds, and I certainly didn’t stash billions away,” Bankman-Fried wrote. Later in the post, he concluded that “Alameda lost money due to a market crash it was not adequately hedged for.”

While alleging the trading firm “failed to sufficiently hedge its market exposure,” he also said he “hasn’t run Alameda for the last few years.”