SEC Sues Terraform and CEO Do Kwon for Fraud (Now It Just Needs to Find Him)

SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes

According to the SEC’s complaint, from April 2018 until the scheme’s collapse in May 2022, Terraform and Kwon raised billions of dollars from investors by offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions. These included “mAssets,” security-based swaps designed to pay returns by mirroring the price of stocks of US companies, and Terra USD (UST), a crypto asset security referred to as an “algorithmic stablecoin” that supposedly maintained its peg to the U.S. dollar by being interchangeable for another of the defendants’ crypto asset securities, LUNA. The complaint further alleges that Terraform and Kwon offered and sold investors other means to invest in their crypto empire, including the crypto asset security tokens MIR—or “mirror” tokens—and LUNA itself.

The SEC’s complaint alleges that Terraform and Kwon marketed crypto asset securities to investors seeking to earn a profit, repeatedly claiming that the tokens would increase in value. For example, they touted and marketed UST as a “yield-bearing” stablecoin, which they advertised as paying as much as 20 percent interest through the Anchor Protocol. The SEC’s complaint also alleges that, while marketing the LUNA token, Terraform and Kwon repeatedly misled and deceived investors that a popular Korean mobile payment application used the Terra blockchain to settle transactions that would accrue value to LUNA. Meanwhile, Terraform and Kwon also allegedly misled investors about the stability of UST. In May 2022, UST depegged from the U.S. dollar, and the price of it and its sister tokens plummeted to close to zero.

Lack of Crypto Audit Regulation Raises Questions About PCAOB Authority

The PCAOB—which sets audit standards, inspects audits and disciplines audit firms—has said it can only oversee audits of public companies and SEC-registered broker-dealers. The watchdog in 2019, however, set up a team of inspectors who focus on emerging audit risks, including in the cryptocurrency field.

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Those efforts aren’t enough for Sens. Ron Wyden (D., Ore.) and Elizabeth Warren (D., Mass.). In a letter last month to PCAOB Chair Erica Williams, they said the watchdog ignored what they called questionable practices by auditors of crypto companies. The lawmakers cited PCAOB rules requiring registered accounting firms to meet the regulator’s standards when preparing any audit, even if an audited firm falls outside the watchdog’s jurisdiction.

SEC Charges Final Participant in Multi-Million Dollar Scheme to Spread and Trade on False Rumors about Public Companies

The Securities and Exchange Commission today charged Milan Vinod Patel, of Cumming, Georgia, for spreading more than 100 false rumors about public companies to generate more than $1 million in illicit trading profits. The SEC previously charged Barton Ross, Mark Melnick, Anthony Salandra, and Charles Parrino for their roles in this scheme.

According to the SEC’s complaint, Patel received rumors that he knew to be false from Ross, Salandra, or Parrino about purported market-moving events, such as corporate mergers or acquisitions, involving publicly-traded companies, and disseminated the rumors to his contacts at financial news services, chat rooms, and message boards. Patel also disseminated the rumors to Melnick, a host of a stock trading webcast, who shared them with his webcast subscribers. The circulation of more than 100 rumors between December 2017 and January 2020 caused the prices of the subject companies’ securities to rise temporarily, which allowed Patel to sell his holdings in such securities and generate more than $1 million in illicit trading profits.

Judge Signals Jail Time if Bankman-Fried’s Internet Access Is Not CurbedSince his arrest two months ago, Samuel Bankman-Fried, the disgraced cryptocurrency executive, has been physically confined to the Palo Alto home of his parents, under the force of a $250 million bail package.

But he has roamed largely unfettered in the wilderness of the internet: conducting interviews, posting narratives, making calls on encrypted apps and using a virtual private network, a web tool that allows users to conceal data and visit websites without detection.

Those unrestrained days may soon be over.

On Thursday, a federal judge overseeing Mr. Bankman-Fried’s multibillion-dollar fraud case signaled a willingness to jail him for his persistent testing of his confinement’s boundaries, going beyond what prosecutors had asked.

To be or not to be a “non-Rule 10b5-1 trading arrangement” – that is the question!

Perhaps someone should submit the following request to the SEC with respect to its Rule 10b5-1 amendment: “Chairman Gensler – we note your definition of the term ‘non-Rule 10b5-1 trading arrangement.’ Please provide a description of the trading arrangements that would be included in, and those that would be excluded from, that definition. It would be particularly helpful if the SEC provided that guidance soon, given the timing within which identification and disclosures of those plans and ‘trading arrangements’ must be made.”

The SEC Comes for Crypto Custody

A general theme of financial regulation is that regulators write rules, and then creative financial-industry lawyers find ways around them. The industry lawyers tend to have advantages over the regulators: They are better paid, for one thing, but also the regulators have to write general public rules that account for all cases and then the industry lawyers get to poke holes in them at their leisure….

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And that is the stereotype: The industry is ruthless and creative about exploiting the rules, and the regulators are constantly playing catch-up.

I just want to say that in crypto right now the SEC is being ruthless and creative about exploiting legal provisions to expand its powers, and the industry seems to be playing catch-up. Just an unusual situation!

Blockchain Association wants crypto to fight regulators through Congress and the courts

The reactions of company leaders to the SEC’s regulation by enforcement have ranged from surrender (Kraken), defiance (Coinbase), obfuscation (Binance) and bewilderment (everyone). Now the industry’s associations and policy experts are starting to weigh in.

“The recent flurry of activity is jarring, but it’s not a surprise and it doesn’t spell doom for crypto in the USA,” said Jake Chervinsky, Chief Policy Officer of the Blockchain Association in a Feb. 14 twitter thread. “Far from it: we have champions in key roles across government, and our industry is strong and ready to fight.”

Chervinsky called 2022 “the worst year in crypto history from a policy perspective, by far,” and perhaps “the worst year in DC for any industry in recent memory.”

Exclusive: Crypto giant Binance moved $400 million from U.S. partner to firm managed by CEO ZhaoGlobal cryptocurrency exchange Binance had secret access to a bank account belonging to its purportedly independent U.S. partner and transferred large sums of money from the account to a trading firm managed by Binance CEO Changpeng Zhao, banking records and company messages show.

Over the first three months of 2021, more than $400 million flowed from the Binance.US account at California-based Silvergate Bank to this trading firm, Merit Peak Ltd, according to records for the quarter, which were reviewed by Reuters. The Binance.US account was registered under the name of BAM Trading, the U.S. exchange’s operating company, according to the records. Company messages show the transfers to Merit Peak began in late 2020.

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The money transfers suggest that the global Binance exchange, which is not licensed to operate in the United States, controlled the finances of Binance.US, despite maintaining that the American entity is entirely independent and operates as its “US partner….”

Nunn backs congressional stock trading ban

Members of Congress and their spouses would be prohibited from trading stock under a bill introduced by Iowa Congressman Zach Nunn.

Nunn and Arizona Congressman Greg Stanton Thursday announced a bipartisan measure called the Prohibit Insider Trading Act. At a news conference in Des Moines, the Bondurant Republican says the bill is focused on curbing insider trading issues in Congress. Nunn claims 78 congressional representatives violated the current law, known as the STOCK Act, during the last Congressional session. Among other things, the current law requires public disclosure of trades within 45 days. Nunn says his proposal would set rigid standards.