What is the Optimal Level of Fraud in Business?

Great Cons Are Part of the American Story. Gray-Area Business Practices Aren’t Necessarily a Bad Thing

When Theranos founder Elizabeth Holmes was on trial for misrepresenting the startup’s finances and business prospects, several people tried to put the practice of hyping supposed tech breakthroughs in context. One of them was the federal judge overseeing her case:

“It’s common in Silicon Valley for promoters to engage in that type of conduct,” said U.S. District Judge Edward Davila.

Even after Holmes’s conviction, venture capitalist Tim Draper, an early investor in Theranos, said he was alarmed about the case having a chilling effect on business. “This verdict makes me concerned that the spirit of entrepreneurship in America is in jeopardy,” he wrote.

He need not have been. Pushing ethical and legal boundaries is as old as the Republic and going strong. For every Holmes, there are entrepreneurs prone to stretching the truth who are celebrated instead of sitting in prison.

The fact that so many business practices fall into a legal gray area in America is no accident, and arguably a good thing up to a point.

SEC Charges Prophecy Asset Management, its CEO/CIO, and Largest Sub-Adviser in $500 Million Advisory Fraud

The Securities and Exchange Commission today announced charges against New York-based Prophecy Asset Management LP as well as its CEO and Chief Investment Officer Jeffrey Spotts, and its largest sub-adviser Brian Kahn, for their roles in a multi-year fraud that concealed hundreds of millions of dollars of losses from investors while bringing in millions in management and incentive fees.

According to the SEC’s complaint, Prophecy Asset Management raised over $500 million between 2014 and 2020 for hedge funds it advised, misleading investors to believe that their investments were protected from loss. The complaint alleges that Prophecy Asset Management and Spotts told investors that the funds’ capital was allocated among dozens of sub-advisers who traded in liquid securities and posted cash collateral to offset any trading losses they incurred. In reality, according to the complaint, most of the funds’ capital went to Kahn, who incurred massive trading losses that far exceeded the cash collateral he had contributed. As alleged, Prophecy Asset Management, Spotts, and the company’s Chief Compliance Officer, John Hughes, worked with Kahn to deceive the funds’ auditor and administrator – and, in turn, investors – through fabricated documents and engaging in a series of sham transactions to cover-up the true financial condition of the funds. According to the complaint, by March 2020, after losses in the funds exceeded $350 million, Prophecy Asset Management indefinitely suspended redemptions by investors.

The SEC previously charged Hughes with fraud in connection with these events.

NYC Pilot Funded by Coinbase Tries Basic Income Payments in Crypto

Acero, now 25, is more focused on investing in his future as he finishes college. So when a friend told Acero about a new initiative to give young, low-income New Yorkers $12,000 over the next five months, he had his reservations. That’s because the money would be distributed in a cryptocurrency called USDC.

Acero decided the opportunity was too good to pass up, and applied for the program. Now, he’s one of 160 New Yorkers between the ages of 18 and 30 picked by lottery to participate; they received the first deposit into their Coinbase account last week.

The program is the latest to study how well no-strings-attached support works to alleviate poverty and improve quality of life. But it’s the first in the US to give out that money in cryptocurrency.

US judge rejects NFT artists’ lawsuit against SEC

A judge on Tuesday dismissed a lawsuit brought by two musical non-fungible token (NFT) creators who sought to block the U.S. Securities and Exchange Commission from pursuing an enforcement action against them.

U.S. District Judge Greg Guidry in New Orleans ruled that the lawsuit from singer-songwriter Jonathan Mann and law professor and conceptual artist Bryan Frye raised only hypothetical concerns about a securities enforcement action targeting their NFTs.

“The SEC’s future regulation of NFTs is far from resolved,” Guidry wrote. “There is little guidance.”