SEC charges Binance with multiple securities law violations
Following on from earlier charges this year against crypto trading platforms Bittrex and Beaxy, the Securities and Exchange Commission (SEC) has now charged Binance Holdings Ltd (“Binance”); US-based affiliate, BAM Trading Services Inc. (“BAM Trading”), which, together with Binance, operates the crypto asset trading platform, Binance.US; and their founder, Changpeng Zhao, with a variety of securities law violations.
The SEC claims that Binance committed multiple securities law violations, including misleading investors, controlling customer assets, and operating unregistered entities. The charge quotes Binance’s own Chief Compliance Office allegedly noting that: “that Binance would engage in ‘the international circumvention of KYC” and elsewhere that: “we do not want [Binance].com to be regulated ever.” The complaint notes too that it was only after August 2021 that Binance began requesting KYC documentation with only 25 million of its 62 million customers having submitted KYC documentation.
According to the SEC, Binance and Zhao publicly proclaimed that US customers were prohibited from transacting on Binance.com. However, the SEC alleges that Binance surreptitiously circumvented its own controls to allow high-value US customers to continue trading on the platform, Binance’s own Chief Compliance Office allegedly saying: “[o]n the surface we cannot be seen to have US users[,] but in reality, we should get them through other creative means.”
Furthermore, while Binance portrayed Binance.US as an independent trading platform exclusively serving American investors, the SEC argues that Zhao and Binance secretly maintained control over its operations.
The SEC further contends that Zhao and Binance wielded control over customer assets, granting them the ability to intermingle and redirect funds as they saw fit. Notably, customer assets were allegedly diverted to Sigma Chain, an entity controlled by Zhao. The SEC’s complaint also accuses BAM Trading and BAM Management, affiliated with Binance, of deceiving investors regarding non-existent trading controls on the Binance.US platform. Additionally, Sigma Chain, owned by Zhao, is implicated in manipulative trading practices that artificially boosted trading volumes.
The SEC’s complaint includes charges against Binance and BAM Trading for operating unregistered national securities exchanges, broker-dealers, and clearing agencies. Moreover, Binance and BAM Trading are accused of conducting unregistered offerings and sales of their proprietary cryptocurrency assets, including BNB and BUSD, as well as various crypto-lending products. Zhao is personally charged as a control person for the operation of these unregistered entities.
In comments, SEC Chair Gary Gensler noted the extensive web of deceit, conflicts of interest, and lack of transparency woven by Zhao and Binance, cautioning potential investors against engaging with these platforms. In other comments, Gurbir S Grewal, Director of the SEC’s Division of Enforcement, asserts that Zhao and Binance knowingly flouted regulations, jeopardizing the interests of customers and investors while prioritizing their own profits. Grewal further emphasizes the heightened risks and conflicts arising from the platforms’ opaqueness, reliance on related-party transactions, and false claims regarding manipulative trading controls.
Where’s the beef? CFTC fines ghost cattle fraudster
The Commodity Futures Trading Commission (CFTC) has confirmed a permanent injunction against Cody Easterday, a cattle rancher from Washington state. This comes as part of a phantom cattle fraud scheme, for which Easterday has been sentenced to 11 years in prison and ordered to pay $244 million in restitution in a parallel criminal action.
In addition to the criminal penalties, Easterday has now been ordered to pay a $1 million civil monetary penalty and is permanently prohibited from further violating the Commodity Exchange Act and CFTC regulations. He is also barred from trading on any CFTC-registered entity or engaging in any activities requiring CFTC registration.
The CFTC’s complaint, filed on March 31, 2021, accused Cody Easterday and Easterday Ranches, Inc. of selling nore than 200,000 non-existent head of cattle to a beef processor, making false statements to an exchange, and exceeding the number of contracts allowed by exchange-set position limits. A consent order was previously entered against Easterday Ranches on December 17, 2021.
In a supportive statements reflecting on the penalty, Commissioner Christy Goldsmith Romero noted: “There is a significant need for the CFTC to send a pronounced message about violating CFTC requirements to prevent excessive speculative trading.”
Commissioner Romero comments on Cboe crypto derivatives approval
Putting ghost cattle to one side, CFTC Commissioner Christy Goldsmith Romero has also confirmed her support for Cboe Clear Digital, LLC’s amended order of registration that allows the exchange to expand its clearing of futures contracts on digital assets.
Romero approved of Cboe’s application because of its compliance with the traditional market structure, the implementation of risk-mitigating measures, and constructive engagement with the staff to address concerns related to risk, noting:
“Too often in recent years, crypto firms have sought to take a business model or market structure that exists in an unregulated environment and port it over to the regulated environment. The CFTC does not have a window into the risks associated with models or structures in an unregulated environment. Cboe has not done that, instead operating within the parameters of the traditional futures market structure and regulatory framework.”
Compliance function blasted in ED&F MAN Capital Markets fine
The UK Financial Conduct Authority (FCA) has fined ED&F Man Capital Markets Ltd (‘MCM’) £17,219,300 for serious failings in its oversight of cum-ex trading. These failings allowed MCM to collect fees for trading strategies designed to enable its clients to illegitimately reclaim tax from the Danish authorities.
Were it not for MCM’s swift agreement with the charges, the Authority would have imposed a financial penalty of £22,428,800.
MCM breached principles 2 and 3 resulting in illegitimate payments in excess of £20 million being paid by the Danish Tax Authority, SKAT, to clients of MCM; MCM benefitted by charging £5 million in fees. The final notice notes a number of significant compliance function failings including:
- A failure to raise any questions or objections in relation to superficial tax and legal opinions purportedly approving dividend arbitrage trading;
- fundamental failings relating to monitoring and reviewing the trading undertaken by the Equity Finance Desk; and
- A failure to fully comprehend the nature of dividend arbitrage trading and taking no steps to understand trading strategies.
The final notice adds: “Compliance left the Equity Finance Desk to run essentially un-checked, save only for a high-level annual Compliance review.”
A selected summary of key developments for regulated financial institutions
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