SEC - Page 44

In his address at the 2023 Securities Enforcement Forum, Gary Gensler, the Chair of the United States Securities and Exchange Commission (SEC), shed light on the extensive regulatory actions undertaken by the agency, resulting in a staggering $5 billion in judgments and orders.

However, it was Gensler’s remarks concerning the cryptocurrency market that ignited fervent discussions within the crypto community on social media platforms.

He emphatically stated, “Don’t get me started on crypto. I won’t even name all the individuals we’ve charged in this highly noncompliant field.”

Discussing the economic ramifications of the SEC’s enforcement endeavors, Gensler highlighted that the agency had initiated over 780 enforcement actions in 2023, with more than 500 of them being standalone cases.

These actions ultimately culminated in judgments and orders totaling $5 billion, with $930 million allocated for restitution to injured investors.

Additionally, Gensler disclosed that the SEC had instituted legal actions against 40 firms for various rule and regulation violations since December 2021, resulting in penalties exceeding $1.5 billion.

Furthermore, he revealed that the SEC had resolved recordkeeping-related charges with 23 firms in the previous fiscal year alone.

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Expanding on his views on cryptocurrency, Gensler reiterated his belief that a significant portion of the crypto market falls within the purview of securities and should therefore be subject to the same regulatory framework.

He expounded upon the broad definition of securities, particularly emphasizing the concept of an investment contract, which he asserted is closely resembled by a substantial segment of the cryptocurrency market.

Gensler maintained that most cryptocurrency assets would pass the investment contract test, thereby necessitating compliance with securities regulations.

Drawing parallels between the present cryptocurrency landscape and the financial environment of the 1920s when securities laws were yet to be established,

Gensler argued that the crypto industry is currently grappling with similar challenges – a lack of clear regulations leading to numerous scams, frauds, and bankruptcies.

He contended that these issues underscore the imperative need for more stringent regulations.

Gensler concluded his speech by stating, “Without prejudging any one asset, the vast majority of crypto assets likely meet the investment contract test, making them subject to the securities laws.”

While his criticism of the cryptocurrency market is a recurring theme in his tenure, calls for greater clarity on crypto regulations have grown louder, with members of Congress, the crypto community, and key U.S. businesses urging Gensler to provide more definitive guidance on this matter.

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Ripple recently celebrated a significant legal victory in its ongoing battle with the U.S. Securities and Exchange Commission (SEC).

On October 19th, the SEC announced its intention to dismiss all claims against Ripple CEO Brad Garlinghouse and Executive Chair Chris Larsen.

This development marked a crucial moment in the civil case initiated by the SEC in late 2020, offering a glimmer of hope for Ripple.

However, the cryptocurrency community’s elation over this news was tempered by another announcement on the same day. LBRY, a prominent blockchain file-sharing and payment network, revealed that it was shutting down its operations.

LBRY cited mounting debts, owed to the SEC, its legal team, and a private creditor, amounting to several million dollars.

LBRY’s creators are renowned for their work on Odysee, an open-source video-sharing platform aimed at providing a decentralized alternative to mainstream platforms like YouTube.

LBRY had been embroiled in its legal dispute with the SEC, which filed a lawsuit against the platform in March 2021 for alleged securities law violations, mirroring its action against Ripple.

Despite the SEC reducing LBRY’s initial $22 million penalty to around $111,000, the company chose not to pursue further legal action.

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The crypto community reacted with mixed emotions. While celebrating Ripple’s victory, many expressed concern about the regulatory overreach and its consequences for smaller players in the industry.

Notably, XRP, Ripple’s cryptocurrency, boasts a market capitalization of $27 billion, while LBRY credits were valued at only $5.5 million at the time.

Critics argued that the stark contrast in resources between Ripple and LBRY underscored how well-funded entities can leverage their financial strength in legal battles against regulatory bodies.

Some questioned the SEC’s priorities, criticizing it for targeting a small American company like LBRY while failing to prevent major issues in the cryptocurrency space.

Pro-XRP lawyer John Deaton condemned the SEC’s actions against LBRY, citing the agency’s inability to secure a substantial penalty despite the considerable resources expended.

He labeled the SEC as a “broken, failed, and inept agency.”

Despite Ripple’s legal win, industry observers anticipate that the legal battle with the SEC is far from over.

The penalty phase of the litigation remains contentious, with lawyers predicting a protracted struggle over the appropriate penalties for Ripple’s institutional sales of XRP.

The SEC has signaled its intent to pursue this aspect further, and discussions between the two parties are set to continue until November 9, 2023.

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In the ongoing fraud trial of Sam Bankman-Fried, prosecutors have taken a significant step by requesting the judge to clarify to the jury that the defendant’s claim of being an effective altruist should not serve as a valid defense.

Bankman-Fried stands accused of embezzling billions of dollars from FTX customers for personal purposes, including political contributions, real estate investments, and other ventures.

In a letter submitted to the court, the prosecution pointed out that Bankman-Fried’s legal team has attempted to argue that he should not be charged with fraud because he intended to reimburse customers through strategies like FTX’s growth and profitable investments.

However, the prosecution strongly contends that this line of argument lacks relevance and does not absolve him of the serious fraud allegations he faces.

Bankman-Fried’s defense strategy has been centered around portraying him as a philanthropist deeply committed to creating a positive global impact.

They argue that his support for effective altruism, a philosophical movement that advocates for impactful ways of helping others, such as charitable donations or pursuing meaningful careers, reflects his underlying motivations.

The prosecutors, on the other hand, maintain that effective altruism cannot serve as a valid defense against fraud.

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They describe it as an “unconventional philosophy regarding the ethics of deception and theft” and assert that it has no bearing on the necessary mental state (mens rea) required for committing fraud.

The trial, which is currently in its third week in New York, has featured several key witnesses presented by the prosecution. These witnesses include Caroline Ellison, former CEO of Alameda Research; Nishad Singh, former engineering chief of FTX and Alameda; and Gary Wang, a co-founder of the now-defunct FTX.

According to their testimonies, Bankman-Fried directed them to acquire funds from FTX customers without their knowledge or consent for purposes unrelated to FTX’s regular operations.

Furthermore, they contend that Bankman-Fried was well aware of the potential risks and consequences of his actions and actively concealed them from regulatory authorities, auditors, and the public.

The prosecution has backed up these claims with a trove of evidence, including emails, messages, spreadsheets, and bank records that expose the extent of Bankman-Fried’s deceptive scheme.

The trial is approaching its conclusion, with the finalization of jury instructions expected next week, followed by closing arguments. Subsequently, the jury will begin deliberations to determine the legal fate of Sam Bankman-Fried.

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A clandestine 75-minute audio recording has unveiled a shocking revelation involving Caroline Ellison and 15 former Alameda Research employees.

The recording exposes the precise moment when they discovered that the trading firm had been “borrowing” user funds from FTX.

The complete audio, obtained by Cointelegraph, sheds light on the intense tension that Ellison and the Alameda staff experienced leading up to FTX’s eventual collapse.

During an all-hands meeting in Hong Kong on November 9, 2022, Ellison disclosed, “Alameda was kind of borrowing a bunch of money via open-term loans and using that to make various illiquid investments.

So like a bunch of FTX and FTX US equity… Most of Alameda’s loans got called in in order to meet those recalls.”

She further confessed, “We ended up borrowing a bunch of funds from FTX, which led to FTX having a shortfall in user funds.”

Ellison made this revelation to the approximately 15 staff members present at the meeting, shocking them with the news that FTX had essentially allowed Alameda to borrow user funds.

Segments of this audio recording were played in court on October 12, during the eighth day of Sam Bankman-Fried’s criminal trial. Christian Drappi, a former software engineer at Alameda, provided witness testimony following three days of Ellison’s testimony.

READ MORE:Former Engineer Exposes Multi-Million Dollar Scams at Alameda Research Amidst FTX Fraud Trial

Prior to this meeting, Drappi and many other Alameda employees had no knowledge of the alleged misappropriation of FTX customer deposits by the hedge fund.

The recording captures Drappi asking Ellison when she first became aware of Alameda’s misuse of FTX user deposits and who else within the company was privy to this information.

Initially hesitant to respond, Ellison was pressed by Drappi, who queried, “I’m sure this wasn’t, like, a YOLO thing, right?”

This audio playback resulted in a humorous moment in court, as Drappi had to explain the term “YOLO” to everyone present. He sought confirmation from Ellison that the use of FTX deposits wasn’t merely a spontaneous decision.

In his testimony, Drappi described Ellison’s demeanor during the meeting as “sunken” and lacking confidence in addressing Alameda employees.

Shocked by the extent of the relationship between FTX and Alameda, Drappi quit the following day.

Alameda Research engineer Aditya Baradwaj, who also attended the meeting, revealed that the room was “extremely tense.”

Ellison disclosed a wealth of previously undisclosed information, including the abandoned acquisition of FTX by its largest competitor, Binance. Baradwaj stated, “It became pretty clear that there was no future for the company, and that we all had to leave. And we did that right after.”

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