The SEC Seeks to Freeze Binance Assets, Bitcoin Dives Six Percent

Crypto assets are down across the board today as as SEC filing says Binance ran an illegal crypto exchange that commingled client funds to a third party owned by Zjao, the Binance founder. 

Here is the SEC Court Filing in the District of Columbia.

Case Summary 

1. This case arises from Defendants’ blatant disregard of the federal securities laws and the investor and market protections these laws provide. In so doing, Defendants have enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk. 
2. Defendants have unlawfully solicited U.S. investors to buy, sell, and trade crypto asset securities through unregistered trading platforms available online at Binance.com (“Binance.com Platform”) and Binance.US (“Binance.US Platform”) (collectively, “Binance Platforms”). Defendants have engaged in multiple unregistered offers and sales of crypto asset securities and other investment schemes. And Defendants BAM Trading and BAM Management defrauded equity, retail, and institutional investors about purported surveillance and controls over manipulative trading on the Binance.US Platform, which were in fact virtually non-existent. 
3. First, Binance and BAM Trading, under Zhao’s leadership and control, have unlawfully offered three essential securities market functions—exchange, broker-dealer, and clearing agency—on the Binance Platforms without registering with the SEC. Acutely aware that U.S. law requires registration for these functions, Defendants nevertheless chose not to register, so they could evade the critical regulatory oversight designed to protect investors and markets.
4. Second, Binance and BAM Trading have unlawfully engaged in unregistered offers and sales of crypto asset securities, including Binance’s own crypto assets called “BNB” and “BUSD,” as well as Binance’s profit-generating programs called “BNB Vault” and “Simple Earn,” and a so-called “staking” investment scheme available on the Binance.US Platform. In so doing, they have deprived investors of material information, including the risks and trends that affect the enterprise and an investment in these securities.
5. Third, BAM Trading and BAM Management have made misrepresentations to investors about controls they claimed to have implemented on the Binance.US Platform, while raising approximately $200 million from private investors in BAM Management and attracting billions of dollars in trading volume from investors (including retail and institutional investors) seeking to transact on the Binance.US Platform.
6. Starting in or around 2018, determined to escape the registration requirements of the federal securities laws, Defendants—under Zhao’s control—designed and implemented a multi-step plan to surreptitiously evade U.S. laws. As Binance’s Chief Compliance Officer (“Binance CCO”) admitted, “we do not want [Binance].com to be regulated ever.”
7. As one part of this plan to evade United States regulatory oversight over Zhao, Binance, and the Binance.com Platform, Zhao and Binance created BAM Management and BAM Trading in the United States and claimed publicly that these entities independently controlled the operation of the Binance.US Platform. Behind the scenes, however, Zhao and Binance were intimately involved in directing BAM Trading’s U.S. business operations and providing and maintaining the crypto asset services of the Binance.US Platform. BAM Trading employees referred to Zhao’s and Binance’s control of BAM Trading’s operations as “shackles” that often prevented BAM Trading employees from understanding and freely conducting the business of running and operating the Binance.US Platform—so much so that, by November 2020, BAM Trading’s then-CEO told Binance’s CFO that her “entire team feels like [it had] been duped into being a puppet.”
8. As a second part of Zhao’s and Binance’s plan to shield themselves from U.S. regulation, they consistently claimed to the public that the Binance.com Platform did not serve U.S. persons, while simultaneously concealing their efforts to ensure that the most valuable U.S. customers continued trading on the platform. When the Binance.US Platform launched in 2019, Binance announced that it was implementing controls to block U.S. customers from the Binance.com Platform. In reality, Binance did the opposite. Zhao directed Binance to assist certain high-value U.S. customers in circumventing those controls and to do so surreptitiously because—as Zhao himself acknowledged—Binance did not want to “be held accountable” for these actions. As the Binance CCO explained, “[o]n the surface we cannot be seen to have US users[,] but in reality, we should get them through other creative means.” Indeed, Zhao’s stated “goal” was “to reduce the losses to ourselves, and at the same time to make the U.S. regulatory authorities not trouble us.”
9. Defendants’ purposeful efforts to evade U.S. regulatory oversight while simultaneously providing securities-related services to U.S. customers put the safety of billions of dollars of U.S. investor capital at risk and at Binance’s and Zhao’s mercy. Lacking regulatory oversight, Defendants were free to and did transfer investors’ crypto and fiat assets as Defendants pleased, at times commingling and diverting them in ways that properly registered brokers, dealers, exchanges, and clearing agencies would not have been able to do. For example, through accounts owned and controlled by Zhao and Binance, billions of U.S. dollars of customer funds from both Binance Platforms were commingled in an account held by a Zhaocontrolled entity (called Merit Peak Limited), which funds were subsequently transferred to a third party apparently in connection with the purchase and sale of crypto assets.
10. Moreover, Defendants understood the importance to crypto asset investors of implementing trading surveillance and controls over crypto trading platforms. Zhao himself stated in 2019 that “CREDIBILITY is the most important asset for any exchange! If an exchange fakes their volumes, would you trust them with your funds?”
11. Defendants BAM Trading and BAM Management touted the surveillance and controls supposedly in place to prevent manipulative trading on the Binance.US Platform.
12. But Defendants failed to implement on the Binance.US Platform the trade surveillance or manipulative trading controls BAM Trading and BAM Management touted to investors. Thus, Defendants failed to satisfy basic requirements of registered exchanges—to have rules designed to prevent fraudulent and manipulative acts and the capacity to carry out that purpose. The supposed controls were virtually non-existent, and those that did exist did not monitor for or protect against “wash trading” or self-dealing, which was occurring on the Binance.US Platform. Most notably, from at least September 2019 until June 2022, Sigma Chain AG (“Sigma Chain”), a trading firm owned and controlled by Zhao, engaged in wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US Platform.
13. Congress enacted the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) in part to provide for the regulation of the offer and sale of securities and the national securities markets through registration and attendant disclosure, recordkeeping, inspection, and conflict-of-interest mitigation requirements. Binance and BAM Trading—both under Zhao’s control—have engaged and continue to engage in unregistered offers and sales of crypto asset securities, effecting unregistered crypto asset securities transactions on the Binance Platforms, combining core securities market functions while purposefully evading registration, and operating while impaired by obvious conflicts of interest. In doing so, they have dodged the disclosure and other requirements that Congress and the SEC have constructed over the course of decades to protect our capital markets and investors and thereby have violated—and continue to violate—the law.

That’s one heck of a summary, straight from the complaint, as posted by the SEC.

Violations

• The SEC says “Binance acted as an exchange, broker and dealer, and clearing agency for the Binance.com Platform without registering in any such capacities, in violation of Sections 5, 15(a), and 17A(b) of the Exchange Act [15 U.S.C. §§ 78e, 78o(a), and 78q-1(b)].”
• “By engaging in the conduct set forth in this Complaint, BAM Trading and BAM Management have further obtained money or property by means of materially false and misleading statements and engaged in transactions, practices, and courses of business that operated as a fraud or deceit upon purchasers in the offer and sale of securities in violation of Section 17(a)(2) and (3) of the Securities Act [15 U.S.C. § 77q(a)(2) and 77q(a)(3)].”

The Remedy

“The Commission seeks a final judgment: (a) permanently enjoining Defendants from committing further violations of the federal securities laws they are alleged to have violated; (b) ordering Defendants to disgorge their ill-gotten gains with prejudgment interest; (c) permanently enjoining Defendants and any entity controlled by them from, directly or indirectly, using the means or instrumentalities of interstate commerce to: (i) participate in the issuance, purchase, offer, or sale of any security, including any crypto asset security, in any unregistered transaction; (ii) act as an unregistered exchange with respect to any securities, including any crypto asset securities; (iii) act as an unregistered broker or dealer with respect to any securities, including any crypto asset securities; and (iv) act as an unregistered clearing agency with respect to any securities, including any crypto asset securities; (d) imposing civil money penalties on Defendants; and (e) ordering equitable relief that may be appropriate or necessary for the benefit of investors.”

Defendants 

• “The Binance Platforms were founded and are maintained and operated by an opaque web of corporate entities, including those identified below, all of which are beneficially Case 1:23-cv-01599 Document 1 Filed 06/05/23 Page 8 of 136 9 owned and controlled by Zhao, Binance’s Chief Executive Officer (“CEO”) and, at least through March 2022, the Chairman of BAM Trading’s and BAM Management’s Boards of Directors.”
• BAM Trading, d/b/a Binance.US, is a Delaware corporation with a principal place of business in Miami, Florida. It is wholly owned by BAM Management. BAM Trading holds 43 money transmitter licenses with U.S. jurisdictions, including this District.
• Zhao, widely known as “CZ,” is a Canadian citizen who resides outside of the United States, is Binance’s founder, beneficial owner, and CEO, and was Chairman of BAM Trading’s and BAM Management’s Boards of Directors at least until approximately March 2022.
• Trust Company A issued in partnership with Binance the crypto asset “BUSD,” which was approved by and under the supervision of the New York Department of Financial Services (“NYDFS”). BUSD is a Binance-branded U.S. Dollar denominated crypto asset on the Ethereum blockchain. In December 2019, BAM Trading entered into a partnership with Trust Company A, whereby Trust Company A provided certain services with respect to BUSD purchases and sales on the Binance.US Platform.
• Trust Company B is a Nevada-based trust company. In or around July 2019, BAM Trading entered into an agreement with Trust Company B to provide certain services to customers purchasing crypto assets on the Binance.US Platform with U.S. dollars.
• Sigma Chain is a crypto asset trading firm incorporated in Switzerland. Zhao is Sigma Chain’s beneficial owner, and several Binance employees conducted its operations. 
• Merit Peak Limited (“Merit Peak”) is a crypto asset trading firm incorporated in the British Virgin Islands. Zhao is Merit Peak’s beneficial owner, and several Binance employees conducted its operations. 

Mish Three-Point Synopsis

1. The SEC says Binance is an illegal, unregistered entity that repeatedly broke federal securities laws and commingled client funds into accounts and corporate relationships controlled by Zhao, Binance’s Chief Executive Officer.
2. The SEC seeks to freeze all the assets at Binance 
3. The SEC seek to “disgorge their ill-gotten gains with prejudgment interest”

Illegal Wash Trading

Bitfinex’ed on Wash Trading

Binance BNB Price 

Trending Cryptos

Who Knew?

The First Message 

The SEC is going after every crypto exchange. Most will be driven out of business.

It is reasonably clear that Binance broke many security laws. But is that what’s this is really all about? 

The Second Message Is Get Out Now!

The second message, for everyone with assets at Binance is to take those assets to cold storage right now, while you still can, if you still can.

I am surprised the BNB token is only down 10 percent. 

There is a strong (non-zero is sufficient) chance that the assets at Binance will be frozen. 

Anyone who has assets at Binance after this filing is crazy. 

So, think of the logical implications. If everyone pulls their funds, Binance will go bust whether or not the SEC wins its cease and desist case. 

This post originated on MishTalk.Com.

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