SEC Hits Binance With 13 Serious Charges
Posted on 06/06/2023
The Securities and Exchange Commission (SEC) has charged Binance Holdings Ltd., known for Binance.com, a separate unit known as BAM Trading, and founder, Changpeng Zhao, with “a variety of securities law violations.”
SEC allegations include: “While Zhao and Binance publicly claimed that U.S. customers were restricted from transacting on Binance.com, Zhao and Binance in reality subverted their own controls to secretly allow high-value U.S. customers to continue trading on the Binance.com platform.” There is quite a bit more involved, “The SEC also alleges that Zhao and Binance exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please, including to an entity Zhao owned and controlled called Sigma Chain.” Allegations about “non-existent trading controls” is also added to the complaint. Importantly, the SEC says the group “engaged in manipulative trading that artificially inflated the platform’s trading volume.” And, investor money was allegedly transferred to a Zhao-controlled entity.
Violations of critical registration-related provisions of the federal securities laws alleged are:
- Binance and BAM Trading with operating unregistered national securities exchanges, broker-dealers, and clearing agencies;
- Binance and BAM Trading with the unregistered offer and sale of Binance’s own crypto assets, including a so-called exchange token, BNB, a so-called stablecoin, Binance USD (BUSD), certain crypto-lending products, and a staking-as-a-service program; and
- Zhao as a control person for Binance’s and BAM Trading’s operation of unregistered national securities exchanges, broker-dealers, and clearing agencies.
SEC Chair Gary Gensler is directly involved, saying: “Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law. As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied. They attempted to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement said: “We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk – all in an effort to maximize their own profits.”
Per the SEC: “The SEC’s complaint, filed in the U.S. District Court for the District of Columbia, alleges that, since at least July 2017, Binance.com and Binance.US, while controlled by Zhao, operated as exchanges, brokers, dealers, and clearing agencies and earned at least $11.6 billion in revenue from, among other things, transaction fees from U.S. customers. The SEC’s complaint alleges that (1) with respect to Binance.com, Binance should have registered as an exchange, broker-dealer, and clearing agency; (2) with respect to Binance.US, Binance and BAM Trading should have registered as an exchange and as clearing agencies; and (3) BAM Trading should have registered as a broker-dealer. The SEC also alleges that Zhao is liable as a control person for Binance’s and BAM Trading’s respective registration violations. The SEC’s complaint alleges that Zhao and Binance created BAM Management and BAM Trading in September 2019 as part of an elaborate scheme to evade U.S. federal securities laws by claiming that BAM Trading operated the Binance.US platform independently and that U.S. customers were not able to use the Binance.com platform. The complaint alleges that, in reality, Zhao and Binance maintained substantial involvement and control of the U.S. entity and that, behind the scenes, Zhao directed Binance to allow and conceal many high-value U.S. customers’ continued access to Binance.com. In one instance, the Binance chief compliance officer messaged a colleague that, “[w]e are operating as a fking unlicensed securities exchange in the USA bro.”
Investigators
The SEC’s investigation into the violations of the Binance U.S. platform was conducted by Kathleen Hitchins, Ann Rosenfield, and Colby Steele, with the assistance of Ainsley Kerr, John Marino, and Donald Battle and the supervision of Paul Kim. The investigation into the violations with respect to the Binance.com platform was conducted by Michael Baker, Donna K. Norman, and Martin Zerwitz, with the assistance of Sachin Verma and Alexander Lefferts and the supervision of Deborah A. Tarasevich. Both matters were overseen by Jorge G. Tenreiro and David Hirsch of the SEC’s Crypto Assets and Cyber Unit. The litigation is being led by Matthew Scarlato, Jennifer Farer, and J. Emmett Murphy, with the assistance of Hope Hall Augustini, and under the supervision of David Nasse, Olivia Choe, and Mr. Tenreiro.
