SEC sues Binance, says it evaded US law with “extensive web of deception”
The US Securities and Exchange Commission today sued Binance and its CEO/founder Changpeng Zhao, alleging that the defendants’ “blatant disregard” of federal law “enriched themselves by billions of US dollars while placing investors’ assets at significant risk.”
“Defendants have unlawfully solicited US investors to buy, sell, and trade crypto asset securities through unregistered trading platforms available online at Binance.com and Binance.US,” alleged the SEC complaint in US District Court for the District of Columbia.
Binance’s CCO (chief compliance officer) “bluntly admitted to another Binance compliance officer in December 2018, ‘we are operating as a fking unlicensed securities exchange in the USA bro,'” according to the lawsuit. The CCO was also quoted as saying, “We do not want [Binance].com to be regulated ever.”
The SEC is seeking fines, disgorgement of ill-gotten gains with interest, and injunctions. In a press release, the SEC alleged that “while Zhao and Binance publicly claimed that US customers were restricted from transacting on Binance.com, Zhao and Binance in reality subverted their own controls to secretly allow high-value US customers to continue trading on the Binance.com platform.”
SEC Chair Gary Gensler said that Binance entities and Zhao “engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.” They “actively conceal[ed] who was operating the platform… and even where and with whom investor funds and crypto assets were custodied” and “attempted to evade US securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value US customers on their platforms,” he said.
Binance accuses SEC of overreach
Defendants also include related companies BAM Trading Services and BAM Management US Holdings Inc. The SEC lawsuit has 13 charges alleging violations of the Securities Act and Exchange Act. The complaint is similar to one filed in March against Binance and Zhao by the US Commodity Futures Trading Commission (CFTC). As we previously wrote, the CFTC lawsuit seeks disgorgement, civil monetary penalties, and permanent trading and registration bans.
Binance issued a response to the SEC on Monday. It said there is “zero justification” for the lawsuit, that the SEC is trying “to claim jurisdictional ground from other regulators,” and that “any allegations that user assets on the Binance.US platform have ever been at risk are simply wrong.”
“All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure, and we will vigorously defend against any allegations to the contrary,” Binance said. Binance further accused the SEC of “overreach” and said that “because Binance is not a US exchange, the SEC’s actions are limited in reach.”
Binance is the world’s largest crypto asset trading platform, with a trading volume of $9.58 trillion in 2021, the SEC lawsuit said. Binance is said to have earned at least $11.6 billion in revenue from June 2018 to July 2021, mostly from transaction fees.
Binance’s own cryptocoin offering, BNB, was down over 10 percent in trading following today’s SEC lawsuit.
SEC: Binance chose to evade US law
The lawsuit alleged that under Zhao’s control, Binance and affiliated entities “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 US 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.”
Binance claimed to the public that Binance.com didn’t serve US people “while simultaneously concealing their efforts to ensure that the most valuable US customers continued trading on the platform,” the SEC said, continuing:
When the Binance.US Platform launched in 2019, Binance announced that it was implementing controls to block US customers from the Binance.com Platform. In reality, Binance did the opposite. Zhao directed Binance to assist certain high-value US 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 US regulatory authorities not trouble us.”
The SEC said that Zhao and Binance tried to evade US regulatory oversight by creating BAM Management and BAM Trading in the US and by “claim[ing] publicly that these entities independently controlled the operation of the Binance.US Platform.” But Zhao and Binance controlled things behind the scenes and “Zhao continues to own 81 percent of BAM Management,” the SEC said. “Neither BAM Management nor any of its subsidiaries or affiliated entities (including BAM Trading) has ever been registered with the SEC in any capacity.”
In 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,'” according to the SEC lawsuit.
Besides the requested monetary penalties and disgorgement, the SEC is seeking a jury trial and injunctions requiring “asset freezes, a verified accounting, repatriation of assets, expedited discovery, preservation of documents and information, prohibition on the destruction of evidence, the appointment of a receiver, alternative service, and/or any other necessary equitable relief that the Court deems just and proper.”
https://arstechnica.com/?p=1945525