A Roundup of the CFTC and SEC Crypto Actions for 2023

2023 was a busy year for enforcement actions generally but crypto related actions from the SEC and CFTC felt like they hit news headlines weekly.?

In total the SEC filed 784 enforcement actions, obtained orders for nearly $5 billion in financial remedies, and distributed nearly $1 billion to harmed investors. The CFTC had a similar bumper year and filed 96 enforcement actions resulting in over $4.3 billion in penalties, restitution and disgorgement.

Whilst many of their crypto specific actions are pretty controversial, some did help weed out bad actors from the space and shut down fraudulent platforms which were harming investors, so it’s only fair that we assess the SEC and CFTC’s crypto actions as a whole…

• ?? The SEC filed charges against Terraform Labs and its founder Do Kwon, Richard Heart and three entities that he controls, Hex, PulseChain, and PulseX, FTX CEO Samuel Bankman-Fried, and other FTX executives.?
• ??The CFTC also brought charges against key FTX execs as well as Binance, its founder, and a former chief compliance officer with operating an illegal digital asset derivatives exchange.
• ??The SEC brought action against a whole host of celebrities who were touting crypto projects, most often scams. Paul Pierce and Kim Kardashian were fined over $1m each and celebrities such as Lindsay Lohan, Jake Paul, Akon, Soulja Boy, Ne-Yo and Lil Yachty were all charged for, and decided to settle, for promoting crypto projects without disclosing they were paid to do so.?
• ??Nexo, Kraken, Celsius and Gemini/Genesis were all targeted by the SEC for offering staking and lending services. In total $52.5m was paid to settle these cases. Hopefully we’ll see some staking specific guidance coming out next year and actions so that US investors aren’t locked out of this opportunity.?
• ??The CFTC took action against Celsius and its former CEO Alex Mashinsky under the banner of fraud and material misrepresentations in connection with a commodity pool scheme - eg crypto lending and borrowing.
• ??Forex fraud company Mirror Trading International was ordered to pay the highest ever civil monetary penalty and victim restitution of $1.73billion.
• ??The SEC took down NFT projects from Stoner Cats and Impact Theory as they claimed these fell under the securities definition. If all NFTs are now deemed securities then pandora’s box is truly opened and arguably Pokemon cards, Beanie babies and artwork should face a similar review ??
• ??The SEC froze the assets of a Miami-based investment adviser BKCoin Management LLC in connection with an alleged $100 million crypto asset fraud scheme.
• ??DAOs were the target in action from the CFTC this year with Ooki DAO being charged with operating an illegal trading platform and acting unlawfully as a futures commission merchant. Fears were raised about whether governance token holders had suddenly become liable for their DAO’s or associated platform’s actions. I expect we’ll see more DAO related challenges in 2024. ??
• ??Depending whether you’re taking the ‘trading strategy’ or ‘toxic activity’ position ,the CFTC’s charges against Mango Market’s exploiter Avraham Eisenber could be seen as a positive or a negative.?
• ??In a worrying precedent the creators of 3 DeFi platforms were charged with illegally offering leverage and margin trading, for failing to register as a swap execution facility and for failing to adopt a KYC program. If the CFTC now has their eyes set on charging DeFi platforms and their creators for non-compliance with regulation which isn’t technically feasible then we’re in for a bumpy ride in 2024.?
• ??The CFTC took action against 14 entities who fraudulently claimed they were registered with them and who were using this air of legitimacy to scam users.?
• ??The SEC filed charges against some of the biggest exchanges in the cryptosphere; Coinbase, Binance and Bittrex for “...rampant noncompliance…”. Most of these exchanges are fighting back so 2024 is heading for a bumper year of spicy court action!

So all in all, a mixed bag of good, bad and ugly actions from the SEC and CFTC in the world of crypto.

However what I found most enlightening from each agencies wrap up of the year was just how much bad activity is happening over in tradfi and flies under the headlines because it’s not new, exciting or out of the norm!

Here’s a sample of bad activity the SEC and CFTC caught, not to do a “look over there, they’re worse than us!” type action but as a reminder that industries who have been around for hundreds of years, have robust regulation, enhanced KYC and AML programs and millions of people in their compliance programs still have bad actors who slip through the net, still have criminals and scammers looking to try and take advantage of users, and still see bad actors rising through their ranks.

The SEC:

• ABB Ltd., a global technology company, agreed to pay a $75 million civil penalty to resolve charges arising out of an alleged bribery scheme.
• Danske Bank, a multinational financial services corporation, to pay a $178.6 million civil penalty to resolve charges that it misled investors about its anti-money laundering compliance program and failed to disclose risks posed by the program’s significant deficiencies
• Vale S.A., a mining company and one of the largest iron ore producers in the world, to pay $55.9 million combined in a civil penalty, disgorgement, and prejudgment interest to settle charges for allegedly false and misleading disclosures about the safety of its dams prior to a collapse that killed 270 people.
• The SEC also charged five publicly traded companies for contributing to the filing failures by insiders or failing to report their insiders’ filing delinquencies. The parties agreed to pay more than $1.5 million combined in civil penalties to settle the cases.
• The SEC charged Merrill Lynch and its parent company, BAC North America Holding Co., with failing to file hundreds of Suspicious Activity Reports from 2009 to late 2019. Merrill Lynch paid a $6 million penalty to settle the SEC charges.
• A former Wells Fargo executive was barred from serving as an officer or director of a public company as part of a settlement of fraud charges for misleading investors about the success of Wells Fargo’s core business. The former executive also agreed to pay a $3 million civil penalty and more than $1.9 million in disgorgement and prejudgment interest
• A host of market abuse actions for; eight social media influencers for allegedly using social media to manipulate exchange-traded stocks in a $100 million securities fraud scheme; two financial services industry professionals for allegedly perpetrating a multi-year front-running scheme that generated at least $47 million in illegal trading profits; and an executive of a public healthcare company with insider trading where he allegedly adopted a 10b5-1 trading plan while in possession of material nonpublic information and avoided losses of more than $12 million.
• Charges against a Deutsche Bank subsidiary for making materially misleading statements about its controls concerning ESG products. The firm marketed itself as a leader in ESG that adhered to specific policies for integrating ESG considerations into its investments, but it allegedly failed to adopt and implement policies and procedures reasonably designed to ensure that its public statements about the ESG integrated products were accurate. The firm agreed to pay a $19 million civil penalty to settle the charges
• A host of public abuse actions; charges against public company Exelon Corporation, its subsidiary, and the subsidiary’s former CEO for fraud in connection with a multi-year political corruption scheme; charges against three broker-dealers for failing to obtain required disclosures for investors when selling new issue municipal bonds; and a case charging an auditor of a municipal issuer for fraud in connection with its audit of financial statements for a Louisiana-based school board.
• Charges against North Carolina-based global chemicals company Albemarle Corporation for, among other violations, allegedly using agents that paid bribes to obtain contracts in Vietnam, India, and Indonesia. To settle the charges, Albemarle agreed to pay more than $100 million in disgorgement and prejudgment interest.

Read the full 2023 SEC roundup here: https://www.sec.gov/news/press-release/2023-234

And for the CFTC:

• Simultaneously filing and settling charges against HSBC Bank USA, N.A. finding it engaged in manipulative and deceptive trading related to swaps with bond issuers, spoofing, and supervision and mobile device recordkeeping failures at various times during approximately an eight-year period, and imposing a $45 million civil monetary penalty.?
• Charging two commodity pool operators (CPOs), Glen Point Capital Advisors LP and Glen Point Capital LLP, and their Co-Founder and Co-Chief Investment Officer, Neil Phillips, with deception and manipulation in a $30 million scheme to illegally trigger payouts on two large binary option contracts that were swaps.
• Charging a registered CTA/CPO and its associated person with spoofing, engaging in manipulative and deceptive conduct, failing to supervise, and violating a prior CFTC order in a scheme involving crude oil and natural gas futures contracts—specifically, calendar spread contracts—traded on CME and ICE Futures Europe.
• Simultaneously filing and settling charges against the affiliates of three financial institutions (Goldman Sachs & Co. LLC, $30 million CMP; JPMorgan Chase Bank, N.A., et al., $15 million CMP; and Bank of America, N.A, et al., $8 million CMP) for swap data reporting and other failures relating to their business as swap dealers (SDs), including, in one case, failures related to the disclosure of pre-trade mid-market marks (PTMMMs).
• Settling charges against a registered introducing broker, its owners, and affiliated companies finding they engaged in fraud by misappropriation of material, nonpublic information by taking the opposite side of thousands of brokerage customer block trade orders without the customers’ prior consent, and imposing a $2.5 million civil monetary penalty and $496K in disgorgement.
• Obtaining a preliminary injunction in an enforcement action charging fraud, misappropriation, and registration violations in connection with a $58 million fraudulent forex scheme.
• Charging precious metals dealers with fraudulently soliciting more than $7 million from over 100 customers, mainly elderly and retirement-aged, to purchase precious metals in self-directed individual retirement accounts, and misappropriating customer funds and assets.
• Charging defendants, doing business as “My Forex Funds,” with fraudulently soliciting at least $310 million in fees from more than 135,000 customers to trade leveraged, margined, or financed retail forex, and leveraged retail commodity transactions.

Read the full 2023 CFTC roundup here: https://www.cftc.gov/PressRoom/PressReleases/8822-23?

As I often say, it’s not only unrealistic but completely impossible to aim for a zero rate of crime in crypto. Just as it would be in tradfi. Instead we should be aiming to make it harder and harder for criminals to perpetrate crypto based crime and make it easier and easier for them to be caught and held accountable.?