The Breakdown - The SEC Drops the Ripple Case: How Big A Deal Is This?

Episode Date: October 21, 2023

NLW explains the latest moves from the SEC. Is their dropping of their case against Ripple Execs as bullish as it seems -- or is it just them gearing up for a different fight? Plus, NYAG sues Gemini, Genesis, DCG, Barry Silbert and Michael Moro. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Most of the crypto industry kind of is at the point of just a plague on all your houses, burn it to the ground, and let something new be built in its stead. There is not a lot of sympathy or compassion or patience left among regular crypto industry participants for all of these people who ended up causing such catastrophic destruction. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on to do? guys, it is Friday, October 20th, and today we are talking about the SEC dropping the ripple case and the New York Attorney General suing DCG. Before we get into that, however, if you are enjoying

the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Well, friends, there is some serious excitement to close out this week, and no, I'm not even talking about JPMorgan's report that an ETF is likely to be approved in the next few months, or Bitcoin's morning rally up above $30,000. What I'm talking about, or at least where we want to start, is with the SEC dropping the Ripple case. Specifically, the SEC will no longer pursue allegations against Ripple CEO Brad Garlinghouse

and executive chairman Chris Larson. The pair had been named as additional defendants in the Ripple lawsuit, with the SEC alleging that they had aided and abetted the company in violating securities laws. The issue was the sole outstanding matter in the Ripple case after the judge ruled. that this part of the lawsuit should continue to a full trial due to disputed facts. Other matters were decided back in July, with the judge finding that public sales of XRP tokens on exchanges, as well as distributions to staff and subcontractors, did not constitute the sale of unregistered securities. Now, the court did hold that sales of

XRP tokens to institutional investors did satisfy the Howey test and were therefore considered sales of unregistered securities. The SEC's Thursday filing said that the regulator would continue to pursue its claims against the company. Earlier this month, the court ruled that the SEC could not put forward an appeal of the Ripple decision until all outstanding matters were resolved. Now that next April's trial has been vacated, the path is cleared for an imminent SEC appeal of the decisions which went against them in July. Ripple for their part is treating this decision to abandon further claims as another small

victory in their ongoing battle with the SEC. A press release from the company characterized the actions as a surrender. Garlinghouse said in a statement, For nearly three years, Chris and I have been the subject of baseless allegation. from a rogue regulator with a political agenda, instead of looking for the criminals stealing customer funds on offshore exchanges that were courting political favor, the SEC went after the good guys. He added,

We look forward to the day this chapter is closed once and for all, now that the SEC has dropped the curtain on their absurd theatrics against Chris and Me. Larson said, quote, We are legally vindicated and personally redeemed in our battle against a troubling attempt to abuse the rules in order to advance a political agenda to suffocate crypto in America. It's a travesty that we were forced to defend ourselves from an ill-advised attack that was flawed from the day it was filed. Indeed, he went on and called the SEC's lawsuit, quote, an abuse by the administrative state that politically connected special interest with clear and proven

conflicts of interest, were able to drag our names through the mud in an attempt to ruin us personally and destroy a company so many have worked so hard for so long to build. As well as dealing with an anticipated appeal, Ripple will also now need to pay penalties for their illegal sales of XRP tokens to institutional investors. The SEC filing said that the parties plan to meet in order to negotiate a settlement. They will set out a briefing schedule in November to proceed on a contested basis if no agreement is reached. This appears on the face of it to be a very good thing.

And that may be true, but it's also maybe not the thing that it initially seems. Catherine Kirkpatrick, the chief legal officer at CBOE, wrote, The SEC has voluntarily dismissed the case against Ripple senior execs. This means they can proceed to appeal the Ripple decision much sooner, otherwise they would have had to wait until the conclusion of that trial in late spring. Gabriel Shapiro from Delphi Digital says, this is the correct read of the ripple dismissal. Instead of the bull signal, it might appear, it's really the SEC wanting to appeal the programmatic sales and service grant holdings immediately.

Now, once this interpretation got out, that the SEC was so focused on wanting to appeal the other part of the decision that they were willing to drop the charges against the execs, some people started to point out that that also seemed a little nuts. Alliance Dow's Jason Franich wrote, this is insane if true. It's equivalent to the SEC saying that either A, the exec lawsuit was weak or even frivolous, or B, we think the execs broke the law, but we don't care. We'd much rather rush to appeal so we can crush the crypto industry at large. If the latter, it's emblematic of how a regulator at war with an industry would behave.

Mike Vafshach also of Alliance Dow said, This is what a nakedly political regulator looks like. The SEC is abandoning a case in which it claims these men unjustly enrich themselves with hundreds of millions of ill-gotten gains from investors. They have abandoned any pretense of neutrality. They don't give an F. Of course, that's not what the Ripple execs did. They are not bad actors. But that's what the SEC claims they did, what they argued in court, what they said before Congress. They don't care about protecting investors. They don't care about you. They care only about their power. Now, there is one other interpretation as well.

On Jacobs post that I just read a moment ago, consensus lawyer Bill Hughes wrote, or they hate trials. That interpretation was reinforced by Elliot Stein, litigation analyst at Bloomberg who said, I wonder if the SEC wants to avoid a trial where facts could come out that maybe jeopardize the SEC's win on institutional sales. Now, it's not at all clear to me that the SEC can actually competently run a contested trial. Remember, we haven't actually seen them run a trial under Gensler, only pretrial motions and settlements.

It may be that they just never had the stomach for it, and when it was headed that way, they had to back off. However, another legal action popped up at the end of this week, and we will come to that just after this quick break. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress.

It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7-365 and moves at the speed of real life. Not everyone believes it. our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice.

Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, DBA, CRAC. Attorney General Leticia James has filed a lawsuit against Gemini Trust, Genesis Global Capital, and Digital Currency Group for allegedly defrauding 230,000 investors out of more than a billion dollars. Also personally named as defendants in the lawsuit are DCG CEO Barry Silbert and former Genesis CEO Michael Morrow. James is seeking to ban Gemini, Genesis and DCG from participating in the financial investment industry in New York. Now, A.G James has definitely been rapidly filing lawsuits over the recent months with active litigation against

Coinex, Ku-Coyne, and Celsius founder Alex Machinsky. The allegations here relate to the events surrounding the Gemini Earned product. The lawsuit claims that Gemini lent funds to Genesis, which is owned by DCG. These funds were then lent to counterparties, including now bankrupt trading firms, Three Arrows Capital, and Alameda Research. It's alleged that these counterparty failures left Genesis with a $1.1 billion loss. Now, it's not illegal for loans to fail and cause a lender's book to collapse. What James is alleging is that both Gemini and Genesis knew about the state of the lending business

as it deteriorated and actively misled investors about the risks being taken. The lawsuit claims that Gemini knew Genesis was lending on an under-collateralized basis and had excessive concentration of loans to a single counterparty in Alameda research. The allegations state that Alameda made up 60% of Genesis' external loan book in July 2022, and that loans were mostly secured by FTT tokens, which of course collapsed in value surrounding the failure of FTX. Both Morrow and Silbert are accused of defrauding the public by attempting to conceal heavy losses which would be borne by investors. The lawsuit claims that the pair, quote, disguised $1.1 billion in losses through a month's long campaign of misstatements, omissions, and concealment. It alleges that tweets sent by DCG and Genesis following the bankruptcy of

Three Arros Capital were false, misleading, and omitted material facts. The complaint claims that, quote, DCG did not simply assume the $1.1 billion open term liability related to Three Arrows, which could be called at any time. It replaced that liability with an illiquid. 10-year promissory note. Internally, a Genesis officer objected to claiming to counterparties that they had, quote, absorbed the loss because they would be unable to defend this statement from any level of scrutiny. Now, for Gemini's part in the deception, the lawsuit claims that, quote, even after Gemini decided to terminate earn and provide formal notification to Genesis Capital, Gemini continued to take tens of millions of dollars worth of additional cryptocurrencies from

earn investors. These additional investments were passed on to Genesis while at the same time, Gemini employees were closing out their personal positions, according to the allegations. The suit claims that Gemini's internal risk management framework fall well short of their pledge to customers, and in fact, that Gemini had internally downgraded Genesis' risk rating to junk status in February 2022 and sought to terminate the Earned program in September. According to the complaint, these were material facts for investors which Gemini had an affirmative duty to disclose. Finally, while both Gemini and Genesis claimed to hold all necessary government licenses to operate their businesses, the lawsuit

alleges that they should have registered under New York securities laws and failed to do so. A.G. James said in a statement, these cryptocurrency companies lied to investors and tried to hide more than a billion dollar in losses, and it was middle-class investors who suffered as a result. Now, of course, this lawsuit compounds active litigation for Gemini, Genesis, and DCG. In January, the SEC sued Genesis and Gemini for offering unregistered securities in the form of the Gemini Earned product, a claim which the two firms are currently pushing the court to dismiss, saying that the details of securities offering are not sufficiently defined,

And then, after negotiations broke down surrounding the Genesis bankruptcy, Gemini sued DCG and Barry Silbert in July. In terms of response, in a statement discussing this new lawsuit, DCG said that they had been, quote, blindsided by the complaint months after cooperating with the Attorney General's investigation. A DCG spokesperson said, we fully intend to fight the claims and look forward to being vindicated in this case. DCG has always conducted its business lawfully and with integrity. There is no evidence of any wrongdoing by DCG, Barry Silbert, or its employees. Silbert added that he was, quote, shocked by the baseless allegations and said that honesty and integrity have always been my guiding principles. Now, Gemini, for their part, tried to kind of have it both ways

and say that this suit backed up what they had been saying about Genesis and DCG for a while, but they were, of course, innocent. They tweeted, today, the New York Attorney General sued Genesis, its former CEO, DCG, and DCG's CEO, Barry Silbert personally, for conspiring to lie and defraud Gemini earn users and other Genesis creditors. The NYAG's lawsuit confirmed, firms what we've been saying all along, that Gemini, earn users, and other creditors were the victims of a massive fraud and systematically lied to by these parties about Genesis's financial condition. With that said, we wholly disagree with the NYU's decision to also sue Gemini. Blaming a victim for being defrauded and lied to makes no sense, and we look forward to defending

ourselves against this inconsistent position. Ryan Selkis from Masari summed up much of the community's reaction when he wrote, I'm no fan of the NYU, but this is one of the most horrific and damning complaints I have read in crypto. Brutal, but I'm glad this. final shoe has finally dropped. Separately, he also tweeted, the only difference between DCG and FTX is that FTX used QuickBooks. James Safart and ETF analyst at Bloomberg said, Historically, you'd say Genesis were the adults in the room, and it really did seem like it. But I feel like there is virtually no interest rate I'd be willing to accept using this stuff

as such a large chunk of the collateral, not to mention such a large chunk of the book. Like if this stuff were disclosed, I suspect a lot of Gemini Earn users would have withdrawn their crypto from the program. I think overall, when it comes to this idea that Gemini are somehow the innocent victims here, the courts will prove whatever they prove and obviously Gemini gets to fight. But unfortunately for them, most of the crypto industry kind of is at the point of just a plague on all your houses, burn it to the ground, and let something new be built in its stead. There is not a lot of sympathy or compassion or patience left among regular crypto industry

participants for all of these people who ended up causing such catastrophic destruction. Now, of course, where a lot of people went was what this means for GBTC. Travis Kling, the founder at Aikai, said, This strikes me as enough for SEC to put GBT conversion on ICE, at least for now. And so that, friends, is I think the next thing to watch whether we get any intimations of what will happen next in Grayscale's attempt to convert the Grayscale Bitcoin Trust into an ETF. Does the SEC approve another set of ETFs in advance and let the market do their work for them?

That's kind of my base case, but we will just have to see. For now, that ends another crazy week in the wild crypto industry. One more big thanks to today's sponsor Cracken. Go to crackin.com slash The Breakdown and see what crypto can be. And until next time, be safe and take care of each other. Peace.