The Breakdown - The SEC Sues Gemini/Genesis as SBF Starts a Blog

Episode Date: January 14, 2023

On this edition of the “Weekly Recap,” NLW looks at the Securities and Exchange Commission lawsuit against Gemini and Genesis involving the Gemini Earn program. He also sums up the recent developments around FTX, including $5 billion of recovered funds and Sam Bankman-Fried’s new Substack.  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   - Join the most important conversation in crypto and Web3 at Consensus 2023, happening April 26–28 in Austin, Texas. Come and immerse yourself in all that Web3, crypto, blockchain and the metaverse have to offer. Use code BREAKDOWN to get 15% off your pass. Visit consensus.coindesk.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Swoon” by Falls. Image credit: Mark Wilson/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

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. The breakdown is produced and distributed by CoinDesk. What's going on, guys? It is Saturday, January 14th, and that means it's time for the weekly recap. One quick note, before we dive into that, there are two ways to listen to The Breakdown. You can hear us on the Coin Desk Podcast Network feed, which comes out every afternoon and features other great shows alongside the or you can listen to the breakdown-only feed, which comes out a few hours later in the evening. Wherever you're listening, if you would take the time to leave a five-star rating or a review,

I would so appreciate it. Now, for this weekly recap, we are, unfortunately, but necessarily, catching up on the latest in the SBF shenanigans. However, before we do that, we do have to do an update with some news from Thursday night. I actually had to record Friday's show before the news of the SEC going after Genesis and Gemini broke, so a little bit of an update on that. Late on Thursday night, Gary Gensler tweeted, We at the SEC charged Genesis and Gemini for the unregistered offer and sale of crypto asset securities through Gemini Earn.

Crypto intermediaries need to comply with our securities laws. This protects investors. It promotes trust in markets. It's not optional. It's the law. Now, the SEC is alleging that both companies engaged in selling unregistered securities. The lawsuit does not make any claims about the status of crypto tokens as securities, but rather the interest-bearing Earn product itself is allegedly a security.

offering. The SEC said in its lawsuit filing that, quote, the defendants offered and sold the Gemini Earn agreements through the Gemini Earn program without registering. As a result, investors lacked material information about the Gemini Earned program that would have been relevant to their investment decisions. The SEC appears particularly concerned that the Earned product was offered to retail investors, rather than restricting to only taking on institutional and accredited investors. The filing also highlighted the lack of proper disclosure of the risks taken by Gemini and Genesis in their lending activities.

In announcing the legal action, SEC Director of Enforcement said, quote, The recent collapse of crypto asset lending programs and the suspension of Genesis' program underscore the critical need for platforms offering securities to retail investors to comply with the federal securities laws. As we've seen time and again, the failure to do so denies investors the basic information they need to make informed investment decisions. Our investigations in this space are very much active and ongoing, and we encourage anyone with information about this matter or other possible securities violations to come forward, including under our whistleblower program, if applicable. The SEC claims that Genesis are liable for damages in this situation due to their

close involvement with the Eurn product and their knowledge that the product would be offered to retail investors in the United States. Almost immediately, Tyler Winklevoss, the co-CEO of Gemini, responded in a Twitter thread. He writes, It's disappointing that the SEC chose to file an action today as Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help earn users get their assets back. Their behavior is totally counterproductive. As a matter of background, the Earn Program was regulated by the New York Department of Financial Services, and we've been in discussion with the SEC about the Earned program for more than 17 months. They never

raise the prospect of any enforcement action until after Genesis paused withdrawals on November 16th. Despite these ongoing conversations, the SEC chose to announce their lawsuit to the press before notifying us. Super lame. It's unfortunate that they're optimizing for political points, instead of helping us advance the cause of 340,000 earn users and other creditors. We look forward to defending ourselves against this manufactured parking ticket, and we will make sure this doesn't distract us from the important recovery work we are doing. But seriously, what is the point or urgency here? The earn program has been shut down for almost two months.

For the avoidance of doubt, Gemini has always worked hard to comply with all relevant laws and regulations. Any suggestion to the contrary is unsupported by the facts. Now, Tyler is obviously a biased source in this, but he was not the only one that thought that this was way more about political grandstanding than real consumer protection. Representative Tom Emmer writes, Gary Gensler is once again late to the game, quote-unquote, protecting no one. Quite clear that his political regulation through enforcement strategy hurts everyday Americans.

Gary Gensler, when can we expect proactive guidance instead of leaving the industry to interpret the rules of the road through your after-the-fact enforcement actions? Now, there were some folks who weren't that surprised. Bill Hughes, a lawyer at consensus formerly of the DOJ, said, SEC has probably been investigating Earned for over a year. These investigations average around 18 months. Coinbase publicly reported that the SEC said they'd sue Coinbase if they went to market with practically the same product. So if you're surprised, 2023 is going to be a doozy for you. Also, no surprise that they were sued after the Earned program collapsed. You want to jump to

the front of the line? Lose investor money. Losing the money meant the SEC couldn't not sue. SEC thinks everyone is violating the securities laws. You're next if you provide a catalyst. Still, by and large, the industry has had it up to here with Gary Gensler. Adam Cochran writes, quote, Today we kicked two companies while they are down, claiming to protect you after the damage was done. We did this instead of providing clear and consistent guidance in advance because I don't like the industry.

I do, however, like political gain, so here's a video for my brand. Adam is, of course, referring to yet another cringe Gary Genser video that accompanied his tweet. Adam goes on. Next time someone asks me why I don't work at a large VC firm and instead just have my own family office, I should send them this tweet. Too many big firms in this industry walk on eggshells rather than

call out this clown. The reality is that unless Gensler is replaced, he will continue regulation by enforcement. The only way we win is calling it out, fighting back and establishing precedent in a court of law that can overrule him. Now look, when it comes to my take on all this, I don't think Gemini is some innocent bystander in the problems going on with the Earn Program. I've said that every time I've done a feature on their fight with DCG. I also am surprised at nothing, and think that Bill Hughes' point about the fact that the SEC had to do something in the wake of this being probably true. But I also think that there's no way to read Gary Gensler's actions for the past few years and not think that his first, second, and probably third motivation is his own political advancement.

There's literally no justification for these unbelievably awkward videos that he keeps producing with himself as the star otherwise. At the same time, I think that, and I've thought for a while, that the only way that these things are going to get settled is in courts. So I hope that Gemini does have the fighting them to actually fight it. But speaking of courts, let's move to today's main topic, a catch-up on SBF and FTX. There have been a number of different revelations this week, and frankly, the biggest headline was that attorneys for FTX say they've recovered more than $5 billion. Lawyers for FTCS said, quote, we've located over $5 billion of cash, liquid cryptocurrency and liquid investment securities measured at petition date value. We do not ascribe any value to holdings

of dozens of illiquid cryptocurrency tokens, where our holdings are so large relative to the total supply, that our positions cannot be sold without substantially affecting the market for the token." End quote. This also doesn't include the $425 million in crypto being held by the Securities Commission of the Bahamas. Now, these numbers confused a lot of people because FTC's new leadership had previously said that they could only locate around $1 billion prior to the court hearing on December 20th. But still, that $5 billion number is what's been reported, and so for now it's all we have to go on. There was, however, a lot more that came out in the hearing this week as well. Lawyers for FTCS confirmed that Sam Bankman-Fried had instructed his co-founder Gary Wong

to create a backdoor in accounting software to enable suspicious loans to be made to affiliated trading firm Alameda Research. They said this secret line of credit was worth $65 billion, although it was unclear how much of this amount was tapped. On the shortfall to repay customers, FTX attorneys said, The amount of the shortfall is not yet clear. It will depend on the size of the claims pool and our recovery efforts. But every week, we come closer to completing the work necessary to estimate recoveries for the purposes of a plan of reorganization. They added that they believe there could be more than 9 million creditors.

It was estimated that FTX's new executive team would need until April to complete this work. However, Judge Dorsey laid out a deadline of March 15th. Another big issue that's been floating around, the judge in the FTX bankruptcy case has ruled that the names of creditor can remain sealed for now. On Wednesday, Judge John Dorsey said, I'm reluctant at this point to say, I'm going to require the disclosure. I'm going to overrule the objections and allow the creditor list to remain sealed at this point. We're talking about individuals here who are not present, individuals who may be at risk if their name and

information is disclosed. Judge Dorsey said he would review the decision in three months. Other recent crypto bankruptcies have highlighted the problems with releasing creditor information in situations where a large cohort of retail investors form the bulk of the creditor list. In last year's initial hearings in the Celsius bankruptcy, the judge ordered the release of complete creditor information. That sparked widespread concern that Celsius customers would become the target of harassment or theft. The Celsius creditor list filing was also criticized for being far too detailed, listing not only names and account balances, but transaction histories as well. The decision in the FTX case may be used as precedent to protect personal

information of customers and other cryptofirm bankruptcies, including the BlockFi case, which is due for a hearing on this same issue next week. Meanwhile, according to data released by Bankruptcy Claims Marketplace X claim, the $91.7 million in FTC claims listed on the site are trading at around 13 cents on the dollar. Other crypto bankruptcy claims from Voyager Digital, BlockFi, and Celsius are trading much higher. Voyager's claims are trading around 41 cents, BlockFi claims around $28.5, and Celsius claims at 18.5 cents. According to X claims chief strategy officer, Andrew Glantz, this massive discount is due to there being less public information available on likely recovery from the FTX bankruptcy. Glantz said that despite this lack of information,

demand has been strong, with 80 new buyers onboarded in the last month. This pool of buyers include hedge fund and specialized distress claims traders, who are, quote, generally well known in the restructuring community. Now, adding complexity in suppressing the price of claims is all the numerous disputes in the case. Glant said, quote, you've got competing interest from BlockFi to SBF to creditors arguing over who owns Robin Hood shares and the government going and taking possession of those. With all these little skirmishes, each one of those shifts potentially shifts value from one

group of creditors to another. Join CoinDesk's Consensus 2023, the most important conversation in crypto and Web 3, happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web 3, and the Metaverse. Immers yourself in all that blockchain technology has to offer creators, builders, founders, brand leaders, entrepreneurs, and more. Use code breakdown to get 15% off your pass. Visit Consenton. census.coindex.com or check the link in the show notes. Now, when it comes to the regulatory side of the FTCS fight, earlier this week, Senators Hickettlouper, Warren, Lummis, and Tillis co-signed a bipartisan letter to the judge

presiding over the FTCs bankruptcy case. The letter called for the appointment of an independent examiner, quote, to have full authority and resources to conduct a thorough, objective investigation of the activities that led to the collapse of FTCS. The letter cast aspersions on the law firm representing FTC, Sullivan, and Cromwell, noting that they had, quote, advised FTCX for years leading up to its collapse, and one of its partners even served as FTC's General Counsel. The senator's question whether Sullivan and Cromwell had suspected fraud at FTCS due to the lack of appropriate legal controls of the firm, and closed by saying, quote, put bluntly, the firm is simply not in a position to uncover the information needed to ensure confidence

in any investigation or findings. Now, Judge Dorsey was not impressed with this communication, calling it inappropriate. He said, quote, I will make my decisions on the matters referred to in the letter based only upon admissible evidence in the arguments of parties and interests presented in open court. He added that the letter will, quote, have no impact whatsoever on my decisions, in this case, which will only be based upon the facts and law presented by the parties. Now, all of that said, Sullivan and Cromwell was a centerpiece of a communique from Sam himself. This guy just cannot stay quiet. He is clearly stewing in his own juices over there in Palo Alto and dropped a very long piece called FTX pre-mortem overview.

I honestly can't imagine what his lawyers are thinking when he does this, but here we are. In that letter, he claims among other things that Sullivan and Cromwell do have a conflict of interest, and were in fact, quote, the primary party strong-arming and threatening me into naming the candidate they themselves chose as CEO of FTX, including for a solvent entity in FTX, US, who then filed for Chapter 11 and chose Sullivan and Cromwell as counsel to the debtor entities. Now, this is very in line with the rest of the piece. If you read Sam's preliminary testimony to Congress what he would have delivered before being arrested, this is really more of the same.

And what it amounts to is that I did nothing wrong and all of this was other people's fault. Sam points again to CZ and Binance for triggering the run on deposits. Genesis and other crypto lenders for tightening the credit lines that Alameda and FTX required to remain liquid. The John Ray led bankruptcy team for not allowing Sam to raise additional capital to keep FTCX afloat, and the overall crypto market for repeatedly crashing last year, basically anyone but Sam himself. The bulk of the substack is devoted to breaking down the state of Alameda's balance

sheet throughout the last three years, which he's doing apparently for memory, which I don't know seems to me a little bit in contrast with Sam's claim that he wasn't actually involved for the last few years. Sam continues to claim that if FTX hadn't been forced into bankruptcy by the new management, then Sam is sure that he could have found emergency funding and made customers whole. He repeated his claim that billions of dollars came in offered just after he filed for bankruptcy. And whatever he thinks he was doing, it's pretty clear that the crypto industry is just not buying it. I Am Nomad writes, oh, SBF writes fan fiction now? Ryan Schott Adams perfectly sums up my feelings when he writes,

Sam's new substack post is gross, blaming everyone but himself. I wish we could leave this guy in 2022. Gawker writes, Sam Bankman-Fried continues his creative torture of his defense team by starting a substack. Udi Wertheimer writes, it's amazing to me that, SBF is still comparing FDX to lenders like Block 5 Voyager and Celsius, who lent out customer funds with poor risk management. FDX shouldn't have been lending out customer funds at all, regardless of risk management. Yes, funds were stolen, Sam.

And then, of course, there's zero hedge which says, SBF says, I didn't steal funds and I certainly didn't stash billions away. That's odd because all of your former coworkers now say you did. The whole situation is sad, and nothing about Sam's letter is going to do anything to make it more likely that people are actually made whole in this situation. He is now officially fighting a PR war almost entirely in his own mind to the benefit of basically no one. Anyways, guys, happy January weekend.

I hope you are doing something fun. I appreciate you listening as always. Until tomorrow, be safe and take care of each other. Peace.