The charges include operating unregistered exchanges, broker-dealers and clearing agencies, misrepresentations regarding the control and supervision of trading on the Binance.US platform, and the unregistered offer and sale of securities – U.S. Securities and Exchange Commission (SEC)
Today, the U.S. Securities and Exchange Commission charged Binance Holdings Ltd. (“Binance”), which operates the world’s largest cryptocurrency trading platform Binance.com, BAM Trading Services Inc. (“BAM Trading”), which together with Binance operates the cryptocurrency trading platform Binance.US, and their founder Changpeng Zhao with a number of securities law violations.
Among other things, the Commission alleges that while Zhao and Binance publicly stated that U.S. customers were prohibited from trading on Binance.com, Zhao and Binance were in fact undermining their own controls to secretly allow large U.S. customers to continue trading on the Binance.com platform. In addition, the Commission alleges, Zhao and Binance publicly claimed that Binance.US was established as a separate, independent trading platform for U.S. investors, Zhao and Binance secretly controlled the operations of the Binance.US platform behind the scenes.
The SEC also alleges that Zhao and Binance exercised control over the platform’s customer assets, allowing them to pool customer assets or redirect them at their discretion, including to Sigma Chain, a company owned and controlled by Zhao. The Commission’s complaint also alleges that BAM Trading and BAM Management US Holdings, Inc. (“BAM Management”) misled investors about non-existent controls over trading on the Binance.US platform, while Sigma Chain engaged in manipulative trading that artificially inflated trading volume on the platform. In addition, the complaint alleges that the defendants concealed the fact that they were commingling billions of dollars of investor assets and sending them to a third party, Merit Peak Limited, which is also owned by Zhao.
The complaint also alleges violations of important registration-related provisions of the U.S. federal securities laws:
Binance and BAM’s trading with existing unregistered national securities exchanges, broker-dealers and clearing agencies;
The unregistered offer and sale of Binance’s own crypto assets, including the so-called BNB exchange token, the so-called stablecoin, Binance USD (BUSD), certain cryptocurrency credit products, and the staking-as-a-service program;
Zhao as a person controlling the activities of unregistered national securities exchanges, broker-dealers and clearing agencies Binance and BAM Trading.
“With the thirteen charges, we allege that Zhao and Binance engaged in an extensive network of deception, conflicts of interest, insufficient disclosure, and willful evasion of the law,” said Gary Gensler, Chairman of the U.S. Securities and Exchange Commission. “Zhao and Binance are alleged to have misled investors about risk controls and misrepresented trading volumes by actively concealing who operated the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were held. They attempted to circumvent U.S. securities laws by claiming bogus controls that they ignored behind the scenes in order to keep high value U.S. clients on their platforms. The public should be wary of investing any of their hard-earned assets in or on these illegal platforms.”
“Zhao and Binance allegedly misled investors about risk controls and misrepresented trading volumes by actively concealing who operated the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were held. They attempted to circumvent U.S. securities laws by claiming bogus controls that they ignored behind the scenes in order to keep high value U.S. clients on their platforms. The public should be wary of investing any of their hard-earned assets in or on these illegal platforms.”
“We allege that Zhao and Binance not only knew the rules of the game, but knowingly chose to violate them, putting their customers and investors at risk – all to maximize their own profits,” said Gurbir S. Grewal, Director of the U.S. Securities and Exchange Commission’s Division of Enforcement. “By engaging in numerous unregistered offerings and failing to register and simultaneously combining the functions of exchanges, brokers, dealers, and clearing agencies, the Binance platforms under Zhao’s control created undue risks and conflicts of interest for investors. These risks and conflicts are only exacerbated by the lack of transparency of Binance’s platforms, reliance on related party transactions, and lies about controls to prevent manipulative trading. Despite their longstanding efforts not to be ‘held accountable,’ today’s complaint begins the process of holding them accountable.”
UNREGISTERED EXCHANGE, BROKER AND CLEARING AGENCY
The Commission’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, under Zhao’s control, have operated as exchanges, brokers, dealers, and clearing agencies and have earned at least $11.6 billion, in part, from transaction fees from U.S. customers. The Commission’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 Commission also alleges that Zhao is liable, as a person in control of Binance and BAM Trading, for the relevant registration violations.
UNREGISTERED OFFER AND SALE OF CRYPTO ASSETS
The Commission accused Binance of unregistered offers and sales of BNB, BUSD, and cryptocurrency products known as “Simple Earn” and “BNB Vault”. In addition, the Commission accused BAM Trading of unregistered offer and sale of the Binance.US “staking as a service” program. The complaint also states that Binance secretly controls the assets invested by US customers in the BAM program.
FAILURE TO RESTRICT U.S. INVESTORS’ ACCESS TO BINANCE.COM
The SEC’s complaint alleges that Zhao and Binance created BAM Management and BAM Trading in September 2019 as part of a complex scheme to circumvent U.S. federal securities laws by claiming that BAM Trading independently operated the Binance.US platform and that U.S. customers could not use the Binance.com platform. The complaint alleges that, in fact, Zhao and Binance maintained significant ownership and control of the U.S. company and that behind the scenes, Zhao instructed Binance to allow and conceal the continued access to Binance.com by many U.S. customers with significant funds. In one instance, Binance’s head of compliance wrote to a colleague that “we are operating as a fictitious unlicensed securities exchange in the US, bro.”
MISLEADING INVESTORS
According to the Commission’s complaint, BAM Trading and BAM Management misled Binance.US customers and investors about the existence and adequacy of market oversight and controls to detect and prevent manipulation of cryptocurrency trading volumes on the Binance.US platform. The complaint also alleges that the strategic and targeted trading for the purpose of money laundering, which was largely carried out by Sigma Chain, the main undisclosed “market maker” trading firm of the Binance.US platform, also owned by Zhao, demonstrates the falsity of BAM Trading’s claims of market oversight and control.
The SEC’s investigation into the Binance.US violations was led by Kathleen Hitchins, Ann Rosenfield, and Colby Steele, with assistance from Ainsley Kerr, John Marino, and Donald Battle, and supervised by Paul Kim.
The Binance.com investigation was led by Michael Baker, Donna K. Norman and Martin Zerwitz, with assistance from Sachin Verma and Alexander Lefferts and supervised by Deborah A. Tarasiewicz. Both cases were supervised by Jorge G. Tenreyro and David Hirsch of the SEC’s Division of Cryptoassets and Cyberspace. The litigation is being led by Matthew Scarlato, Jennifer Farer and J. Emmett Murphy, with assistance from Hope Hall Augustini and supervised by David Nasse, Olivia Chow and Mr. Tenreyro.
Source: https://www.sec.gov/news/press-release/2023-101
Author: Ivaneta Mykyta
