A Question for Congress: Why Didn’t the SEC Stop FTX?

By Hal Scott and John Gulliver. January 18, 2023. (Wall Street Journal).

The Securities and Exchange Commission brought an enforcement action last week against the cryptocurrency brokerages Genesis Global Capital and Gemini Trust. As with the failure of crypto exchange FTX, the SEC is late to the game—likely too late for the 340,000 U.S. customers affected by Genesis’ decision to halt all withdrawals.

Genesis’ financial problems stem from large holdings with FTX, and it is unlikely to be the last crypto firm caught in FTX’s wake. Who is to blame and what can be done to protect U.S. retail investors in crypto?

Rep. Patrick McHenry, the new chairman of the House Financial Services Committee, can answer that question by investigating the SEC’s failure to prevent the FTX disaster. The harm to U.S. investors from the alleged theft of FTX customer assets by Sam Bankman-Fried is likely to be enormous. FTX’s global operations held more than $8 billion in customer assets, and there were 2.7 million U.S. customers of FTX’s U.S. operations alone. FTX customers have had their assets frozen in bankruptcy and now face large losses. They deserve to know why the SEC failed to be the “cop on the beat.”

In 2008, after Bernie Madoff’s Ponzi scheme was revealed, SEC Chairman Christopher Cox promptly initiated an internal investigation into the commission’s failures to uncover the fraud. Gary Gensler, the current chairman, has so far failed to do the same. Madoff’s evasion of applicable SEC regulations was a surprise. FTX’s state of nonregulation was the reddest of flags. Madoff was largely cheating rich sophisticated investors. FTX’s retail investors were left helpless.

Read the full article here.

The FTX Scandal: Accountability and Regulatory Clarity Are What We Need Now

By John E Deaton

I started CryptoLaw to provide everyday investors with a “clearinghouse of information, news and analysis on key U.S. legal and regulatory developments for digital asset holders”. After the massive fraud at FTX was exposed, something that unfolded right under the nose of the Securities and Exchange Commission (SEC), I am only more passionate about continuing this work for the digital asset holders.

It still seems that we don’t have anyone protecting us. Now more than ever we need to press Congress to hold bad actors and government agencies accountable for what they’ve done and what they failed to do.

Sam Bankman-Fried defrauded millions of customers and investors of billions of dollars while he was the toast of Washington. SEC Chairman Gary Gensler has been claiming “the rules are clear” on crypto and that his agency has the authority to regulate the whole space. He said FTX should have been registered, and that would have somehow prevented this from happening. But when lawmakers from his own political party ask him what compliance and registration actually means, they get no answers, only more talking points.

Gensler repeats over and over that for retail holders and investors, like those defrauded by Bankman-Fried, the solution is for exchanges to “come in and register” but the details end there. If Gensler is telling the truth that the “rules are clear”, then he failed miserably at enforcing them. His Enforcement Division has spent much of its resources suing Ripple and LBRY in long, non-fraud cases that failed to protect a single investor while the FTX fraud was happening right under its nose.

Through the “decentralized justice” of hundreds of digital asset holders investigating government documents, we learned that Gensler and the SEC met with Bankman-Fried at least three times. Good journalists and Congressional offices took that information and discovered that the subject of those meetings was a regulatory deal that would recognize FTX as a sanctioned crypto exchange. Gensler refuses to answer questions or release notes and documents from those meetings that will clarify what was discussed, or why the fraud was never detected.

Bankman-Fried is a fraud. He’s been arrested and will face prosecution and likely a long prison sentence. But that’s only part of what went wrong here. The SEC’s mission statement is “to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.”. In this instance, and in the crypto overall, Chairman Gensler and the SEC failed on every point.

Accountability and regulatory clarity are the two most important things that we need now. The bipartisan hearing of the House Financial Services Committee on December 13 was a positive step forward, where it seemed most of the committee members agreed that they have to step in and write the rules that Gensler has refused to produce. The also promised to investigate Gensler’s repeated misfires and distractions that do little or nothing to protect anyone. Those lawmakers need our support, collaboration and pressure to get it done.

Gensler ‘Singularly Responsible’ for Failing To Expose FTX Fraud, Rep. Says

By Casey Wagner. December 7, 2022. (Blockworks).

A member of the House Committee on Financial Services is calling for the Government Accountability Office, known as Congress’ investigation arm, to look into the SEC and its “failure to protect the investing public” from FTX. 

Rep. Ritchie Torres, D-N.Y., drafted the letter, dated Tuesday. 

“Chair Gensler took the position that the SEC had clear authority to investigate crypto exchanges,” Torres told Blockworks via email.

“When it comes to government failure, the public official singularly responsible for failing to expose the FTX fraud is SEC Chair Gary Gensler.”

Torres also referred to the SEC’s handling of FTX as “egregious mismanagement.” 

“If he had clear authority to do so, why did he fail to uncover the largest crypto Ponzi scheme in history?” Torres added. “It is on Congress to pass laws, but it is on the regulators to apply those laws to conduct investigations, and in the case of Gary Gensler, the regulators failed catastrophically. Chair Gensler has some explaining to do.”

Read the full article here.

What McHenry Has Planned for the Gavel

By Kate Davidson and Aubree Eliza Weaver. April 26, 2022. (Politico)

McHENRY PLANTING FLAGS — North Carolina Republican Patrick McHenry, who has decided to seek a turn as chair of the Financial Services Committee should the GOP win the House, has already started to put down markers on pressing policy questions that would be in front of the panel next year.

Key among them: what to do about cryptocurrency regulation.

Earlier this month, he also released a report calling for legislation in line with the 2012 JOBS Act, bipartisan legislation signed by then-President Barack Obama that eased rules for companies seeking to raise money in the stock market.

McHenry’s previous role in House GOP leadership, where he served as chief deputy whip, had prompted speculation that he might return to a leadership position rather than pursue the committee chairmanship, our Zachary Warmbrodt reported. With Republicans favored to take back the House, McHenry’s choice will begin to give committee watchers a clearer outlook of the panel’s agenda for the next few years.

Read the full article here

Since Chairman Patrick McHenry threatened to SUBPOENA Gary Gensler for NON-COMPLIANCE with Congressional oversight.

ACT NOW!