Last year, the Court in SEC v. Terraform Labs suggested, by denying the defendants’ motion to dismiss, that the sale of a digital asset to the public on a secondary market may constitute a security.[1]  Now, the Court has determined, as a matter of law, that crypto assets are securities. [2] 

Three days before the end of the year, the Court issued a summary judgment opinion determining that there is no genuine dispute that Terraform’s four crypto assets—UST,[3] LUNA, wLUNA, and MIR[4]—were securities because they are investment contracts.  The Supreme Court in Howey defined an investment contract as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promotor or a third party.” [5][6]  All four crypto assets satisfied the Howey test. Continue Reading Judge Rules That Terraform’s Crypto Assets Are Securities

Recently, the Securities and Exchange Commission brought fraud charges against Jonathan Larmore for allegedly looting $35 million from real estate funds he advised.   Larmore is a real estate investor, an investment adviser, and CEO of ArciTerra Companies LLC.[1][2]  The complaint alleges that they used the proceeds to pay personal expenses, including credit card bills, and to fund a “lavish lifestyle of private jets, yachts, and expensive residences.”  The complaint alleges violations of the antifraud provisions of the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934.Continue Reading SEC Charges Real Estate Fund Adviser with Misappropriating $35 Million and Later Manipulating the Market in a Fake Tender Offer to Acquire WeWork

On Tuesday, August 29, 2023, Bitcoin once again loomed large over financial markets after the D.C. Circuit Court of Appeals vacated an SEC order that rejected Grayscale Investments’ (“Grayscale”) application to list a spot Bitcoin exchange-traded fund (“ETF”) on NYSE Arca. The price of Bitcoin initially jumped almost seven percent on the news. But as of this writing, the market has erased nearly all those gains.

Background

With the increased prevalence of digital assets, the SEC received numerous applications to list and trade shares of digital assets as ETFs on various exchanges. As the most well-known digital asset, Bitcoin represents the focal point for many of these applications. The key distinction between these applications is whether the ETF is based on the spot or the future market.Continue Reading A Potential Big Win for Bitcoin: A Federal Court Overturned the SEC’s Refusal to List a Spot Bitcoin ETF

The issue of whether the sales of digital assets constitute investment contracts (and therefore securities) remains at the forefront of SEC regulatory issues. Yesterday, in SEC v. Terraform Labs, a federal judge in New York rejected a fellow judge’s recent ruling in SEC v. Ripple Labs[1] that XRP was not a security when sold to the public on secondary markets.

On Monday, U.S. District Judge Jed Rakoff denied Terraform Labs’ motion to dismiss an SEC enforcement action.[2] In that case, the SEC alleged that Terraform Labs and its founder, Do Kwon, defrauded investors and sold digital assets in unregistered securities offerings. In its motion to dismiss, Terraform Labs argued that purchasers of UST did not have an expectation of it being an investment. In allowing the SEC’s case to proceed against Terraform Labs and Kwon, Judge Rakoff declined to follow the recent ruling in SEC v. Ripple.Continue Reading Federal Court in Terraform Labs Rejects Ripple Decision

In a recent and highly anticipated decision, a court in the Southern District of New York held that Ripple’s cryptocurrency token – XRP – is not inherently a security.  In a setback to the SEC, the court also held that certain sales of XRP to retail investors through blind “bid/ask” transactions[1] were not securities transactions when considering the economic realities and under the totality of the circumstances.  SEC v. Ripple Labs, Inc., et al.[2] 

The court delivered its decision on these “programmatic sales” of XRP to retail investors, as well as its decisions on “institutional” and other types of sales of XRP, when ruling on competing summary judgment motions.  Even though the court’s rulings were limited to the transactions at issue and could be appealed, its decision undermines the SEC’s current position that it requires no additional authority from Congress to regulate both sales of tokens and cryptocurrency trading platforms. Continue Reading Ripple’s Legal Waves: Ripple Summary Judgment Ruling Could Have Wide-Ranging Impact

Last week, the U.S. Securities and Exchange Commission brought five insider-trading cases against a slew of individuals. The U.S. Attorney’s Office for the Southern District of New York also announced parallel criminal charges against the defendants in four of the five cases. These cases contain examples of the classical theory and the misappropriation theory of insider trading.

These cases were the result of close coordination with the SDNY and SEC, and they appear to be the result of an enforcement sweep. Increasingly sophisticated data analytics and market surveillance make it highly likely that those who wish to exploit material nonpublic information will be caught, with severe consequences, including disgorgement, criminal restitution, civil penalties, and incarceration.Continue Reading SEC and DOJ Go On An Insider-Trading Enforcement Spree

Action Implicates Attorney-Client Privilege and Other Concerns

Factual Background

On January 10, 2023, the SEC filed a subpoena enforcement action against Covington, a large law firm that was victimized by the so-called Hafnium cyberattack by Chinese state actors.[1]  Hafnium reportedly was engaged in espionage to determine priorities of the incoming Biden administration in November 2020.  The SEC seeks names of Covington clients whose information was accessed by the attackers.  Covington has refused to supply the name of its clients, arguing that such information is protected by the attorney-client privilege and work-product doctrine, and that compliance with the subpoena would be unduly burdensome.Continue Reading SEC Files Subpoena Enforcement Action Against Covington & Burling, Seeking Names of Clients Impacted by Chinese State-Sponsored Cyberattack

On December 20, 2021, the SEC[1] and DOJ[2] each announced fraud charges against five Russian nationals. The five defendants are charged with a multiyear scheme of hacking into service providers that help public companies make quarterly and annual filings with the SEC through the EDGAR filing system.  By hacking the service providers, the defendants allegedly obtained material nonpublic information (MNPI) regarding earnings releases before those releases were made public.  The defendants then allegedly traded ahead of the release of the MNPI, reaping profits of some $82 million in the process.
Continue Reading SEC and DOJ Bring Parallel Civil and Criminal Charges Against Five Russians for $82 Million Hack-And-Trade Scheme