The Securities and Exchange Commission Is Taking Legal Action Against Changpeng Zhao, the CEO of Binance, for Numerous Alleged Securities Violations
On Monday, the U.S. Securities and Exchange Commission filed a lawsuit against Binance and Binance.US and Binance founder and CEO Changpeng Zhao. The SEC accused them of violating federal security laws.
Binance, Binance.US and CZ made unregistered securities available to the public in the form of BNB tokens and BUSD stablecoins linked to Binance, the lawsuit states, which also alleges that the staking services of Binance violating securities laws. BAM Trading, the company that operates Binance.US, and Binance itself are also facing similar allegations, such as failing to register with a clearinghouse or broker, or failing to register as an exchange. The SEC also claimed that Binance allowed the mixing and commingling of client funds, that CZ “covertly” controlled Binance.US, and that a company owned and operated by CZ controlled Binance.US trading volume drive up.
The lawsuit states, “As part of Zhao and Binance’s plan to shield them from US regulations, they constantly claimed to the public that the Binance.com platform did not serve US citizens while “US customers continued to trade on the platform.” of the Binance.com platform. Binance has actually done the opposite. Zhao instructed Binance to help certain high-volume US clients circumvent these controls, secretly because Binance did not want to be “held accountable” for these actions.
The SEC also claimed a number of other tokens are securities, including native coins for Solana (SOL), Cardano (ADA), Polygon (MATIC), Coti (COTI), Algorand Blockchains (ALGO), Filecoin Network (FIL) . , Cosmos Hub (ATOM), Sandbox Platform (SAND), Axie Infinity (AXS) and Decentraland.
Binance’s Chief Compliance Officer told an employee in 2018 “that we are operating as a fake, unlicensed security exchange in the US,” the lawsuit states.
Diversion and commingling of funds
The lawsuit alleged that Binance’s poor financial controls had led to the diversion of client funds, possibly for personal use. Merit Peak Limited (a market maker previously associated with Zhao) had access to “billions of dollars in client funds,” while Sigma Chain (another CZ-controlled company) received nearly $200 from BAM Trading and a custody account from BAM Trading to the SEC. CZ reportedly received $62.5 from one of Binance’s bank accounts between October 2022 and January 2023.
According to the lawsuit, “Without regulatory oversight, defendants were free to transfer investors’ crypto and fiat assets at will, commingled and diverted them in a manner that included duly registered brokers and dealers, exchanges, and clearinghouses could not have done.
The SEC also reported that Sigma Chain bought a $11 million yacht through the account that had access to client funds.
According to the lawsuit, CZ owned 100 percent of a company called CPZ Holdings Limited, and that company owned 100 percent of BAM Management Company Limited, which owned 81 percent of BAM Management US Holdings Inc. while the remaining equity went to seed capital investors. BAM Management US is the parent company of BAM Trading Services that operates Binance.US.
The SEC revealed the internal struggle between US CEOs and CZ officials who controlled US operations despite asserting they were independent. The US operation complained of “shackles” that required managers to seek approval from the global corporation for essential tasks.
Following Binance’s SEC lawsuit, Coinbase shares fell 10% “I realized that the mission I thought I had signed up for was was not the mission. As soon as I realized that, I left,” the lawsuit quotes former US Chief Executive Brian Brooks, who took over the US Office of the Comptroller of Currency after leaving the US Treasury. He is only identified as “CEO B”. Brooks left Binance’s US branch after just three months.
Brooks was particularly concerned about the actions of Merit Peak and Sigma Chain on Binance.US.
Brooks was quoted as saying, “I thought it was a serious problem that our customers couldn’t fulfill orders without those manufacturers being on our platform.” It suggested that CZ was not just a controlling person, but was also heavily dependent on the company as an economic counterparty.
According to the lawsuit, Catherine Coley was the US company’s first CEO. She complained internally that “the entire team was at a point of breaking point,” the lawsuit says.
Coley attempted to advance what she dubbed “Project 1776,” a nod to the American Revolution. According to the complaint, she told a colleague that it was “for independence”.
Circumvention of Regulation
The SEC lawsuit relates to the “Tai Chi Documents” reported by Forbes in 2020. These documents appeared to be Binance’s plan to exit the US but still maintain a presence through a subsidiary.
The lawsuit quotes Binance employees discussing how US customers can trade on Binance.com.
The SEC also raised concerns that Binance had access to Binance.US assets and wallets, as well as the US company’s custody tools and keys.
The company also hired market makers, notably Merit Peak and Sigma Chain, to increase trading volume on Binance.US. The SEC claimed that this created conflicts between CZ and Binance.US customers.
BAM Trading, which recruited other institutions and market-making firms to maintain liquidity on Binance.US platforms, offered low fees to entice them. “Zhao and Binance had a close relationship in this venture, putting Zhao’s financial interests at odds with the interests of clients trading on the platform he controls,” the SEC said.
The lawsuit also found that Binance .US operated its own OTC desk and its only counterparty was Alameda Research for two years. This company was founded by Sam Bankman Fried, the inventor of FTX. Alameda collapsed along with the rest of the FTX empire in November last year.
“Defend Vigorously”
Binance.US tweeted that the lawsuit was “the latest example” of “regulation through enforcement” and deemed it “baseless.”
Binance published a blog post stating that the company was “actively cooperating” with the SEC investigation and was working to address the SEC’s concerns and answer questions. It was also said that the company was working on an agreement.
The staff had sufficient time to investigate and no justification was given for their actions. The statement stated that all user resources on Binance, the Binance partner platforms and Binance.US are safe and secure. We will vigorously combat claims to the contrary.
Binance gives rising star Teng a key role to replace CEO Zhao at the largest crypto exchange SEC Chairman Gary Gensler said in a press release: “ We allege that there are 13 charges that Zhao and Binance entities are engaged in a web of deception, conflicts of interest, secrecy and calculated evasion of the law.”
An SEC spokesman pointed out a press release shared by the agency to AskFX . Binance emailed AskFX with a similar response to the blog post. The spokesman said that the tokens listed by the SEC are not securities.
The SEC lawsuit follows allegations made by the US regulator Commodity Futures Trading Commission in March that Binance and its founder Changpeng Zhou knowingly offered crypto derivatives in the US in violation of federal laws. The SEC lawsuit contains many of the same allegations as the CFTC complaint.
Penalties
The SEC wants to stop Binance, Binance.US and “each” of their agents. The SEC wants Binance, Binance.US, and “each of their respective agents” to stop violating federal law.
The SEC wants to ban CZ and Binance from trading in securities or holding as officers or directors of issuers, including crypto assets.
The lawsuit also stated that the defendants are prohibited from posing as unregistered brokers, clearinghouses, or exchanges in securities of crypto assets.
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