SEC v Binance battle over disclosures relating to Binance.US customer assets

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The U.S. Securities and Exchange Commission (SEC) is currently fighting against a ‘house of mirrors’ to get a better look into Binance.US’ inner workings as it continues to pursue its case against the exchange’s various corporate entities as well as founder Changpeng Zhao over illegally selling unregistered securities and operating an unregistered exchange.

In a filing made last week, the SEC accused Binance’s US entities—including BAM Trading and BAM Management US Holdings—of refusing to provide disclosures mandated by the court concerning Binance customer assets held by the BAM entities. The court had earlier mandated that the international Binance entities or Changpeng Zhao do not access Binance customer assets held by BAM. It’s a key issue for the SEC: as noted in last week’s filing, both CZ and the international entities still claim to be outside the jurisdiction of the U.S. courts, meaning any assets that do get leaked from BAM to Binance will be far more difficult to recover (though it appears we may be in the last days of Binance being able to enjoy the fiction that they are not subject to U.S. jurisdiction). 

This concern only became more urgent as CZ announced that Binance Custody had been rebranded as ‘Ceffu,’ which the SEC believes may have a cover to move U.S. customer funds abroad.

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SEC seeks court order for inspection of Binance US.

Now expressly calling out that Ceffu is indeed a Binance related entity and that Binance US has been misleading the court. pic.twitter.com/2XZ2kChib3

— Adam Cochran (adamscochran.eth) (@adamscochran) September 18, 2023

On September 19, Bloomberg reported that Judge Zia Faruqui had provisionally declined the SEC’s request, telling the regulator to return with more specific information requests.

While the outcome of this particular fight is still to be determined, it’s clear that the Binance circle of companies is doing everything in its power to contribute as little to discovery as possible. That’s understandable—just about every bit of information to leak out of Binance’s various brushes with investigative reporters and law enforcement has revealed something meaningful about the company’s underhanded business dealings. 

It also reveals an ugly truth about policing the digital asset industry. Many of these companies are far more well-resourced than the SEC, which relies on government coffers to function. As such, defendants to SEC actions tend to throw as many filings at the SEC as possible to overwhelm their relatively small enforcement teams.

For example, among the SEC requests being resisted by Binance are proposed depositions of BAM’s CEO and CFO, Brian Shroder and Jasmine Lee (more on them in a moment). In a case against Binance’s U.S. entities, the BAM executive team is predictably at the top of the list of the SEC’s requested depositions. Yet, Binance is trying to prevent either one of them from testifying. 

So evasive have Binance been in relation to BAM’s executive team that the SEC flagged to the court that they had been attempting to depose Shroder but were initially told by BAM that Shroder’s deposition would be ‘disruptive to BAM’s business’—then just days before this week’s hearing was told that Shroder had departed the company.

Bam Trading (Binance’s U.S. Affiliate) Seeks To Block the U.S. SEC From Deposing its CEO and CFO (Oh, and that CEO Just "Resigned" Amid the Birth of 100 Potential Binance Whistleblowers)

Binance just filed for a protective court order against the U.S. SEC, seeking to limit the… pic.twitter.com/vMxXXSrnQx

— John Reed Stark (@JohnReedStark) September 13, 2023

As consultant and legal academic John Reed Stark says on Twitter, this is an extraordinary—and likely doomed—move by Binance. 

“During my almost 20 years in the SEC enforcement division,” Stark tweeted, “I worked on and quarterbacked dozens, maybe even over 100 investigations, litigation actions (including emergency assets freezes) and administrative proceedings where a company was suspected of violating, or alleged to have violated, the anti-fraud provisions of the U.S. federal securities laws.”

“Along those lines, I can’t recall a court ever denying the SEC the opportunity to take the testimony of, or depose, a CEO or CFO, especially in the context of a temporary restraining order (TRO) and consent order.”

The SEC is right to be concerned about Binance.US assets

No matter what you think of the legal basis of the SEC’s request, the regulator’s urgency would appear to be well-founded. Chain analysis conducted by ChainArgos reveals that ever since the SEC and CFTC sued Binance earlier this year, millions’ worth of digital assets have been flowing from Binance.US accounts into what appears to be wallets owned by either CZ or Binance’s international entities.

Many ERC20 tokens have flowed out of Binance US since the CFTC suit was filed on March 27th. Much of that is the work of market makers like Wintermute.

Most interesting is the large amount of funds moved to addresses the CFTC suit specifically named as CZ's Sigma Chain wallets. https://t.co/QGWwbmhC1b pic.twitter.com/e7wNYYvRdD

— ChainArgos (@ChainArgos) September 17, 2023

4/4 The @SECGov's concerns are well-founded. Even after the @CFTC suit, on-chain evidence shows that as late as June 13, 2023, almost $7mln $USDT was sent from @BinanceUS to @binance. pic.twitter.com/e5JA0NYW9w

— ChainArgos (@ChainArgos) September 16, 2023

The SEC may or may not return with information requests sufficiently tailored to determine whether BAM is complying with the court order to keep customer assets from Binance’s overseas entities. By now, however, the SEC knows that whatever slivers of information it can uncover from Binance’s network of companies can be the key to nailing Binance on any number of the lies it has told over the years and continues to tell now that it is facing multiple charges.

For example, one of the SEC’s requests asks for an explanation as to why Paxos Trust Company, Binance’s stablecoin issuer, transferred $183 million to BAM Trading in January 2023. BAM says it was the result of a $250 million convertible note—in effect a loan—issued to CZ in December 2022, which CZ secured with BUSD, which was then converted to USD using Paxos and apparently sent directly to BAM Trading from Paxos.

No loans, eh?

So what about this $250m convertible note financed with the stablecoin that was rehypothecated by the billion in 2021, straight from the wallets of Binance International? https://t.co/7Y7dMJUry8 pic.twitter.com/ue3kYYILXY

— Dylan LeClair 🟠 (@DylanLeClair_) September 18, 2023

It’s hardly a leap to suggest that this $250 million did not come from nowhere and likely was drawn from the very assets that the SEC is currently trying desperately hard to ensure it stay with BAM. What this apparent loan to CZ was used for is even easier to guess: in addition to allowing CZ to directly move funds from the Binance.US entities to the global entities, it should be noted that at the same time, CZ took $250 million from BAM, BTC went on a significant run-up which continues to this day.

Probably just a happy coincidence, I'm sure.

CZ definitely was not trading with customers funds.

Oh wow, would you look at that, Bitcoin prices started going back up after CZ loaned himself $250 million dollars from his own exchange.

Where did the exchange get the money from? pic.twitter.com/gr5egeEfF3

— Bitfinex'ed 🔥🐧 Κασσάνδρα 🏺 (@Bitfinexed) September 18, 2023

If this sounds familiar, it should. It’s exactly what Sam Bankman-Fried (SBF) did with FTX and Alameda. SBF took over $2 billion in loans from Alameda and then used FTX customer deposits to fill in the resulting holes. 

These are the sorts of activities that the so-called ‘house of mirrors’ erected by Binance is intended to conceal.

SEC can smell a rat

Both the SEC and Binance know from experience that no matter where among Binance’s many entities and operations you look, there is writing to be found on the wall. This is just as true inside of the courtroom as outside of it: for instance, Binance’s various entities have been hemorrhaging its senior leadership team since the SEC charges were first filed, including Binance.US CEO Brian Shroder and, most recently, its head of legal Krishna Juvvadi and Chief Risk Officer Sidney Majalya.

A full list of the departures, which stretches all the way back to 2021 (when much of Binance and CZ’s regulatory evasion, reported by Reuters, took place), was compiled by Twitter user Stanimir Uzunov:

Binance Leadership Departures

Early 2021 – Catherine Coley, Binance US Chief Executive Officer resigns

09.06.2021 – Wei Zhou, Binance Chief Financial Officer, announces resignation

06.08.2021 – Brian Brooks, Binance US Chief Executive Officer, announces resignation

11.2021…

— Stanimir Uzunov (@stan1m1r) September 13, 2023

Binance’s conduct across its various individuals and entities worldwide is a puzzle waiting to be put together: the individual pieces have been floating around for years thanks to detailed investigations by the likes of Reuters and what details can be gleaned from discovery in cases like SEC v Binance. As these puzzle pieces are discovered, they may or may not be helpful to the SEC’s current case against CZ and Binance. If they aren’t, they will certainly be of use to the inevitable future cases against Binance, such as the Department of Justice’s longstanding investigation, which is likely to come to fruition sooner rather than later. Every disclosure and every position Binance is forced to put to paper provides more opportunities for them to be caught in a lie—and the SEC no doubt knows that even if it fails in proving its civil charges against Binance, it is adding to an already massive body of evidence that Binance and CZ are as non-compliant as they appear.

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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.