SEC summons CZ, more Binance dirty laundry exposed

Binance’s woes are only just beginning as the ripples from this week’s Securities and Exchange Commission (SEC) lawsuit threaten to engulf the world’s largest digital asset exchange.

On Wednesday, the SEC issued a civil summons for Binance founder Changpeng ‘CZ’ Zhao, along with his Cayman-based Binance Holdings Ltd and the two entities controlling CZ’s U.S.-facing exchange Binance.US (BAM Management U.S. Holdings and BAM Trading Services). Monday’s SEC lawsuit accused all of the above of engaging in “an extensive web of deception … and calculated evasion of the law.”

The summons formally alerts the defendants that they have 21 days following service to respond to the SEC’s complaint. Failure to do so will result in a default judgment entered against the defendants for the relief demanded in the complaint— disgorgement of all ill-gotten gains along with prejudgment interest and civil money penalties.

CZ tweeted that the summons “is just part of the SEC compliant [sic] process. Nothing new. Also told I won’t have to appear in person. No need to FUD.” Honestly, we love the Freudian slip confusing ‘complaint’ with ‘compliant’ as CZ does appear generally confused by compliance.

CZ bravely continues to downplay the impact of the lawsuit, including one notable attempt at misdirection that quoted a Chinese-language Instagram account that said CZ died in a hail of gunfire following a confrontation with U.S. authorities. CZ appears to be hoping that if he can find one truly absurd online anecdote about him, it proves that every negative piece of news is similarly bogus. Sorry, but no.

The lawsuit was notable enough to warrant coverage on China’s state broadcaster CCTV, which cited the suit as part of the tsunami of legal difficulties currently washing over Binance. CZ frantically polished this PR turd, highlighting CCTV’s description of Binance as the world’s largest crypto exchange. (CZ could get a prison tattoo attesting to that fact!)

Decidedly less impressed are Binance.com customers, who withdrew another $750 million or so worth of assets from the exchange on Tuesday, bringing the seven-day net outflow to $1.75 billion.

On Wednesday, the SEC v. Binance suit was assigned to U.S. District Court for the District of Columbia Judge Amy Berman Jackson, who has handled some major cases related to former U.S. President Donald Trump. These include trials of some January 6 rioters, who, like CZ, appear all too comfortable living in denial about the severity of their actions.

Swimming naked when the tide went out

As part of its lawsuit, the SEC continues to file supporting documentation with the court. These include the declaration of Sachin Verma, a certified public accountant who examined Binance.US’s financial statements and other documents. Verma estimates that Binance.US generated total revenue of nearly $411 million from 2019 to 2023, with a gross profit of $224.7 million during that span, representing a gross profit margin of 54.7%.

Verma also states that BAM Management sold $216.8 million worth of equity to capitalize Binance.US. Remember that the SEC seeks disgorgement of all ill-gotten gains and prejudgment interest. Verma estimates the interest to be $13.45 million on the gross profit and another $14.8 million on the equity raise.

BAM Trading’s income statements—prepared by Armanino, the group that brought us Binance’s woefully misconstrued ‘proof of reserves’ last November—show net losses in each year of operation, with the exception of 2021’s crypto bubble, during which net income hit nearly $150 million. But that bubble soon burst, leading to net losses of $181.3 million in 2022 and another $23 million in the first four months of 2023.

‘Survive for 2 years and f off’

By now, we’ve come to understand just how casually the criminals working at Binance would detail in writing the specifics of their lawbreaking. Case in point: a December 2018 internal chat between Binance’s chief compliance officer (CCO) Samuel Lim and another staffer identified as ‘Alvin Bro.’

Lim, who was quoted admitting criminal activity in the lawsuit filed against Binance in March by the U.S. Commodity Futures Trading Commission (CFTC), warns Alvin that the company’s antics will likely result in an SEC enforcement action, after which the value of Binance’s in-house BNB token will be “down 50% and more.” Alvin replies: “Can easily go to cents.” (The SEC fingered BNB as an unregistered security in its lawsuit.)

Lim added that “anyone who takes BNB now is fking brave” and advised Alvin to take his company bonus and “straight away sell 50%.” Lim said those who chose to hold on to their BNB “were being fking retarded.” Lim added that “the strategy of bnb is to survive for 2 years and f off and in this 2 years try ur bestest to not land in jail.”

Clearly conscious of the severity of Binance’s flouting of international law, Lim complains that “the risk reward of this company is not balanced” and “there is no fking way in hell I am signing off as the cco for the [U.S. Office of Foreign Assets Control] shit.”

Lim claimed he was told by former Binance CFO Wei Zhou that “theres no way we can hire a usa cco due to our budget, I rather just double ur pay sam and u sign off, I said no fking way … theres a certain point where money is totally useless, and that is making a declaration to USA that you are clean … when shanghai is totally cowboy.” (More on Shanghai below.)

Lim admits that “there is no fking way we are clean … i have seen NOTHING to prove we are … i have zero visibility on our VIP clients … ZERO … and our [customer service] is teaching ppl how to circumvent sanctions … bunch of fktards”.

In a different chat from 2020, Lim tells a staffer called Anatoly how Binance will “always have a way for [U.S.-based] whales” to transact with the dot-com exchange, provided they’re “doing sick ass volumes.” Lim says he’s been “briefed by top management to always find a way to support biz” and that “CZ will definitely agree to this” because “it’s either we do it, or huobi does it.”

‘I did not get answers from CZ on why or how or what’

Among the SEC suit’s more tantalizing revelations was the cooperation of the two former CEOs of Binance.US: Catherine Coley and Brian Brooks. Coley was with Binance.US from its 2019 launch until early 2021, when she left and was replaced by Brooks, who lasted three months before he too flew the coop.

Both CEOs reportedly chose to leave after realizing they were figureheads/puppets installed by CZ, who retained absolute control over virtually all aspects of Binance.US, including its U.S. bank accounts. Evidence has emerged that these accounts commingled customer and corporate funds, much of which was funneled out of the country to other CZ-controlled entities (which spent $11 million on a yacht).

The SEC uploaded an internal chat from December 2020 that shows Coley expressing confusion over millions of dollars moving out of Silvergate Bank accounts that ostensibly belonged to Binance.US but were, in reality, controlled by CZ and his inner circle. Coley expresses concern over “someone breaking our limits with massive withdraws” and notes that she chatted with the same person just the day before, and nothing was mentioned about any forthcoming transfers of this scope.

Among the other documents filed Tuesday was an 18-page snippet of a much lengthier deposition Coley gave in January 2022. The snippet starts with Coley addressing the ‘service agreements’ under which Binance.US was to license the Binance brand and technology. Coley confirmed that, while Binance.US began trading in September 2019, the first of these agreements wasn’t signed until January 2020.

Coley claims she tried to “push for independence from those resources overseas because it would make us a stronger business.” But “the data and the finance were the two most difficult ones to bring over to the U.S., and the data was – had a significant opacity to it. And I did not get answers from CZ on why or how or what we would need to do to be able to bring the data over.”

Coley’s deposition also inadvertently pokes larger holes in CZ’s repeated claims to have no operations in China. Coley related how she traveled to Shanghai to meet with Binance staff before the launch of Binance.US in 2019. While Chinese authorities later shut down a Binance office in Shanghai, the work appears to have simply relocated across town.

The SEC’s lawsuit stated that Binance’s “Shanghai-based finance team managed payment of BAM Trading’s expenses, including by executing money transfers between bank accounts and depositing cash injections from [CZ-owned market-maker] Merit Peak when BAM Trading operating funds were low.”

‘The mission that I believe I signed up for isn’t the mission’

Brooks, who didn’t start as CEO of Binance.US until April 2021, gave his own deposition in December 2021. The posted snippet of this transcript shows Brooks confirming that Binance had a “Shanghai based technology team” numbering around “50 or 60” employees that had been “allocated full-time to Binance.US.”

Brooks went on to say, “the question was if you had a group of Shanghai-based people working for Binance.US, could they actually legally in China work for Binance.US.” These staff were assigned to an entity called Boran, but Brooks couldn’t say where Boran was incorporated.

Brooks also revealed his growing realization that his control of Binance.US was basically a charade, asking himself, “Do I have the delegation and autonomy to carry out the mission of a CEO as outlined in the mission document that you’ve seen, right? And at a certain point I concluded that I did not.”

Brooks related how he’d spent his first 80 days as CEO resolving many undisclosed issues, but “all of the things that we had previously agreed and had worked on for 80 days were suddenly repudiated with no further discussion, and on that day, I realized, huh, I’m not actually the one running this company, and the mission that I believe I signed up for isn’t the mission. And as soon as I realized that, I left.”

Brooks also revealed that the Shanghai team “had apparently received part of their compensation in BNB tokens, which were provided by Binance.com, which was a source of real concern, you know, for the [chief financial officer] and me when we learned about that.”

Brooks claims the BNB payments were “part of [the Shanghai team’s] compensation. I don’t know if it was a quarterly payment or an annual bonus payment or what that was.” So, a China-based team working full-time for Binance.US was somehow paid by Binance.com in Binance.com’s proprietary Chuck E. Cheese token. Sounds right.

Tai Chi chew on this

The SEC also filed the presentation a consultant gave Binance’s senior management in 2018 on the merits of establishing a U.S.-based exchange to steer the U.S. regulatory spotlight away from the dot-com site.

This infamous ‘Tai Chi strategy’ has been detailed at length, but the full document had previously never surfaced. (Here’s the Risks and Strategies section, along with the Proposed Implementation file.)

If Coley and Brooks were ever curious as to what Binance really thought of them, it can be spelled out in a bullet point on ‘Eventual integration with Binance,’ which notes that Binance would “acquire the US operation at a nominal price and re-arrange its leadership when it has served its purposes.”

Wyred to explode

One of the more recent SEC filings is a June 1 letter from William McLucas, a WilmerHale attorney representing BAM Trading, responding to the SEC’s requests for more information on how BAM stores Binance.US customer assets. One question focused on $9.8 million in customer cash held with Prime Trust, a Nevada-based processor with its own questionable crypto entanglements.

McLucas notes that New Jersey’s formerly crypto-friendly Cross River Bank had decided it “would no longer hold assets on behalf of BAM Trading” due to the “ongoing regulatory environment.” As such, the $9.8 million was transferred from Prime Trust to Wyre Payments Inc., a California-based firm that temporarily halted customer withdrawals in January but somehow managed to remain a going concern.

Predictably, Wyre’s current chief compliance officer Steven Huynh previously served a similar role at Binance.US. Nonetheless, McLucas assured the SEC that “neither Mr. Zhao nor anyone at [Binance Holdings] or other entities controlled by Mr. Zhao can withdraw or transfer funds from Wyre or other accounts used to hold fiat currency on behalf of BAM Trading’s customers.”

However, there’s a mighty big footnote to this assertion, namely: “As you are aware, Mr. Zhao owns, directly or indirectly, a controlling interest in [BAM Trading] and BAM Management. However, for purposes of this response and other items seeking similar information, we assume that you are asking about Mr. Zhao or other entities that he controls, and not whether BAM Trading personnel have control over the Company’s accounts. To the extent than an entity owned or controlled by Mr. Zhao maintains an account on the platform, it of course retains the ability to transfer or withdraw its own funds to the same extent as any other customer.”

Reassured? We sure are.

No, I broke up with you!

Two other Binance-employed law firms, Gibson Dunn and Latham & Watkins, wrote a letter to the SEC on June 4 arguing that SEC chair Gary Gensler should recuse himself from anything to do with Binance’s prosecution because he “may be a material fact witness” in the legal proceedings.

Quoting CZ, the lawyers claim that Gensler offered his advisory services to Binance in March 2019, back when Gensler was still a professor at MIT. CZ claims that he and Gensler had lunch in Japan, at which the discussion ranged from Binance’s U.S. exchange plans to the BNB token.

The lawyers claim that CZ “understood that [Gensler] was comfortable serving as an informal advisor” to Binance and that Gensler made the offer. The lawyers cite CZ’s later participation in a cryptocurrency course that Gensler taught at MIT as evidence of the chumminess between the two.

However, CZ’s claims don’t jibe with a Wall Street Journal report from March that quoted internal communications in which two senior Binance execs said it was Binance pitching Gensler for the adviser position and that Gensler declined the offer. Also, in July 2019, Gensler testified to a U.S. House of Representatives committee, in which he stated: “I do not advise any financial, technology, blockchain or other companies.”

The SEC told CNBC it was confident that Gensler has nothing to hide here. So unless CZ has something in the way of physical receipts, this letter appears to be little more than the type of social media drive-by that’s such a hit with the laser-eyed crypto bros. A U.S. federal court will require a higher burden of proof.

Binance.US token purge

The courts have yet to rule on the SEC’s emergency application for a freeze on all Binance.US assets, but it’s worth remembering that, with the exception of accounts controlled by ‘Binance Entities,’ the SEC specifically permitted Binance.US to “continue to transfer Customer Assets to support redemptions of Customer Crypto Assets.”

Meanwhile, Binance.US announced Wednesday that it had “decided to streamline our Buy, Sell & Convert offering and have paused our OTC Trading Portal.” The exchange will also “remove select Advanced Trading pairs” on June 8 at 12 pm EDT.

The doomed trading pairs are centered on USDT (Tether), BTC, and the BUSD stablecoin. The latter was specifically cited in the SEC suit as an unregistered security, while the purged USDT pairs represent a proper ‘shitcoin’ smorgasbord. Interestingly, some of the tokens the SEC identified as unregistered securities—including ADA, SOL, ATOM, and MATIC—remain available under Buy, Sell & Convert.

While some tokens are coming off Binance.US, others show a significant premium to the fiat value available at other exchanges. At one point, BTC was trading $1,000 over its fiat value elsewhere, while ETH also enjoyed an unexplained boost.

Binance’s Australian customers saw the exact opposite effect last month, with BTC trading nearly one-fifth below its value elsewhere. In that case, the discrepancy resulted from Binance’s banking partner losing patience with CZ’s antics and cutting off the exchange’s fiat rails, leaving customers without a way to get cash off the exchange.

But, as someone who used to cover the gambling industry, the Binance.US situation recalls the behavior of sketchy online betting sites right before their operators did a runner, promising whatever it took to entice as many deposits as possible before the withdrawal window slammed shut forever.

In this case, one hopes digital asset holders can resist the urge to transfer their BTC/ETH to Binance.US for a little profitable arbitrage, lest they later discover that getting fiat off Binance.US is like getting blood from a very cold stone.

Do not pass Gopax

Finally, the SEC suit has apparently convinced South Korean authorities to pause Binance’s acquisition of the Gopax exchange. A report by Korean media outlet Newspim claimed that the country’s Financial Services Commission (FSC) had chosen to ‘internally review’ an ‘executive change report’ on Gopax’s proposed ownership transfer to Binance. The delay is reportedly intended to give the FSC more time to study the SEC lawsuit’s claims.

The executive change report was submitted in March, one month after Binance struck a deal to acquire a majority stake in Gopax, which had suspended certain customer payments last November. Gopax had partnered on a DeFi project with digital lender Genesis Global Capital, which itself suspended customer withdrawals last November and filed for bankruptcy in January.

Binance planned to use the acquisition to backdoor into Korea after fleeing the market in December 2020 rather than adhere to local regulations. Buying a locally licensed operator is one of Binance’s patented regulatory dodges, although it’s worked better in some markets than others.

CZ better hope his buddy Elon Musk establishes that colony on Mars pronto. It may soon be the only place Binance is allowed to operate.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, 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.