WEBVTT - New SEC Crypto Chief Faces Tough Challenge

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<v Speaker 1>Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every

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<v Speaker 1>day we bring you insight and analysis into the most

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<v Speaker 1>important legal news of the day. You can find more

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<v Speaker 1>episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud

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<v Speaker 1>and on Bloomberg dot com slash Podcasts. Speaking before the

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<v Speaker 1>Senate Banking Committee earlier this year, SEC Chief Jay Clayton

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<v Speaker 1>explained his views on the rapid rise of cryptocurrencies. The

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<v Speaker 1>funny thing about these cryptocurrencies is they only work if

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<v Speaker 1>they're integrated with They only work for their purported purpose

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<v Speaker 1>if they're integrated with the financial system, and that integration

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<v Speaker 1>is top of mind for the SEC official overseeing regulation

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<v Speaker 1>of the cryptocurrency agency joining us as Ben Bain, Bloomberg

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<v Speaker 1>News financial regulation reporter, who has written about the SEC's

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<v Speaker 1>new cryptos are so, Ben, tell us a little bit

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<v Speaker 1>about her. She's a twenty year SEC vetter and why

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<v Speaker 1>was she given the job? Sure? Thanks a lot um so, Yeah,

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<v Speaker 1>Valerie Sapanics, as you mentioned, you know, twenty years in

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<v Speaker 1>the agency and actually in the agency's enforcement division, which

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<v Speaker 1>you know, if if you think about kind of the

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<v Speaker 1>famous cases that the SEC has brought against Big Wall

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<v Speaker 1>street firms. That's the unit that does it. UH. This

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<v Speaker 1>new job is in a different division, which is more

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<v Speaker 1>focused on kind of corporate filings, some of the more

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<v Speaker 1>mundane aspects that the SEC does. So what they did

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<v Speaker 1>is they tapped um miss Stepan. I moved her over

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<v Speaker 1>into this kind of less threatening division. And the idea

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<v Speaker 1>is to get crypto firms, which are kind of notoriously

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<v Speaker 1>reticent to engage with government. Certainly it has its UM,

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<v Speaker 1>you know, very kind of libertarian UH origins cryptocurrency to

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<v Speaker 1>come in and talk to the SEC so regulators can

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<v Speaker 1>get a little bit better idea what's going on. They

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<v Speaker 1>spent the last year really trying to get their arms

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<v Speaker 1>around this, and I think the hope is that the

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<v Speaker 1>regulator is going to be able to UH age more

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<v Speaker 1>by having someone who's not an enforcement reaching out to

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<v Speaker 1>the industry. So do what do analysts say, does the

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<v Speaker 1>SEC have its hands around crypto now? Well, if you

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<v Speaker 1>look at the numbers, UM, you know, the SEC, UH,

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<v Speaker 1>you know, has been warning about the dangers of initial

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<v Speaker 1>coin offerings. UM. The chairman you played a clip from

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<v Speaker 1>him earlier has warned that, you know, this market is

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<v Speaker 1>kind of righte with fraud. But you know, in June

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<v Speaker 1>of this year, it was a record month for i

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<v Speaker 1>c o is. More than five and a half billion

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<v Speaker 1>dollars were raised. That's according to coin scheduled data. So

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<v Speaker 1>you know what we're seeing is, yes, certainly the SEC

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<v Speaker 1>has a much better idea of where things are than

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<v Speaker 1>they were, uh than they did a year ago, let's say,

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<v Speaker 1>but it's still very much uh, you know, a quick

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<v Speaker 1>changing market and they haven't been able to uh to

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<v Speaker 1>you know, to stop firms from from raising money and

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<v Speaker 1>what they say are unregistered securities offerings. So ben as

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<v Speaker 1>you write, the Justice Department, Commodities Future Trading Commission also

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<v Speaker 1>have people involved in this. So what is sapanics approach

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<v Speaker 1>and how is she going to work if at all

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<v Speaker 1>with those other agencies. I mean, these these regulars, they

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<v Speaker 1>all talk to each other, you know all the time.

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<v Speaker 1>I think, what what what we're seeing happening here in

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<v Speaker 1>Washington with cryptocurrencies is it doesn't really fit neatly into

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<v Speaker 1>the jurisdiction of any one of these agencies. So the SEC,

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<v Speaker 1>you know, they're responsible for overseeing securities. So you think

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<v Speaker 1>about stocks, you think about you know, kind of traditional

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<v Speaker 1>equity like products, the CFTC overseas commodities. Um. You know,

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<v Speaker 1>so you have all these different agencies kind of trying

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<v Speaker 1>to figure out their lane. So when it comes to

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<v Speaker 1>to you know, uh, miss Sapanics job, she's going to

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<v Speaker 1>be dealing with how the SEC looks at securities, which

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<v Speaker 1>which you know, the SEC has said a lot of

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<v Speaker 1>these initial coin offerings are, but also um, the broker

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<v Speaker 1>dealers that that work in them, uh, you know, banks

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<v Speaker 1>and investment funds that are increasingly trying to get involved. Uh,

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<v Speaker 1>and and also exchanges or platforms which haven't registered uh

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<v Speaker 1>to actually be trading these things, which the SEC has

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<v Speaker 1>also warned them about. So there's a whole bunch of

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<v Speaker 1>things on their plate, not to mention, uh you know,

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<v Speaker 1>the push for an exchange traded fund based on cryptocurrencies,

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<v Speaker 1>which the SEC rejected again last week. So you talked

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<v Speaker 1>about all the regulators trying to find their find their

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<v Speaker 1>lanes with regulation of crypto whors? Congress is it doing

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<v Speaker 1>anything to try and clarify this? Does it plan to?

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<v Speaker 1>I mean, so so far Congress has kind of stayed

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<v Speaker 1>out of it. Um, there's been a couple of bills,

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<v Speaker 1>uh you know that have popped up, but haven't really

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<v Speaker 1>gone anywhere UM, And it seems like right now, uh,

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<v Speaker 1>there's nothing on kind of the front burner. Congress hasn't said,

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<v Speaker 1>you know, who's ultimately going to be responsible. We kind

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<v Speaker 1>of have to remember when we're talking about cryptocurrencies, is

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<v Speaker 1>that in the spot market? Right? We talked about the

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<v Speaker 1>cash market, So who's trading cryptocurrencies we might think about UM.

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<v Speaker 1>No regulator really has clear direct jurisdiction over that. So

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<v Speaker 1>there's a question about whether Congress needs to come in

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<v Speaker 1>and say, hey, as SEC, you handle that, or hey

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<v Speaker 1>Commodity Future Trading Commissioners CFTC, you handle that, or Treasury

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<v Speaker 1>Department or another regulator altogether. So, uh, the short answer

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<v Speaker 1>is no, Congress is focusing on other stuff right now.

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<v Speaker 1>So Ben, you say that she's going to try this

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<v Speaker 1>less confrontational approach, how long will she try that and

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<v Speaker 1>when will that turn into a more aggressive approach? What

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<v Speaker 1>would make her get more aggressive? Well, I think what

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<v Speaker 1>I mean, what the SEC says is that they are

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<v Speaker 1>being aggressive. You know, on the one hand, they're going

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<v Speaker 1>after UM instances, which they, you know, consider to be

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<v Speaker 1>kind of blatant violations. You know, fraudulent uh type of

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<v Speaker 1>action uh, you know going on in these markets. But

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<v Speaker 1>at the same time, what they're what they're realizing, what

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<v Speaker 1>they've come to realize, is that to really understand these markets,

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<v Speaker 1>they need to have you know, an open door, if

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<v Speaker 1>you will, the ability for firms to come in. So

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<v Speaker 1>I don't think they're necessarily you know, exclusive in the

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<v Speaker 1>sense that I think they can continue to have missed

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<v Speaker 1>sepanic uh, you know, having firms I'm in and and

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<v Speaker 1>and and some of the other UH divisions that aren't

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<v Speaker 1>enforcement uh, you know, trying to get their hand hand

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<v Speaker 1>heads around this market. But at the same time, you know,

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<v Speaker 1>we understand there are there is a lot of enforcement activity.

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<v Speaker 1>There's been several cases, but you know, we understand there's

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<v Speaker 1>a big pipeline as well. But when you mentioned that

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<v Speaker 1>she also knows jiu jitsu, so that's what I was

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<v Speaker 1>going to go for that. Yes, the crypto companies take

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<v Speaker 1>take anything away from that, well, I mean, you know,

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<v Speaker 1>it's uh, you know, certainly, you know, an interesting uh

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<v Speaker 1>in an interesting element here, um, you know, kind of

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<v Speaker 1>someone who practices jiu jitsu in here in her spare time. UM,

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<v Speaker 1>you know, not you know, certainly someone who's who's going

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<v Speaker 1>to take this very seriously. Um, And you know she

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<v Speaker 1>she was kind of one of the first regulators here

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<v Speaker 1>in Washington to start paying attention to this, even like

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<v Speaker 1>six years ago. Um, you know she was. She was

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<v Speaker 1>kind of poking around and digging around it. And at

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<v Speaker 1>that point, UM, I'm not sure too many of us

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<v Speaker 1>had ever heard of bitcoin. Well, um, and we have

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<v Speaker 1>to end it there. It's really interesting article. And yes,

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<v Speaker 1>she also has an engineering degree of a different kind

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<v Speaker 1>of secer re person. That's Ben Bain, Bloomberg News financial

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<v Speaker 1>regulation reporter. Two jury trials to convictions, a seven month

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<v Speaker 1>prison stay, two appeals, and two convictions tossed out by

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<v Speaker 1>the Second Circuit. But now the five year legal odyssey

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<v Speaker 1>of former Jeffreys managing director Jesse lit Fac is over.

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<v Speaker 1>Federal prosecutors have decided not to try and for a

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<v Speaker 1>third time, for fraud for lying to clients about mortgage

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<v Speaker 1>bond prices while negotiating trades. Is the federal crackdown on

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<v Speaker 1>questionable bond trading tactics also over joining us. As Robert Hockett,

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<v Speaker 1>professor at Cornell University Law School, bob the Second Circuit

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<v Speaker 1>throughout lick Fax conviction on technical legal grounds, but found

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<v Speaker 1>there was evidence enough to support the guilty verdicts. So,

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<v Speaker 1>after all the effort the prosecutors put into it, are

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<v Speaker 1>you surprised that they gave up? Uh? You know, in

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<v Speaker 1>a way I am in a way I'm not June um. So,

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<v Speaker 1>I mean, basically, there's been an ambivalence when it comes

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<v Speaker 1>to this particular charge all, you know, sort of right

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<v Speaker 1>from the get go. Right. The ambivalence is basically this,

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<v Speaker 1>what do you do in a case where there's no

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<v Speaker 1>question but that the defendant has done something wrongful, but

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<v Speaker 1>there is question about how much the victims, you know,

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<v Speaker 1>sort of were responsible themselves, how much they should have known.

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<v Speaker 1>It used to be that the rule that we had

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<v Speaker 1>was we could say, look, just be honest, you know,

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<v Speaker 1>as far as the defendant is concerned, just be honest,

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<v Speaker 1>and we were not going to require anything in particular

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<v Speaker 1>of the alleged victims. Um. And then you know, sort

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<v Speaker 1>of overtime in order to kind of lessen the number

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<v Speaker 1>of cases that were actually brought before the courts. Uh,

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<v Speaker 1>the course began to sort of fashion a sort of

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<v Speaker 1>a halfway house doctrine where sometimes they'd say well, you know,

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<v Speaker 1>if the victims should have known better or were saving

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<v Speaker 1>enough to know better, we won't actually recognize an action

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<v Speaker 1>against them. And there's been a kind of a back

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<v Speaker 1>and courth over that particular issue under the rubric of

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<v Speaker 1>so called material reality. Oh, for the last thirty forty

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<v Speaker 1>fifty years, it looked like we were kind of going

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<v Speaker 1>back to the old ways or in recent years where

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<v Speaker 1>we're saying just be honest. Um. But then all of

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<v Speaker 1>a sudden, the second Circuit weighed in as you as

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<v Speaker 1>you've just noted a couple of times. Uh, And I

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<v Speaker 1>think that's done either of two things to the Justice Department.

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<v Speaker 1>They've either decided, well, all right, we can't really win

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<v Speaker 1>these cases anymore because the courts are beginning to get

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<v Speaker 1>a bit more strict again about which sorts of suits

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<v Speaker 1>they'll let go through, or they've just decided that they

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<v Speaker 1>don't care that much about this sort of thing anyway.

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<v Speaker 1>Are there any other outstanding cases out there that might

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<v Speaker 1>be affected by this, Yeah, yes there are. There are

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<v Speaker 1>a number of other defendants, as as you guys know,

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<v Speaker 1>who have been being investigated and prosecuted along with Mr

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<v Speaker 1>Litt back um, and I would say that between the

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<v Speaker 1>two second circuits, the recent second circuit decisions on the

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<v Speaker 1>one hand, at the d o j's decision not to

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<v Speaker 1>kind of keep pursuing this. On the other hand, Uh,

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<v Speaker 1>this might you know, sort of be good news for

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<v Speaker 1>those other defendants, even if not exactly for the bond markets.

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<v Speaker 1>Let fax arrest in sent shock waves through Wall Street,

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<v Speaker 1>and there was the resignation suspensions of dozens of traders.

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<v Speaker 1>Did it change behavior in the bond industry at all, Well,

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<v Speaker 1>it seems to have induced a little bit of caution,

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<v Speaker 1>which is exactly what the point would have been, right.

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<v Speaker 1>The idea of of a sort of a high profile

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<v Speaker 1>case like this is to send a signal, right, to

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<v Speaker 1>tell the traders out there, and the and the bond

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<v Speaker 1>sellers out there that look, we're not going to let

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<v Speaker 1>you rest on the possible sophistication of your victims. When

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<v Speaker 1>it comes to sort of policing your honesty in these markets,

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<v Speaker 1>it's always easy to tell the truth. Just say what

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<v Speaker 1>you really did pay for the bonds, and that will

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<v Speaker 1>be the default rule. And that seems to have had

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<v Speaker 1>an effect, right, I mean, people seem to have been

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<v Speaker 1>a little bit more careful for a while while these

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<v Speaker 1>suits were pending. I suspect that they're probably now thinking, well,

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<v Speaker 1>all right, thank god, that's over. That five year nightmare

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<v Speaker 1>is done. We can get back to business as usual

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<v Speaker 1>as it was before. When you when you look at

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<v Speaker 1>the case, is do you see failures on the prosecution's

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<v Speaker 1>part or was it just that the appellate courts changed

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<v Speaker 1>the rules. I think it's more the latter. To tell

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<v Speaker 1>the truth, I mean, I think that that's the prosecution

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<v Speaker 1>to a fine job, I mean, as as good a

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<v Speaker 1>job as can be expected. I think they made the

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<v Speaker 1>case quite well, um, you know, and it was there

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<v Speaker 1>there was no question right but that these were just

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<v Speaker 1>flat out misstatements of fact that were made by Mr

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<v Speaker 1>litt Back and by other defendants in the same sort

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<v Speaker 1>of set of suits. Um, so you know, I I

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<v Speaker 1>find it hard to fault the prosecution in all of this.

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<v Speaker 1>I think it's just a case of the second Circuit

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<v Speaker 1>not exactly changing the law, but once again kind of

0:11:39.840 --> 0:11:44.160
<v Speaker 1>pendulum swinging in the direction of permissiveness, which again tends

0:11:44.200 --> 0:11:46.000
<v Speaker 1>to happen. Right, we seem to go through cycles on

0:11:46.040 --> 0:11:49.160
<v Speaker 1>that under this rubric of materiality. Sometimes they'll sort of

0:11:49.200 --> 0:11:52.160
<v Speaker 1>really hit materiality hard sometimes they'll hit it less hard,

0:11:52.520 --> 0:11:56.400
<v Speaker 1>and it's always basically riding on well, to what extent

0:11:56.480 --> 0:11:58.920
<v Speaker 1>are you going to give the defendant a free pass

0:11:59.360 --> 0:12:02.480
<v Speaker 1>when the alleged victim quote unquote should have known better?

0:12:02.559 --> 0:12:05.760
<v Speaker 1>In other words, you can always decide to say caveat emptor,

0:12:05.960 --> 0:12:08.520
<v Speaker 1>or you can decide to say, well, no, not caveat emptor,

0:12:08.600 --> 0:12:11.160
<v Speaker 1>but just let the sellers be honest. And we seem

0:12:11.200 --> 0:12:14.199
<v Speaker 1>to swing back and forth on that one over the years,

0:12:14.280 --> 0:12:16.480
<v Speaker 1>and it looks to me like the Second Circuit has

0:12:16.520 --> 0:12:18.400
<v Speaker 1>just decided to kind of swing back in that kind

0:12:18.440 --> 0:12:21.880
<v Speaker 1>of caveat em or direction again after about five years

0:12:21.960 --> 0:12:26.800
<v Speaker 1>worth of caution. Um uh inducing. So Bob, is the

0:12:26.800 --> 0:12:32.520
<v Speaker 1>crackdown over? Then? Can traders rest easy? Well? I very

0:12:32.600 --> 0:12:34.960
<v Speaker 1>much hope not June. But it's you know, I don't

0:12:34.960 --> 0:12:38.079
<v Speaker 1>see a lot of reason to to say no, um

0:12:38.120 --> 0:12:40.400
<v Speaker 1>at this point, right, I mean, all of the indications

0:12:40.440 --> 0:12:42.440
<v Speaker 1>at this point seem to be the Second Circuit's going

0:12:42.480 --> 0:12:44.160
<v Speaker 1>to be a bit permissive again when it comes to

0:12:44.720 --> 0:12:47.880
<v Speaker 1>um stretching the truth when you're selling something in the

0:12:47.920 --> 0:12:50.920
<v Speaker 1>bond market, and it's looking as the Department of Justice

0:12:50.960 --> 0:12:54.440
<v Speaker 1>is not inclined to fight that at the present time.

0:12:54.720 --> 0:12:57.280
<v Speaker 1>There's a certain irony, of course in this, given that

0:12:57.360 --> 0:13:00.839
<v Speaker 1>we were told during the campaign that, uh, the guy

0:13:00.880 --> 0:13:03.880
<v Speaker 1>who ultimately won whatever his own business dealings was at

0:13:03.920 --> 0:13:05.920
<v Speaker 1>least going to be a bit of a sheriff where

0:13:05.920 --> 0:13:08.680
<v Speaker 1>Wall Street is concerned. Um, but it's kind of looking

0:13:08.720 --> 0:13:13.480
<v Speaker 1>like we're returning to, you know again, businesses pre usual

0:13:13.840 --> 0:13:16.199
<v Speaker 1>on Wall Street. Uh. And it seems this this d

0:13:16.440 --> 0:13:18.839
<v Speaker 1>J is okay with that. Well, what does this say

0:13:19.000 --> 0:13:23.800
<v Speaker 1>about the system itself? Because you have Jesse litfac who

0:13:23.880 --> 0:13:29.160
<v Speaker 1>assume insurance paid for two jury trials, you know, two appeals.

0:13:29.240 --> 0:13:31.760
<v Speaker 1>I mean the amount over five years. I have no

0:13:31.840 --> 0:13:35.280
<v Speaker 1>idea what the cost would be. But yeah, a person

0:13:35.320 --> 0:13:38.160
<v Speaker 1>who wasn't insured or didn't have money couldn't have gone

0:13:38.200 --> 0:13:41.640
<v Speaker 1>through this. Yeah. So I think it's a I think

0:13:41.679 --> 0:13:44.600
<v Speaker 1>it's a nutty system. I don't I don't think there's

0:13:44.640 --> 0:13:47.160
<v Speaker 1>much that can recommend it. Uh. The easiest way to

0:13:47.200 --> 0:13:49.319
<v Speaker 1>fix it, it seems to me, would be for Congress

0:13:49.760 --> 0:13:54.679
<v Speaker 1>to pass legislation that clarifies that the anti fraud provisions

0:13:54.720 --> 0:13:57.280
<v Speaker 1>of both the thirty three and the thirty four Acts

0:13:57.559 --> 0:14:00.360
<v Speaker 1>really mean what they say. And among the things that

0:14:00.400 --> 0:14:03.680
<v Speaker 1>they say is, you know, thou shalt not lie, and

0:14:03.880 --> 0:14:07.120
<v Speaker 1>the you know, the sophistication or otherwise of your victim

0:14:07.240 --> 0:14:09.640
<v Speaker 1>is sort of neither dear nor there. It's just irrelevant.

0:14:09.880 --> 0:14:12.559
<v Speaker 1>We should bob. We have to end it there honesty.

0:14:13.040 --> 0:14:15.680
<v Speaker 1>Thanks so much. As always, that's Robert Hockett, a professor

0:14:15.720 --> 0:14:20.000
<v Speaker 1>at Cornell University Law School. Thanks for listening to the

0:14:20.000 --> 0:14:23.400
<v Speaker 1>Bloomberg Law Podcast. You can subscribe and listen to the

0:14:23.400 --> 0:14:27.320
<v Speaker 1>show on Apple Podcasts, SoundCloud, and on Bloomberg dot com

0:14:27.400 --> 0:14:35.240
<v Speaker 1>slash podcast. I'm June Brosso. This is Bloomberg. Yeah, yeah,