Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every
Speaker 1: day we bring you insight and analysis into the most
Speaker 1: important legal news of the day. You can find more
Speaker 1: episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud
Speaker 1: and on Bloomberg dot com slash Podcasts. Speaking before the
Speaker 1: Senate Banking Committee earlier this year, SEC Chief Jay Clayton
Speaker 1: explained his views on the rapid rise of cryptocurrencies. The
Speaker 1: funny thing about these cryptocurrencies is they only work if
Speaker 1: they're integrated with They only work for their purported purpose
Speaker 1: if they're integrated with the financial system, and that integration
Speaker 1: is top of mind for the SEC official overseeing regulation
Speaker 1: of the cryptocurrency agency joining us as Ben Bain, Bloomberg
Speaker 1: News financial regulation reporter, who has written about the SEC's
Speaker 1: new cryptos are so, Ben, tell us a little bit
Speaker 1: about her. She's a twenty year SEC vetter and why
Speaker 1: was she given the job? Sure? Thanks a lot um so, Yeah,
Speaker 1: Valerie Sapanics, as you mentioned, you know, twenty years in
Speaker 1: the agency and actually in the agency's enforcement division, which
Speaker 1: you know, if if you think about kind of the
Speaker 1: famous cases that the SEC has brought against Big Wall
Speaker 1: street firms. That's the unit that does it. UH. This
Speaker 1: new job is in a different division, which is more
Speaker 1: focused on kind of corporate filings, some of the more
Speaker 1: mundane aspects that the SEC does. So what they did
Speaker 1: is they tapped um miss Stepan. I moved her over
Speaker 1: into this kind of less threatening division. And the idea
Speaker 1: is to get crypto firms, which are kind of notoriously
Speaker 1: reticent to engage with government. Certainly it has its UM,
Speaker 1: you know, very kind of libertarian UH origins cryptocurrency to
Speaker 1: come in and talk to the SEC so regulators can
Speaker 1: get a little bit better idea what's going on. They
Speaker 1: spent the last year really trying to get their arms
Speaker 1: around this, and I think the hope is that the
Speaker 1: regulator is going to be able to UH age more
Speaker 1: by having someone who's not an enforcement reaching out to
Speaker 1: the industry. So do what do analysts say, does the
Speaker 1: SEC have its hands around crypto now? Well, if you
Speaker 1: look at the numbers, UM, you know, the SEC, UH,
Speaker 1: you know, has been warning about the dangers of initial
Speaker 1: coin offerings. UM. The chairman you played a clip from
Speaker 1: him earlier has warned that, you know, this market is
Speaker 1: kind of righte with fraud. But you know, in June
Speaker 1: of this year, it was a record month for i
Speaker 1: c o is. More than five and a half billion
Speaker 1: dollars were raised. That's according to coin scheduled data. So
Speaker 1: you know what we're seeing is, yes, certainly the SEC
Speaker 1: has a much better idea of where things are than
Speaker 1: they were, uh than they did a year ago, let's say,
Speaker 1: but it's still very much uh, you know, a quick
Speaker 1: changing market and they haven't been able to uh to
Speaker 1: you know, to stop firms from from raising money and
Speaker 1: what they say are unregistered securities offerings. So ben as
Speaker 1: you write, the Justice Department, Commodities Future Trading Commission also
Speaker 1: have people involved in this. So what is sapanics approach
Speaker 1: and how is she going to work if at all
Speaker 1: with those other agencies. I mean, these these regulars, they
Speaker 1: all talk to each other, you know all the time.
Speaker 1: I think, what what what we're seeing happening here in
Speaker 1: Washington with cryptocurrencies is it doesn't really fit neatly into
Speaker 1: the jurisdiction of any one of these agencies. So the SEC,
Speaker 1: you know, they're responsible for overseeing securities. So you think
Speaker 1: about stocks, you think about you know, kind of traditional
Speaker 1: equity like products, the CFTC overseas commodities. Um. You know,
Speaker 1: so you have all these different agencies kind of trying
Speaker 1: to figure out their lane. So when it comes to
Speaker 1: to you know, uh, miss Sapanics job, she's going to
Speaker 1: be dealing with how the SEC looks at securities, which
Speaker 1: which you know, the SEC has said a lot of
Speaker 1: these initial coin offerings are, but also um, the broker
Speaker 1: dealers that that work in them, uh, you know, banks
Speaker 1: and investment funds that are increasingly trying to get involved. Uh,
Speaker 1: and and also exchanges or platforms which haven't registered uh
Speaker 1: to actually be trading these things, which the SEC has
Speaker 1: also warned them about. So there's a whole bunch of
Speaker 1: things on their plate, not to mention, uh you know,
Speaker 1: the push for an exchange traded fund based on cryptocurrencies,
Speaker 1: which the SEC rejected again last week. So you talked
Speaker 1: about all the regulators trying to find their find their
Speaker 1: lanes with regulation of crypto whors? Congress is it doing
Speaker 1: anything to try and clarify this? Does it plan to?
Speaker 1: I mean, so so far Congress has kind of stayed
Speaker 1: out of it. Um, there's been a couple of bills,
Speaker 1: uh you know that have popped up, but haven't really
Speaker 1: gone anywhere UM, And it seems like right now, uh,
Speaker 1: there's nothing on kind of the front burner. Congress hasn't said,
Speaker 1: you know, who's ultimately going to be responsible. We kind
Speaker 1: of have to remember when we're talking about cryptocurrencies, is
Speaker 1: that in the spot market? Right? We talked about the
Speaker 1: cash market, So who's trading cryptocurrencies we might think about UM.
Speaker 1: No regulator really has clear direct jurisdiction over that. So
Speaker 1: there's a question about whether Congress needs to come in
Speaker 1: and say, hey, as SEC, you handle that, or hey
Speaker 1: Commodity Future Trading Commissioners CFTC, you handle that, or Treasury
Speaker 1: Department or another regulator altogether. So, uh, the short answer
Speaker 1: is no, Congress is focusing on other stuff right now.
Speaker 1: So Ben, you say that she's going to try this
Speaker 1: less confrontational approach, how long will she try that and
Speaker 1: when will that turn into a more aggressive approach? What
Speaker 1: would make her get more aggressive? Well, I think what
Speaker 1: I mean, what the SEC says is that they are
Speaker 1: being aggressive. You know, on the one hand, they're going
Speaker 1: after UM instances, which they, you know, consider to be
Speaker 1: kind of blatant violations. You know, fraudulent uh type of
Speaker 1: action uh, you know going on in these markets. But
Speaker 1: at the same time, what they're what they're realizing, what
Speaker 1: they've come to realize, is that to really understand these markets,
Speaker 1: they need to have you know, an open door, if
Speaker 1: you will, the ability for firms to come in. So
Speaker 1: I don't think they're necessarily you know, exclusive in the
Speaker 1: sense that I think they can continue to have missed
Speaker 1: sepanic uh, you know, having firms I'm in and and
Speaker 1: and and some of the other UH divisions that aren't
Speaker 1: enforcement uh, you know, trying to get their hand hand
Speaker 1: heads around this market. But at the same time, you know,
Speaker 1: we understand there are there is a lot of enforcement activity.
Speaker 1: There's been several cases, but you know, we understand there's
Speaker 1: a big pipeline as well. But when you mentioned that
Speaker 1: she also knows jiu jitsu, so that's what I was
Speaker 1: going to go for that. Yes, the crypto companies take
Speaker 1: take anything away from that, well, I mean, you know,
Speaker 1: it's uh, you know, certainly, you know, an interesting uh
Speaker 1: in an interesting element here, um, you know, kind of
Speaker 1: someone who practices jiu jitsu in here in her spare time. UM,
Speaker 1: you know, not you know, certainly someone who's who's going
Speaker 1: to take this very seriously. Um, And you know she
Speaker 1: she was kind of one of the first regulators here
Speaker 1: in Washington to start paying attention to this, even like
Speaker 1: six years ago. Um, you know she was. She was
Speaker 1: kind of poking around and digging around it. And at
Speaker 1: that point, UM, I'm not sure too many of us
Speaker 1: had ever heard of bitcoin. Well, um, and we have
Speaker 1: to end it there. It's really interesting article. And yes,
Speaker 1: she also has an engineering degree of a different kind
Speaker 1: of secer re person. That's Ben Bain, Bloomberg News financial
Speaker 1: regulation reporter. Two jury trials to convictions, a seven month
Speaker 1: prison stay, two appeals, and two convictions tossed out by
Speaker 1: the Second Circuit. But now the five year legal odyssey
Speaker 1: of former Jeffreys managing director Jesse lit Fac is over.
Speaker 1: Federal prosecutors have decided not to try and for a
Speaker 1: third time, for fraud for lying to clients about mortgage
Speaker 1: bond prices while negotiating trades. Is the federal crackdown on
Speaker 1: questionable bond trading tactics also over joining us. As Robert Hockett,
Speaker 1: professor at Cornell University Law School, bob the Second Circuit
Speaker 1: throughout lick Fax conviction on technical legal grounds, but found
Speaker 1: there was evidence enough to support the guilty verdicts. So,
Speaker 1: after all the effort the prosecutors put into it, are
Speaker 1: you surprised that they gave up? Uh? You know, in
Speaker 1: a way I am in a way I'm not June um. So,
Speaker 1: I mean, basically, there's been an ambivalence when it comes
Speaker 1: to this particular charge all, you know, sort of right
Speaker 1: from the get go. Right. The ambivalence is basically this,
Speaker 1: what do you do in a case where there's no
Speaker 1: question but that the defendant has done something wrongful, but
Speaker 1: there is question about how much the victims, you know,
Speaker 1: sort of were responsible themselves, how much they should have known.
Speaker 1: It used to be that the rule that we had
Speaker 1: was we could say, look, just be honest, you know,
Speaker 1: as far as the defendant is concerned, just be honest,
Speaker 1: and we were not going to require anything in particular
Speaker 1: of the alleged victims. Um. And then you know, sort
Speaker 1: of overtime in order to kind of lessen the number
Speaker 1: of cases that were actually brought before the courts. Uh,
Speaker 1: the course began to sort of fashion a sort of
Speaker 1: a halfway house doctrine where sometimes they'd say well, you know,
Speaker 1: if the victims should have known better or were saving
Speaker 1: enough to know better, we won't actually recognize an action
Speaker 1: against them. And there's been a kind of a back
Speaker 1: and courth over that particular issue under the rubric of
Speaker 1: so called material reality. Oh, for the last thirty forty
Speaker 1: fifty years, it looked like we were kind of going
Speaker 1: back to the old ways or in recent years where
Speaker 1: we're saying just be honest. Um. But then all of
Speaker 1: a sudden, the second Circuit weighed in as you as
Speaker 1: you've just noted a couple of times. Uh, And I
Speaker 1: think that's done either of two things to the Justice Department.
Speaker 1: They've either decided, well, all right, we can't really win
Speaker 1: these cases anymore because the courts are beginning to get
Speaker 1: a bit more strict again about which sorts of suits
Speaker 1: they'll let go through, or they've just decided that they
Speaker 1: don't care that much about this sort of thing anyway.
Speaker 1: Are there any other outstanding cases out there that might
Speaker 1: be affected by this, Yeah, yes there are. There are
Speaker 1: a number of other defendants, as as you guys know,
Speaker 1: who have been being investigated and prosecuted along with Mr
Speaker 1: Litt back um, and I would say that between the
Speaker 1: two second circuits, the recent second circuit decisions on the
Speaker 1: one hand, at the d o j's decision not to
Speaker 1: kind of keep pursuing this. On the other hand, Uh,
Speaker 1: this might you know, sort of be good news for
Speaker 1: those other defendants, even if not exactly for the bond markets.
Speaker 1: Let fax arrest in sent shock waves through Wall Street,
Speaker 1: and there was the resignation suspensions of dozens of traders.
Speaker 1: Did it change behavior in the bond industry at all, Well,
Speaker 1: it seems to have induced a little bit of caution,
Speaker 1: which is exactly what the point would have been, right.
Speaker 1: The idea of of a sort of a high profile
Speaker 1: case like this is to send a signal, right, to
Speaker 1: tell the traders out there, and the and the bond
Speaker 1: sellers out there that look, we're not going to let
Speaker 1: you rest on the possible sophistication of your victims. When
Speaker 1: it comes to sort of policing your honesty in these markets,
Speaker 1: it's always easy to tell the truth. Just say what
Speaker 1: you really did pay for the bonds, and that will
Speaker 1: be the default rule. And that seems to have had
Speaker 1: an effect, right, I mean, people seem to have been
Speaker 1: a little bit more careful for a while while these
Speaker 1: suits were pending. I suspect that they're probably now thinking, well,
Speaker 1: all right, thank god, that's over. That five year nightmare
Speaker 1: is done. We can get back to business as usual
Speaker 1: as it was before. When you when you look at
Speaker 1: the case, is do you see failures on the prosecution's
Speaker 1: part or was it just that the appellate courts changed
Speaker 1: the rules. I think it's more the latter. To tell
Speaker 1: the truth, I mean, I think that that's the prosecution
Speaker 1: to a fine job, I mean, as as good a
Speaker 1: job as can be expected. I think they made the
Speaker 1: case quite well, um, you know, and it was there
Speaker 1: there was no question right but that these were just
Speaker 1: flat out misstatements of fact that were made by Mr
Speaker 1: litt Back and by other defendants in the same sort
Speaker 1: of set of suits. Um, so you know, I I
Speaker 1: find it hard to fault the prosecution in all of this.
Speaker 1: I think it's just a case of the second Circuit
Speaker 1: not exactly changing the law, but once again kind of
Speaker 1: pendulum swinging in the direction of permissiveness, which again tends
Speaker 1: to happen. Right, we seem to go through cycles on
Speaker 1: that under this rubric of materiality. Sometimes they'll sort of
Speaker 1: really hit materiality hard sometimes they'll hit it less hard,
Speaker 1: and it's always basically riding on well, to what extent
Speaker 1: are you going to give the defendant a free pass
Speaker 1: when the alleged victim quote unquote should have known better?
Speaker 1: In other words, you can always decide to say caveat emptor,
Speaker 1: or you can decide to say, well, no, not caveat emptor,
Speaker 1: but just let the sellers be honest. And we seem
Speaker 1: to swing back and forth on that one over the years,
Speaker 1: and it looks to me like the Second Circuit has
Speaker 1: just decided to kind of swing back in that kind
Speaker 1: of caveat em or direction again after about five years
Speaker 1: worth of caution. Um uh inducing. So Bob, is the
Speaker 1: crackdown over? Then? Can traders rest easy? Well? I very
Speaker 1: much hope not June. But it's you know, I don't
Speaker 1: see a lot of reason to to say no, um
Speaker 1: at this point, right, I mean, all of the indications
Speaker 1: at this point seem to be the Second Circuit's going
Speaker 1: to be a bit permissive again when it comes to
Speaker 1: um stretching the truth when you're selling something in the
Speaker 1: bond market, and it's looking as the Department of Justice
Speaker 1: is not inclined to fight that at the present time.
Speaker 1: There's a certain irony, of course in this, given that
Speaker 1: we were told during the campaign that, uh, the guy
Speaker 1: who ultimately won whatever his own business dealings was at
Speaker 1: least going to be a bit of a sheriff where
Speaker 1: Wall Street is concerned. Um, but it's kind of looking
Speaker 1: like we're returning to, you know again, businesses pre usual
Speaker 1: on Wall Street. Uh. And it seems this this d
Speaker 1: J is okay with that. Well, what does this say
Speaker 1: about the system itself? Because you have Jesse litfac who
Speaker 1: assume insurance paid for two jury trials, you know, two appeals.
Speaker 1: I mean the amount over five years. I have no
Speaker 1: idea what the cost would be. But yeah, a person
Speaker 1: who wasn't insured or didn't have money couldn't have gone
Speaker 1: through this. Yeah. So I think it's a I think
Speaker 1: it's a nutty system. I don't I don't think there's
Speaker 1: much that can recommend it. Uh. The easiest way to
Speaker 1: fix it, it seems to me, would be for Congress
Speaker 1: to pass legislation that clarifies that the anti fraud provisions
Speaker 1: of both the thirty three and the thirty four Acts
Speaker 1: really mean what they say. And among the things that
Speaker 1: they say is, you know, thou shalt not lie, and
Speaker 1: the you know, the sophistication or otherwise of your victim
Speaker 1: is sort of neither dear nor there. It's just irrelevant.
Speaker 1: We should bob. We have to end it there honesty.
Speaker 1: Thanks so much. As always, that's Robert Hockett, a professor
Speaker 1: at Cornell University Law School. Thanks for listening to the
Speaker 1: Bloomberg Law Podcast. You can subscribe and listen to the
Speaker 1: show on Apple Podcasts, SoundCloud, and on Bloomberg dot com
Speaker 1: slash podcast. I'm June Brosso. This is Bloomberg. Yeah, yeah,