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Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.

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Speaker 1: The frenzy over n f T s or non fungible

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Speaker 1: tokens is a little hard to wrap your head around.

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Speaker 1: From digital art to sports memorabilia to tweets, everyone seems

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Speaker 1: to be getting into the craze, and the sales prices

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Speaker 1: are staggering, from nearly six hundred thousand dollars for the

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Speaker 1: n f T of Nion Cat, a cat with a

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Speaker 1: pop tart body that leaves a trail of rainbows, to

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Speaker 1: two point nine million dollars for an n f T

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Speaker 1: of Twitter founder Jack Dorsey's first tweet, to a record

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Speaker 1: sixty nine million dollars for the n f T of

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Speaker 1: a digital art collage by the artist People sold at

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Speaker 1: Christie's auction house in March. Even the artist, whose real

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Speaker 1: name is Mike Winkleman, seemed overwhelmed by the final price

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Speaker 1: as he and his family watched the auction from his

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Speaker 1: living room. We're watching that closing of the auction, which

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Speaker 1: closes in an hour and eight minutes. It's already at

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Speaker 1: like an absolutely ridiculous amount to say congratulations, Yet I

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Speaker 1: think it probably means digital art is here. To stay.

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Speaker 1: I'm going to Disney World. So what is an n

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Speaker 1: f T and why are they so hot? Joining me

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Speaker 1: is Robert him a partner at Tartar, Crinsky and Drogan

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Speaker 1: who recently wrote an article on n f T s

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Speaker 1: and securities law and turned it into an n f T. So,

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Speaker 1: Bob tell us what an n f T is. An

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Speaker 1: n f T is a non fungible token, and it's

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Speaker 1: a new development that's been occurring in the markets. And

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Speaker 1: unlike say a cryptocurrency like bitcoin, which is fungible in

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Speaker 1: the way dollar bills are in the sense that you

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Speaker 1: don't care what sort of dollar bill you get. They're

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Speaker 1: all pretty much the same and they do the same thing.

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Speaker 1: And n f T is a unique token, so people

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Speaker 1: do care about the specific token that they're getting because

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Speaker 1: each one is on the blockchain and each one individually

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Speaker 1: carries a certain amount of right with it, whether it's

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Speaker 1: to digital art or to music or two other things.

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Speaker 1: And it's really a way that's starting to revolutionize a

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Speaker 1: lot of the creative industries. N f T seemed to

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Speaker 1: be really popular for artistic endeavors. N f t s

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Speaker 1: have been the most popular with respect to artistic endeavors.

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Speaker 1: In March, there was an auction at Christie's where an

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Speaker 1: artist named People had sold a digital art collection for

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Speaker 1: sixty nine million dollars and that's really raised a lot

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Speaker 1: of interest. And the n f T market for art

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Speaker 1: had been growing before that, but with that blockbuster sale

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Speaker 1: it really came into the mainstream. There's other companies, especially

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Speaker 1: the NBA, they've been at the forefront in terms of

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Speaker 1: creating n f T s for essentially collectibles and almost

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Speaker 1: like the digital version of sports collectible cards. And as

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Speaker 1: we look to the future, there's a lot of exciting

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Speaker 1: possibilities in the in the physical world, like an ownership

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Speaker 1: of real property that can be documented on the blockchain.

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Speaker 1: There's a lot of new opportunities that are out there.

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Speaker 1: But currently it seems like the creative industries are really

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Speaker 1: um in the throws of the new n FT craze

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Speaker 1: and benefiting a lot from it. So just to get

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Speaker 1: really down to basics, if you buy an n f T,

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Speaker 1: what do you get a digital file? Do you get

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Speaker 1: a thumb drive? What do you get in your hand

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Speaker 1: or on your computer? Well, that's a great question, June,

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Speaker 1: because h n f T has its own set of

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Speaker 1: rights with it, and really right now, it's a buyer

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Speaker 1: beware market, so buyers really have to dig deep and

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Speaker 1: understand what they're getting. But at the heart of it,

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Speaker 1: a person gets essentially a piece of code, and they're

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Speaker 1: mostly being done on the Ethereum blockchain, but there's some

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Speaker 1: other blockchains that are doing it as well. But you

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Speaker 1: don't get any sort of physical device like a USB drive.

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Speaker 1: You have to have a digital wallet which accepts Ethereum

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Speaker 1: or whatever cryptocurrency you you get, and it appears essentially

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Speaker 1: in your wallet, on your browser, on your cell phone,

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Speaker 1: and it's an n f T that's unique. It's on

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Speaker 1: the blockchain, and it's a way of authenticating the person

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Speaker 1: that purchase a n f T is really the true

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Speaker 1: owner of that piece of digital artwork or work that

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Speaker 1: was created. The n f T that was sold at

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Speaker 1: Christie's for the digital art. So you own the n

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Speaker 1: f T. Do you own the digital art? Can you

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Speaker 1: say if someone tries to show that digital art on

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Speaker 1: a computer somewhere, can you say that's mine? You can't

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Speaker 1: use that. It really comes down to the rights that

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Speaker 1: the creator the artist gives to the token purchaser um

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Speaker 1: and and each token can carry different rights. Um, A

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Speaker 1: lot of the digital art tokens that are being created

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Speaker 1: come with licenses for the person to be able to

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Speaker 1: essentially use it for personal use. Other n f t

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Speaker 1: s come with rights to commercialize the digital artwork and

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Speaker 1: to to generate royalties. And that's really one of the

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Speaker 1: nice thing about n f f p s is that they

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Speaker 1: really allow for a lot of customization. Uh, some artists

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Speaker 1: are even including residual clauses in their tokens, so that

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Speaker 1: if they sell the first one, say for a thousand dollars,

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Speaker 1: and in that person resells it for ten thousand, the

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Speaker 1: artists might get ten percent as a residual royalty from

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Speaker 1: the subsequent sales of the token, and they the rights

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Speaker 1: can really be tailored to however the artist wants to

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Speaker 1: give to the to the purchaser. So is it governed

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Speaker 1: by the securities laws? Whether the securities laws apply is

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Speaker 1: going to be a developing question. I recently wrote an

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Speaker 1: article that ties into whether n f t s are

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Speaker 1: covered by securities laws, and I actually turned that article

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Speaker 1: into an n f T and I sold it on

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Speaker 1: a digital platform. So somebody out there purchased my n

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Speaker 1: f T of the first legal articles as far as

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Speaker 1: I know, but a lot of the securities law questions

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Speaker 1: are going to be tied into how the token is marketed.

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Speaker 1: If it's marketed it as an investment as a way

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Speaker 1: for people to make money, as something where they're going

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Speaker 1: to be relying on the efforts of other people in

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Speaker 1: order to earn a profit, then it's very likely that

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Speaker 1: an n f T could come under the regulations of securities.

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Speaker 1: But if it's being marketed it is more of a

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Speaker 1: digital collectible as a way to authenticate the ownership, as

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Speaker 1: a way to authenticate that it's a legitimate, authorized piece

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Speaker 1: of digital art, then in that situation, it's a lot

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Speaker 1: less likely to become a security So it's really going

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Speaker 1: to be a new developing areas we apply these principles

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Speaker 1: that have been around for over a hundred years with

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Speaker 1: the securities laws to these new emerging technologies in the

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Speaker 1: digital space. So let's say that three people get together

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Speaker 1: to create an n f T for profit based on art.

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Speaker 1: Is that an investment contract that might be subject to

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Speaker 1: securities laws? It certainly can be if the people create

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Speaker 1: an n f T that's focused on digital art, But

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Speaker 1: when they go out to sell that n f T

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Speaker 1: and they promote it in such a way the person

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Speaker 1: can get rich or they could make a significant profit

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Speaker 1: by buying this n f T, And it's really a

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Speaker 1: decision that's being driven by an investment desire and a

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Speaker 1: profit making desire. Under an old Supreme Court test called

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Speaker 1: the Howie test, that contract that n f T could

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Speaker 1: be considered an investment contract and therefore security. These days,

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Speaker 1: most people are trying to stay away from that. So

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Speaker 1: we are seeing a lot of marketing being done by

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Speaker 1: artists that are really emphasizing the art and the collectibility

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Speaker 1: of the art and the significance of the art, versus

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Speaker 1: a way of trying to entice people to invest based

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Speaker 1: on a desire to turn a quick profit. Now a

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Speaker 1: lot of people are purchasing these n f T s

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Speaker 1: with the desire to perhaps make money, but that in

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Speaker 1: it itself will not be enough to make it a security.

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Speaker 1: It's really going to depend on the whole picture about

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Speaker 1: how the tokens are being marketed to people. Do you

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Speaker 1: know of any n f T s that have been

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Speaker 1: registered as a security I'm not aware of any n

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Speaker 1: f T s that have yet to be registered it

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Speaker 1: as a security. UM I do know that recently there

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Speaker 1: is an investment fund that is in the process of

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Speaker 1: being started that it looks like it's going to be

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Speaker 1: listed on the London UH Stock Exchange UM. So definitely

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Speaker 1: there's some more established players that are coming into the

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Speaker 1: n f T market to UM to invest in it,

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Speaker 1: but as of yet, I don't believe in any n

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Speaker 1: f t s have been registered as securities. And the

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Speaker 1: nice thing about n f T s, as we kind

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Speaker 1: of compare it to the boom and initial coin offerings

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Speaker 1: UH several years ago, is that while initial coin offerings

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Speaker 1: had a lot of the traditional indications that they would

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Speaker 1: be securities. In other words, people were using UM initial

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Speaker 1: coin offerings to raise money for new businesses and they

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Speaker 1: were going to be deploying the capital to develop concept.

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Speaker 1: Those things were almost, you know, very similar to typical

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Speaker 1: startups issuing stock. Here with n f T s, I

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Speaker 1: think there's much more of a real world application in

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Speaker 1: terms of people UM, you know, purchasing these items, not

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Speaker 1: so much to invest in the business because these these

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Speaker 1: digital artworks are already created, So people aren't funding new ideas,

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Speaker 1: they're they're purchasing digital art They're purchasing certificates of authenticity.

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Speaker 1: So I think the whole impetus in a lot of

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Speaker 1: ways for n f t s has a much more

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Speaker 1: real world focus and much much not more natural affinity

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Speaker 1: for collectibles and for art than they would for for

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Speaker 1: securities laws and investment purposes. Let's say it was determined

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Speaker 1: that one of these n f t s was an

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Speaker 1: investment contract. What kinds of procedures do you have to

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Speaker 1: go through if if it's considered a security. Well, if

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Speaker 1: it's a security, there's a couple of problems that are

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Speaker 1: going to come up. You know, one of the creator

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Speaker 1: sells an n f T and it's subsequently determined to

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Speaker 1: be a security, that person is going to be subject

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Speaker 1: to sanctions in terms of having to potentially disgorge any

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Speaker 1: money that they received, having to pay civil penalties to

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Speaker 1: the sec having an injunction entered against the person um

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Speaker 1: and that's going to be quite quite problematic. But if

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Speaker 1: a person was to um create an n f T

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Speaker 1: that that was designed to be a security and to

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Speaker 1: come under the securities laws, then the traditional ways of

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Speaker 1: marketing and security would come into effect. If the person

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Speaker 1: wants to sell it to the general public, they'll have

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Speaker 1: to register that n f T with the Securities and

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Speaker 1: Exchange Commission on a registration statement with the perspectives that

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Speaker 1: outlines the business purpose of the n FT outlines the

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Speaker 1: risk factors. But probably if people are going to create

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Speaker 1: n f t s that their first um their first

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Speaker 1: approaches are more likely to be private placement, which are

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Speaker 1: also regulated by the SEC under something called Regulation D.

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Speaker 1: And these are investment opportunities that are open to accredited

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Speaker 1: investors and they generally can't be marketed to the general

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Speaker 1: public UM with certain exceptions. So it's a it's a

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Speaker 1: it's a much more established market and in in a

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Speaker 1: regulatory that people will become familiar with. So if you

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Speaker 1: create an n f T and decide to sell it,

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Speaker 1: what do you have to think about legally? Well, right

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Speaker 1: now it's it's an open question. But if you're just

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Speaker 1: a regular person that's participating in some of these online marketplaces,

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Speaker 1: there's there's quite a few that have gotten to be

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Speaker 1: very popular. There's different marketplaces called Mintable and Wearable and

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Speaker 1: top Shop as the NBA shop. UM as a as

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Speaker 1: a person just buying an n f T for their

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Speaker 1: own use or maybe looking to resell it down the road.

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Speaker 1: You really don't have much in the way to to

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Speaker 1: worry about with regards to securities regulations. It really only

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Speaker 1: becomes an issue if, um if you're go out and

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Speaker 1: you're promoting it and you're issuing perhaps press releases or

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Speaker 1: another area that's been a great concern to the SEC

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Speaker 1: or social media influencers. There's been a number of celebrities

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Speaker 1: that have been charged by the SEC for accepting undisclosed

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Speaker 1: payments for cryptocur in seas and touting those cryptocurrencies on

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Speaker 1: their social media accounts. Floyd Mayweather, the famous boxer, was

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Speaker 1: one of the one of the people that settled with

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Speaker 1: the SEC about that. Um. So, but as long as

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Speaker 1: you're not accepting payments for that aren't being disclosed, and

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Speaker 1: you're just kind of personally purchasing and selling n f

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Speaker 1: T s, there's really not a lot of risk to

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Speaker 1: that process. So, but can you walk us through how

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Speaker 1: you made an n f T of your article? Yeah,

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Speaker 1: what I did is I used one of the popular

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Speaker 1: sites called Mintable, So I took the b d F

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Speaker 1: of the article that I wrote, I used the Mintable

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Speaker 1: site to create an n f T from it, and

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Speaker 1: then I listed it for sale on the mintable site,

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Speaker 1: and to my surprise, about five hours after I created it,

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Speaker 1: there was a crypto investor an entrepreneur that had purchased

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Speaker 1: the n f T. But it was really a pretty

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Speaker 1: straightforward process. I had a basic understanding of ethereum and

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Speaker 1: had a wallet already. Once you have the basic covered,

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Speaker 1: it's not a very difficult process. And a lot of

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Speaker 1: people that are every day artists that aren't necessarily tech

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Speaker 1: people are finding it manageable to create their own n

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Speaker 1: f t s. And so how much did you get?

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Speaker 1: I did it more just as a learning experience, So

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Speaker 1: I saw this for the grand price of five dollars um.

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Speaker 1: But you know, in the future, as I think about it,

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Speaker 1: maybe I'll create another n f T or something else

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Speaker 1: in the legal space. But it was really a great

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Speaker 1: learning experience and some a securities lawyer that's worked a

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Speaker 1: did it was to better understand my clients who who

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Speaker 1: are also starting to operate with n f t s

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Speaker 1: and creating them. Thanks Bob, that's Robert him of tartar

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Speaker 1: Kinsky and Drogan. The Netflix documentary series on the college

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Speaker 1: admission scandal entitled Operation Varsity Blues the College Admission Scandal,

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Speaker 1: became available for streaming on Mark seventeen. The movie, starring

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Speaker 1: actor Matthew Modine as Rick Singer, the admitted mastermind of

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Speaker 1: the college admission scheme, presents re enactments of conversations drawn

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Speaker 1: from FBI tapes in addition to the usual interviews of

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Speaker 1: documentary fair We helped the wealthiest families in the US

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Speaker 1: get their kids into school. So I've done seven sixty

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Speaker 1: one what I would call side doors. The front door

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Speaker 1: means getting in on your own. So I've created this

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Speaker 1: kind of side door. And because my families, I want

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Speaker 1: to guarantee A private equity and real estate executive accused

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Speaker 1: of paying bribes to get his children into Harvard, Stanford

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Speaker 1: and USC as recruited athletes is suing Netflix for defamation.

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Speaker 1: John B. Wilson has pleaded not guilty and is awaiting

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Speaker 1: trial on charges including money laundering, conspiracy, federal programs, bribery,

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Speaker 1: and filing a false tax return. Joining me is Bloomberg

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Speaker 1: Legal reporter Patricia Hurtado tell us a little bit about

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Speaker 1: the series and the complaint. Well, their Netflix did a

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Speaker 1: series based on the investigation in the case called Operate

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Speaker 1: and Varsity Blurs, and it's based on the events of

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Speaker 1: the case and allegations including you know that Lori Laughlin

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Speaker 1: were real athletes so they could get into like usd UM.

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Speaker 1: This dad is a private equity UM executive and he

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Speaker 1: lives in Lynnfield and he is finding the charges the

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Speaker 1: next six series. It's a documentary that is a re

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Speaker 1: enactment of the investigation. So what they've done is they've

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Speaker 1: hired actors and actresses to read the transcripts of the

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Speaker 1: the criminal complaints and indictments against the parents, and then

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Speaker 1: they have actors and actresses re enact SBI agents listening

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Speaker 1: to the call. So it's a documentary, but not in

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Speaker 1: the typical ken Burns type of documentary that you're thinking

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Speaker 1: of with real people. UM. This is of a recent

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Speaker 1: case that's still pending. So there are at least a

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Speaker 1: half dozen parents that are still fighting the charges of

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Speaker 1: the more than thirty parents that were charged in the case.

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Speaker 1: And so the parents that are still fighting. The charges

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Speaker 1: include this dab John Wilson from Lynnfield, Massachusetts. He has

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Speaker 1: three kids, and he was accused of conspiring to get

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Speaker 1: with the with singer to pay bribes to get his

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Speaker 1: children into USC, Stanford and Harvard. So Wilson says he's innocent,

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Speaker 1: but the film groups him in with the parents who

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Speaker 1: pleaded guilty, and he claims they contacted the producers before

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Speaker 1: the series aired. What happened is, according to uh the

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Speaker 1: lawyer for John Wilson, is that they met with the

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Speaker 1: Netflix producers before the series was completed. The documentary was completed,

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Speaker 1: and they lawyer gave them evidence. The producer's evidence of

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Speaker 1: what he said is will clear him of wrongdoing, evidence

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Speaker 1: of his actual innocence, including that the dad, John Wilson,

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Speaker 1: took a a lie detector test and passed with flying colors,

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Speaker 1: according to lawyer Howard Cooper. He also says that they

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Speaker 1: have evidence of the kids F A T and a

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Speaker 1: C T score test scores um the grade of the

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Speaker 1: three kids that they narrited applying to these schools, and

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Speaker 1: one of the key examples is that there is um

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Speaker 1: the allegation that his son may have had this picture

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Speaker 1: doctor to a fake athlete as a water polo athlete.

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Speaker 1: When John Wilson's lawyer says, they actually have proof that

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Speaker 1: his son, Johnny was a star high school water polo

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Speaker 1: player who is now at USC on the USC water

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Speaker 1: polo team and he's never been taken off so that

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Speaker 1: he narrated it. There also is um. The father's says

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Speaker 1: there's proof that all three of his kids tested in

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Speaker 1: the ninetieth percentile as their college exams, including one daughter

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Speaker 1: who got a perfect score on her a c T test.

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Speaker 1: So they presented all this evidence to the Netflix producers,

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Speaker 1: according to Howard Cooper, who's John Wilson's lawyer, and Netflix

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Speaker 1: went ahead and put him in the same hopper with

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Speaker 1: the parents who pled guilty, and they talked about doctored

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Speaker 1: photos and photoshop pictures of kids that are fake athletes.

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Speaker 1: So now John Wilson says he's technically gonna stand trial

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Speaker 1: in September. You have all these people sitting at home

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Speaker 1: watching Netflix because they're the global pandemic. They can't go

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Speaker 1: to the movie, so they're live streaming their hearts out

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Speaker 1: at home on their sofas. And John Wilson says, the

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Speaker 1: whole potential jury pool who could hear his case in

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Speaker 1: September has now been painted. That evidence sounds pretty strong.

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Speaker 1: But before trial, they would have tried to approach the

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Speaker 1: prosecution right and present that evidence. But the prosecution is

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Speaker 1: still going forward. So what does that tell us? Well,

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Speaker 1: it tells us I mean there is a fine line

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Speaker 1: if you think about it. You know, everyone has presumed

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Speaker 1: innocent until convicted, right until either plead you plead guilty

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Speaker 1: or convicted a trial. So it sounds to me almost

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Speaker 1: like the producers and Netflix didn't make that distinction in

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Speaker 1: their depictions of the parents and um. John Wilson's lawyer

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Speaker 1: told me that he the family friends of his client

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Speaker 1: have called him up and said, hey, I didn't know

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Speaker 1: you did this. I thought you did what you know

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Speaker 1: x or y, and and it completely blurs the line

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Speaker 1: between those who have admitted their guilt versus those who didn't.

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Speaker 1: So I mean, technically, you know, we as we journalists,

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Speaker 1: we would write and say the person has denied wrongdeering

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Speaker 1: and it's fighting the charges, and here's what they're defense

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Speaker 1: lawyers say. But that's kind of omitted from these re enactments,

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Speaker 1: according to the lawyer complaining about the documentary. So they

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Speaker 1: sued them for defamation, and the producers saying they're basically

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Speaker 1: put in the same bucket with all the parents who

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Speaker 1: pled guilty, you know, the likes of A. Lori Laughlin

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Speaker 1: and her husband or in Felicity Huffman. They've admitted their guilt.

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Speaker 1: They said they did these crimes. They plead guilty, and

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Speaker 1: that's the truth as far as the courts are concerned.

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Speaker 1: But somebody who has pled not guilty has a right

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Speaker 1: to say, wait a minute. The court of public opinion

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Speaker 1: may say something, but you know, technically you're fighting the charges,

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Speaker 1: and if you want to be accurate, you know, you

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Speaker 1: might need to remember that even in a in a

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Speaker 1: documentary depiction. So Wilson says he's not guilty, but did

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Speaker 1: he have any contact at all with Singer, who masterminded

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Speaker 1: the admission scandal. He argues that he did have contact

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Speaker 1: with Singer, but nothing was improper. He said he was

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Speaker 1: introduced to Singer after a major financial advisory firm referred

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Speaker 1: him to him, so that he was called a highly

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Speaker 1: reputable college admissions counselor so, and that they were legitimate

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Speaker 1: donations that were made, not bribes paid with the way

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Speaker 1: the government argues this. Have the producers or Netflix responded

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Speaker 1: to why they put Wilson in with the people who

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Speaker 1: pleaded guilty. Uh, now, they would not give us any comments,

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Speaker 1: so I guess we'll remain to see what their responses

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Speaker 1: are in court. Um, they filed a lawsuit, and I

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Speaker 1: understand from my colleague in Boston the lawyer for John Wilson,

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Speaker 1: his name is Howard Cooper, and he's been successful as

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Speaker 1: one of the top defamation lawyers in the Boston area.

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Speaker 1: So this child will be pending in state court in Boston.

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Speaker 1: You know, we've seen all the movie stars, the famous

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Speaker 1: people going to prison, coming out of prison. It's surprising

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Speaker 1: to me that the case is still going on. Oh,

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Speaker 1: you know, with the government charged a whole slew of people.

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Speaker 1: I mean, I think the universe of people. I think

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Speaker 1: we're up into the fifties now. Um, many of them

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Speaker 1: have pled guilty. And there's certainly, you know, a whole

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Speaker 1: cast of characters and parents, coaches, school consultants, testing consultants

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Speaker 1: as well as um, you know, the parents that have

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Speaker 1: been implicated in this case, and many of them have

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Speaker 1: pled guilty. I think the scorecard is I think we

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Speaker 1: have over thirty parents that have pled guilty. Um, and

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Speaker 1: certainly some coaches. There was a Stanford sailing coach, a

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Speaker 1: Georgetown tennis coach. They all they played guilty. So the

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Speaker 1: universe of people that the documentary filmmakers could have used,

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Speaker 1: you know, there's plenty, it's plenty of material. I guess

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Speaker 1: this dad is saying, I'm not in that universe of people,

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Speaker 1: so you should have made more of a distinction. And

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Speaker 1: you know, especially he's got a well known libel and

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Speaker 1: defamation lawyer who's met in advance of the documentary being

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Speaker 1: broadcast and completed, and he said that, you know, he

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Speaker 1: put a dossier of information and they went ahead and

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Speaker 1: he says, defamed him. And what about the parents who

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Speaker 1: pleaded guilty and went to prison. Um, some of the

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Speaker 1: parents have gone in and they went into One of

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Speaker 1: the interesting things about this is they went in right

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Speaker 1: at the beginning of the pandemic, and some of them

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Speaker 1: got out because of humanitarian reasons that you know, the

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Speaker 1: risk of COVID, because of their health issues and they were,

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Speaker 1: you know, with co morbidity, so they were able to

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Speaker 1: get out. But some of the parents who went in

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Speaker 1: later after pleading guilty, they ended up finding themselves in

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Speaker 1: a jam because they asked to get released from prison,

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Speaker 1: and basically the judge said, you should have thought about

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Speaker 1: this before you agree to go into prison. So I

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Speaker 1: can't let you out now because there's just as much

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Speaker 1: COVID out of prison as in prison. So some of

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Speaker 1: the parents that have played guilty and some of the

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Speaker 1: other participants in the case that have played guilty, they

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Speaker 1: have now postponed their sentencing until things calmed down at

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Speaker 1: COVID before they go in. Thanks for being on the show,

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Speaker 1: pat That's Patricia Hurtado, Bloomberg Legal reporter. And that's it

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Speaker 1: for this edition of The Bloomberg Law Show. I'm June Grasso.

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Speaker 1: Thanks so much for listening. Please tune into The Bloomberg

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Speaker 1: Law Show every night at TAMPM Eastern right here on

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Speaker 1: Bloomberg Radio.