Summarized SEC charges against Binance and CZ
SEC’s 13 charges against Binance Holding Limited, BAM Trading Services Inc., BAM Management US Holdings Inc., and Changpeng Zhao (CZ).
Original SEC complaint document.
Background and context
On 5-June-2023 the SEC filed a lawsuit against Binance, BAM Trading, BAM Management and their founder / beneficial owner Changpeng Zhao aka CZ on allegations of violations of US federal securities law in the US District Court for the District of Columbia.
The violations pertain to Binance and BAM Trading operating as unregistered exchanges, broker-dealers, and clearing agents in the US exposing US investors’ capital to undocumented risks and exploitative trade practices.
Zhao maintains that there was no requirement for registration as Binance does not have a physical headquarters within the jurisdiction of the US. However, the SEC allegation considers that Binance and BAM Trading specifically solicited US investors for their native token, digital assets, and staking program using different market mediums. The SEC considers these crypto assets and investment schemes offered to US customers to be securities, given their objectives and structures, and therefore subject to US federal securities regulation.
Being unregistered, the defendants resorted to practices that an otherwise registered market participant would not have done. Some instances include the failure to disclose the counterparty risk inherent in transferring investor funds through a Zhao-controlled account; the same entity acting as exchange, broker/dealer, and clearing agent where otherwise such functions would be clearly demarcated and segregated; the commingling of investor funds in omnibus wallets and company-owned accounts.
The SEC alleges that besides violating registration requirements, the defendants failed to put into place sufficient controls and trade surveillance rules against manipulative trade practices. This was not only a misrepresentation by the entities of the rules and controls they told investors they had in place, but the failure to have such controls allowed Zhao-controlled and Binance-related market makers to trade with themselves and to fraudulently increase trade volumes, with the customer being the losing party to a trade.
The complaint outlines how the defendant tried to circumvent restrictions placed on large-volume US investors to invest in Binance.com by encouraging them to hide IP addresses and omit information from KYC forms. Former BAM trading and BAM management employees relate instances of business operations and crypto asset control retained by Binance.com even though the formation of a separate Binance.US Platform was to ensure independence between the US and Asian-based operations. The SEC alleges that the main purpose for creating BAM Trading and BAM Management and the new Binance.US Platform was a ruse to keep the regulatory pressure off Binance.com. Correspondence between the defendants and their consultants, lawyers, and employees were used to confirm this and other questionable practices.
Alleged Violations
The 13 charges on alleged violations of federal securities law levied by SEC against Binance, BAM and CZ are as follows:
1. Binance is in violation of Sections 5a & 5c of the Securities Act of 1933 for the unregistered offers and sales of BNB. Registration statements provide material, sufficient, and accurate information to make informed investment decisions.
2. Binance is in violation of Sections 5a & 5c of the Securities Act of 1933 for the unregistered offers and sales of BUSD.
3. Binance is in violation of Sections 5a & 5c of the Securities Act of 1933 for the unregistered offer and sale of Simple Earn and BNB Vault.
4. BAM Trading is in violation of Sections 5a & 5c of the Securities Act of 1933 for the unregistered offer and sale of its Staking Program.
5. Binance is in violation of Section 5 of the Securities Exchange Act of 1934 for acting as an unregistered exchange for the Binance.com Platform. Under the Act, the entity was required to register with the SEC as a national securities exchange or operate pursuant to an exemption from registration but did not do so.
6. Binance is in violation of Section 15 (a) of the Securities Exchange Act of 1934 for acting as an unregistered broker-dealer for the Binance.com Platform. Under the law, the entity was required to register with the SEC as a broker-dealer or operate pursuant to an exemption from registration but did not do so.
7. Binance is in violation of Section 17 (A)(b) of the Securities Exchange Act of 1934 for acting as an unregistered clearing agent for the Binance.com Platform. Under the law, the entity was required to register with the SEC as a clearing agency or operate pursuant to an exemption but did not do so.
8. Binance & BAM Trading are in violation of Section 5 of the Securities Exchange Act of 1934 for acting as unregistered exchanges for the Binance.US Platform. Under the Act, the entities were required to register with the SEC as a national securities exchange or operate pursuant to an exemption from registration but did not do so.
9. BAM Trading is in violation of Section 15 (a) of the Securities Exchange Act of 1934 for acting as an unregistered broker for the Binance.US Platform. Under the law, the entity was required to register with the SEC as a broker or operate pursuant to an exemption from registration but did not do so.
10. Binance & BAM Trading are in violation of Section 17 (A)(b) of the Securities Exchange Act of 1934 for acting as unregistered clearing agents for the Binance.US Platform. Under the law, the entity was required to register with the SEC as a clearing agency or operate pursuant to an exemption but did not do so.
11. Mr. Zhoa as a control person over Binance is in violation of Section 5, 15(a) and 17(A)(b) of the Securities Exchange Act of 1934 for the Binance.com Platform violations.
12. Mr. Zhoa as a control person over Binance & BAM Trading is in violation of Section 15 (a) of the Securities Exchange Act of 1934 for the Binance.US Platform violations.
13. BAM Trading and BAM Management are in violation of Sections 17(a)(2) & 17(a)(3) of the Securities Act of 1933 for obtaining money or property by means of materially false and misleading statements to Binance.US Platform customers and equity investors in BAM Management, and for engaging in transactions, practices, and courses of business that operated as a fraud or deceit upon purchasers (Binance.US Platform customers) in the offer and sale of securities, particularly regarding the extent of implemented controls to prevent manipulative trading on the Binance.US Platform. This lack of control encouraged wash trading and fake inflated trade volumes.
Summary of complaint
Binance and BAM Trading were unregistered entities while acting and performing as securities exchanges, broker-dealers and clearing agencies. They engaged in unregistered offers, sales, and trades of crypto assets, including their own offers- BNB, BUSD, BNB Vault, Simple Earn, and a Staking Program investment scheme on the Binance.US Platform.
They openly and covertly solicited US investors.
They misrepresented the controls implemented on their Binance.US Platform. They failed to implement sufficient trading surveillance and manipulative trading controls and rules, which were in fact virtually non-existent, on Binance.US Platform to prevent fraudulent and manipulative trades.
Controls did not prevent “wash trading” or self-dealing by Sigma Chain, a Zhao-controlled trading firm, through its various accounts on the Binance.US Platform or by other Binance and Zhao-related accounts. This led to artificially enhanced (and fraudulent) trading volumes on the Platform.
They deliberately sought to evade US laws and regulatory oversight. BAM Management and BAM Trading were created to independently control the Binance.US Platform and to divert potential regulatory enforcement efforts away from Binance.com. However, the control of the business operations, including bank accounts that held Binance.US customers’ funds, and crypto asset services (including asset addresses and custody and control of digital wallets and crypto assets) of these entities were retained by Mr. Zhao and Binance. Billions of dollars were transferred by Binance from BAM Trading’s bank accounts without the latter’s knowledge.
They falsely claimed that the Binance.com Platform was blocked for US investors and did not serve them. However, they continued to solicit the most high-valued US customers, who provided volume and liquidity to the Binance.com trades. They encouraged these customers to change IP addresses using virtual private networks (VPNs) & updated KYC documentation that omitted a US connection, to ensure they had access to trading on this platform.
They enabled the transfer of billions of dollars of crypto and fiat assets of US customers in a manner a regulated broker-dealer, clearing agency, or exchange would not have done.
A customer’s crypto assets were not segregated from the assets of other customers or the firm’s assets but kept in Binance-controlled omnibus wallets.
Funds were also commingled in accounts owned and controlled by Zhao (e.g., Merit Peak Limited). The Merit Peak account was used as an intermediary to transfer the customers’ money to buy BUSD which exposed the customers to an undisclosed counterparty risk.
They operated while impaired by conflicts of interest — for example, the Securities Exchange Act prohibits broker-dealers that are members of exchanges from effecting transactions on that exchange for their accounts, whereas unregistered crypto asset trading platforms have the financial incentive to trade against their own customers on the platform, putting them on the losing side of a trade. Merit Peak and Sigma Chain were Zhao-controlled market makers that were active traders on the Binance.US Platform involved in such manipulative trades.
By evading registration, they avoided the recordkeeping, disclosure, separation of functions, and other requirements of the Securities Act of 1933 and Securities Exchange Act of 1934 that are meant to ensure the protection of US investors and national securities markets, hence putting billions of dollars of US investor capital at risk.
