by T. GormanPosted on Posted in SECActions

The Public Company Accounting Oversight Board declared victory yesterday in the battle to inspect audit workpapers for China based issuers whose shares are listed on U.S. exchanges, according to a press release dated December 15, 2022. Specifically, the release headline states “PCAOB Secures Complete Access to Inspect, Investigate Chinese Firms for First Time in History.” The release goes on to claim that the new policy has been verified: “Today’s announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong. It is a recognition that, for the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them.”

This success is based on the Foreign Companies Accountable Act of 2020. That Act sets up a procedure through which the SEC is required to ban an issuer if the PCAOB concludes that it has refused to permit inspection. It is the potential sanctions from this Act which the PCAOB claims have now changed the landscape.

Yet the the Board has conducted inspections for years pursuant to the directive of the Sarbanes-Oxley Act of 2002. China has always been the exception. The PRC government and the China Securities Regulatory Commission or CSRC have steadfastly declined to permit the required inspections with few exceptions.

In 2011 and 2012 it appeared there was a breakthrough. The SEC brought enforcement actions against foreign affiliates of the major accounting firms centered on the inspection question. Those actions, brought as Commission administrative proceedings, ultimately ended with an agreement between the PCAOB and CSRC under which the parties pledged the “fullest assistance permissible to secure compliance with the respective Laws and Regulations of the Authorities.” The MOU went on to detail procedures to facilitate the arrangement. Yet little in the way of tangible results can be found despite the fact that ultimately under SOX firms that are not in compliance can be delisted. The deal failed.

Now the PCAOB claims to have road tested China’s willingness to comply the success of the 2020 Act: “More than 30 PCAOB staff members conducted on-site inspections and investigations in Hong Kong, reviewing thousands of pages of documents, conducting interviews and taking testimony over a nine-week period from September to November,” according to the Board release. While this sounds promising, so did the earlier deal. The proof will come in the future: Will China and CSRC continue to permit full inspections?

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by T. GormanPosted on Posted in SECActions

Things change, at least sometimes. Take Crypto assets. They began as a way to “get off the grid.” Over time some came on to the grid as their popularity increased. Others stayed off. And still others began trading at venues that often look like, but are not, securities exchanges. Trading and speculating in the assets continues at some venues. There continues to be huge price gyrations.

One crypto exchange that did not come in is FTX. It remained “off the grid.” No regulation here. Nevertheless, it quickly obtained a billion dollar plus valuation; its popularity increased. The co-founder’s legend grew as he moved across the horizon, even reaching out to help others in an industry that spawned DoucheCoin, at first a joke, but which is still being traded. And now the reason FTX stayed off the grid is clear – it is an illusion. SEC v. Samuel Backman-Fried, Civil Action No. 1:22-cv-10501 (S.D.N.Y. Filed December 13, 2022); CFTC v. Samuel Bankman-Fried, Civil Action No. 1:22-cv-10503 (S.D.N.Y. Filed December 13, 2022. The Department of Justice also filed criminal charges.

In 2018 Defendant began work on a crypto asset trading platform. Gary Wang and Nishad Singh joined the effort. Together the three founded FTX. The firm begain operations in May 2019. The new trading platform was closely associated with Alameda Research LLC, a firm that had operations in the U.S., Hong Kong and The Bahamas. Known as a “crypto hedge fund,” its CEO was Defendant Bankman-Fried. He became the ultimate decision maker.
Defendant Bankman-Fried raised over $1.8 billion from U.S. and other investors who acquired an equity stake in FTX. Investors were repeatedly told that the firm had the necessary and appropriate controls – it was not off the grid. FTX was the grid; it was the second largest crypto trading platform. Mr. Bankman-Fried fostered this belief throughout the period of operations. Yet from the beginning Mr. Bankman-Fried diverted investor assets from FTX to Alameda.

As the cash diversions continued Defendant touted FTX as having “top-notch, sophisticated, automated risk measures in place to protect customer assets, that those assets were safe and secure . . .” Alameda was portrayed as just another investor, not a the funnel for investor cash to Defendant. Throughout its operations Mr. Bankman-Fried spent lavishly on office space and condominiums in The Bahamas. Billions of dollars in customer funds were put into speculative investments.

These activities continued even as FTX began to crumble. Indeed, as the house-of cards collapsed, funds were still being diverted to Alameda. For example, in the summer of 2022 Defendant moved millions of dollars in customer funds to himself. At the same time investors were continually reassured that the platform was successful, right up to the end. With the filing for bankruptcy on November 11, 2022, however, it was clear that FTX had never come in from being off the grid – millions and billions of investor dollars were put into what was essentially an empty box without internal controls — except perhaps a path to move investor cash to Defendant. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

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