New SEC Crypto Chief Faces Tough Challenge

explained his views on the rapid rise of cryptocurrencies. The funny thing about these cryptocurrencies is they only work if they're integrated with They only work for their purported purpose if they're integrated with the financial system, and that integration is top of mind for the SEC official overseeing regulation of the cryptocurrency agency joining us as Ben Bain, Bloomberg News financial regulation reporter, who has written about the SEC's new cryptos are so, Ben, tell us a little bit

about her. She's a twenty year SEC vetter and why was she given the job? Sure? Thanks a lot um so, Yeah, Valerie Sapanics, as you mentioned, you know, twenty years in the agency and actually in the agency's enforcement division, which you know, if if you think about kind of the famous cases that the SEC has brought against Big Wall street firms. That's the unit that does it. UH. This new job is in a different division, which is more focused on kind of corporate filings, some of the more

mundane aspects that the SEC does. So what they did is they tapped um miss Stepan. I moved her over into this kind of less threatening division. And the idea is to get crypto firms, which are kind of notoriously reticent to engage with government. Certainly it has its UM, you know, very kind of libertarian UH origins cryptocurrency to come in and talk to the SEC so regulators can

get a little bit better idea what's going on. They spent the last year really trying to get their arms around this, and I think the hope is that the regulator is going to be able to UH age more by having someone who's not an enforcement reaching out to the industry. So do what do analysts say, does the SEC have its hands around crypto now? Well, if you look at the numbers, UM, you know, the SEC, UH, you know, has been warning about the dangers of initial

coin offerings. UM. The chairman you played a clip from him earlier has warned that, you know, this market is kind of righte with fraud. But you know, in June of this year, it was a record month for i c o is. More than five and a half billion

dollars were raised. That's according to coin scheduled data. So you know what we're seeing is, yes, certainly the SEC has a much better idea of where things are than they were, uh than they did a year ago, let's say, but it's still very much uh, you know, a quick changing market and they haven't been able to uh to you know, to stop firms from from raising money and

what they say are unregistered securities offerings. So ben as you write, the Justice Department, Commodities Future Trading Commission also have people involved in this. So what is sapanics approach and how is she going to work if at all with those other agencies. I mean, these these regulars, they all talk to each other, you know all the time. I think, what what what we're seeing happening here in Washington with cryptocurrencies is it doesn't really fit neatly into

the jurisdiction of any one of these agencies. So the SEC, you know, they're responsible for overseeing securities. So you think about stocks, you think about you know, kind of traditional equity like products, the CFTC overseas commodities. Um. You know, so you have all these different agencies kind of trying

to figure out their lane. So when it comes to to you know, uh, miss Sapanics job, she's going to be dealing with how the SEC looks at securities, which which you know, the SEC has said a lot of these initial coin offerings are, but also um, the broker dealers that that work in them, uh, you know, banks and investment funds that are increasingly trying to get involved. Uh, and and also exchanges or platforms which haven't registered uh to actually be trading these things, which the SEC has

also warned them about. So there's a whole bunch of things on their plate, not to mention, uh you know, the push for an exchange traded fund based on cryptocurrencies, which the SEC rejected again last week. So you talked about all the regulators trying to find their find their lanes with regulation of crypto whors? Congress is it doing anything to try and clarify this? Does it plan to? I mean, so so far Congress has kind of stayed

out of it. Um, there's been a couple of bills, uh you know that have popped up, but haven't really gone anywhere UM, And it seems like right now, uh, there's nothing on kind of the front burner. Congress hasn't said, you know, who's ultimately going to be responsible. We kind of have to remember when we're talking about cryptocurrencies, is that in the spot market? Right? We talked about the cash market, So who's trading cryptocurrencies we might think about UM.

No regulator really has clear direct jurisdiction over that. So there's a question about whether Congress needs to come in and say, hey, as SEC, you handle that, or hey Commodity Future Trading Commissioners CFTC, you handle that, or Treasury Department or another regulator altogether. So, uh, the short answer is no, Congress is focusing on other stuff right now. So Ben, you say that she's going to try this less confrontational approach, how long will she try that and

when will that turn into a more aggressive approach? What would make her get more aggressive? Well, I think what I mean, what the SEC says is that they are being aggressive. You know, on the one hand, they're going after UM instances, which they, you know, consider to be kind of blatant violations. You know, fraudulent uh type of

action uh, you know going on in these markets. But at the same time, what they're what they're realizing, what they've come to realize, is that to really understand these markets, they need to have you know, an open door, if

you will, the ability for firms to come in. So I don't think they're necessarily you know, exclusive in the sense that I think they can continue to have missed sepanic uh, you know, having firms I'm in and and and and some of the other UH divisions that aren't enforcement uh, you know, trying to get their hand hand heads around this market. But at the same time, you know, we understand there are there is a lot of enforcement activity.

There's been several cases, but you know, we understand there's a big pipeline as well. But when you mentioned that she also knows jiu jitsu, so that's what I was going to go for that. Yes, the crypto companies take take anything away from that, well, I mean, you know, it's uh, you know, certainly, you know, an interesting uh in an interesting element here, um, you know, kind of

someone who practices jiu jitsu in here in her spare time. UM, you know, not you know, certainly someone who's who's going to take this very seriously. Um, And you know she she was kind of one of the first regulators here in Washington to start paying attention to this, even like six years ago. Um, you know she was. She was kind of poking around and digging around it. And at that point, UM, I'm not sure too many of us had ever heard of bitcoin. Well, um, and we have

to end it there. It's really interesting article. And yes, she also has an engineering degree of a different kind of secer re person. That's Ben Bain, Bloomberg News financial regulation reporter. Two jury trials to convictions, a seven month prison stay, two appeals, and two convictions tossed out by the Second Circuit. But now the five year legal odyssey of former Jeffreys managing director Jesse lit Fac is over.

Federal prosecutors have decided not to try and for a third time, for fraud for lying to clients about mortgage bond prices while negotiating trades. Is the federal crackdown on questionable bond trading tactics also over joining us. As Robert Hockett, professor at Cornell University Law School, bob the Second Circuit throughout lick Fax conviction on technical legal grounds, but found

there was evidence enough to support the guilty verdicts. So, after all the effort the prosecutors put into it, are you surprised that they gave up? Uh? You know, in a way I am in a way I'm not June um. So, I mean, basically, there's been an ambivalence when it comes to this particular charge all, you know, sort of right

from the get go. Right. The ambivalence is basically this, what do you do in a case where there's no question but that the defendant has done something wrongful, but there is question about how much the victims, you know, sort of were responsible themselves, how much they should have known. It used to be that the rule that we had was we could say, look, just be honest, you know, as far as the defendant is concerned, just be honest, and we were not going to require anything in particular

of the alleged victims. Um. And then you know, sort of overtime in order to kind of lessen the number of cases that were actually brought before the courts. Uh, the course began to sort of fashion a sort of a halfway house doctrine where sometimes they'd say well, you know, if the victims should have known better or were saving enough to know better, we won't actually recognize an action against them. And there's been a kind of a back and courth over that particular issue under the rubric of

so called material reality. Oh, for the last thirty forty fifty years, it looked like we were kind of going back to the old ways or in recent years where we're saying just be honest. Um. But then all of a sudden, the second Circuit weighed in as you as you've just noted a couple of times. Uh, And I think that's done either of two things to the Justice Department.

They've either decided, well, all right, we can't really win these cases anymore because the courts are beginning to get a bit more strict again about which sorts of suits they'll let go through, or they've just decided that they don't care that much about this sort of thing anyway. Are there any other outstanding cases out there that might

be affected by this, Yeah, yes there are. There are a number of other defendants, as as you guys know, who have been being investigated and prosecuted along with Mr Litt back um, and I would say that between the two second circuits, the recent second circuit decisions on the one hand, at the d o j's decision not to kind of keep pursuing this. On the other hand, Uh, this might you know, sort of be good news for those other defendants, even if not exactly for the bond markets.

Let fax arrest in sent shock waves through Wall Street, and there was the resignation suspensions of dozens of traders. Did it change behavior in the bond industry at all, Well, it seems to have induced a little bit of caution, which is exactly what the point would have been, right. The idea of of a sort of a high profile case like this is to send a signal, right, to tell the traders out there, and the and the bond sellers out there that look, we're not going to let

you rest on the possible sophistication of your victims. When it comes to sort of policing your honesty in these markets, it's always easy to tell the truth. Just say what you really did pay for the bonds, and that will be the default rule. And that seems to have had an effect, right, I mean, people seem to have been a little bit more careful for a while while these suits were pending. I suspect that they're probably now thinking, well, all right, thank god, that's over. That five year nightmare

is done. We can get back to business as usual as it was before. When you when you look at the case, is do you see failures on the prosecution's part or was it just that the appellate courts changed the rules. I think it's more the latter. To tell the truth, I mean, I think that that's the prosecution to a fine job, I mean, as as good a

job as can be expected. I think they made the case quite well, um, you know, and it was there there was no question right but that these were just flat out misstatements of fact that were made by Mr litt Back and by other defendants in the same sort of set of suits. Um, so you know, I I find it hard to fault the prosecution in all of this.

I think it's just a case of the second Circuit not exactly changing the law, but once again kind of pendulum swinging in the direction of permissiveness, which again tends to happen. Right, we seem to go through cycles on

that under this rubric of materiality. Sometimes they'll sort of really hit materiality hard sometimes they'll hit it less hard, and it's always basically riding on well, to what extent are you going to give the defendant a free pass when the alleged victim quote unquote should have known better? In other words, you can always decide to say caveat emptor, or you can decide to say, well, no, not caveat emptor,

but just let the sellers be honest. And we seem to swing back and forth on that one over the years, and it looks to me like the Second Circuit has just decided to kind of swing back in that kind of caveat em or direction again after about five years worth of caution. Um uh inducing. So Bob, is the crackdown over? Then? Can traders rest easy? Well? I very

much hope not June. But it's you know, I don't see a lot of reason to to say no, um at this point, right, I mean, all of the indications at this point seem to be the Second Circuit's going to be a bit permissive again when it comes to um stretching the truth when you're selling something in the bond market, and it's looking as the Department of Justice is not inclined to fight that at the present time.

There's a certain irony, of course in this, given that we were told during the campaign that, uh, the guy who ultimately won whatever his own business dealings was at least going to be a bit of a sheriff where Wall Street is concerned. Um, but it's kind of looking like we're returning to, you know again, businesses pre usual on Wall Street. Uh. And it seems this this d J is okay with that. Well, what does this say

about the system itself? Because you have Jesse litfac who assume insurance paid for two jury trials, you know, two appeals. I mean the amount over five years. I have no idea what the cost would be. But yeah, a person who wasn't insured or didn't have money couldn't have gone through this. Yeah. So I think it's a I think it's a nutty system. I don't I don't think there's

much that can recommend it. Uh. The easiest way to fix it, it seems to me, would be for Congress to pass legislation that clarifies that the anti fraud provisions of both the thirty three and the thirty four Acts really mean what they say. And among the things that they say is, you know, thou shalt not lie, and the you know, the sophistication or otherwise of your victim is sort of neither dear nor there. It's just irrelevant. We should bob. We have to end it there honesty.

Thanks so much. As always, that's Robert Hockett, a professor at Cornell University Law School. Thanks for listening to the Bloomberg Law Podcast. You can subscribe and listen to the show on Apple Podcasts, SoundCloud, and on Bloomberg dot com slash podcast. I'm June Brosso. This is Bloomberg. Yeah, yeah,