The Case the Crypto World Is Watching

at a steep discount to the cryptocurrency it holds. Grayscale wants to convert its Bitcoin trust into an exchange traded fund, but the SEC rejected the plan. In June, the DC Federal Appeals Court judges grilled the SEC on its decision to reject their proposed spot bitcoin ETF when it had

earlier approved a similar product based on bitcoin futures. Here's Chief Circuit Judge Sri Shrine Vassin and Judge Naomi Rao whether Commission really needs to explain is how it understands the relationship between bitcoin futures and the spot price a bitcoin, Because it seems to me that these things, I mean, you know, one is just essentially a derivative of the other they moved together in ninety nine point nine percent of the time, it's just going to follow like the

night follows the day that it affects both because the futures market, of course, it turns on the spot market. Joining me is security's law expert Robert him a partner at Tartar Krinsky and Drogan. Bob tell us. How we

got to arguments at the DC Circuit Court of Appeals. Well, this all started when Greyscale wanted to create an exchange traded product for its Bitcoin trust, and the Bitcoin Trust is priced and trades in actual bitcoins, unlike some of the other exchange products that are currently on the market that concern futures contracts, and as a result, Grayscale and an exchange called ARCA applied to the SEC asking permission for gray scales Bitcoin Trust to become an exchange traded

product and be available for retail investors. The SEC rejected that proposal in twenty twenty two, and Grayscale sued the SEC and file the petition with the DC Circuit Court, arguing that the SEC's rejection of its request was an arbitrary and capricious decision which should be overturned. By the court.

Why did the SEC reject gray Scales application. The SEC's entire argument for why it rejected gray Scales application is that gray Scales product with Bitcoin it trades in the spot market, which means essentially that Grayscale has a trust that actually owns bitcoin digital currency, and the current products that are on the market that are exchange traded products.

The underling asset in those products are futures Bitcoin futures contracts, and according to the SEC's reasoning, the SEC told the court that there's a big difference between those two types of structures because with futures contracts, those are regulated products. They're overseen by the CME, there's market surveillance, and there's all sorts of investor protections in place, whereas with the bitcoin spot market, it's essentially an unregulated market. There's no

regulator that oversees that. As a result, the SEC felt that there just wasn't enough safeguards in place for Gray Scales trust to warrant it being approved for retail trading. And how did Grayscale frame its arguments to the DC circuit.

What the court specifically is looking at is whether the SEC has articulated a reasonable position or not when it distinguishes between exchange traded products that are based on futures versus exchange traded products that are based on actual bitcoin, and arding to Grayscale, their arguments are is that there's really no meaningful distinction between the two and that any sort of concerns the SEC has about manipulation or fraud in the unregulated bitcoin market, you know, essentially also have

to carry over to the futures market because those futures contracts are based on this unregulated market. So what gray Scales argument to the court is is that the SEC is drawing a distinction here that has no real substantive weight behind it, and the SEC obviously disagrees with Dad and is putting forward its reasons for why it thinks there's a difference between the two markets. In the oral arguments, the judges seem to be grilling the SEC's attorney more

than gray Scale's attorney. The judges really seem to be picking up a lot of the points that gray Scale raised in their briefs, especially when it was the SEC's lawyer's turn to argue. The judges were really pressing the SEC to explain and justify the position that there is some sort of meaningful distinction between the bitcoin futures market

and the bitcoin spot market. And from listening to the judges questions and seeing how they responded to the arguments, it seemed like the judges were really not convinced by the SEC's arguments that there was a valid basis between distinguishing these different types of exchange traded products. Tell us about the different ways the Court could rule here. So I think there's still a lot of uncertainty ahead for Grayscale, because the Court here can do a few different things.

One of course, it could agree with the SEC that there is some sort of reasonable basis for the arguments that the SEC is making, And the court's role is really not to sit in second guests the SEC and to substitute its judgment for the SEC's judgment. The courts they are really to ensure the SEC hasn't gone off the rails and has not presented any sort of reasonable

argument for its position. If the Court finds that there's even some reasonableness to the section, it could very well sustain the SEC's position and uphold the denial of the listing. Gray Scales argument is that the SEC's position is just arbitrary, capricious, and their lawyer, Donald Barelli, who is the former Solicitor General of the United States, made the point in his argument that this is a very different case because gray

Scale is actually asking for more regulation. They've applied to the SEC to become a regulated exchange traded product, and they want that SEC regulation in order to offer and trade their shares because right now this is traded in the over the counter market, which is subject to a lot less regulation. So gray Scale is actually arguing that they want to come under SEC regulation for this product. And what's your best guess about how the court might

rule here. You never really know in litigation how things are going to come out, even though some of the questions seem to be favorable to gray Scale, and the Court could still do a couple of things. Even if it doesn't rule outright in favor of the SEC. It could rule in favor of Grayscale and just overturn the

SEC's decision and allow the fund to begin trading. Or kind of a middle ground approach is that the Court could send it back to the SEC and say you need to reconsider this because we don't find your reasoning persuasive, and I think that might be the most likely scenario, especially given the recent blow up of FTX and all the problems that have been occurring in the crypto market.

I think the judges are going to be reluctant to just replace the SEC's judgment with their own and say that this exchange fund can now begin trading which is based on bitcoin. There may be a lot of reluctance on the judge's part to do that, and it may be more comfortable for them to send it back to the SEC with more guidance and have the SEC take a second look at this. Do you think that a spot bitcoin ETF protects investors better? As the really argued? Well,

I think that the SEC's arguments were fairly weak. While their concerns about fraud and manipulation are well justified in the bitcoin market. The SEC specifically mentioned things like wash trading,

insider trading, hacking. You know, those are all very legitimate concerns that need to be addressed, But the SEC really, in my opinion, didn't do a very good job of explaining why those same risks are less when you have a futures product based on bitcoin, And it seems to the judges and to me that there really are the

same risks. And the interesting thing about the Grayscale case too, is that there's been a number of amiki that have filed Friends of the Court briefs, and in some of those briefs there was some pretty compelling arguments made about all the steps that the exchanges and other service providers take to try to address those sort of fraudulent and

manipulative practices in the bitcoin spot market. Grayscale has said that if it loses, it will appeal to the Supreme Court and that if it loses, it may try a tender offer. Do you think the Supreme Court would take this case? Well, this case has more going for it than the average case. It is a very important case to the crypto industry, as is evidenced from the fact that so many amicus briefs were filed, and bitcoin is the largest digital currency by far its market cap is

four hundred billion. The gray Scale Trust itself has twelve billion of bitcoin, so this is clearly a case that

has national implications and importance for a developing industry. And as of the last few years, the Supreme Court has also shown an interest in taking cases where the SEC has been a respondent, because there are a number of cases that have come out over the last five years where the SEC has lost at the Supreme Court because the Court viewed the Commission is either overstepping its boundaries

or acting in an arbitrary and capricious manner. So I do think that this cases more than an average cases chance of success in being taken up by the Supreme Court. But still it's a very small percentage of cases are taken by the Supreme Court. Yes, smaller and smaller every year, it seems. Something So, And what about Grayscale trying a tender offer? You know, I think that's going to be

an interesting option. You know, it's clearly PLANEDZ. I think for Grayscale it's not an ideal solution because it's going to be quite a bit more costly. It's a different regulatory path that's involved, and I think that Grayscale would much prefer to have this product traded in the market, and it would also allow it to grow and to really set this standard. The tender offer may be something

that they would look at. I don't think they've really fleshed out the idea very much in terms of pricing and valuation and how that would work with the discount to the market, whether the tenderoffer would be made at some premium or whether it would be the full discount. So I think there's a lot of open questions on the tender for plan. Still, has the SEC been cracking down on digital asset products in general, Yes, I would

say so. Ever since the new chair came in, Gary Gensler, he's been very aggressive in terms of tackling the cryptocurrency issues and digital asset issues. There has been a number of enforcement cases under his tenure against digital asset companies.

I would say it's it's a real effort on the SEC's part to expand their turf and to bring these digital assets under the umbrella of securities regulation and everything that goes with it in terms of disclosures and regulation of trading platforms and all of the surveillance and so forth. So yes, and that emphasis only got stronger in the wake of the FTX collapse and really brought that to the top of the SEC's agenda in terms of regulating

digital assets and cryptocurrencies. So the SEC has rejected several applications for ETF similar to this. If the court rules against the SEC here, will it have to reconsider those applications. Not necessarily because this case is going to be limited just a gray scale, but if the SEC loses, those other funds certainly may want to reapply to the SEC and get the benefit of any sort of favorable decision

on that. And it's an interesting point the SEC is making because the gray Scales almost their entire argument is that the SEC is treating their bitcoin fund differently than the exchange traded products that were approved, even though essentially in gray scale's view, they're economically very, very similar, and the SEC notes that, well, you know, in their view,

that's not the case. The SEC says that they've been very consistent in terms of rejecting exchange traded products that were based on bitcoin spot prices, just like here, though the SEC is arguing to the court the relevant comparison is not looking at futures based funds to spot based funds, but the relevant consideration is how did the SEC treat other spot funds, And they've rejected those applications too, So in the SEC's view, they are being consistent in the

way they're treating gray Scale because they've rejected gray Scale just like they've rejected other spot ETF types of funds for bitcoin. A lot of people interested in this decision, Thanks so much, Bob. That's Robert him of Tartar, Krinsky and Drogen. Special Counsel Jack Smith is moving aggressively in his investigation, subpoenaing former Vice President Mike Pence, former White House Chief of Staff Mark Meadows, and several of Trump's

attorneys to testify before the grand jury. Multiple news outlets are reporting that the special counsel is asking a judge to bypass the attorney client privilege claims made by Trump's attorney, Evan Corkran due to the crime fraud exception. Joining me is former federal prosecutor Robert Mints, a partner McCarter and English.

Trump's attorney, Evan Corkran had raised attorney client privilege claims, but the special counsel is asking the judge to bypass those claims of attorney client privilege by invoking the crime fraud exception. Explain what the crime fraud exception is. The attorney client privilege is a broad privilege that protects all communications between a client and an attorney, whether it's information that the client is giving to the attorney in or to seek legal advice or advice that the attorney is

giving to the client. But there is one exception to that that is often used by prosecutors, and that's something called the crime fraud exception. What that means is that there's an exception where there's reason to believe that the legal advice that the attorney is giving is being used

in furtherance of a crime. So, in other words, of a client and comes in and talks about something they did in the past, that would all be covered by the privilege, even though the prior conduct may constitute a crime. What you cannot do is close your conversations with your attorney going forward if you're talking about a prospective crime.

So if you're asking for advice from an attorney about conduct that may in and of itself be criminal and has not yet occurred, that is something that does not fall within the attorney client privilege, but is something called the crime fraud exception. What does it tell you that the special counsel is invoking that here? Does it tell you just that they suspect that a crime was committed,

or that they suspect the lawyer was involved in the crime. Well, in this case, mister Corkran was among at least three lawyers for a former President Trump who appeared before a grand jury in January as part of the investigation into classified documents discovered at former President's Trump Maralago's residence in Florida.

And during the course of that investigation, mister Corkran emerged as a figure of interest because federal investigators spoke to him about the fact that he handled mister Trump's response is the government's request to return those records that the government said belonged to the presidency and did not belong

to mister Trump personally. And in fact, there came a point in time where there was a statement that was signed by another attorney, not by mister Corkrane, where that attorney vouched for the fact that they had done a diligent search of Marilago and did not believe that they were any classified documents located at the former president's resident. Following that, we all know the federal government came in. The FBI came in and did a search of Marilago

and found additional classified documents. And still likely what they want to talk to mister Corkran about is what he did in terms of looking for those documents and whether or not his conversations with former President Trump in any way facilitated and obstruction of justice crime. Going forward, do prosecutors often invoke the crime fraud exception or is it unusual? The crime fraud excepts is not something that comes up all the time because judges are generally pretty wary of

piercing the attorney client privilege. It is such a bedrock concept in our protections and our civil rights in the way that individuals are able to talk to their attorneys and they have to be able to believe that all the conversations with their attorneys are protected in order to get fair legal advice. You can't be in a situation where a client is fearful that the information that he's giving he or she is giving to his attorney will

somehow be made public. On the other hand, where it's clear and organized crime cases are One example that I prosecuted and we did see this come up time and again, is where an outside council can be used not to give advice to a client about some prior conduct at defense against the potential criminal charge. It could be brought down the road, but lawyers have been used in order to help guide organized crime figures and other criminals in

terms of perpetrating crimes in the future. And that's where you see a piercing of the attorney client privilege based upon the crime product exception. So while it's unusual, it's certainly not unheard of. Since Jack Smith was appointed special counsel, does it seem as if his department is moving aggressively their subpoenaing former Vice President Mike Penson, former White House Chief of Staff Mark Meadows, And here you have they're

trying to get more information out of the lawyers. I wouldn't call it aggressive, but I would call it mindful of the fact that the presidential election is approaching, the presidential primaries are approaching, and there is a general rule in the Department of Justice that you do not want to return indictments so close in time to an election.

They could in some way impact that election. So while on the one hand, as the prosecutor and someone who's going to be careful and thorough, you want to make sure you're dinning while your eyes, you're crossing your keys. You want to take your time and build your case to make sure if you do seek an indictment from the grand jury, that it's a strong one and ultimately you're going to be able to convict when you get

to trial. On the other hand, in a sense, the special prosecutor is racing against the political clock, because clearly he does not want to be in a position where he's returning an indictment close in time to the primaries or close in time for the presidential election, such that there can be an argument that could be made that is in some way political interference with the outcome of

the election. As far as the subpoena of Mike Pants, let's talk first about what former President Trump is trying to do to block that subpoena, or at least to block specific issues he claims were covered by executive privilege. Former President Trump has repeatedly invoked the legal protection of executive privilege to try to block the testimony of his allies from subpoenas related to the January sixth attack on

the US capital. In this case, he has thought to block the testimony of former President Might Tense on the

basis that that is also covered by executive privilege. Executive privilege is a legal protection for the president of the United States that allows them to shield some of their private communications from Congress and the course, and basically, at its core, it is designed to allow presidential advisors to give candidate advice free from fear of public disclosure, to allow presidents to deliberate productively, to have all the information they may need in order to make a decision without

the fear that those discussions would someday become public. In this case, there's a question about whether the former president has a right to invoke executive privilege. That's something that has been tested by the courts, and in most instances

the courts have ruled against former President Trump. In addition, executive privilege is clearly not something that is absolute, and generally the courts have held that if the information that is being sought is in connective with a criminal investigation that overrides executive privilege, is it more for the current president than a prior president. The question of whether a former president can invoke executive privilege is still somewhat unsettled.

President Nixon tried to invoke executive privilege after he left office when prosecutors were seeking tapes in connection with the Watergate break, and in that case, we know Nixon lost the case. He had to turn over the tape, but the court was never entirely clear on the question of whether a former president could exercise executive privilege or not. So far, in the cases that have been tested by

former President Trump, he has not prevailed. In most cases, of course, never a looted on the fact that the information that was thought was done in connection with a criminal investigation, and that is something that the Supreme Court has always acknowledged will outweigh the protection of executive privilege. Mike Pence himself is not using an executive privilege argument. He's using the speech and debate clause. I think it's the first time it's been used by a vice president

in these kinds of circumstances. Explain what that's about. The speech or debate clause is designed as a safeguard against politically motivated civil litigation or criminal prosecutions that can kill congressional debate or arguably intimidate legislators. In this case, the former Vice president Pence is calling the subpoena by the Special Council unconstitutional, arguing that the executive branch cannot summon officials in the legislative branch into court or in any

other place. The facts here are that as Vice president, Vice President Pence with a member of the executive branch during the Trump administration, but also held a unique role as all vice presidents do, as also acting as President of the Senate, and he does preside over the joint session of Congress, in this case, the one that certified the twenty twenty electoral vogue count. The Vice president also acts in the legislative capacity by breaking ties in the Senate.

So the argument in support of his contention that the Special Council is not in pedal to subpoena him in connection with his role and certifying the twenty twenty election is that he was acting in the legislative capacity rather than an executive capacity when he was deciding whether or not he would certify those election results. Lindsay Graham used this to try to block a subpoena in Georgia. The subpoena was not blocked, but the judge said he could

raise objections during the testimony to specific things. Is that a ruling that Mike Pence might face? Sure? I mean this question of whether or not vice president draws the same speech or debate protections as members of Congress is largely unsettled. It's a murky area where frankly, there is

no clear outcome. On the other hand, I think it's clear that it will not act as a blanket or wholesale protection against Vice President Pence from having to appear before the grand jury and answer any questions at all.

As you point out, when Lindsey Graham tried to raise the question of speech or debate clause, which frankly is arguably a stronger argument than the one being raised by Vice President Pence, the Eleventh Circuit Court of Appeals said that he had to appear in front of that grand jury. They compel them to testify, and they said so long as investigators steer their questions away from anything involving his legislative responsibilities, they were entitled to make him appear before

the grand jury and answer questions. I think in this case, at the end of the day, Vice President Pence will also be required to answer questions about some of the act vities. Exactly the scope of the speech or debate cosse protection is unclear, but it will likely not act as a blanket protection that will bar the special prosecutor for asking him any questions whatsoever in connection with the

certification of the twenty twenty election. Thanks Bob. That's Robert Mints of McCarter and English, and that's it for this edition of The Bloomberg Law Show. Remember you can always get the latest legal news on our Bloomberg Law Podcast. You can find them on Apple Podcasts, Spotify, and at www dot bloomberg dot com slash podcast Slash Law, and remember to tune in to The Bloomberg Law Show every weeknight at ten pm Wall Street Time. I'm Junie Grossow, and you're listening to Bloomberg