SEC sues Binance, key points from the lawsuit documents.

On the evening of June 5th Beijing time, Binance Holdings Limited (hereinafter referred to as "Binance"), a cryptocurrency trading platform, and its CEO Zhao Changpeng (hereinafter referred to as "CZ"), were sued by the US Securities and Exchange Commission (hereinafter referred to as "SEC" or "Commission") for allegedly violating securities trading rules. This is the second time that Binance and its CEO CZ have been sued by US regulators, following a lawsuit filed by the US Commodity Futures Trading Commission (CFTC) on March 28th for alleged violations of trading and derivatives rules, which caused significant fluctuations in the cryptocurrency market.

SEC accuses Binance Holdings Limited, BAM Trading Services Inc. (referred to as "BAM Trading"), BAM Management USA LLC (referred to as "BAM Management") and CZ of violating federal securities laws and disregarding investor protection. The defendants are accused of illegally promoting cryptographic asset securities to US investors and issuing and selling cryptographic asset securities and other investment plans multiple times on the unregistered online trading platforms at Binance.com and Binance.US. The defendants are said to have made billions of dollars in profits through this method, while putting investors' assets at significant risk.

Following is the file Summary:

This case originated from the defendant Binance Holdings Limited and others blatantly disregarding the Federal Securities Law and the protections it provides to investors and the market. During this time, the defendant illegally misappropriated investor assets and earned billions of dollars, putting investor assets at significant risk.

The defendant illegally induced American investors to buy and trade securities of encrypted assets through unregistered trading platforms on Binance.com and Binance.US. The defendant participated in multiple unregistered offers and sales of encrypted asset securities and other investment plans. Defendants BAM Trading and BAM Management deceived equity, retail, and institutional investors by claiming that they monitored and controlled manipulative trading on the Binance.US platform, when in fact such regulation and control were almost non-existent.

First of all, under the leadership and control of CZ, Binance and BAM trading provided three basic securities market functions - trading platform, securities dealer and clearing agency (illegally) on the Binance platform, but did not register with the SEC. The defendant clearly realized that US law requires registration of these functions, but chose not to register, so they could evade key regulation aimed at protecting investors and the market.

Secondly, Binance and BAM are illegally engaged in unregistered trading, offering and selling of cryptographic asset securities, including Binance's own cryptographic assets "BNB" and "BUSD", as well as Binance's "BNB Vault" and "Simple Earn" functions, and the so-called "staking" investment plan offered on the Binance.US platform. In doing so, they deprive investors of substantive information, including risks and trends affecting the enterprise, and investment in these securities.

Thirdly, BAM Trading and BAM Management lied to investors about their supposed control measures over the Binance.US platform, while raising approximately $200 million from private investors of BAM Management and obtaining control over billions of dollars in trading volume from investors (including retail and institutional investors) seeking to trade on the Binance.US platform.

Starting around 2018, under CZ's control, the defendant was determined to evade the registration requirements of federal securities laws, and designed and implemented a multi-step plan to secretly evade US laws. As Binance CCO admitted, "We never want Binance.com to be regulated."

As part of the plan to evade US regulation of CZ, Binance, and the Binance website, CZ and Binance established BAM Management and BAM Trading in the US, publicly claiming that these entities independently control the operation of the Binance.US platform. However, behind the scenes, CZ and Binance are closely involved in guiding BAM Trading's business operations in the US and providing and maintaining cryptocurrency asset services for the Binance.US platform. BAM Trading employees refer to CZ and Binance's control over BAM Trading's operations as a "shackle," which often hinders their understanding and freedom to conduct business on the Binance.US platform. By November 2020, the former CEO of BAM Trading told Binance's CFO that her "entire team feels like they've been made into puppets."

As part of CZ and Binance's plan to protect themselves from US regulation, they have been publicly claiming that the Binance website does not serve Americans, while secretly working to ensure that the most valuable US customers continue to trade on the platform. When Binance.US was launched in 2019, Binance announced that it was implementing controls to prevent US customers from trading on the Binance website. However, in fact, Binance did the opposite. CZ instructed Binance to assist certain high-net-worth US customers in circumventing these controls, and all of this was done in secret, because as CZ himself admitted, Binance did not want to "take responsibility" for these actions. As Binance's chief compliance officer explained, "we cannot be seen as having US users on the surface, but in fact, we should attract them through other creative means." In fact, CZ's "goal" was to "reduce our own losses while keeping US regulators from causing us trouble."

The defendant intentionally evaded the efforts of US regulators while providing securities-related services to US clients, placing billions of dollars of US investor funds under the control of Binance and CZ, and facing risks. Without regulatory supervision, the defendant can freely transfer investors' cryptocurrency and fiat currency assets, sometimes using mixed and transfer methods that compliant registered brokers, dealers, exchanges, and settlement institutions cannot perform. For example, through accounts owned and controlled by CZ and Binance, billions of dollars in customer funds from two Binance platforms were mixed and stored in an account controlled by an entity (named Merit Peak Limited) controlled by CZ, and these funds were subsequently traded with third parties, clearly related to the purchase and sale of cryptocurrency assets.

In addition, the defendant understands the importance of implementing transaction monitoring and control on cryptocurrency trading platforms for cryptocurrency investors. CZ himself stated in 2019: "Reputation is the most important asset of any exchange! If an exchange falsifies its trading volume, would you trust them to safeguard your funds?"

The defendant BAM Trading Corporation and BAM Management Corporation claimed that they have implemented monitoring and control measures to prevent manipulative trading on the Binance.US platform.

However, the defendant did not implement the trade monitoring or manipulation controls that BAM Trading Services Inc. and BAM Management LLC promoted to investors on the Binance.US platform. Therefore, the defendant failed to meet the basic requirements of a registered exchange - to establish rules aimed at preventing fraudulent and manipulative behavior and to have the ability to fulfill this purpose. The so-called controls were almost non-existent, and the actual controls that existed were not monitored or prevented "money laundering transactions" or insider trading, which were occurring on the Binance.US platform. It is worth noting that at least from September 2019 to June 2022, Sigma Chain AG, a trading company owned and controlled by CZ, engaged in artificial trading to artificially increase the trading volume of cryptocurrency securities on the Binance.US platform.

The Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934, partly to regulate the issuance and sale of securities and the national securities market through registration and accompanying disclosure, recordkeeping, inspection, and conflict-of-interest mitigation requirements. Binance and BAM Trading Companies - both controlled by CZ - have engaged and continue to engage in the unregistered offering and sale of digital asset securities, and the unregistered trading of digital asset securities on the Binance platform, combining core securities market functions, intentionally evading registration, and operating in the presence of obvious conflicts of interest. By doing so, they have circumvented the disclosure and other requirements established by Congress and the SEC over decades to protect our capital markets and investors, repeatedly violating US law.

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