MOTION for Order Directing Counsel for Plaintiff to Comply with Applicable Rules of Conduct by BAM MANAGEMENT US HOLDINGS INC., BAM TRADING SERVICES INC.. (Attachments: # (1) Declaration of Adam J. Fee, # (2) Exhibit 1 - Transcript, # (3) Exhibit 2 - SEC Press Release, # (4) Text of Proposed Order)(Canellos, George)
Page 1 Exhibit Page 2
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
Securities Exchange
Commission,
)
) Civil Action
) No. 23-cv-Plaintiff,
)
) Hearing for Temporary
vs.
) Restraining Order
)
Binance Holdings Limited,
) Washington, DC
et al.,
) June 13, ) Time: 2:00 p.m.
Defendants. )
___________________________________________________________
TRANSCRIPT OF HEARING FOR TEMPORARY RESTRAINING ORDER
HELD BEFORE
THE HONORABLE JUDGE AMY BERMAN JACKSON
UNITED STATES DISTRICT JUDGE
____________________________________________________________
A P P E A R A N C E S
For Plaintiff:
Jorge G. Tenreiro
John Emmett Murphy
Securities and Exchange Commission
100 Pearl Street
New York, NY
Matthew Scarlato
Jennifer Farer
David Nasse
Securities and Exchange Commission
100 F Street, NE
Washington, DC
For Defendant:
Binance
Daniel Nelson
Jason Mendro
Richard Grime
Kendall Day
Stephanie Brooker
Gibson, Dunn & Crutcher, LLP
1050 Connecticut Avenue, NW, Suite Washington, DC 20036Page 3
For Defendant
Binance
Mary Beth Maloney
Gibson, Dunn & Crutcher, LLP
200 Park Avenue
New York, NY Michael Celio
Gibson, Dunn & Crutcher, LLP
1881 Page Mill Road
Palo Alto, CA
BAM Entities
Matthew Martens
Matthew Beville
Wilmer, Cutler, Pickering, Hale and Dorr
2100 Pennsylvania Avenue, NW
Washington, DC
Adam Fee
Milbank, LLP
1850 K Street, NW, Suite Washington, DC
Changpeng Zhao
Abid R. Qureshi
Michael Bern
William Baker, III
Douglas Yatter
Melanie Blunschi
Latham & Watkins, LLP
555 11th Street, NW, Suite Washington, DC
____________________________________________________________
Court Reporter:
Janice E. Dickman, RMR, CRR, CRC
Official Court Reporter
United States Courthouse, Room 333 Constitution Avenue, NW
Washington, DC 202-354-3267Page 4
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*P R O C E E D I N G S*
THE COURTROOM DEPUTY:
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Good afternoon, Your Honor.
This afternoon we have civil action No. 23-1599, the SEC versus
Management U.S. Holdings, Inc., and Changpeng Zhao.
Will one of the attorneys representing the SEC please
approach the lectern, identify himself and his colleagues for
the record.
MR. SCARLATO:
Good afternoon.
This is Matt Scarlato
on behalf of the SEC.
I have with me, on the right, Jen Farer,
Jorge Tenreiro, Emmett Murphy, and David Nasse on the left.
THE COURT:
All right.
THE COURTROOM DEPUTY:
MR. NELSON:
Good afternoon.
Counsel for Binance.
Good afternoon, Your Honor.
Dan Nelson
from Gibson, Dunn on behalf of Binance Holding, Limited.
me are my colleagues Michael Celio, Mary Beth Maloney, Jason
Mendro, Stephanie Brooker, Kendall Day, and Richard Grime.
THE COURT:
All right.
MR. NELSON:
THE COURTROOM DEPUTY:
MR. MERTENS:
With
Good afternoon, everybody.
Thank you, Your Honor.
Counsel for the BAM parties.
Good afternoon, Your Honor.
Mertens for the BAM entities.
Beville.
Matthew
I'm joined by my colleague Matt
And from the Milbank law firm, Adam Fee.
THE COURT:
All right.
THE COURTROOM DEPUTY:
Good afternoon.
Mr. Qureshi, representing thePage 5
individually named defendant Mr. Zhao.
MR. QURESHI:
Good afternoon, Your Honor.
Abid R.
Qureshi, of Latham & Watkins on behalf of the individual
defendant.
and Ms. Melanie Blunschi, also of Latham.
With me are Mr. Yatter, also of Latham & Watkins,
THE COURT:
All right.
Good afternoon, everyone.
Is
that everyone?
I take it there's lots more lawyers sitting in
the back representing all of these people.
all consider, before you leave the courthouse, filling out the
And I hope you'll
form agreeing to accept CJA assignments.
Apparently there are a lot of them who have a lot of time on
their hands here in the District of Columbia.
if any of you speak Spanish, because we need some people like
that to take on even just mediations on behalf of indigent
defendants, which apparently these defendants are not.
All right.
We need lawyers.
And please note
We're here on the government's motion for
a TRO.
written as if it was for opposing counsel, as opposed to a
neutral who has not been living with these entities and assets
on a day-to-day basis for the past few years.
technical terminology that takes a lot of time to unpack, as
they say in the business space, along with parades of acronyms
which I've devoted considerable time to reviewing and
absorbing.
The memorandum, I have to say, at some points was
There's a lot of
But I do have some basic questions that I want toPage 6
ask, just to make sure I know exactly what is and what is not
being alleged and exactly what the government's position is
with respect to these assets and these companies.
However, before I get into that -- I was planning to
do this later, but this seems like the appropriate time -- I do
want to note that you've given me, the government, 1,000 pages
of exhibits, and the defendants have filed more than 3,000,
some of them late.
of the legal and factual allegations, I think everyone in the
room can agree that it's important to get this issue of first
impression right.
going to give me enough time to get to the bottom of everything
that you've given me with the level of understanding that you
all deserve.
Putting aside who is right about the merits
And even holding a hearing in 14 days isn't
And it appeared to me last night, when I got the
defense submission, was largely about the fact that you thought
there was some sort of consent decree that could be entered,
that the parties weren't really that far apart in terms of how
to preserve the assets of the U.S. investors and the U.S.
entities pending the outcome of these proceedings, and if an
order could be entered with the parties' agreement, that would
actually give us time to give this complicated factual and
legal matter the attention it deserves.
So I ordered the government to give me a red line,
what exactly is missing from what they've proposed?
I wantedPage 7
to kind of strip away the grand statements by each side about
what was and wasn't a good proposal and I want to get into the
nitty-gritty.
across the red line that initially was a little intimidating,
the more I looked at it, the more I thought that, really,
there's not that much difference between the parties anymore.
The SEC seems to understand that BAM Trading needs to operate
in the ordinary course of business pending the outcome of this
proceeding, not only for itself, but shutting it down
And while there was sort of a spray of red
completely would create significant consequences not only for
the company, but for the digital asset market in general.
What's left to negotiate is the kind of nitty-gritty
and the kind of details, the wallets, and the shards that are
of importance to and understood much better by those who are
knowledgeable and immersed in these matters.
to me, notwithstanding the fact that I think I'm a pretty smart
person, I do a pretty good job up here, that there's a lot of
reasons why it would be far better for people like you, as
opposed to a generalist like me, to get this consent decree
over the finish line and you have the opportunity to be
operating under an agreement that you all crafted, as opposed
to the one that I come up with, and which would ultimately then
be appealable by whichever side is disappointed, taking even
more time and attention away from getting to the merits.
And so it seems
So, in some cases, when you have this many lawyersPage 8
working on something, there's kind of a Department of State and
a Department of Defense and you've got the people that are
doing the diplomacy and the people that are getting ready for
battle.
benefit to excusing some of you, the Department of State, to
now discuss the red line that you have, that all of the
disputes have now been limited to, a couple pages, or whether
you still want the afternoon and the evening to think about it,
at which time I could, if you thought it was -- would be of
And if that is the case here, and there would be some
benefit, send you to Magistrate Judge Faruqui to try to finish
the process.
But does it make sense to just go ahead with all my
questions and answers with all of you present right now, or
would some of you like the opportunity to confer?
(Pause.)
MR. SCARLATO:
THE COURT:
MR. SCARLATO:
Your Honor?
Yes.
Matt Scarlato.
Good afternoon.
Your
points are well taken.
And so if you can give us a minute's
indulgence to speak with the other side, we'll have an answer
for you shortly.
THE COURT:
MR. SCARLATO:
THE COURT:
All right.
Thank you, Your Honor.
I'll be happy to give you all the time
you need to cross the middle of the courtroom and put yourPage 9
heads together.
room?
No?
Would it be easier for you all if I left the
It looks like you're fine.
(Pause.)
MR. SCARLATO:
That was fast, Your Honor.
No, we
cannot come to an agreement right now.
THE COURT:
Shocker.
Okay.
All right.
What I'm
going to do then is go ahead with the questions that I have.
But, one of the questions I will be asking all of you is
whether you would agree to participate with Judge Faruqui as
early as he can see you to try to discuss the consent decree.
In the meantime, I'm going to have the TRO and everything you
tell me today under advisement.
But, there's a lot of reasons, in addition to the
ones I've listed, why the best agreement would be one that you
all draft.
you can be prepared for it.
All right.
Then are you the one answering the
questions with respect to the motion?
So I'm not going to ask you that question now, but
MR. SCARLATO:
Depends on the question, Your Honor,
but probably.
THE COURT:
Okay.
Well, that will be fun.
All
right.
The memorandum says, at multiple points, including on
pages 16 and 19, that the defendant, particularly the U.S.
entity BAM Trading offers the ability to buy and sell, quote,
crypto assets, including crypto asset securities.
That's yourPage 10
formulation.
At various points in the memorandum you refer to
"crypto assets," but in others you use the term "crypto asset
securities."
I am aware of your legal argument about what made a
particular offer, the Binance coin -- which you also refer to
BNB -- a security for purposes of the act.
is, is that the same as the BUSD, or is it different?
MR. SCARLATO:
THE COURT:
My first question
Different coin, Your Honor.
Okay.
All right.
And we'll get to that
in a minute, but it would help me if, first, you would walk me
through what differentiates crypto assets from crypto asset
securities, and then I'm going to ask you to tell me which
assets in particular referred to in the memo and in the
complaint, other than the Binance coin, are the securities that
are the predicate for your complaint.
MR. SCARLATO:
THE COURT:
For our complaint, Your Honor?
Yes.
The only one mentioned, are we in
agreement, in the TRO is the Binance coin, is that correct.
MR. SCARLATO:
It's correct.
We also rely on other
cases where judges have found other coins in other cases to be
securities.
THE COURT:
All right.
And so the notion as to
whether these are securities or not, are you saying this has
been -- this is not a case of first impression here, that this
has been dealt with before?Page 11
MR. SCARLATO:
Other courts have dealt with the
question in other -- not as to, at least, the coins at issue in
the TRO, which is Binance's coins, but in other cases, yes,
there have been judicial opinions on whether they meet what's
called the Howey test, Your Honor.
THE COURT:
Okay.
I understand that.
But before we
get into -- so my point is, the only one you're arguing in
the -- in your TRO motion of the defendants' is the Binance
coin?
You're saying that is a security.
MR. SCARLATO:
THE COURT:
That's correct.
All right.
But when you talk generally
about the companies and their businesses, you say they deal
both in crypto assets and crypto asset securities.
complaint allege any other specific coins are securities,
besides the BNB or the Binance coin?
MR. SCARLATO:
THE COURT:
MR. SCARLATO:
Does the
Yes, it does, Your Honor.
Which ones are they?
That would be in our complaint, Your
Honor, starting on paragraphs -- in the 300s, page 85, section
8, we give an explanation of the different coins that were
trading on the defendants' platforms.
it's our position we only need to prove one of these coins is a
security to prove our case, you know, we thought it proper to
allege that there were other coins that we see trading on these
platforms that should also be deemed securities.
And, you know, whilePage 12
THE COURT:
All right.
MR. SCARLATO:
THE COURT:
And --
Go ahead.
When you use the formulation crypto asset
versus crypto asset securities, can you tell me, what are the
differentiating factors?
MR. SCARLATO:
THE COURT:
Whether they meet the Howey test.
That's it?
The Howey test for each
one --
MR. SCARLATO:
THE COURT:
MR. SCARLATO:
Yes.
-- in -I'm sorry, Your Honor.
Yes, that's
how a security is defined, and we give 14 specific
representatives.
Honor.
gave a bunch that we thought satisfied that test and reserve
our right in discovery to, you know, conform our complaint to
the pleadings or whatever is necessary before trial.
Our complaint, we feel like, was long enough, so we
THE COURT:
All right.
Are the other crypto assets
that you're not labeling as securities, commodities?
We're not saying that's exclusive, Your
MR. SCARLATO:
The other -- that aren't alleged in
our complaint, Your Honor?
THE COURT:
The others that you say they're trading
in that you're not saying are securities, because you're not
saying all of the ones they're trading in are securities,
correct?Page 13
MR. SCARLATO:
We -- at this time, Your Honor, we're
reserving our rights, just given we're at the pleading stage we
have to get into discovery where we can make a full assessment.
But our position, Your Honor, is that if one of these coins are
a security, we've won.
THE COURT:
MR. SCARLATO:
THE COURT:
I heard that.
Okay.
But you have said all over the complaint
crypto assets -- and you differentiate that specifically from
crypto asset securities, and you make it clear that one
category is larger than the other category and that both
categories are on the Binance.com platform and the Binance.US
platform, correct?
MR. SCARLATO:
THE COURT:
Yes.
So I'm asking you, the ones that you are
not putting in the securities category, what are they?
they commodities?
MR. SCARLATO:
Are
We are not -- thank you, Your Honor.
We are not taking a position at this time.
We're at the
pleading stage.
potential motion to dismiss and satisfying our burden under the
rules.
So we have, we think, way more than is required under
Rule 8.
We gave the Court and the parties notice as to -- I
think the number is 14 total coins, including BNB, which is at
issue in the TRO.
We are trying to get past, you know, anyPage 14
THE COURT:
All right.
If the Binance coin is the
only security that you're relying on right now for purposes of
the TRO and the facts that you rely upon when you describe to
me why it meets the test are from the time of the initial
offering, how does that -- how does that make it a security
now, such that BAM Trading, which was created later, didn't
even exist at the time of the ICO, how does it make it a dealer
in these securities?
MR. SCARLATO:
And, Your Honor, I want to see if my
colleague wants to -- do you mind if I defer to my colleague,
Mr. Murphy, on this?
THE COURT:
No.
Go ahead.
I don't want two of you
answering the same question, but two of you can answer
different questions.
MR. MURPHY:
So, sorry, Your Honor, let me just
restate -- oh, Emmett Murphy, from the SEC.
So let me just restate, so I understand.
The
question is, why is -- why are facts back from 2017 relevant to
whether BNB is a security when BAM Trading as a platform hadn't
opened by 2017?
THE COURT:
Yes.
There's an argument made in their
opposition that when you describe it as a security, the facts
you're relying upon are the fact that it was offered at the
time when they were saying we're going to use these funds to
set up this platform, et cetera, et cetera, and you talk aboutPage 15
the enterprises being created and you -- all your facts relate
to the 2017 offering.
didn't exist at the time of the offering and now these coins
have been around since then.
security?
And they have pointed out that they
So, how does it make it a
Why is it still a security now?
MR. MURPHY:
Yeah, Your Honor, so I was reading that
last night and I was confused because I thought at one point
they were making an argument about statute of limitations for a
Section 5 offering under the Securities Act, which they can
raise as a defense.
facie case.
Howey looks at the economic substance of the instrument at
issue.
I don't think that undermines our prima
But if the question is:
Why is it a security?
And here, those statements back in 2017 are
unfiltered statements about what the economic reality is of
these crypto assets.
were investments where they were seeking money for investors to
grow the enterprise.
no longer an investment contract because -- and they have a
bunch of different things in their papers -- because it's
become adequately decentralized or somehow has changed its
nature --
THE COURT:
They were absolutely candid that these
If their argument is that it somehow is
I guess the point is, when you did the
offering, people could buy them.
And since then they've been
on the platforms and people could trade them, sell them,Page 16
repurchase them.
the initial offering, they're responding to that asset.
one of those, I don't want one of those.
is it a security, as opposed to, like, another coin?
At that point the people aren't responding to
MR. MURPHY:
I want
So at that point, why
I guess I would just say that there are
secondary trading markets for all kinds of securities.
And if
the idea that once it goes into the secondary trading market it
doesn't become a security, that would destroy all kinds of
understandings of how the securities markets work.
The
statements that they made, again, go to the raw economic
reality of these people buy them so that their value will be
appreciated.
The Binance enterprise -- and you know in our papers
that we don't think there's such a clear distinction between
.com and BAM and the platforms.
both.
set out in our papers that this is an ongoing enterprise, there
are ties to the BNB, their prestige is tied to the BNB, they
will support the price; you will make money if you buy BNB.
And that is continuous from that ICO to the present day.
Right?
Binance is running
But they're clear in statement after statement that we
THE COURT:
Isn't that the flip side of what you say
a security is?
You're saying that they're saying it's tied to
them, as opposed to they're tied -- the success of the coin is
based on the success of the platform, and you just turned that
the other way, I think.Page 17
MR. MURPHY:
I don't know, Your Honor.
I think
they've tied their fate to BNB in many ways, which goes to the
commonality element of Howey, where folks are looking at the
efforts of others.
statements in their papers to the effect of Binance has nothing
to do with BNB anymore, BNB is a baby that's been born and we
have nothing to do with it and it will be fine without Binance.
And I think the facts that we put into our papers are very
clear that that's not the case, that they've -- on their web
And the question might be, there's
page and their blog, they are constantly monitoring the price,
talking about how it's a valuable asset, giving you additional
uses for the asset, and making clear to the investing public
that they are invested in it, they are going to continue to
create ways to make money on BNB.
THE COURT:
All right.
What is your response to the
argument that the coin can't be a security contract for
purposes of the Howey case if there's no contract?
MR. MURPHY:
I would respond by pointing to the
language in Howey itself which says, essentially, that
investment contract was meant to be a catchall term for all the
different ways that people solicit capital to get other
people's money on the promise of profits.
Howey -- if I could just look, so I don't -- Howey says that an
investment contract can cover schemes or contracts.
think that language is clear.
And the language in
And I
And if you look at -- this isPage 18
on, sorry, 298 and -99 in Howey.
Howey defined the investment contract as a contract
transaction or scheme.
If you look at the Telegram case that
we cited in our papers, there you had initial purchasers who
had contracts and the later public where it was distributed
very quickly.
substance of that, where there had clearly been an attempt made
to insulate themselves from the securities laws by saying we
had these initial sophisticated purchasers, they're exempt from
And the Court looked through the economic
the securities laws, they're very sophisticated, and whatever
happens after that we have no control of.
The Court in Telegram looked through that and said,
no, it's all part of the same offering.
broader public, that's the only reason it has its value.
was no contract with that broader public and yet the Court
still found a Section 5 offering there.
THE COURT:
Okay.
You are selling to a
There
I want to talk about the
misrepresentations, which is section 6 of your statement of
facts.
I don't know if that's your issue.
MR. MURPHY:
THE COURT:
MR. MURPHY:
We're going to tag team, if you'd allow.
All right.
Sorry, I don't want to walk off with
Mr. Scarlato's papers here.
THE COURT:
All right.
That section alleges
misrepresentations by the U.S. BAM entities regarding tradePage 19
surveillance and trade volume, and it expresses skepticism
about whether these organizations are really truly monitoring
for market manipulation or whether they have procedures to
control it, and you point to the wash trades.
the actionable misrepresentation?
pitch deck that they hired vendors and got the reporting
software to provide trade surveillance and market manipulation
monitoring?
MR. SCARLATO:
Close.
What exactly is
Is it the statement in the
It's basically -- it's not the
wash trading itself, Your Honor.
we use it as evidence that -- of the misreps that you
identified.
misrepresentation in the pitch deck, which are to the equity
investors that we allege.
misrepresentations.
had surveillance on the platform, which is, Your Honor, typical
of any registered platform.
didn't have any surveillance and wasn't required to.
We don't charge that conduct,
And just to put them in boxes, you first have
THE COURT:
And you have two sets of
You have one, first, that they said they
This one was not registered, so it
The sentence, I think you put it in your
statement of facts, you said the platform is engaged in
monitoring for manipulation.
statements?
Or you just said --
MR. SCARLATO:
THE COURT:
Is that one of the false
Correct --
-- that they represented that, but you
didn't say where they said it, so I wasn't --Page 20
MR. SCARLATO:
If that's the case, Your Honor, we
apologize.
given to equity investors, Exhibit A-53.
But it's a citation to the pitch deck, which was
THE COURT:
Right.
Is there anything else?
The
statement in the pitch deck was we hired vendors and got
third-party software to provide trade surveillance and
monitoring.
MR. SCARLATO:
THE COURT:
That's right.
Okay.
That's the false statement.
Is
there any other false statement?
MR. SCARLATO:
In the category of surveillance
there's another false statement where the former CEO, Catherine
Coley, made a public statement -- I don't have it in front of
me, but it's something about how we don't allow toxic behavior
on the exchange, which, again, this was in, I think, 2019, and
that statement was also false because at that time, in effect,
it wasn't until 2022 that BAM Trading put any trade
surveillance on the platform.
So that's one box.
And it has two subparts, equity
investors and then just the retail public who is listening to
the CEO talk about the platform.
The second box, if Your Honor is ready, has to do
with the volume reporting itself.
And here we -- you know,
this is a trading platform, the way that it solicits customers
is it says we have a lot of volume, come trade with us, right?Page 21
So throughout the relevant period BAM Trading made a bunch of
representations on Twitter, through data aggregators and
elsewhere that said our trading volume is X.
fraud was, is they did not explain that X meant we weren't even
checking for any wash trade.
point comes in, where they were actually conducting wash
trading, which was inflating the volumes.
And what the
And that's where the Sigma Chain
The final piece in that category, Your Honor, is
again back to the pitch deck, because the pitch deck itself
that was shared with investors who invested in BAM also made
representations about trading volumes.
other accompanying documents we did not include in the TRO
papers for simplicity sake, but there were other
representations made to these investors about the volume on the
platform.
by wash trading and the lack of surveillance.
And then there was some
And again, the fraud is these volumes were inflated
THE COURT:
All right.
What's your response to the
defense argument that the volume was minimal compared to the
overall volume and it couldn't have really been material or
affected anybody?
MR. SCARLATO:
Then I would refer defense counsel to
Mr. Zhao's own statement on Twitter that we cite, I think both
in our brief and the complaint, where he acknowledges that
investors want to know if they're trading on a platform that is
corrupted by wash trading or lacked surveillance.Page 22
And then in addition, Your Honor, as to the equity
investors --
THE COURT:
I think the statements you quoted were
much broader than that.
I don't remember -- he made a specific statement about wash
trades that you --
MR. SCARLATO:
It was like credibility is important.
I believe it does mention wash
trading.
I have to pull it up.
Honor, I'll just say that we also, in the Steele declaration,
give -- Mr. Steele attests to an interview we had with one of
the equity investors who told us that when he was investing in
BAM Trading -- or, BAM Management, excuse me, he wanted to know
if this volume was inflated and if they had trade surveillance.
And that was -- so that was the materiality point from a
different perspective.
THE COURT:
But while I'm doing that, Your
And so is he saying he relied on that
when he made his decision to buy?
MR. SCARLATO:
He said it would have been important
for him to know.
He didn't know it at the time, right?
He was
defrauded.
situation, he -- you know, I can refer you to the paragraph in
the Steele declaration, if you'd like.
But when we interviewed post hoc and told him the
But if I can first refer to Mr. Zhao's comment?
THE COURT:
MR. SCARLATO:
Sure.
He said, "Credibility is the mostPage 23
important asset for any exchange.
volumes" -- and that's how you fake your volumes, through wash
trades.
THE COURT:
All right.
If an exchange fakes their
So let's go back to the
statement in the pitch deck that they hired vendors and got
third-party software to provide trade surveillance and market
monitoring.
just that they -- those things weren't actually doing what they
were supposed to do?
Are you alleging that they did not do that, or
Was the statement literally false or did
it just give rise to an impression of more oversight than there
was?
You don't actually say that.
MR. SCARLATO:
So the full facts are that they had
hired a trade surveillance monitor, but they had done nothing
with it at the time that these statements were made.
are that it wasn't until after the -- what was called the seed
funding ground was completed, they finally started ramping up
the actual surveillance of the platform.
after these statements were made.
the time the statements were made and at that time they had
nothing, frankly.
implemented in any way.
The facts
But that was well
And so, again, it matters at
They had a contract, but it wasn't
THE COURT:
Are there -- putting aside the ones
described in section 6, are there other alleged
misrepresentations that you maintain were in violation of the
Act?Page 24
MR. SCARLATO:
THE COURT:
All with respect to trade volume and
trade surveillance on the U.S. BAM platform.
MR. SCARLATO:
THE COURT:
Those two categories with retail and
equity investors are it.
That's exactly right.
Are there any other misrepresentations
that you're alleging?
MR. SCARLATO:
Oh, Your Honor, I forgot to mention
that the terms of use for BAM Trading and the terms of use,
which is what anyone who joined the platform has to sign up
for, they have a section on manipulative trading, and we allege
that, and I believe prove in our TRO papers, that when people
were signing up for the platform, they were defrauded by
believing that BAM prohibited manipulative trading, when in
fact its own control person, Mr. Zhao, was doing exactly that.
THE COURT:
But the answer -- but that's
sort of part of the same thing, right, the --
All right.
MR. SCARLATO:
Correct, yeah.
I just forgot a layer
to it.
THE COURT:
All right.
So I read that section.
Are
there any other misrepresentations that you're talking about
besides that set?
MR. SCARLATO:
Not at this time.
THE COURT:
relates to failure to register.
So every other claim in the case then
Am I correct about that?Page 25
MR. SCARLATO:
Failure to register, the exchange, the
clearing agency, the broker-dealer, and then the section
claims, which are the office --
THE COURT:
MR. SCARLATO:
THE COURT:
MR. SCARLATO:
Control person.
Excuse me?
The control person.
No.
I'm sorry.
The section
Securities Act, which is registering the office in sales.
that we allege they were selling BNB, BUSD, and then they're
providing a service or offering sales that needed to be
registered and were not.
THE COURT:
MR. SCARLATO:
THE COURT:
So
All right.
Did I confuse you?
When you go through -- I'm going to go
through all the failure to register claims with you to make
sure I understand them.
MR. SCARLATO:
THE COURT:
Sure.
You're kind of swallowing your words and
I still don't know what you said at the end of the last
sentence, the sentence that you keep saying failure to
register.
failure to register as an exchange, and failure to register --
what's the term?
Besides failure to register as a broker-dealer,
As the trading --
MR. SCARLATO:
THE COURT:
Clearing agency.
Clearing agency.Page 26
MR. SCARLATO:
THE COURT:
There you go.
Okay.
Those were the three.
And different
entities are alleged to be one or the other, and fail to
register as one or the other.
ones you're alleging are or aren't those things, and fail to
register.
talking about?
But is there some other failure to register you're
MR. SCARLATO:
clear.
I'm going to go through which
Yes.
And I apologize if I wasn't
So there are the offers and sales of the securities
themselves.
about the IPO -- ICO, excuse me, of BNB.
been registered; it was not.
includes to the employees, and then we also allege BUSD -- it's
not in the TRO papers, Your Honor, but in the complaint we also
allege that the offer and sale of BUSD should have been
registered under Securities Act section 5.
For example, you talked earlier with my colleague
THE COURT:
Okay.
MR. SCARLATO:
THE COURT:
Subsequent sales of BNB, which
I think that is more in the
complaint than in the --
So that should have
Correct.
-- in the TRO memo, which is what I'm
really focused on at this point.
Is it an element of the claims, the failure to
register claims, that the individual or organization knew of
the registration obligation, failed to register, or is knowing
and willful not an element of that violation?Page 27
MR. SCARLATO:
THE COURT:
Not an element at all.
And a big theme of the submission, an
important aspect of your concerns is the potential conflicts
arising from the overlapping ownership and relationships
between the various defendants and the multiple functions that
they perform; in particular, the international company and then
the U.S. companies.
specifically allege that those conflicts or functions violate
the Act.
But the memo in support of the TRO doesn't
And if the companies were registered, would there be
regulations that would be violated by these relationships?
MR. SCARLATO:
Your Honor is exactly on point.
We
point out those conflicts of interest to show you why they
should have been registered, because the failure to register
creates the conflicts of interests that things like wash
trading and commingling result in without supervision or
regulation.
violated.
But those themselves are not the laws that are
THE COURT:
You say the failure to register created
the conflicts of interest.
MR. SCARLATO:
THE COURT:
MR. SCARLATO:
THE COURT:
So --
Permitted.
Permitted.
Permitted.
So if they were registered, then these
would not be violations of the Act, but they would be
regulatory violations of a registered entity?Page 28
MR. SCARLATO:
Like, if the exchange were registered,
there would be safeguards in place to make sure there was trade
surveillance so that Mr. Zhao could not wash trade on the
platform.
THE COURT:
And disclosure obligations, I take it,
also?
MR. SCARLATO:
Many.
And including the custody of
assets, which is why we're here today, right, Your Honor.
THE COURT:
Now, the SEC has obviously been aware of
the nature of Binance's business and the business of the U.S.
affiliates for some time.
they told Binance they couldn't operate in the U.S., which is
what led to the creation of the U.S. entities.
prompted the need to seek emergency relief?
MR. SCARLATO:
They got involved back in 2019 when
Right.
So what
So, Your Honor, it is true we
have been investigating the entities for several years.
And
obviously they were -- we were aware that they were operating,
but as I'm sure Your Honor can understand, that, you know,
government investigations take time.
been engaged with the parties to ensure that, you know, just
that the investigation went as planned.
process, we followed it, and there came a time that we, as well
as the defendants, that was this year, there were settlement
discussions and when those settlement discussions broke down we
realized that we were going to have to file a case, and then at
And, you know, we have
And so there is aPage 29
that point we assessed the facts that we were learning, and we
were learning them real-time, Your Honor.
learned leading up to filing, like some of the audit reports
that we cite in our briefs.
and then there was a failure to come to an agreement on a deal,
the SEC realized it needed to not only file the case, but
accompany it with a TRO.
THE COURT:
There were things we
And when we put that all together
All right.
Now, the defendants say,
well, this is a big broad area that is generally unregulated at
this point, you should be proceeding by rule making.
seems to be saying let's see what congress gets around to
doing.
to assign the determination that would have such far-reaching
affects in a billion dollar industry to a lone federal district
judge, especially when there's another lone federal district
judge in a parallel action who could rule the other way?
seems like an inefficient and cumbersome way to establish a
national, consistent, understandable policy for the regulation
of trading in crypto assets.
No one
Why is it prudent, from the Commission's point of view,
It
Now, I'm not sure on what basis the defense says,
well, you should tell them that they should have exercised
their discretion to do a rule making, because I don't know that
I have the power to do that and I imagine you would tell me
that I don't.
make sense to go this way?
But, still, the question is, why -- why does itPage 30
MR. SCARLATO:
Because this is the law, Your Honor.
The Howey test has been around since the 1940s.
we tried to interact with these entities to, you know, figure
out a plan.
longstanding and anything but new, Your Honor, and defendants
knew the rules.
of our claims are not scienter based.
allege, there are many things that the defendants have said
that acknowledge they knew these were the rules and they just
The technology was new.
And, you know,
The rules are
You know, Your Honor says this wasn't -- many
But, you know, as we
chose not to follow them.
So at a given time the SEC can try to interact with
these entities to come to a resolution or try to do rule
making.
enforcement arm is here, too, and when we see the law is being
violated, we have to act on it.
THE COURT:
Yes, there's lots of things the SEC could do, but the
All right.
Now, most important for
purposes of the TRO and the asset freeze is section 7 of your
statement of facts where you're talking about the money that's
going out and where it's going.
about amounts transferred and where they went, but it wasn't
always clear to me in the memorandum, even when I sat down and
looked at the accountant's declaration, where they come from
and your language kind of blurred the distinction.
And there are a lot of details
For example, on page 26 you say:
Between 2019 and
2021, Merit Peak's account received over $22 billion.
And thenPage 31
you say:
owned company of defendant Zhao, and you -- offshore.
say these funds consisted in significant part of Binance
Platforms, plural, customer assets, including those of
Binance.US platform customers and other sources.
And Merit Peak, just to circle back, is a wholly
And you
Can you clarify or walk me through the transfers you
allege were made specifically from the U.S. entities, as
opposed to the international Binance platform, to offshore
accounts held by Zhao and how you know that those were customer
assets?
MR. SCARLATO:
Sure, Your Honor.
It is a lot of
details.
money primarily from three sources, one of which was an entity
called Key Vision.
at 8-A, you believe -- let me grab it.
some detail, Mr. Verma gives some detail on the application
that Key Vision submitted, and it shows you that -- it talks
about how Key Vision was involved in accepting deposits for
converting to the stable coin BUSD that we talked about
earlier.
Binance.com.
So the Merit Peak account, Your Honor, was receiving
And if you look at Mr. Verma's declaration
Yep, 8-A.
It gives
And it shows you that the email address is at
So that shows that this is Binance customers --
Binance.com, the international entity, customers and investors
who were putting money into the platform and it's going through
Key Vision, and so you have that.
And then separately, MeritPage 32
Peak had billions of dollars coming in through other finance-
related entities, primarily BAM trade.
a billion dollars, I believe.
I believe that's paragraph 12.
And it was over
I was just trying to get to it.
Yep, 1.154 billion.
So you have what totals, in paragraph 12, $11 billion
coming in from Key Vision, which is customer funds, and then
you have $6 billion coming from Binance Holdings Limited, which
is the entity that operates the foreign exchange, .com.
don't allege that's customer funds; we don't know at this time,
And we
you know, discovery hasn't begun.
money coming from Binance Holdings.
inference of that, but we're not saying that at this time.
similar as to BAM Trading.
THE COURT:
But coming -- that amount of
There's probably an
And
So you're taking --
I'm still trying to get to the money
coming from the U.S. platform customers.
I think the thrust of
the TRO is the U.S. entities, making sure that their customers'
assets and their assets are not dissipated, are not sent
offshore, and are here in the event you determine that they
should be registered, or that there's a disgorgement or money
owed, due to the customers.
really, the focus of your proposed TRO, that they can't
transfer any money.
assume when you're talking about bringing money back to this
country, you're talking money back to the U.S. entities, not to
Binance.com.
And they're the subject of the --
And you're asking for repatriation.
IPage 33
So what I want to know is where specifically are the
allegations about transfers from BAM Trading -- BAM Trading --
out, offshore, as opposed to the examples you're giving me are
still Binance.com, not Binance.US.com.
MR. SCARLATO:
Fair enough, Your Honor.
Sorry if
that was not clear.
But the point is that BAM Trading is
operating in the U.S., that's correct.
abroad are some of those so-called key shards, and that's part
of the repatriation order.
THE COURT:
MR. SCARLATO:
terminology down?
The only thing that's
We want those back.
Some of the what?
Key shards.
Key shards.
Did you get that
I can explain it, if you'd like.
THE COURT:
Go right ahead.
MR. SCARLATO:
Okay.
So under the crypto currency
security protocols that Binance -- excuse me, this is BAM
Trading employs, you need keys, kind of like, you know, the
nuclear football needs several people to put a key and turn it.
This is the crypto version of that.
are seven keys, as far as we understand.
THE COURT:
And there's -- three of them are
offshore.
MR. SCARLATO:
THE COURT:
MR. SCARLATO:
And so you need -- there
That's right, and we want them back.
Okay.
But your question was as to the money,
so do you want me to continue there?Page 34
THE COURT:
Well, if you're saying we need to shut
down and impose this regime on the U.S. companies because we're
concerned about the dissipation of assets from the U.S.
companies, I want to know, where have you made a showing that
it is the money from the U.S. companies that is moving out?
MR. SCARLATO:
It hasn't happened yet, Your Honor.
But that's not the point.
The point is that we are concerned
about Mr. Zhao and Binance exerting their influence, based on
the motives that they've shown since the relevant period began,
for many years now, to exert that influence and to take those
funds offshore.
THE COURT:
Okay.
So you can say we don't want your
funds to go offshore, but why does what you just told me
justify saying you don't get to spend your money at all, it's
just frozen?
you describe the back and forth with counsel for the
defendants -- and we're talking about the U.S. -- and you said
the SEC has not obtained sufficient reassurance that Binance.US
customer assets, which total over 2.2 billion, are squarely in
the control of BAM Trading, rather than under the control or
influence of Binance or Zhao.
I mean, you've argued, on page 31 of your memo,
You're not alleging that they aren't, you're saying
you're not sufficiently reassured that they are.
say the SEC is concerned about the safety and security of those
assets.
Okay.
I understand that.
And then youPage 35
But, I want to know, besides the interlocking
relationships then, what have you seen of money going out that
supports those concerns?
enough to support the kind of significant -- you're saying I
want to preserve the status quo.
you've got, that 2.2 billion, that stays right here in the
U.S., thank you very much.
you're saying you can't spend any of it, and we want an
accounting.
And are the concerns you talked about
The status quo is anything
But you're saying more than that,
But you're not alleging that it's gone anywhere.
You said it hasn't happened yet.
earlier in the TRO for asset freeze process than usual?
MR. SCARLATO:
Isn't that a little bit
Your Honor, I would say this is the
perfect time to freeze those assets.
But my colleague,
Ms. Farer, would like to comment on your question as well.
THE COURT:
All right.
Okay.
MS. FARER:
Good afternoon.
THE COURT:
And just to finish up, when you're
talking about repatriation, you're not talking about
repatriation of funds taken from the U.S. entities, because
you're not saying funds from the U.S. entities are gone; is
that correct?
MS. FARER:
We're saying funds from -- that relate to
the U.S. entities and the customers of the U.S. entities are
not based in the United States.
THE COURT:
Funds that relate to the U.S. customersPage 36
and the U.S. entities are not based in the United States.
MS. FARER:
Correct.
THE COURT:
That is a different statement than the
question I asked you.
fit into what you're saying?
question of whether customer assets that came into the U.S.,
whether they left?
disagree with that?
So what does that mean and how does that
And what's the answer to the
Have they left?
MS. FARER:
He said no.
Do you
Your Honor, there are a number of
transfers out of the United States bank accounts that have left
the country.
$2.2 billion in crypto assets.
securities and crypto assets generally are controlled, and
their movement is controlled, is through these functions called
private keys, and portions thereof are what defendants refer to
as key shards.
But I think in large part we're focussed on the
And the way that crypto asset
And so the private keys, which control the
$2.2 billion in customer assets just for the Binance.US
platform, all but one of those are based outside of the
United States.
private keys.
And so our concern is with respect to those
In addition --
THE COURT:
I thought the keys were -- four were in
the U.S. and three were out?
it was three and four.
their position.
There were seven altogether, and
So you always needed one U.S., wasPage 37
MS. FARER:
So we can take a step back, Your Honor.
And I think that would be helpful to help us -THE COURT:
But what bothers me is the keys and the
dissipating assets, assets are going, they're leaving, and see
the Verma declaration.
money that left the United States that belonged to U.S.
investors, because you're saying we're really concerned that
So I'm saying, okay, tell me about
it's going to disappear.
disappeared.
MS. FARER:
The memorandum
And now you're not saying that it has
So I think we're saying a couple of
things, Your Honor.
significant transfers out of bank accounts in the
United States.
THE COURT:
I think in our memo we did identify
Okay.
And I think you said that they
consisted of Binance platforms customer assets, including those
of Binance.US.
from Binance.US?
happened yet.
coming out of the U.S., is it money in accounts that the
international company happened to have in the U.S. that it's
now moved out?
U.S. that has been moved out?
And so I said, okay, where was the money coming
And your colleague just said it hasn't
So has it happened?
What is the -- the money
Or is it money that the U.S. company had in the
MS. FARER:
It's both, Your Honor.
So I think, toPage 38
take a step back, contrary to defendant's framing and
characterization of our papers, we are concerned about all U.S.
investors, both those on the domestic platform, Binance.US, and
the international platform, Binance.com.
for the violation set forth in our complaint does relate to, as
Your Honor identified, the interlocking of the entities and
trading platforms, the trading and money flow between the
platforms, between the entities.
And a large reason
And we have really tried to be reasonable, as set
forth in our papers and as represented by my colleague here, in
trying to have a narrowly tailored order to preserve assets
that are currently identifiable in the United States, and to
preserve assets, the crypto assets, the $2.2 billion in crypto
assets that we understand are under the control of individuals,
including those relating to Binance Holdings that are located
outside of the United States.
Really, what we're just trying to accomplish here,
Your Honor, is to preserve the status quo for all of the U.S.
investors on both platforms, and having a narrowly tailored
order to freeze this and understand the lay of the land.
And what I think is important for Your Honor to
understand is in addition to --
THE COURT:
your memo.
memo.
Except it's not their characterization of
I'm talking about your characterization of your
And what you said in your memo was we need this TROPage 39
because we don't have sufficient reassurance that Binance.US
customer assets, which total over 2.2 billion, are in the
control of BAM Trading.
the safety and security of those assets.
me, well, no, actually, the TRO is about all the investors on
both platforms.
me or what you wrote in your pleading?
defendants have to say.
And you said you're concerned about
What is it?
And now you just told
Which is it?
What you just told
Put aside what the
MS. FARER:
So it's both, Your Honor.
THE COURT:
Where is that --
MS. FARER:
-- so the asset --
THE COURT:
-- in your memorandum, where you asked me
The freeze --
to do this?
MS. FARER:
So the asset freeze pertains to the
$2.2 billion.
asked for that relate to the Binance holdings and Binance.com
relate to the broader universe investors.
very reason that I explained, Your Honor, is that we've
identified this $2.2 billion that we want to preserve and we
need additional information about the assets that may still be
held by Binance Holding on the .com platform that relate to
U.S. investors.
narrowly tailored as possible.
THE COURT:
Some of the discovery provisions that we've
And it is for this
As we said, we are trying to have this as
Okay.
Well, why is it saying that the
trading company, U.S. trading company can't make anyPage 40
withdrawals whatsoever, narrowly tailored, to accomplish this,
now that you've said that really a big part of the problem is
the investors on the international platform and not on their
platform?
MS. FARER:
We're saying the crux of the focus for
the freeze, Your Honor, relates to the 2.2 billion in U.S.
assets.
risks that we've identified here relates to the ever changing
story and the movement of key shards and crypto assets that
And if you'll allow me, Your Honor, I'll explain.
The
have occurred within the past six months.
If you'll indulge me, Your Honor, I can explain.
There's been a lot of talk in the papers about this wallet
custody agreement.
established, the domestic entities engaged in a number --
entered into a number of service agreements with Binance
holdings and Mr. Zhao, one of which was the wallet custody
agreement which specifically designated that Binance holdings
was the custodian of the wallets, meaning they had the -- they
set up the servers, they set up the software, they set up the
wallets, had control of all of the keys.
that view that that agreement was in effect.
referred to the Binance Holdings and Binance.com as the
custodian.
When the BAM Trading platform was
All evidence furthers
All the employees
It has been only recently, since the fall, that
defense counsel has now told us that the wallet custodyPage 41
agreement was, quote, not operationalized.
This is in the face
of audited financial reports reflecting that the wallet
agreement was in effect and that auditors have in fact
identified that Binance Holdings is implementing those
custodial functions.
and BAM Management counsel representations to the SEC
specifically identifying that this wallet agreement that --
that wallet custody agreement was in effect and that Binance
served as the custodian.
This is also in the face of BAM Trading
To the point, so much so, that they
said we are trying to explain to you how our assets are
custodied and controlled, but we have limited information,
given that Binance.com is our wallet custodian and performs the
functions at issue here.
So this -- we started asking a number of questions
for the past few months and all of the information has changed.
The wallet agreement is not operationalized, the wallet
agreement that was not operationalized has now been terminated
with no explanation as to why an agreement that was not
operationalized needed to be terminated.
THE COURT:
Well, does it matter, for purposes of the
TRO, to get to the bottom of whether it was operationalized or
whether it wasn't, whether it was operationalized and then
terminated?
who is controlling them?
Isn't just the question, where are the assets and
MS. FARER:
We don't care what you call it.
This gives rise to some of the questions,Page 42
because then, subsequent to this engagement about the back and
forth of this agreement, because we would submit that it gets a
little bit too into the weeds, and we've said, we just want to
know who is in control and how they're in control and to make
sure that they -- the investor assets are safe and secure.
then we start hearing about all these movements of tech stocks
and servers and key shards.
So
The protocols that govern and secure the assets at
issue have changed multiple times since January.
It used to be
that there were -- it was a nine key shard protocol.
Honor, if you would like to take it to a higher level to
explain.
pieces and there are a certain number of pieces -- from what
our understanding is, we've asked a number of questions about
how this protocol works -- but what they've represented to us,
the particular pieces need to have, like -- need to execute
transfers and withdrawal.
But really, it's a password that's broken up into
January it was nine key shards, Binance Holdings had
three of them.
transfer.
without BAM Trading key shards.
And, Your
It was -- three shards were only required to
So as of that time, Binance.com could transfer
Again, at that time no key shards, except for maybe
one, was located in the United States.
Then at some point the
key shards changed to seven key shards.
required, three of which are by Binance.com.
You know, four
But notably, thisPage 43
key shard protocol does not even govern all of the assets at
issue.
governed by this protocol.
they were in the control of BAM Trading, but when pressed upon
that, it was a Binance employee who had recently been holding
the wallet at issue and now it was a BAM employee.
There were assets in Singapore and Tokyo that were not
And we were told by counsel that
So there's been a lot of moving parts, including,
most recently, we've been engaged with counsel for weeks now
about a hardware leger wallet located in Singapore.
And in
their papers, as of last night, they've said that there are no
Binance.US wallet -- assets on that wallet.
significant transfers.
And we've seen
So our concern here about the risk, Your Honor, is
there are all these moving parts, there's no evidence as to who
is in control at what point and there's -- all the evidence
shows that there is not a sufficient control within the
United States, within the Court's jurisdiction to make sure the
significant amount of customer assets are protected.
contrary to defense counsel's explanation about the, quote,
unquote, fiat, the U.S. dollars in bank accounts, we have no
confidence that the company assets and the investor assets are
segregated because they are held in these -- what are called
omnibus wallets, they all go into these wallets.
And
So in addition to the significant movement of money,
dollars through these fiat accounts, numbers of accounts havePage 44
closed, even before we began this TRO process, the fiat has
changed --
THE COURT:
Well, that's what I keep asking about, is
the significant movement of money.
You've explained to me that
we've got the 2.2 billion, whether they're in wallets or
they're not, they have eight people governing them, they have
nine; they're here, they are there.
trading Binance.US platform, some of it are assets that people
got on the international platform, but they belong to U.S.
Some of it is from the BAM
customers, and it's 2.2 billion and it's somewhere, and you
want it frozen.
that also a repatriation because you don't think it's here?
I understand that.
MS. FARER:
And is that a freeze or is
Your Honor, the way that we -- because we
are not -- we were trying to have a very narrowly tailored
order.
investor assets frozen.
redemptions out of those customer funds.
just want whoever is controlling those assets to be within the
United States under the Court's jurisdiction.
And as Your Honor identified, we don't want the
THE COURT:
So we are allowing customer
All right.
Our concern is we
Now, that's the 2.2 billion
that you said you wanted to preserve.
MS. FARER:
Right.
THE COURT:
But the memo talks a lot about transfers,
not -- this went to Merit Peak, this went here, this went
there, it's going offshore.
And I thought the upshot was thatPage 45
it was going offshore from -- I'm not taking about the 2.
anymore -- from BAM Trading's customers' assets or BAM
trading's own assets.
and what your colleague said is our concern is that they're at
risk of going offshore.
It hasn't happened yet.
And you just
said we're seeing significant movement of money.
So I want to
know, talking about Binance.US, U.S. customer assets, money
that should be in the control of BAM Trading here in the
United States, has it moved yet?
MS. FARER:
U.S. assets are going offshore or are --
Is it moving?
The current account information that we
have, Your Honor, is that it is moving within banks within the
United States.
counsel, certain banking partners have not allowed them to --
are shutting down their accounts.
raised any -- we raised the idea of a TRO.
In the time that we have been engaging with
And this is even before we
So contrary to defense counsel's representation,
these banking issues have been public that BAM is having.
so they are having trouble securing the U.S. dollars in the
United States.
And
But to Your Honor's question about all of the
allegations -THE COURT:
I want to know, are they going offshore?
That was a big theme of the memo.
MS. FARER:
Yes, Your Honor.
THE COURT:
And I just want to know, are you sayingPage 46
it's happening or it's not?
that I've now asked this question to each of you five times.
MS. FARER:
And it's kind of stunning to me
So currently the assets are not going
offshore.
relates to a lot of movement of funds from Merit Peak into the
United States, into accounts that include U.S. customer funds
and back out.
current accounts, we're not seeing any flows of money outside
of the United States.
The references to the Merit Peak and Sigma Chain
But the current funding is that we are -- the
THE COURT:
So other than the 2.2 billion, are you
seeking an order to freeze or repatriate money transferred from
the international Binance platform at this time?
MS. FARER:
Binance.com platform, Your Honor.
There is no freeze focused on the
THE COURT:
Now, is the accounting a necessary
predicate for the repatriation order?
MS. FARER:
Before this morning, Your Honor, I would
have said no, but now we understand from defense counsel's
brief that the staking assets that were located on a ledger
wallet in Singapore have since moved.
So as we said, the risk is great, Your Honor.
Funds
and crypto -- either crypto and fiat, everything is moving,
that's why we need everything frozen and we need an accounting
to preserve the status quo and ensure that our investors are
protected.Page 47
THE COURT:
All right.
Now the argument that they
keep making -- and again, I'm not sure I hear anybody
address -- is that you said freeze this, freeze that.
respect to BAM Trading in particular, you basically said freeze
it, period.
That's what you asked me to impose.
backed off of that considerably in the red line that I asked
for and received in the middle of the day today.
But with
Not, you can use it in the ordinary course.
Now it seems like you've
So what are you saying now with respect to what needs
to be ordered with respect to the U.S. company BAM Trading and
their ability to do business while this case plays out?
MS. FARER:
So our proposal, Your Honor, is to
freeze -- have a freeze on the assets; it allows for customer
withdrawals.
counsel, they have asked for exceptions relating to the
ordinary course of business.
That was our proposed order.
In engagement with
And some additional context that we think is
important, Your Honor, since we've been engaging with them, as
we identified, we are very focused on protecting investors, but
reasonably understand the continued -- the issues associated
with the continued operations of the business.
Honor, we have been told multiple times by defense counsel that
the business is shutting down.
have represented to my colleague that there is a fear of
dissipation of assess.
However, Your
And multiple defense counselPage 48
So, Your Honor, we have no choice.
We have a duty to
our investors, a duty under our authority to be before the
Court when defense counsel themselves are identifying a risk of
dissipation of assets, that there's a back and forth about
whether they're shutting down or not shutting down.
why we're here, Your Honor.
point -- to an agreement on this issue.
This is
But we are trying to get to a
And we have told defense counsel, we are not
categorically opposed to a very narrow exception for ordinary-
course expenses, given the context I just identified, that they
are telling us they're shutting down, we've had defense counsel
tell us that there is a serious risk of dissipation of
assets --
THE COURT:
Well, they're going to object to that --
MS. FARER:
Yes.
THE COURT:
-- and I really don't think I can base
this TRO on what everybody's representing about what you each
said to each other in the context of these settlement
discussions.
some need for ordinary-course expenses.
salaries.
they at least probably pay salaries, and they may pay for
their -- some utilities or internet or WiFi or something.
What I want to know is:
If they operate, there's
They have to pay
I don't know if these entities even pay rent.
But
MS. FARER:
We propose --
THE COURT:
So they have expenses to do what they'rePage 49
doing; they have accountants, they have lawyers, they have a
number of expenses that they need to pay.
went further than it needs to go to preserve customer assets by
saying nothing, no exception.
then still there's a way to say whatever is in there, the
customers can get their own stuff out, but nothing else, the
bank accounts need to be preserved.
MS. FARER:
And I think the TRO
And if they are shutting down,
So what we've proposed on this issue,
Your Honor, is while we maintain the low threshold to preserve
the status quo of a freeze is appropriate here, we have
proposed -- we hear you on the ordinary expenses, but we want a
better sense of what is involved, particularly given the
interrelationship between these entities.
You know, Mr. Zhao spins up a new company --
there's almost 100 companies that we're aware of for which he's
the ultimate beneficial owner.
expressly put a carve-out in, but we just want an understanding
to make sure that the expenses that they are paying will not
unduly dissipate the assets that should be preserved for
investors.
And we appreciate that they
And so what we've proposed is a limited, ten-day
period in which -- provides some expedited discovery so we can
evaluate the experiences that they have incurred now and they
anticipate going forward, so we can see, evaluate what might be
appropriate ordinary-course expenses to allow for thePage 50
exception.
THE COURT:
All right.
So a lot of what you're
talking about now has arisen since you even filed your memo?
MS. FARER:
Correct, Your Honor.
THE COURT:
So --
MS. FARER:
Literally, the ordinary expense
discussion occurred over the weekend.
We expressed to counsel
our concerns on the issue, they came back with a proposal.
don't think it's sufficient because of the -- you know, sort of
We
moving targets that we've received on information, what
payments are being made, et cetera, so we just said provide
some accounting information, provide some additional discovery
and hopefully we can work this out, but understanding that we
believe a narrowly tailored exception is the appropriate
carve-out in this instance, given the nature of the activity at
issue.
THE COURT:
All right.
I think the answer to the
questions that I was asking about the transfers -- and I still,
I guess, want to go back through -- I got off the track with my
allegations.
So I don't know if you're back up, but --
MS. FARER:
Depends on what the question is.
THE COURT:
Okay.
Well, I want to talk about which
of the three defendant entities you're alleging is performing
which role without registration, and just make sure I've got
this straight based on the memorandum.Page 51
MS. FARER:
Yes, I'm happy to turn it over to
Mr. Murphy.
THE COURT:
All right.
All right.
In the
memorandum, in section II.5, you assert that Binance is an
unregistered exchange.
II.6 you assert that Binance and BAM Trading as a group are an
unregistered exchange.
alone is an unregistered exchange?
I think that much is clear.
And in
So you're not alleging that BAM Trading
MR. MURPHY:
It is, as part of a group of persons
with Binance.
Because that really goes to the point that in
the early days Binance was really providing all the
functionality for the exchange.
THE COURT:
Well, that's my question.
You said it
is, as part of a group.
get to II.7, you say that Binance and BAM Trading each are
unregistered clearing agencies, but XI.6 you say Binance and
BAM Trading as a group are an unregistered exchange.
there's no allegation by BAM Trading by itself, while it is an
unregistered clearing agency, is an unregistered exchange.
I correct about that?
MR. MURPHY:
But there's some things, like when you
No, it is.
So
Am
It is on its own an
exchange.
THE COURT:
Okay.
That's not -- it may be in the
complaint, but it's not clear at all in the memo.
So, that's helpful.
All right.Page 52
You've also alleged that Binance and BAM Trading are
each unregistered broker-dealers.
broker-dealers overlap with the acts that make them exchanges
or clearing agencies?
conduct?
MR. MURPHY:
Do the acts that make them
Or are all these separate types of
There is overlap, Your Honor, and part
of that is because -- and the securities laws account for that.
There are exceptions, for example, that if you are acting as a
broker-dealer, there's an acknowledgment that you are matching
buyers and sellers, which is something that exchanges do, but
you don't have to register as a national exchange if you are
registered as a broker-dealer.
THE COURT:
As it turns out here --
So you can be a broker-dealer without
being an exchange, but you can't really be an exchange without
being a broker-dealer, or no?
MR. MURPHY:
Yeah.
I mean, exchanges don't typically
take custody of funds, for example, Your Honor, whereas brokers
do.
in matching buyers and sellers.
THE COURT:
Brokers do carry some of the functions that exchanges do
All right.
Well, and finally, in section
II.9 you allege that Zhao is a -- has control person liability
for all of it; the unregistered exchanges, clearing agencies
and broker-dealers, and the misrepresentations, the alleged
misrepresentations by BAM Trading and BAM Management.
that's your allegation as to him individually.
SoPage 53
MR. MURPHY:
Yes, Your Honor.
And I think part of
this is that the services are so intertwined for the three
intermediary charges that it's kind of -- it goes to the core
of the business that he founded.
THE COURT:
Now, that's everything that's in the
memorandum in section II about the failures to register.
what was the outstanding failure to register that was being
described to me earlier?
MR. MURPHY:
So
I think that's a section 5 offering of
individual securities, which, frankly, I don't think you need
to reach for the purposes of the TRO, Your Honor.
THE COURT:
All right.
So that, I think, might have
been referenced when you get to the personal jurisdiction
section.
purposefully availed themselves of a forum by their coordinated
operation of three essential securities market functions:
Exchange, broker-dealer, and clearing agency on the Binance
platforms in the U.S. without registering with the SEC.
On page 56 you say:
And then you said:
Binance and Zhao have
In addition, Binance and BAM
Trading have engaged in the offers and sales of crypto asset
securities, including BNB, in the U.S.
function that you're talking about.
have, "and failed to register."
register that you're talking about?
MR. MURPHY:
So that's the other
But that sentence didn't
So that's the other failure to
Yes, Your Honor.Page 54
THE COURT:
MR. MURPHY:
THE COURT:
Okay.
Unregistered offers and sales.
Okay.
On page 57 you mention contracts
between Binance and BAM Trading governed by the law of New York
as a sign of availing themselves of the forum.
New York or any U.S. forum?
MR. MURPHY:
That does mean
Well, under the securities laws, I think
here we're talking about any forum because of the contacts with
the United States for personal jurisdiction.
THE COURT:
All right.
So now my question, before I
turn to the defendants and give the court reporter a break,
is -- maybe I can ask you this after the break -- is whether
you're going to continue to discuss this among yourselves or
whether you're going to accept my very strong suggestion to get
together with Magistrate Faruqui with respect to this consent
decree which, notwithstanding everything that's been said this
morning, the differences between the parties and their rhetoric
is much greater than the differences between the parties and
the proposal and the red line.
So if you can answer that question, that would be
helpful.
do that as well.
But if you want to answer it after the break, we can
MR. MURPHY:
I think it would be helpful to answer
after the break.
THE COURT:
All right.
So we're going to break forPage 55
ten minutes and then we'll be back.
(Recess.)
THE COURT:
All right.
Before I ask the question, I
just want to underscore that I am not urging the parties at
this point to get together, unless you choose to do so, to
hammer out a permanent consent decree.
is to have an order that works for both parties in place so
that we can then proceed to deal with the merits at an
appropriate pace.
What I'm looking to do
And it seems that there might be some
benefit, given some of the distrust going back and forth, to
have a neutral in the room.
But all I'm looking for is for some variation of what
we almost already have, which is something that permits BAM
Trading to operate, permits the government to be comfortable
that the 2.2 billion is secure, and that U.S. assets, U.S.
customer assets, don't leave the country and don't leave the
U.S. company's control, and that then we get the additional
information and documents that we're seeking.
So, you know, again, I think the nitty-gritty of it,
because it's very detailed, is better handled by all of you
than by me.
then the government risks having an order that doesn't go as
far as it wants it to go, and the defense risks having an order
that it really finds it hard to live under.
benefit to this.
And if you don't work it out among yourselves,
So there's somePage 56
So what's your point of view about whether it makes
sense to meet with Judge Faruqui with respect to the
refinement, potentially, of a consent decree, instead of a TRO?
MS. FARER:
Your Honor, the government is certainly
open to that.
we're seeking is a freeze of all of the assets.
importantly, the operating -- the company operating funds
should be preserved under the applicable precedent for --
ultimately if we get a judgment, for disgorgement to investors.
We did want to clarify that the freeze that
Because,
In addition to --
THE COURT:
Freeze of all of the assets of?
MS. FARER:
Of the BAM entities.
THE COURT:
With the exception that they're allowed
Our position is --
to give customers back their money when they ask for it and to
pay salaries and operate their business, if they're still
operating their business, or not?
MS. FARER:
Yes, Your Honor.
What we're proposing
here is that all assets are frozen, both the customer assets,
but subject to the exception that is already included for
withdrawals, and then the remainder of the company assets.
It's important to note that we're preserving the status quo for
the investors who have paid transaction fees and whatnot that
would be included in a disgorgement order, should we prevail at
the end.
And so what we're asking for is the freeze, and thenPage 57
we are certainly open to mediation on the scope of the
ordinary-course expenses.
open to the business continuing to operate, we just want to get
additional information as to what the scope of the payments
will be.
THE COURT:
As discussed, Your Honor, we are
But the extent of your position is fully
set out in what you sent me at 1 o'clock today, or a little
before?
MS. FARER:
Yes, Your Honor.
THE COURT:
All right.
All right let me hear from the BAM defendants.
I want to start with you by saying that obviously
Okay.
Thank you.
your memorandum raises a lot of legitimate questions and
concerns about the merits and about whether litigation is the
best method to get at this highly disputed issue that affects
billions of dollars already invested on multiple platforms in
the U.S. and elsewhere.
shocked that the SEC thinks you're dealing in securities and
took this step.
pleadings rang a little hollow in light of defendant Zhao's
statements over the years, the fact that the SEC banned Binance
from doing business in the United States in 2019.
appears to be an extension of that, given the overlapping
ownerships and relationships.
But some of your claims claim to be
And some of the surprise expressed in the
And this
And so the BAM Trading was in direct response for thePage 58
fact that Binance couldn't trade here anymore.
defendants received a Wells Notice, which you don't get unless
the SEC is planning to bring a civil enforcement action.
I'm not necessarily interested in getting further into whether
it's surprising or shocking or not, as much as how to deal with
it and get to the merits of it in a logical and organized
fashion.
Plus, the
So
Similarly, you all repeat in the memo that there's no
evidence, absolutely no evidence of any dissipation of assets
whatsoever.
haven't seen the evidence of offshore transfers from BAM
Trading itself.
offshore transfers and we do have the problem of the individual
defendants' ownership of the entities that own BAM Management,
which is the parent of BAM Trading.
going on here and a lot of onion that needs to be peeled to
figure out who is doing what.
And the government at this point has said they
But we do have considerable evidence of
So there's a lot of layers
So while you can quibble with the strength of the
evidence, whether there's anything wrong with any of the
transfers, I probably don't need a lot of hyperbole about how
shocking this is, and I probably don't need to hear the word
"draconian" anymore.
So you gave me the terms of exactly what you would be
willing to agree to in a consent decree.
But your proposed
order to me within your opposition to the memo just said TROPage 59
denied.
So if you all can't come to an agreement, if I enter
the terms that you proposed, would that be with your consent?
MR. MERTENS:
THE COURT:
Yes.
And then, would it then be appropriate to
consolidate the PI with the merits and order that it remain in
place pending a ruling on a dispositive motion?
MR. MERTENS:
I believe it would, Your Honor.
We've
said all along that we are not -- we are not interested in
making transfers among the defendants.
The sticking point, and
the really only sticking point, and it is still a sticking
point, even with the SEC's most recent submission, is on page
of the filing, which is numbered 5 at the bottom of the red
line, which is a paragraph 3-A which prohibits any disposal
whatsoever of any funds in BAM's possession.
That is a
prohibition on ordinary course expenditures.
And that is the
sticking point.
We are not willing to accept the death penalty eight
days into the case, and that is, in effect, what that would be
for our business.
And because while we don't --
We are simply asking for ordinary course.
THE COURT:
When you say ordinary course and that is
the sticking point, and I know that's the sticking point --
MR. MERTENS:
THE COURT:
able to do?
Yes, yes.
-- what is it exactly that you need to bePage 60
MR. MERTENS:
So for example, last night on the call
we said things like rent, salaries, vendor costs, professional
fees; you know, normal operating business expenses.
the -- and we could make -- we offered last night to make a
list of those things.
We think we could sit down and make a
list of those things.
But the government's position, the SEC's
position has been until this point --
THE COURT:
All right.
MR. MERTENS:
THE COURT:
I'm not asking you whether
they're being unreasonable or not --
Those are
Sure.
Understood.
-- I want to know what you need.
I may
have to craft this myself.
MR. MERTENS:
Right.
We need ordinary-course
business expenses, which is how the language we belive normally
appears in an order.
happy to provide them.
are thinking about are like salaries, rent, vendors.
obviously have, to the extent that there are servers or
licensing of software, professional fees, you know, those are
the sorts of things -- office supplies, you know, to the extent
that those are relevant, those are the types of things that we
are asking for; normal, ordinary course.
the primary sticking point.
THE COURT:
If we need a laundry list of those, we're
But the things, the type of things we
All right.
We
That is, I believe,
So you're willing to agree on
a ban of transfers to any account in which the individualPage 61
defendant not only has an ownership interest -- or, whether he
has an ownership interest or signatory authority, nothing
that's got his name on it?
MR. MERTENS:
We are -- it is acceptable to us not to
transfer money to -- you know, directly or indirectly in
control of the co-defendants.
whatever the appropriate language is.
THE COURT:
And you obviously don't need to transfer
money to any offshore account in the ordinary course, much less
one that he owns.
You know, affiliated with them,
MR. MERTENS:
I assume that we could -- there are
enough U.S. accounts that we could deal with that.
THE COURT:
And they also seem to be interested, with
respect to the 2.2 billion, about the clearing team and who
holds the key shards and all that.
they all have to be -- why they can't all be independent from
Binance?
MR. MERTENS:
Is there any reason why
We are prepared to bring all the key
shards to the U.S., if the Court orders that.
problem with that.
THE COURT:
We have no
The Court will definitely order it if you
agree to it.
MR. MERTENS:
Well, the only reason I'm hesitating on
that is because to the extent that the key shards are in the
possession of Binance, I can't speak for Binance.
I can speakPage 62
to what we, BAM will do.
THE COURT:
I understand that.
MR. MERTENS:
And the order would have to direct or
not direct what another entity would do.
objection to them all being in BAM's possession.
THE COURT:
All right.
But we don't have an
And there was a point where
you told me earlier today that there is no daylight between any
of the defendants at this point.
particular language was in the existing order, so I will
But I don't know that that
actually ask that to Binance's counsel.
And if there is no consent order and I have to issue
my own order -- and I meant to ask the government this, and
I'll ask you this when you get back up, because I know you're
going to want to get back up at the end.
about how long a TRO could remain in place?
without notice, which is what Rule 65 says only lasts 14 days.
The government seems to take the position that it could only
last 14 days or it might expire, unless it gets turned into a
PI.
What's your position
It's not a TRO
I don't see how, given what I've been provided, that
I can do the kind of order that would rule on all of the legal
and factual issues underlying a preliminary injunction in two
weeks.
stay in place?
So if I have to put something in place, how long can it
MR. MARTENS:
Well, I don't have an answer to thatPage 63
because our position is that a TRO is not warranted, so I'm not
in a position to say so we would agree to one for X number of
days.
have a discussion, as you do in any case, about how long is
necessary for discovery to conduct a PI hearing.
today, we don't believe that the sale -- and I think this is an
important point, and the Court identified this, they're
alleging on crypto asset among more than 100, and arguing --
while they say that allows them to win the case, that doesn't
Obviously, if the Court ordered one, we would have to
But as of
provide a justification for taking over an entire business.
And that, I think, is -- I think we're going a long way to
saying, listen, we don't think this is justified at all based
on their showing, but we are willing to do -- to take steps to
allay concerns because we don't think that there's any valid
concerns here.
And so we're fine with agreeing to the handling of
these funds appropriately because my client believes they are
handling the funds appropriately.
to do is accept something that goes so far as to shut down our
business.
THE COURT:
MR. MERTENS:
But what we're not willing
I understand that.
I can't really answer the Court's
question about how long we would be willing to tolerate a TRO.
A, because we don't believe it's appropriate, but, B, because
depending on what it does, it could end our business.Page 64
THE COURT:
I don't think that a TRO can completely
shut down your business; it has to preserve the assets.
talked about status quo, status quo, status quo; status quo,
this business exists.
TRO, it can't really go much further than literally preserving
the assets that we're talking about.
They
So I think if they're talking about a
MR. MERTENS:
But that's not the status quo, Your
Honor.
business and pay ordinary business expenses, that's the status
The status quo is that we're continuing to operate as a
quo.
THE COURT:
I understand that.
I understand your
position about that.
that is why I was asking you what you need in the ordinary
course.
if it wasn't received over the phone last night, you can docket
that.
I think you've made that very clear and
And if you want to put it in a piece of paper for me,
It would be helpful for you to be specific.
MR. MERTENS:
THE COURT:
Sure.
But I think that I don't need to be in
the room where it happens and that there is a better way to get
to what the nature of this is and should be.
MR. MERTENS:
We're happy to provide that list, Your
Honor.
THE COURT:
All right.
Now, you raised important
questions to be considered in terms of whether the Binance coin
is or is not a security and, therefore, whether thePage 65
registration obligations attach.
legal question at the heart of the case that I'm going to have
to resolve.
while you disagree that the assets bought and sold were
securities, do you dispute whether BAM Trading was operating as
an exchange with Binance with respect to those assets, whatever
they are?
And that's, obviously, the
But I want to make sure I understand, though, that
MR. MERTENS:
So the reason I hesitate is because I
don't know whether you're using an exchange in a technical
sense under the securities laws or whether you mean in a
colloquial sense.
people could buy and sell crypto assets.
word "exchange" because that has technical legal meaning in the
securities laws that we're not prepared to concede.
Certainly it was a platform under which
THE COURT:
All right.
I hesitate to use the
Well, I was going to ask the
same questions about acting as a broker-dealer and acting as a
clearing agency.
took issue with the "it's a security," as opposed to "I'm
making them available for sale, I'm providing credit or
dealing, clearing the transactions, I'm offering them on a
platform where people can pick and choose among, and buy and
sell."
And I guess my question is:
Your memorandum
The underlying facts that make something an exchange,
a broker-dealer or clearing agency, you took issue with
whatever -- our offering of these assets is not somethingPage 66
that's subject to the jurisdiction of the agency because the
assets aren't securities, that's what you were saying, as
opposed to, no, we're not engaged in those operations.
MR. MERTENS:
We didn't have to get to the issue of
the operations because the operations -- the statutes governing
the operations only govern the operations if it's a security.
And so if they -- and we do believe they do -- fail on the
question of whether it's a security, everything else falls,
too.
THE COURT:
I understand that.
I was just wondering
if there's some even-if argument, that even if it turned out to
be a security, you can't call me a broker-dealer because I
didn't do X, Y, or Z, or I'm not a clearing agency because I
didn't do X, Y, and Z.
you're not giving that up as an option, should it come down to
that?
It wasn't in the memo and I assume
MR. MERTENS:
Right.
It's just for the TRO purposes
we took a simpler approach.
THE COURT:
All right.
You argue in your memo that
the Binance coin, at least by the time it was available to be
purchased through BAM Trading on the Binance.US platform was
not a security.
So what was it?
MR. MERTENS:
THE COURT:
Was it a commodity?
It was a crypto asset.
What is a crypto asset that is different
from a crypto security?
No one wants to tell me.Page 67
MR. MERTENS:
Well, the crypto asset security, as I
understand it, is they're adding the world "security" to bring
it within the scope of the federal securities laws.
whether it's section -- I believe it's section 2 of the
Securities Act or section 3 of the Exchange Act, defines a
security as, among other things, an investment contract, as the
Court has heard, and that is what the government is relying on.
An investment contract requires a contract.
And
language about a scheme, as I understand, it was dicta.
The
There
was not a scheme at issue in Howey, it was a contract.
I understand the case law, all of the cases under Howey and all
of the cases under the Blue Sky laws prior to Howey under which
was the origin of the securities laws, involved a contract.
are not aware of any case that's found a security without a
contract.
And as
And that is -THE COURT:
Even since Howey?
I mean, what about the
government's citing cases where actually crypto assets were
found to be securities?
We
MR. MERTENS:
So my understanding is that those other
cases did have a contract in place, and there is not a contract
here.
contract without a contract.
contract without some expectation of profit.
there's -- no one has talked, explained at all what the
obligation -- what the contractual obligations or the
And that's our dispute.
You can't have an investment
You also can't have an investment
And herePage 68
contractual benefits are from supposedly buying one of these
assets.
And, you know, there's lots of other language used by
the SEC when they were speaking about it that, you know, people
hoped to earn a return.
investment contract.
orange grove in Howey and expecting to earn returns when the
oranges were picked from the trees and sold.
contract here --
That's not -- that doesn't equal an
It's a long way from investing in an
THE COURT:
There's no
When you buy stock in a company that's a
security, yes, you'd hoped to earn a profit, but is there any
promise you're going to earn a profit?
MR. MERTENS:
So the difference there is the stock is
specifically identified in the definition of a security as
being a security.
other things.
"investment contract."
So it begins stock and then it has a list of
Halfway down the definition is the word
So investment contract is its own unique thing, and
in order to claim this is an investment contract, they need to
start with a contract.
THE COURT:
And I know you've said that.
So that
even at the ICO stage, you're saying it wasn't even a security
then because there was no contract.
were also arguing even if it was, it lost that character by the
time it was being sold on the U.S. platform with something else
But it seemed like youPage 69
at that point.
when and how does it transform itself?
Is that something you're also arguing?
MR. MERTENS:
And
I think what -- so we were focused on
the time when it was trading on our platform because that is
the time relevant to establishing, thus, whether we were an
exchange or a broker-dealer.
for purposes of the TRO, was at the time it was trading on our
platform there was not a contract and, thus, not an investment
contract.
THE COURT:
MR. MERTENS:
And I think our particular focus,
Okay.
Yet, I think it remains to be seen, if
this proceeds into litigation, whether there was ever a
contract, even at the time of the ICO.
is that there is not a contract even at that point.
particular focus was at the time it was trading on our
platform.
THE COURT:
I suspect the evidence
But our
Well, you've been very clear about the
need for the ordinary course exception to any freeze with
respect to BAM Trading's assets.
of time today talking about the 2.2 billion of U.S. investor
assets that it wants to make sure that they're under your
control and nobody else's control.
with any of that?
MR. MERTENS:
THE COURT:
The government's spent a lot
Do you have any problems
We do not.
Okay.
And then given the fact that itPage 70
seems like really the difference between the two parties is
rent and ordinary expenses, what's your position about whether
it makes sense for you to be in a room with Magistrate Judge
Faruqui and your colleagues on the other side of the courtroom
sooner rather than later?
MERTENS:
We are happy to have a discussion with or
without the magistrate judge.
to sort out what ordinary-course expenses are.
to reach an agreement on ordinary-course expenses.
We don't think that's required
But we're happy
Again, we
don't -- I think that that language is typical.
it's really a novel term to be included.
there's always a list, but we're not against having a
discussion about a list.
THE COURT:
All right.
I don't think
I don't know that
Well, they have added a lot
of language about the 2.2 billion and who is actually going to
be in charge of it, and it seems to be different, what they
wrote than what you had.
you consternation at this point.
MR. MERTENS:
But that's not the area that's giving
That is not the area that's giving us
consternation.
The area that's giving us consternation is an
asset freeze that will be misconstrued by our banks.
have agreed -- what we want to be able to do is make clear we
are entitled to continue spending our money in the ordinary
course and so that the banks understand that and so that we can
continue to operate.
What wePage 71
THE COURT:
All right.
Do you want to say anything
in response to the statement that you said something about
shutting down or not shutting down?
MR. MERTENS:
Your Honor, I think -- I know you don't
want rhetoric, so I'll be measured.
But I think it is
inappropriate for the government to come in and make
announcements about whether a business will continue or not
continue.
don't believe it's appropriate to come into court and make
We have made no such decision as BAM Trading.
announcements about what we are or not going to do as a
business.
THE COURT:
And I
Well, given the public nature of these
proceedings, I wanted to give you the opportunity to say
something with respect to that, so that was why I asked the
question.
I have fewer questions for you, not because I think
your position is any less important, but because I think I
understand your position and I think that the questions for
what I'm supposed to do in the short-term for interim relief
are different questions than, at the end of the day, the legal
rulings that lie at the heart of this case, which I don't think
I should be making at this pace.
What I'm trying to do is to make sure that we can
reach that decision in a thoughtful pace and not have the
chickens fly the coop in the meantime.Page 72
So I think you and I have discussed what I need to
ask you about that, unless there is anything you would like to
put on the record right now that I haven't asked you about.
MR. MERTENS:
I don't think there is, Your Honor.
Again, I agree with you that I don't think we need to sort out
the merits now.
forward here that allows us to keep operating and allows this
litigation to proceed in the normal case and to decide these
issues on the facts, with appropriate time to review them.
Our position is we belive there's a way
THE COURT:
All right.
Let me hear from counsel for
Binance then.
MR. NELSON:
THE COURT:
Good afternoon, Your Honor.
Good afternoon.
What was I supposed to
do with 3,000 pages of exhibits filed four and a half hours
after memorandum was due without a motion for leave to file it
at that time?
MR. NELSON:
Hopefully accept an apology.
And we
worked hard to coordinate with counsel for Mr. Zhao.
candidly, underestimated the process of getting everything into
ECF.
brief and a single set of exhibits, we ended up with some
logistical issues yesterday afternoon that were wrong, so I
apologize.
And,
But the process of trying to work to coordinate on a
THE COURT:
All right.
Well, you understand,
obviously, that by 9:30 last night I was really focused on thePage 73
dueling proposals and the larger issues, rather than the
exhibits.
dig into them fully.
I'm not going to be able to decide this case without looking at
all of theirs and looking at all of yours.
trying to do is figure out how to manage this case so that that
is done.
I've not yet had the opportunity, the pleasure to
But, understanding that I need to, and
And what we're
What's your position about sitting down with a
magistrate judge to try to finish the process of hammering out
something that will govern the conduct of the parties between
now and then?
MR. NELSON:
Your Honor, Binance Holding, Limited,
would be agreeable with that approach, and we think it has
wisdom.
If the parties can come to an agreement, that would be
better.
Mr. Mertens has addressed the main issue.
other details about, you know, difference of wording that may
make a difference.
instance would be best positioned to address that.
There are
But I think the parties in the first
THE COURT:
Well, putting aside wording, and I
understand the ordinary course issue is BAM Trading's issue,
but the 2.2 million and whether anyone other than BAM Trading
is going to hold the wallets or make the decisions on
withdrawals, do you have problems with what the government has
proposed with respect to the 2.2 billion, which they are
alleging are U.S. investor dollars that are at stake in thisPage 74
litigation?
MR. NELSON:
We do not, Your Honor.
And while we
disagree that it's necessary to transfer the key shards in
order to preserve the security of the assets, as you've seen
from our proposed order, we're willing to voluntarily undertake
the steps necessary to do that.
specifically agreed to do that to address what we understand is
the government's concern.
THE COURT:
It's in II.4, where we have
All right.
Now one of the points you
made -- I'm just going back to the original point.
without the apology, I've accepted the filing of the exhibits
and I'm not going to strike them or do anything horrible to you
because of the four hours; it was just frustrating to have them
arrive.
Even
I don't understand your addressability point.
You're
not saying that the lawsuit itself can't provide relief or
redress if the defendants are indeed performing the functions
for which they need to be registered.
they could have to pay penalties.
has to go back to customers.
TRO, for interim relief, based on the facts in the complaint,
has to separately meet all of the Lujan requirements if there
is standing to bring the action?
MR. NELSON:
colleague Mr. Celio.
They could be enjoined,
There might be money that
Are you saying that a motion for
Your Honor, I'll hand off to myPage 75
THE COURT:
All right.
MR. CELIO:
Good afternoon, Your Honor.
Michael
Celio for BHL.
It's not the Lujan holding, it's that for an exercise
of this Court's jurisdiction on the TRO, what the law requires
is that the relief that is sought be tightly coupled to what it
is we've actually done.
THE COURT:
And --
But my jurisdiction is over the case.
The TRO is a pleading in the case.
jurisdiction to hear this case?
MR. CELIO:
You're saying I don't have
It's that the relief sought can't be
granted by this Court on this record.
case against us.
other side cited where a registration case has resulted in a
TRO like this.
I'm not disagreeing with anything my colleague said.
offered what we've offered and we stand by that.
on the law -- we just want to be clear -- we're going far
beyond what we're required to do here.
case, where it's just a question of whether we should have
registered, an issue that's been out there for what?
years?
that kind of relief.
case, we get that.
This is a registration
We're not aware of any of the cases that the
Now we're willing to do it, I want to be clear.
We've
But we think
Because this kind of
Six
That doesn't actually allow the Court, no, to enter
THE COURT:
You absolutely have jurisdiction over the
The question is whether ultimately I'mPage 76
going to have -- there would be relief associated, if it was
found to be a security.
failed to register and you were supposed to register and that
resulted in X billions of trades or profits, you're saying
you're not going to owe anything at the end of the day?
would just be I'm sorry, will you accept my apology, as we said
earlier?
And if it was found that you had
MR. CELIO:
No, ma'am.
THE COURT:
So there could be a penalty owed.
It
That's not what I'm saying.
And
they're saying all we're saying is we want to make sure the
money is there when we're all left standing at the end of the
day.
How does standing fit into this?
MR. CELIO:
Because redressability is a separate --
and we've said it in our papers, the redressability is a
separate element at the TRO stage and they have not met their
burden to establish that.
THE COURT:
Tell me what happened in the NLRB, the
one case you cited for that.
MR. CELIO:
So I can't give you chapter and verse on
that case, but I think -- it's really just a common sense
principle, Your Honor.
THE COURT:
It isn't to me, actually.
I've never
heard of it before and that's why I want to know what the case
held and why you're relying on it.
MR. CELIO:
So I'm not prepared to answer thatPage 77
question, and I apologize Your Honor.
though, is really what this goes to is the emergency nature of
what's sought against us here.
case, we understand that this is an important issue.
around us, we get it; it's an issue of first impression and
it's important.
But what we're saying,
We understand why we're in the
Look
So we're not --
THE COURT:
Some of those are press, some of those
are your associates, I'm pretty sure.
MR. CELIO:
I only know which ones are associates of
Gibson, Dunn, Your Honor.
it's obviously an important case.
stage, just at this narrow first stage, the Court doesn't have
unlimited ability to fashion any relief.
relief that's related to what's actually in the complaint and
what's actually before you, that's the argument.
But there are a lot of people here,
The question is, at this
It's got to fashion
As to my client, who is simply a corporate cousin of
BAM, admittedly with some relationship, contractual
relationships and other things, but we don't really understand
why we're here at the TRO stage.
the case, to be clear.
position is that at the end, if jurisdiction is established in
all the ways, that it will be fought.
the claims you suggested.
We understand why we're in
We understand, at the end -- and our
We're not making any of
But it is the case that the Court's ability to issue
interim relief has to be tied to what's actually in thePage 78
complaint and it's just not here.
THE COURT:
What are the specific aspects that
they're asking for in their order that apply to you in
particular?
documents in discovery and that sort of thing, but what are the
particular aspects of what they're asking for that you say are
deficient for this reason?
I mean, there's things like the not destroying any
MR. CELIO:
Here's the good news, Your Honor:
We
don't have to get into it because we've offered to do it
voluntarily.
know, I think that our proposal that we filed today, earlier,
really makes this an easy question for me.
our record that we think, you know, we're doing more than we're
required to do.
reasonable --
So, I mean, we've said -- I think that it's, you
We want to preserve
But we really want to assure the Court how
THE COURT:
The record will so reflect, that it is
your position that you are doing more than you're required to
do.
MR. CELIO:
I appreciate that.
THE COURT:
You argue, and your argument has some
force, that these kinds of complex legal and financial issues
are better resolved through regulation or rule making than
through test case litigation, but I don't run the executive
branch.
say, as you suggested, no, I'm sorry, you've exceeded your
So what would be the authority under which I couldPage 79
discretion, you must proceed by rule making here.
in my lane as a member of the judiciary?
MR. CELIO:
How is that
If we made that statement, that's not
what I'm arguing today.
I think that it is something -- it may
well be in the brief, but I think that that's -- we're not
asking you to deny it on that basis.
I've got to go to Chicago in a little bit and defend the same
case on the issue of whether it's a commodity, and we are put
in a difficult position.
I think the issue is --
And I hope that the Court appreciates
that the executive has its authority to do what it wishes, they
have the right to bring this case, I suppose.
difficult thing for my client to be told it's a security, it's
a commodity --
It is a
THE COURT:
Well, "it," is the "it" the same?
MR. CELIO:
I think it is, but I'm sure we're going
to argue about that.
here.
But I think that the issue that we're trying to raise --
But the BNB is what I'm talking about
But I think that there's disagreement as on those facts.
THE COURT:
In the CFTC case they say the BUSD was
the commodity, and the SEC just told me that that's not the
same as the BNB.
Are you saying it is?
MR. CELIO:
BUSD is not the same as BNB, but BUSD is
very much in the papers that they filed, it's right there.
THE COURT:
Yes.
MR. CELIO:
So those things -- I mean, the point morePage 80
broadly is, and I think it's relevant to the TRO, right, is
because the TRO is a terrible way to do this, right?
putting unfair pressure on the Court, it's putting unfair
pressure on my client.
fight.
pretty clear that it was coming against someone -- maybe not
against us, but someone -- for years.
The Court should be given the opportunity to hear from
different parties, from -- you know, from amicus briefs, from
It is
We accept that we have to have this
We understand that this is coming.
I think it's been
So let's have the fight.
sort of all the relevant parties that this Court usually has
access to.
You know, we should do this over -- in a normal,
orderly discovery process so that the facts aren't coming in
the night before the Court -- you know, I had my apologies that
it came in late -- that the Court should have a full record.
THE COURT:
I agree, completely.
And so the question
is:
What do I need to do to make sure that happens and to make
sure that the government's, I think, legitimate concerns, given
the offshore nature of some of the defendants and the ease of
moving money from place to place, given the overlapping
ownership, that something needs to be done.
everything they originally asked for.
everything they originally asked for anymore.
lot like what you all have proposed.
like better than an orderly process to get at complicated
But, it may not be
They're not asking for
It may look a
There's nothing I wouldPage 81
issues, that's the way we do things.
All right.
I don't think I have anything else to ask
MR. CELIO:
Okay.
THE COURT:
And, finally, counsel for the individual
you.
defendant, your brief and your proposals were linked, but if
there's anything you want to add to the discussion I just had
on behalf of the two defendants?
MR. QURESHI:
Thank you, Your Honor.
No, I have
nothing to add.
I would agree with my colleague representing
Binance that there are some stray issues that we look forward
to discussing with the Commission and hopefully resolving in
the ways that you've outlined.
THE COURT:
But right now there's no reason that you
see -- is there any reason that BAM Trading needs to be sending
money offshore to your client's accounts to operate its
business?
MR. QURESHI:
No, Your Honor.
And I think in the
proposed stipulation that we offered at 1 o'clock today, I
think that's at docket 58-1, there is a restriction on anything
like that happening.
THE COURT:
All right.
And so if all of that is in
place with respect to the 2.2 billion of U.S. customer assets,
that's something preserving your objections, the jurisdictional
objections and your personal jurisdiction, that's somethingPage 82
you're willing to live with while we figure out all these other
objections?
MR. QURESHI:
THE COURT:
All right.
All right.
Is there anything the government wants to
That is correct, Your Honor.
All right.
Thank you.
add at this point?
MS. FARER:
Just briefly, Your Honor.
On the issue
of the case brought by the CFTC, we would just highlight that
courts across the country have identified that different crypto
assets can be a commodity in certain contexts, can be a
security in different contexts.
aware, there's a very fulsome court opinion, the CFTC versus
McDonnell, an EDNY case that sets forth the framework.
number of the regulatory agencies have issued joint statements
about how different assets can be treated differently in
different context.
the CFTC's complaint is different than the one that we are
alleging here.
As Your Honor may very well be
And a
So the BUSD product that is identified in
With respect to the open questions, as Your Honor
identified with respect to just wanting a list, that's really
all we're asking for.
expenses at issue.
unquote, professional fees.
that could cover a lot of things.
understanding of what may be anticipated.
We just want information about the
You know, a general category of, quote,
When I was in the private sector,
And so we just want anPage 83
THE COURT:
Notwithstanding the eye rolling on my
right, I'm going to just order that BAM Trading docket a list
of what it maintains are the ordinary-course expenses, even if
it's obvious and even if it's commonly ordered, just go ahead
and do it, put it in writing.
up having to issue a TRO, and the government can see it, and
maybe that will streamline the conversation that you're going
to have with Magistrate Faruqui.
And then I'll see it, if I end
Yes?
MS. FARER:
We would just ask, Your Honor, in
connection with that request, that there be some time
parameters imposed.
an understanding of, sort of, the time periods at which these
expenses are anticipated.
We want to -- it would be helpful to have
THE COURT:
All right.
MS. FARER:
We would just add a couple other things
for the record.
THE COURT:
Yes.
MS. FARER:
We understand that defendants may be
frustrated by our reference to communications that we've had
with them, and we certainly, as a regulator in this space,
appreciate the sensitivities.
defendants made this public themselves by including
communications between us that reference the shutdown
communications, at docket 41-6.
We would just highlight that the
And we thought it wasPage 84
important for Your Honor to understand our position on certain
issues that was within that context, that we needed to take
certain positions on certain issues.
And the final point, Your Honor, is I think an open
question that was a sticking point with respect to the consent
is -- are the terms of discovery.
why Mr. Zhao is -- and Binance are extending the time period by
which they would be subject to certain discovery obligations.
We think that it's very important, for all the reasons that
It's not clear to us exactly
we've discussed, that we have expedited discovery of all the
parties for -- as set forth in the proposed order.
that's one of the open questions for us, as well.
THE COURT:
All right.
So I think
Well, if you get to the point
that you can agree to everything except things like that --
MS. FARER:
We agree, Your Honor.
THE COURT:
-- you can submit to me a consent decree
that has, you know, two brackets; what one party thinks and
what the other party thinks, and I can figure that out.
that all the time with discovery disputes among parties.
think if that's -- if that's where this resides, then there's
absolutely no need for a TRO, we can figure that out.
I do
So, I
And, you know, I don't think I've ever issued a
discovery order that sooner or later somebody didn't say, Your
Honor, can we have additional time?
make at the end of the day if I say ten days?
So what difference does it
Ten days fromPage 85
now somebody is going to tell me they need more time.
MS. FARER:
Maybe.
Given the expedited issue, we completely
appreciate.
I think the last piece on the list of expenses, Your
Honor, we understand that certain processors that may be
involved with BAM's ongoing operation are not located in the
United States.
the issues that we want to make sure that all payments or all
vendors that may control the investor assets at issue are
And so it would be helpful -- this is one of
within the United States, so it would be helpful if there are
going to be payments going offshore.
THE COURT:
All right.
But, I mean, everything
you've said is really so much to the side of what you stood up
and said, oh, you know, we're really worried about the
2.2 billion and we're really worried about BAM trading and
their investor assets, and this is -- these are all, like, the
little details around the fringes.
not important and that you all shouldn't be caring deeply about
them as advocates for your side, but if they're telling you we
don't need to send money offshore, we'll send the keys and the
wallets and all that back, they're telling you they're willing
to do that by consent, that gets you a lot further and the
relief lasts a long longer than even if I issued a TRO that
said everything you asked me to say.
And I'm not saying they're
So that's really worth thinking about.
And thatPage 86
leads me to the question I didn't ask initially, which is, if I
have to issue a TRO, your pleading assumed it would evaporate
in two weeks.
after a hearing?
Is that true if it was issued with notice and
MS. FARER:
Our position, Your Honor, is that it
should convert to a preliminary injunction and last for the
duration of litigation.
THE COURT:
need an opinion with more findings in it than a TRO would have,
isn't that true?
If and when it converts, at that point I
MS. FARER:
It's our position that if it's entered by
consent, which we are hopeful --
THE COURT:
Well, yes, if it's entered by consent, I
don't have to do anything.
and it really should, given how close you are -- and I have to
do something, I think we have to think seriously about how long
it could last and when we would be having a hearing on a
preliminary injunction, which would be very similar to this
hearing except you would actually be talking about the
exhibits, and I don't see how I have a chance to read them in
two weeks.
But if that process doesn't work --
Given the volume of what you've all given me, I don't
think it would be fair to the Court or fair to you to say this
thing needs to be decided in two weeks, particularly since
everything else I have on my schedule and had on my schedulePage 87
before the TRO came along, in the next two weeks.
So what I'm going to do then is refer just the
question of the language of the consent decree to mediation
with Magistrate Judge Faruqui starting as soon as he can see
you, and ask the parties for a status report with respect to
the -- if you haven't docketed anything within the day after
the order, then I guess I would ask for a status report on --
what is today?
as to whether the discussions are ongoing or whether they've
Tuesday.
Maybe by close of business Thursday
reached an impasse.
And if it's just an impasse with respect to things
that you can say we've agreed to all this, but we have this and
this and this, you can just let me know what's going on by
close of business Thursday.
see you between now and then, you need more time, let me know.
And if it turns out that he can't
If there is a consent decree, that will render the
request for a TRO, and I think preliminary injunction, moot.
And at that point, what we will need to do is set a schedule
for the disposition, dispositive motions, whether they're
motions to dismiss or they're motions for summary judgment, and
you'll be able to propose how long you think you need to do
that and do that right.
The way I would envision this happening is the
defense would file -- defendants would file their motions
first, the government would then have the opportunity to opposePage 88
and file at that time any cross motion of its own, supported by
a single memorandum of law, and then the reply or cross
opposition, and then the cross reply.
in big finance cases, like the A&E Trust case, that shortly
after the pleading is due -- you'll get detailed instructions
about how to do this -- but you're going to file a hyperlinked
version so that I can read -- with all the technology in this
courtroom, I know you can do it -- so that I can read the
pleading and just click on the link and get to the exhibit that
I think, I've done this
you're citing.
I have a lot of difficulty toggling back and forth.
The government's memo, when it got to the legal section, it
cited the statement of facts, so then I had to go back to the
statement of facts and see what you cited in the statement of
facts.
will be instructions, it's not going to look like this, where
it's full paragraphs and they're fairly argumentative.
going to be one fact per numbered paragraph, with the citation
that supports it in that paragraph, so it's very, very clear to
me where every fact that either side is relying on is coming
from.
With respect to that, the statement of facts, there
It's
But I don't think we need to set the schedule for
that until -- if we know that we have a consent decree, then
you can propose a schedule for how to do this and we'll set a
hearing date and all that.
But, let's -- and if this is notPage 89
going to work out and I have to issue on order, then I'll issue
on order.
All right.
Is there anything else I need to take up
right now on behalf of the government?
MS. FARER:
Nothing for the government, Your Honor.
THE COURT:
Okay.
Anything further on behalf of any
of the defenses?
MR. CELIO:
No, Your Honor.
MR. NELSON:
(Shakes head.)
THE COURT:
Okay.
Appreciate the time that everyone
has put into this this afternoon.
dog.
*
*
*
Thank you.
Including thePage 90
CERTIFICATE OF OFFICIAL COURT REPORTER
I, JANICE DICKMAN, do hereby certify that the above and
foregoing constitutes a true and accurate transcript of my
stenographic notes and is a full, true and complete transcript
of the proceedings to the best of my ability.
Dated this 14th day of June,
________________________________
Janice E. Dickman, CRR, CMR, CCR
Official Court Reporter
Room 333 Constitution Avenue, N.W.
Washington, D.C.
25
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PlainSite Cover Page
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Exhibit 1
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1
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
2
3
4
5
6
7
8
Securities Exchange
Commission,
)
) Civil Action
) No. 23-cv-1599
Plaintiff,
)
) Hearing for Temporary
vs.
) Restraining Order
)
Binance Holdings Limited,
) Washington, DC
et al.,
) June 13, 2023
) Time: 2:00 p.m.
Defendants. )
___________________________________________________________
9
10
11
TRANSCRIPT OF HEARING FOR TEMPORARY RESTRAINING ORDER
HELD BEFORE
THE HONORABLE JUDGE AMY BERMAN JACKSON
UNITED STATES DISTRICT JUDGE
____________________________________________________________
12
A P P E A R A N C E S
13
For Plaintiff:
14
15
16
17
Jorge G. Tenreiro
John Emmett Murphy
Securities and Exchange Commission
100 Pearl Street
New York, NY 10004
18
19
20
21
22
23
24
25
Matthew Scarlato
Jennifer Farer
David Nasse
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
For Defendant:
Binance
Daniel Nelson
Jason Mendro
Richard Grime
Kendall Day
Stephanie Brooker
Gibson, Dunn & Crutcher, LLP
1050 Connecticut Avenue, NW, Suite 300
Washington, DC 20036
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1
For Defendant
Binance
2
3
4
2
Mary Beth Maloney
Gibson, Dunn & Crutcher, LLP
200 Park Avenue
New York, NY 10166
Michael Celio
Gibson, Dunn & Crutcher, LLP
1881 Page Mill Road
Palo Alto, CA 94304
5
6
BAM Entities
7
8
Matthew Martens
Matthew Beville
Wilmer, Cutler, Pickering, Hale and Dorr
2100 Pennsylvania Avenue, NW
Washington, DC 20037
9
Adam Fee
Milbank, LLP
1850 K Street, NW, Suite 1100
Washington, DC 20006
10
11
12
Changpeng Zhao
13
14
15
Abid R. Qureshi
Michael Bern
William Baker, III
Douglas Yatter
Melanie Blunschi
Latham & Watkins, LLP
555 11th Street, NW, Suite 1000
Washington, DC 20004
16
____________________________________________________________
17
Court Reporter:
18
19
20
21
22
23
24
25
Janice E. Dickman, RMR, CRR, CRC
Official Court Reporter
United States Courthouse, Room 6523
333 Constitution Avenue, NW
Washington, DC 20001
202-354-3267
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1
*
*
*
2
*
*
*
*P R O C E E D I N G S*
THE COURTROOM DEPUTY:
*
*
*
3
*
*
*
Good afternoon, Your Honor.
3
This afternoon we have civil action No. 23-1599, the SEC versus
4
Binance Holdings Limited, BAM Trading Services, Inc., BAM
5
Management U.S. Holdings, Inc., and Changpeng Zhao.
6
Will one of the attorneys representing the SEC please
7
approach the lectern, identify himself and his colleagues for
8
the record.
9
MR. SCARLATO:
Good afternoon.
This is Matt Scarlato
10
on behalf of the SEC.
I have with me, on the right, Jen Farer,
11
Jorge Tenreiro, Emmett Murphy, and David Nasse on the left.
12
THE COURT:
All right.
13
THE COURTROOM DEPUTY:
14
MR. NELSON:
Good afternoon.
Counsel for Binance.
Good afternoon, Your Honor.
Dan Nelson
15
from Gibson, Dunn on behalf of Binance Holding, Limited.
16
me are my colleagues Michael Celio, Mary Beth Maloney, Jason
17
Mendro, Stephanie Brooker, Kendall Day, and Richard Grime.
18
THE COURT:
All right.
19
MR. NELSON:
20
THE COURTROOM DEPUTY:
21
MR. MERTENS:
With
Good afternoon, everybody.
Thank you, Your Honor.
Counsel for the BAM parties.
Good afternoon, Your Honor.
22
Mertens for the BAM entities.
23
Beville.
Matthew
I'm joined by my colleague Matt
And from the Milbank law firm, Adam Fee.
24
THE COURT:
All right.
25
THE COURTROOM DEPUTY:
Good afternoon.
Mr. Qureshi, representing the
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1
4
individually named defendant Mr. Zhao.
2
MR. QURESHI:
Good afternoon, Your Honor.
Abid R.
3
Qureshi, of Latham & Watkins on behalf of the individual
4
defendant.
5
and Ms. Melanie Blunschi, also of Latham.
6
With me are Mr. Yatter, also of Latham & Watkins,
THE COURT:
All right.
Good afternoon, everyone.
Is
7
that everyone?
I take it there's lots more lawyers sitting in
8
the back representing all of these people.
9
all consider, before you leave the courthouse, filling out the
And I hope you'll
10
form agreeing to accept CJA assignments.
11
Apparently there are a lot of them who have a lot of time on
12
their hands here in the District of Columbia.
13
if any of you speak Spanish, because we need some people like
14
that to take on even just mediations on behalf of indigent
15
defendants, which apparently these defendants are not.
16
All right.
We need lawyers.
And please note
We're here on the government's motion for
17
a TRO.
18
written as if it was for opposing counsel, as opposed to a
19
neutral who has not been living with these entities and assets
20
on a day-to-day basis for the past few years.
21
technical terminology that takes a lot of time to unpack, as
22
they say in the business space, along with parades of acronyms
23
which I've devoted considerable time to reviewing and
24
absorbing.
25
The memorandum, I have to say, at some points was
There's a lot of
But I do have some basic questions that I want to
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5
1
ask, just to make sure I know exactly what is and what is not
2
being alleged and exactly what the government's position is
3
with respect to these assets and these companies.
4
However, before I get into that -- I was planning to
5
do this later, but this seems like the appropriate time -- I do
6
want to note that you've given me, the government, 1,000 pages
7
of exhibits, and the defendants have filed more than 3,000,
8
some of them late.
9
of the legal and factual allegations, I think everyone in the
10
room can agree that it's important to get this issue of first
11
impression right.
12
going to give me enough time to get to the bottom of everything
13
that you've given me with the level of understanding that you
14
all deserve.
15
Putting aside who is right about the merits
And even holding a hearing in 14 days isn't
And it appeared to me last night, when I got the
16
defense submission, was largely about the fact that you thought
17
there was some sort of consent decree that could be entered,
18
that the parties weren't really that far apart in terms of how
19
to preserve the assets of the U.S. investors and the U.S.
20
entities pending the outcome of these proceedings, and if an
21
order could be entered with the parties' agreement, that would
22
actually give us time to give this complicated factual and
23
legal matter the attention it deserves.
24
25
So I ordered the government to give me a red line,
what exactly is missing from what they've proposed?
I wanted
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6
1
to kind of strip away the grand statements by each side about
2
what was and wasn't a good proposal and I want to get into the
3
nitty-gritty.
4
across the red line that initially was a little intimidating,
5
the more I looked at it, the more I thought that, really,
6
there's not that much difference between the parties anymore.
7
The SEC seems to understand that BAM Trading needs to operate
8
in the ordinary course of business pending the outcome of this
9
proceeding, not only for itself, but shutting it down
And while there was sort of a spray of red
10
completely would create significant consequences not only for
11
the company, but for the digital asset market in general.
12
What's left to negotiate is the kind of nitty-gritty
13
and the kind of details, the wallets, and the shards that are
14
of importance to and understood much better by those who are
15
knowledgeable and immersed in these matters.
16
to me, notwithstanding the fact that I think I'm a pretty smart
17
person, I do a pretty good job up here, that there's a lot of
18
reasons why it would be far better for people like you, as
19
opposed to a generalist like me, to get this consent decree
20
over the finish line and you have the opportunity to be
21
operating under an agreement that you all crafted, as opposed
22
to the one that I come up with, and which would ultimately then
23
be appealable by whichever side is disappointed, taking even
24
more time and attention away from getting to the merits.
25
And so it seems
So, in some cases, when you have this many lawyers
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7
1
working on something, there's kind of a Department of State and
2
a Department of Defense and you've got the people that are
3
doing the diplomacy and the people that are getting ready for
4
battle.
5
benefit to excusing some of you, the Department of State, to
6
now discuss the red line that you have, that all of the
7
disputes have now been limited to, a couple pages, or whether
8
you still want the afternoon and the evening to think about it,
9
at which time I could, if you thought it was -- would be of
And if that is the case here, and there would be some
10
benefit, send you to Magistrate Judge Faruqui to try to finish
11
the process.
12
But does it make sense to just go ahead with all my
13
questions and answers with all of you present right now, or
14
would some of you like the opportunity to confer?
15
(Pause.)
16
MR. SCARLATO:
17
THE COURT:
18
MR. SCARLATO:
Your Honor?
Yes.
Matt Scarlato.
Good afternoon.
Your
19
points are well taken.
And so if you can give us a minute's
20
indulgence to speak with the other side, we'll have an answer
21
for you shortly.
22
THE COURT:
23
MR. SCARLATO:
24
THE COURT:
25
All right.
Thank you, Your Honor.
I'll be happy to give you all the time
you need to cross the middle of the courtroom and put your
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1
heads together.
2
room?
No?
Would it be easier for you all if I left the
It looks like you're fine.
3
(Pause.)
4
MR. SCARLATO:
5
8
That was fast, Your Honor.
No, we
cannot come to an agreement right now.
6
THE COURT:
Shocker.
Okay.
All right.
What I'm
7
going to do then is go ahead with the questions that I have.
8
But, one of the questions I will be asking all of you is
9
whether you would agree to participate with Judge Faruqui as
10
early as he can see you to try to discuss the consent decree.
11
In the meantime, I'm going to have the TRO and everything you
12
tell me today under advisement.
13
But, there's a lot of reasons, in addition to the
14
ones I've listed, why the best agreement would be one that you
15
all draft.
16
you can be prepared for it.
17
18
All right.
Then are you the one answering the
questions with respect to the motion?
19
20
So I'm not going to ask you that question now, but
MR. SCARLATO:
Depends on the question, Your Honor,
but probably.
21
THE COURT:
Okay.
Well, that will be fun.
All
22
right.
The memorandum says, at multiple points, including on
23
pages 16 and 19, that the defendant, particularly the U.S.
24
entity BAM Trading offers the ability to buy and sell, quote,
25
crypto assets, including crypto asset securities.
That's your
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9
1
formulation.
At various points in the memorandum you refer to
2
"crypto assets," but in others you use the term "crypto asset
3
securities."
4
I am aware of your legal argument about what made a
5
particular offer, the Binance coin -- which you also refer to
6
BNB -- a security for purposes of the act.
7
is, is that the same as the BUSD, or is it different?
8
MR. SCARLATO:
9
THE COURT:
My first question
Different coin, Your Honor.
Okay.
All right.
And we'll get to that
10
in a minute, but it would help me if, first, you would walk me
11
through what differentiates crypto assets from crypto asset
12
securities, and then I'm going to ask you to tell me which
13
assets in particular referred to in the memo and in the
14
complaint, other than the Binance coin, are the securities that
15
are the predicate for your complaint.
16
MR. SCARLATO:
17
THE COURT:
18
19
For our complaint, Your Honor?
Yes.
The only one mentioned, are we in
agreement, in the TRO is the Binance coin, is that correct.
MR. SCARLATO:
It's correct.
We also rely on other
20
cases where judges have found other coins in other cases to be
21
securities.
22
THE COURT:
All right.
And so the notion as to
23
whether these are securities or not, are you saying this has
24
been -- this is not a case of first impression here, that this
25
has been dealt with before?
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MR. SCARLATO:
10
Other courts have dealt with the
2
question in other -- not as to, at least, the coins at issue in
3
the TRO, which is Binance's coins, but in other cases, yes,
4
there have been judicial opinions on whether they meet what's
5
called the Howey test, Your Honor.
6
THE COURT:
Okay.
I understand that.
But before we
7
get into -- so my point is, the only one you're arguing in
8
the -- in your TRO motion of the defendants' is the Binance
9
coin?
You're saying that is a security.
10
MR. SCARLATO:
11
THE COURT:
That's correct.
All right.
But when you talk generally
12
about the companies and their businesses, you say they deal
13
both in crypto assets and crypto asset securities.
14
complaint allege any other specific coins are securities,
15
besides the BNB or the Binance coin?
16
MR. SCARLATO:
17
THE COURT:
18
MR. SCARLATO:
Does the
Yes, it does, Your Honor.
Which ones are they?
That would be in our complaint, Your
19
Honor, starting on paragraphs -- in the 300s, page 85, section
20
8, we give an explanation of the different coins that were
21
trading on the defendants' platforms.
22
it's our position we only need to prove one of these coins is a
23
security to prove our case, you know, we thought it proper to
24
allege that there were other coins that we see trading on these
25
platforms that should also be deemed securities.
And, you know, while
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1
THE COURT:
All right.
2
MR. SCARLATO:
3
THE COURT:
11
And --
Go ahead.
When you use the formulation crypto asset
4
versus crypto asset securities, can you tell me, what are the
5
differentiating factors?
6
MR. SCARLATO:
7
THE COURT:
8
Whether they meet the Howey test.
That's it?
The Howey test for each
one --
9
MR. SCARLATO:
10
THE COURT:
11
MR. SCARLATO:
Yes.
-- in -I'm sorry, Your Honor.
Yes, that's
12
how a security is defined, and we give 14 specific
13
representatives.
14
Honor.
15
gave a bunch that we thought satisfied that test and reserve
16
our right in discovery to, you know, conform our complaint to
17
the pleadings or whatever is necessary before trial.
Our complaint, we feel like, was long enough, so we
18
19
THE COURT:
All right.
Are the other crypto assets
that you're not labeling as securities, commodities?
20
21
We're not saying that's exclusive, Your
MR. SCARLATO:
The other -- that aren't alleged in
our complaint, Your Honor?
22
THE COURT:
The others that you say they're trading
23
in that you're not saying are securities, because you're not
24
saying all of the ones they're trading in are securities,
25
correct?
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1
MR. SCARLATO:
12
We -- at this time, Your Honor, we're
2
reserving our rights, just given we're at the pleading stage we
3
have to get into discovery where we can make a full assessment.
4
But our position, Your Honor, is that if one of these coins are
5
a security, we've won.
6
THE COURT:
7
MR. SCARLATO:
8
THE COURT:
9
I heard that.
Okay.
But you have said all over the complaint
crypto assets -- and you differentiate that specifically from
10
crypto asset securities, and you make it clear that one
11
category is larger than the other category and that both
12
categories are on the Binance.com platform and the Binance.US
13
platform, correct?
14
MR. SCARLATO:
15
THE COURT:
Yes.
So I'm asking you, the ones that you are
16
not putting in the securities category, what are they?
17
they commodities?
18
MR. SCARLATO:
Are
We are not -- thank you, Your Honor.
19
We are not taking a position at this time.
We're at the
20
pleading stage.
21
potential motion to dismiss and satisfying our burden under the
22
rules.
So we have, we think, way more than is required under
23
Rule 8.
We gave the Court and the parties notice as to -- I
24
think the number is 14 total coins, including BNB, which is at
25
issue in the TRO.
We are trying to get past, you know, any
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1
THE COURT:
All right.
13
If the Binance coin is the
2
only security that you're relying on right now for purposes of
3
the TRO and the facts that you rely upon when you describe to
4
me why it meets the test are from the time of the initial
5
offering, how does that -- how does that make it a security
6
now, such that BAM Trading, which was created later, didn't
7
even exist at the time of the ICO, how does it make it a dealer
8
in these securities?
9
MR. SCARLATO:
And, Your Honor, I want to see if my
10
colleague wants to -- do you mind if I defer to my colleague,
11
Mr. Murphy, on this?
12
THE COURT:
No.
Go ahead.
I don't want two of you
13
answering the same question, but two of you can answer
14
different questions.
15
16
17
MR. MURPHY:
So, sorry, Your Honor, let me just
restate -- oh, Emmett Murphy, from the SEC.
So let me just restate, so I understand.
The
18
question is, why is -- why are facts back from 2017 relevant to
19
whether BNB is a security when BAM Trading as a platform hadn't
20
opened by 2017?
21
THE COURT:
Yes.
There's an argument made in their
22
opposition that when you describe it as a security, the facts
23
you're relying upon are the fact that it was offered at the
24
time when they were saying we're going to use these funds to
25
set up this platform, et cetera, et cetera, and you talk about
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14
1
the enterprises being created and you -- all your facts relate
2
to the 2017 offering.
3
didn't exist at the time of the offering and now these coins
4
have been around since then.
5
security?
6
And they have pointed out that they
So, how does it make it a
Why is it still a security now?
MR. MURPHY:
Yeah, Your Honor, so I was reading that
7
last night and I was confused because I thought at one point
8
they were making an argument about statute of limitations for a
9
Section 5 offering under the Securities Act, which they can
10
raise as a defense.
11
facie case.
12
Howey looks at the economic substance of the instrument at
13
issue.
14
I don't think that undermines our prima
But if the question is:
Why is it a security?
And here, those statements back in 2017 are
15
unfiltered statements about what the economic reality is of
16
these crypto assets.
17
were investments where they were seeking money for investors to
18
grow the enterprise.
19
no longer an investment contract because -- and they have a
20
bunch of different things in their papers -- because it's
21
become adequately decentralized or somehow has changed its
22
nature --
23
THE COURT:
They were absolutely candid that these
If their argument is that it somehow is
I guess the point is, when you did the
24
offering, people could buy them.
And since then they've been
25
on the platforms and people could trade them, sell them,
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1
repurchase them.
2
the initial offering, they're responding to that asset.
3
one of those, I don't want one of those.
4
is it a security, as opposed to, like, another coin?
5
15
At that point the people aren't responding to
MR. MURPHY:
I want
So at that point, why
I guess I would just say that there are
6
secondary trading markets for all kinds of securities.
And if
7
the idea that once it goes into the secondary trading market it
8
doesn't become a security, that would destroy all kinds of
9
understandings of how the securities markets work.
The
10
statements that they made, again, go to the raw economic
11
reality of these people buy them so that their value will be
12
appreciated.
13
The Binance enterprise -- and you know in our papers
14
that we don't think there's such a clear distinction between
15
.com and BAM and the platforms.
16
both.
17
set out in our papers that this is an ongoing enterprise, there
18
are ties to the BNB, their prestige is tied to the BNB, they
19
will support the price; you will make money if you buy BNB.
20
And that is continuous from that ICO to the present day.
21
Right?
Binance is running
But they're clear in statement after statement that we
THE COURT:
Isn't that the flip side of what you say
22
a security is?
You're saying that they're saying it's tied to
23
them, as opposed to they're tied -- the success of the coin is
24
based on the success of the platform, and you just turned that
25
the other way, I think.
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1
MR. MURPHY:
I don't know, Your Honor.
16
I think
2
they've tied their fate to BNB in many ways, which goes to the
3
commonality element of Howey, where folks are looking at the
4
efforts of others.
5
statements in their papers to the effect of Binance has nothing
6
to do with BNB anymore, BNB is a baby that's been born and we
7
have nothing to do with it and it will be fine without Binance.
8
And I think the facts that we put into our papers are very
9
clear that that's not the case, that they've -- on their web
And the question might be, there's
10
page and their blog, they are constantly monitoring the price,
11
talking about how it's a valuable asset, giving you additional
12
uses for the asset, and making clear to the investing public
13
that they are invested in it, they are going to continue to
14
create ways to make money on BNB.
15
THE COURT:
All right.
What is your response to the
16
argument that the coin can't be a security contract for
17
purposes of the Howey case if there's no contract?
18
MR. MURPHY:
I would respond by pointing to the
19
language in Howey itself which says, essentially, that
20
investment contract was meant to be a catchall term for all the
21
different ways that people solicit capital to get other
22
people's money on the promise of profits.
23
Howey -- if I could just look, so I don't -- Howey says that an
24
investment contract can cover schemes or contracts.
25
think that language is clear.
And the language in
And I
And if you look at -- this is
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1
17
on, sorry, 298 and -99 in Howey.
2
Howey defined the investment contract as a contract
3
transaction or scheme.
If you look at the Telegram case that
4
we cited in our papers, there you had initial purchasers who
5
had contracts and the later public where it was distributed
6
very quickly.
7
substance of that, where there had clearly been an attempt made
8
to insulate themselves from the securities laws by saying we
9
had these initial sophisticated purchasers, they're exempt from
And the Court looked through the economic
10
the securities laws, they're very sophisticated, and whatever
11
happens after that we have no control of.
12
The Court in Telegram looked through that and said,
13
no, it's all part of the same offering.
14
broader public, that's the only reason it has its value.
15
was no contract with that broader public and yet the Court
16
still found a Section 5 offering there.
17
THE COURT:
Okay.
You are selling to a
There
I want to talk about the
18
misrepresentations, which is section 6 of your statement of
19
facts.
I don't know if that's your issue.
20
MR. MURPHY:
21
THE COURT:
22
MR. MURPHY:
23
24
25
We're going to tag team, if you'd allow.
All right.
Sorry, I don't want to walk off with
Mr. Scarlato's papers here.
THE COURT:
All right.
That section alleges
misrepresentations by the U.S. BAM entities regarding trade
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18
1
surveillance and trade volume, and it expresses skepticism
2
about whether these organizations are really truly monitoring
3
for market manipulation or whether they have procedures to
4
control it, and you point to the wash trades.
5
the actionable misrepresentation?
6
pitch deck that they hired vendors and got the reporting
7
software to provide trade surveillance and market manipulation
8
monitoring?
9
MR. SCARLATO:
Close.
What exactly is
Is it the statement in the
It's basically -- it's not the
10
wash trading itself, Your Honor.
11
we use it as evidence that -- of the misreps that you
12
identified.
13
misrepresentation in the pitch deck, which are to the equity
14
investors that we allege.
15
misrepresentations.
16
had surveillance on the platform, which is, Your Honor, typical
17
of any registered platform.
18
didn't have any surveillance and wasn't required to.
19
We don't charge that conduct,
And just to put them in boxes, you first have
THE COURT:
And you have two sets of
You have one, first, that they said they
This one was not registered, so it
The sentence, I think you put it in your
20
statement of facts, you said the platform is engaged in
21
monitoring for manipulation.
22
statements?
Or you just said --
23
MR. SCARLATO:
24
THE COURT:
25
Is that one of the false
Correct --
-- that they represented that, but you
didn't say where they said it, so I wasn't --
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1
MR. SCARLATO:
If that's the case, Your Honor, we
2
apologize.
3
given to equity investors, Exhibit A-53.
4
19
But it's a citation to the pitch deck, which was
THE COURT:
Right.
Is there anything else?
The
5
statement in the pitch deck was we hired vendors and got
6
third-party software to provide trade surveillance and
7
monitoring.
8
MR. SCARLATO:
9
THE COURT:
10
11
That's right.
Okay.
That's the false statement.
Is
there any other false statement?
MR. SCARLATO:
In the category of surveillance
12
there's another false statement where the former CEO, Catherine
13
Coley, made a public statement -- I don't have it in front of
14
me, but it's something about how we don't allow toxic behavior
15
on the exchange, which, again, this was in, I think, 2019, and
16
that statement was also false because at that time, in effect,
17
it wasn't until 2022 that BAM Trading put any trade
18
surveillance on the platform.
19
So that's one box.
And it has two subparts, equity
20
investors and then just the retail public who is listening to
21
the CEO talk about the platform.
22
The second box, if Your Honor is ready, has to do
23
with the volume reporting itself.
And here we -- you know,
24
this is a trading platform, the way that it solicits customers
25
is it says we have a lot of volume, come trade with us, right?
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20
1
So throughout the relevant period BAM Trading made a bunch of
2
representations on Twitter, through data aggregators and
3
elsewhere that said our trading volume is X.
4
fraud was, is they did not explain that X meant we weren't even
5
checking for any wash trade.
6
point comes in, where they were actually conducting wash
7
trading, which was inflating the volumes.
8
9
And what the
And that's where the Sigma Chain
The final piece in that category, Your Honor, is
again back to the pitch deck, because the pitch deck itself
10
that was shared with investors who invested in BAM also made
11
representations about trading volumes.
12
other accompanying documents we did not include in the TRO
13
papers for simplicity sake, but there were other
14
representations made to these investors about the volume on the
15
platform.
16
by wash trading and the lack of surveillance.
17
And then there was some
And again, the fraud is these volumes were inflated
THE COURT:
All right.
What's your response to the
18
defense argument that the volume was minimal compared to the
19
overall volume and it couldn't have really been material or
20
affected anybody?
21
MR. SCARLATO:
Then I would refer defense counsel to
22
Mr. Zhao's own statement on Twitter that we cite, I think both
23
in our brief and the complaint, where he acknowledges that
24
investors want to know if they're trading on a platform that is
25
corrupted by wash trading or lacked surveillance.
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1
2
21
And then in addition, Your Honor, as to the equity
investors --
3
THE COURT:
I think the statements you quoted were
4
much broader than that.
5
I don't remember -- he made a specific statement about wash
6
trades that you --
7
MR. SCARLATO:
It was like credibility is important.
I believe it does mention wash
8
trading.
I have to pull it up.
9
Honor, I'll just say that we also, in the Steele declaration,
10
give -- Mr. Steele attests to an interview we had with one of
11
the equity investors who told us that when he was investing in
12
BAM Trading -- or, BAM Management, excuse me, he wanted to know
13
if this volume was inflated and if they had trade surveillance.
14
And that was -- so that was the materiality point from a
15
different perspective.
16
THE COURT:
But while I'm doing that, Your
And so is he saying he relied on that
17
when he made his decision to buy?
18
MR. SCARLATO:
He said it would have been important
19
for him to know.
He didn't know it at the time, right?
He was
20
defrauded.
21
situation, he -- you know, I can refer you to the paragraph in
22
the Steele declaration, if you'd like.
But when we interviewed post hoc and told him the
23
But if I can first refer to Mr. Zhao's comment?
24
THE COURT:
25
MR. SCARLATO:
Sure.
He said, "Credibility is the most
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22
1
important asset for any exchange.
2
volumes" -- and that's how you fake your volumes, through wash
3
trades.
4
THE COURT:
All right.
If an exchange fakes their
So let's go back to the
5
statement in the pitch deck that they hired vendors and got
6
third-party software to provide trade surveillance and market
7
monitoring.
8
just that they -- those things weren't actually doing what they
9
were supposed to do?
Are you alleging that they did not do that, or
Was the statement literally false or did
10
it just give rise to an impression of more oversight than there
11
was?
12
You don't actually say that.
MR. SCARLATO:
So the full facts are that they had
13
hired a trade surveillance monitor, but they had done nothing
14
with it at the time that these statements were made.
15
are that it wasn't until after the -- what was called the seed
16
funding ground was completed, they finally started ramping up
17
the actual surveillance of the platform.
18
after these statements were made.
19
the time the statements were made and at that time they had
20
nothing, frankly.
21
implemented in any way.
22
The facts
But that was well
And so, again, it matters at
They had a contract, but it wasn't
THE COURT:
Are there -- putting aside the ones
23
described in section 6, are there other alleged
24
misrepresentations that you maintain were in violation of the
25
Act?
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1
2
MR. SCARLATO:
THE COURT:
All with respect to trade volume and
trade surveillance on the U.S. BAM platform.
5
MR. SCARLATO:
6
THE COURT:
7
Those two categories with retail and
equity investors are it.
3
4
23
That's exactly right.
Are there any other misrepresentations
that you're alleging?
8
MR. SCARLATO:
Oh, Your Honor, I forgot to mention
9
that the terms of use for BAM Trading and the terms of use,
10
which is what anyone who joined the platform has to sign up
11
for, they have a section on manipulative trading, and we allege
12
that, and I believe prove in our TRO papers, that when people
13
were signing up for the platform, they were defrauded by
14
believing that BAM prohibited manipulative trading, when in
15
fact its own control person, Mr. Zhao, was doing exactly that.
16
17
THE COURT:
20
But the answer -- but that's
sort of part of the same thing, right, the --
18
19
All right.
MR. SCARLATO:
Correct, yeah.
I just forgot a layer
to it.
THE COURT:
All right.
So I read that section.
Are
21
there any other misrepresentations that you're talking about
22
besides that set?
23
MR. SCARLATO:
Not at this time.
24
THE COURT:
25
relates to failure to register.
So every other claim in the case then
Am I correct about that?
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MR. SCARLATO:
24
Failure to register, the exchange, the
2
clearing agency, the broker-dealer, and then the section 5
3
claims, which are the office --
4
THE COURT:
5
MR. SCARLATO:
6
THE COURT:
7
MR. SCARLATO:
Control person.
Excuse me?
The control person.
No.
I'm sorry.
The section 5
8
Securities Act, which is registering the office in sales.
9
that we allege they were selling BNB, BUSD, and then they're
10
providing a service or offering sales that needed to be
11
registered and were not.
12
THE COURT:
13
MR. SCARLATO:
14
THE COURT:
So
All right.
Did I confuse you?
When you go through -- I'm going to go
15
through all the failure to register claims with you to make
16
sure I understand them.
17
MR. SCARLATO:
18
THE COURT:
Sure.
You're kind of swallowing your words and
19
I still don't know what you said at the end of the last
20
sentence, the sentence that you keep saying failure to
21
register.
22
failure to register as an exchange, and failure to register --
23
what's the term?
Besides failure to register as a broker-dealer,
As the trading --
24
MR. SCARLATO:
25
THE COURT:
Clearing agency.
Clearing agency.
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MR. SCARLATO:
2
THE COURT:
There you go.
25
Okay.
Those were the three.
And different
3
entities are alleged to be one or the other, and fail to
4
register as one or the other.
5
ones you're alleging are or aren't those things, and fail to
6
register.
7
talking about?
8
9
But is there some other failure to register you're
MR. SCARLATO:
clear.
I'm going to go through which
Yes.
And I apologize if I wasn't
So there are the offers and sales of the securities
10
themselves.
11
about the IPO -- ICO, excuse me, of BNB.
12
been registered; it was not.
13
includes to the employees, and then we also allege BUSD -- it's
14
not in the TRO papers, Your Honor, but in the complaint we also
15
allege that the offer and sale of BUSD should have been
16
registered under Securities Act section 5.
17
18
For example, you talked earlier with my colleague
THE COURT:
Okay.
MR. SCARLATO:
20
THE COURT:
22
Subsequent sales of BNB, which
I think that is more in the
complaint than in the --
19
21
So that should have
Correct.
-- in the TRO memo, which is what I'm
really focused on at this point.
Is it an element of the claims, the failure to
23
register claims, that the individual or organization knew of
24
the registration obligation, failed to register, or is knowing
25
and willful not an element of that violation?
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MR. SCARLATO:
2
THE COURT:
26
Not an element at all.
And a big theme of the submission, an
3
important aspect of your concerns is the potential conflicts
4
arising from the overlapping ownership and relationships
5
between the various defendants and the multiple functions that
6
they perform; in particular, the international company and then
7
the U.S. companies.
8
specifically allege that those conflicts or functions violate
9
the Act.
10
But the memo in support of the TRO doesn't
And if the companies were registered, would there be
regulations that would be violated by these relationships?
11
MR. SCARLATO:
Your Honor is exactly on point.
We
12
point out those conflicts of interest to show you why they
13
should have been registered, because the failure to register
14
creates the conflicts of interests that things like wash
15
trading and commingling result in without supervision or
16
regulation.
17
violated.
18
19
But those themselves are not the laws that are
THE COURT:
You say the failure to register created
the conflicts of interest.
20
MR. SCARLATO:
21
THE COURT:
22
MR. SCARLATO:
23
THE COURT:
So --
Permitted.
Permitted.
Permitted.
So if they were registered, then these
24
would not be violations of the Act, but they would be
25
regulatory violations of a registered entity?
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1
MR. SCARLATO:
27
Like, if the exchange were registered,
2
there would be safeguards in place to make sure there was trade
3
surveillance so that Mr. Zhao could not wash trade on the
4
platform.
5
6
7
8
9
THE COURT:
And disclosure obligations, I take it,
also?
MR. SCARLATO:
Many.
And including the custody of
assets, which is why we're here today, right, Your Honor.
THE COURT:
Now, the SEC has obviously been aware of
10
the nature of Binance's business and the business of the U.S.
11
affiliates for some time.
12
they told Binance they couldn't operate in the U.S., which is
13
what led to the creation of the U.S. entities.
14
prompted the need to seek emergency relief?
15
MR. SCARLATO:
They got involved back in 2019 when
Right.
So what
So, Your Honor, it is true we
16
have been investigating the entities for several years.
And
17
obviously they were -- we were aware that they were operating,
18
but as I'm sure Your Honor can understand, that, you know,
19
government investigations take time.
20
been engaged with the parties to ensure that, you know, just
21
that the investigation went as planned.
22
process, we followed it, and there came a time that we, as well
23
as the defendants, that was this year, there were settlement
24
discussions and when those settlement discussions broke down we
25
realized that we were going to have to file a case, and then at
And, you know, we have
And so there is a
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28
1
that point we assessed the facts that we were learning, and we
2
were learning them real-time, Your Honor.
3
learned leading up to filing, like some of the audit reports
4
that we cite in our briefs.
5
and then there was a failure to come to an agreement on a deal,
6
the SEC realized it needed to not only file the case, but
7
accompany it with a TRO.
8
9
THE COURT:
There were things we
And when we put that all together
All right.
Now, the defendants say,
well, this is a big broad area that is generally unregulated at
10
this point, you should be proceeding by rule making.
11
seems to be saying let's see what congress gets around to
12
doing.
13
to assign the determination that would have such far-reaching
14
affects in a billion dollar industry to a lone federal district
15
judge, especially when there's another lone federal district
16
judge in a parallel action who could rule the other way?
17
seems like an inefficient and cumbersome way to establish a
18
national, consistent, understandable policy for the regulation
19
of trading in crypto assets.
20
No one
Why is it prudent, from the Commission's point of view,
It
Now, I'm not sure on what basis the defense says,
21
well, you should tell them that they should have exercised
22
their discretion to do a rule making, because I don't know that
23
I have the power to do that and I imagine you would tell me
24
that I don't.
25
make sense to go this way?
But, still, the question is, why -- why does it
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MR. SCARLATO:
29
Because this is the law, Your Honor.
2
The Howey test has been around since the 1940s.
3
we tried to interact with these entities to, you know, figure
4
out a plan.
5
longstanding and anything but new, Your Honor, and defendants
6
knew the rules.
7
of our claims are not scienter based.
8
allege, there are many things that the defendants have said
9
that acknowledge they knew these were the rules and they just
10
The technology was new.
And, you know,
The rules are
You know, Your Honor says this wasn't -- many
But, you know, as we
chose not to follow them.
11
So at a given time the SEC can try to interact with
12
these entities to come to a resolution or try to do rule
13
making.
14
enforcement arm is here, too, and when we see the law is being
15
violated, we have to act on it.
16
THE COURT:
Yes, there's lots of things the SEC could do, but the
All right.
Now, most important for
17
purposes of the TRO and the asset freeze is section 7 of your
18
statement of facts where you're talking about the money that's
19
going out and where it's going.
20
about amounts transferred and where they went, but it wasn't
21
always clear to me in the memorandum, even when I sat down and
22
looked at the accountant's declaration, where they come from
23
and your language kind of blurred the distinction.
And there are a lot of details
24
For example, on page 26 you say:
Between 2019 and
25
2021, Merit Peak's account received over $22 billion.
And then
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1
you say:
2
owned company of defendant Zhao, and you -- offshore.
3
say these funds consisted in significant part of Binance
4
Platforms, plural, customer assets, including those of
5
Binance.US platform customers and other sources.
6
And Merit Peak, just to circle back, is a wholly
And you
Can you clarify or walk me through the transfers you
7
allege were made specifically from the U.S. entities, as
8
opposed to the international Binance platform, to offshore
9
accounts held by Zhao and how you know that those were customer
10
assets?
11
MR. SCARLATO:
Sure, Your Honor.
It is a lot of
12
details.
13
money primarily from three sources, one of which was an entity
14
called Key Vision.
15
at 8-A, you believe -- let me grab it.
16
some detail, Mr. Verma gives some detail on the application
17
that Key Vision submitted, and it shows you that -- it talks
18
about how Key Vision was involved in accepting deposits for
19
converting to the stable coin BUSD that we talked about
20
earlier.
21
Binance.com.
22
So the Merit Peak account, Your Honor, was receiving
And if you look at Mr. Verma's declaration
Yep, 8-A.
It gives
And it shows you that the email address is at
So that shows that this is Binance customers --
23
Binance.com, the international entity, customers and investors
24
who were putting money into the platform and it's going through
25
Key Vision, and so you have that.
And then separately, Merit
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31
1
Peak had billions of dollars coming in through other finance-
2
related entities, primarily BAM trade.
3
a billion dollars, I believe.
4
I believe that's paragraph 12.
5
And it was over
I was just trying to get to it.
Yep, 1.154 billion.
So you have what totals, in paragraph 12, $11 billion
6
coming in from Key Vision, which is customer funds, and then
7
you have $6 billion coming from Binance Holdings Limited, which
8
is the entity that operates the foreign exchange, .com.
9
don't allege that's customer funds; we don't know at this time,
And we
10
you know, discovery hasn't begun.
11
money coming from Binance Holdings.
12
inference of that, but we're not saying that at this time.
13
similar as to BAM Trading.
14
THE COURT:
But coming -- that amount of
There's probably an
And
So you're taking --
I'm still trying to get to the money
15
coming from the U.S. platform customers.
I think the thrust of
16
the TRO is the U.S. entities, making sure that their customers'
17
assets and their assets are not dissipated, are not sent
18
offshore, and are here in the event you determine that they
19
should be registered, or that there's a disgorgement or money
20
owed, due to the customers.
21
really, the focus of your proposed TRO, that they can't
22
transfer any money.
23
assume when you're talking about bringing money back to this
24
country, you're talking money back to the U.S. entities, not to
25
Binance.com.
And they're the subject of the --
And you're asking for repatriation.
I
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1
So what I want to know is where specifically are the
2
allegations about transfers from BAM Trading -- BAM Trading --
3
out, offshore, as opposed to the examples you're giving me are
4
still Binance.com, not Binance.US.com.
5
MR. SCARLATO:
Fair enough, Your Honor.
Sorry if
6
that was not clear.
But the point is that BAM Trading is
7
operating in the U.S., that's correct.
8
abroad are some of those so-called key shards, and that's part
9
of the repatriation order.
10
THE COURT:
11
MR. SCARLATO:
12
terminology down?
The only thing that's
We want those back.
Some of the what?
Key shards.
Key shards.
Did you get that
I can explain it, if you'd like.
13
THE COURT:
Go right ahead.
14
MR. SCARLATO:
Okay.
So under the crypto currency
15
security protocols that Binance -- excuse me, this is BAM
16
Trading employs, you need keys, kind of like, you know, the
17
nuclear football needs several people to put a key and turn it.
18
This is the crypto version of that.
19
are seven keys, as far as we understand.
20
21
THE COURT:
And there's -- three of them are
offshore.
22
MR. SCARLATO:
23
THE COURT:
24
MR. SCARLATO:
25
And so you need -- there
That's right, and we want them back.
Okay.
But your question was as to the money,
so do you want me to continue there?
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1
THE COURT:
33
Well, if you're saying we need to shut
2
down and impose this regime on the U.S. companies because we're
3
concerned about the dissipation of assets from the U.S.
4
companies, I want to know, where have you made a showing that
5
it is the money from the U.S. companies that is moving out?
6
MR. SCARLATO:
It hasn't happened yet, Your Honor.
7
But that's not the point.
The point is that we are concerned
8
about Mr. Zhao and Binance exerting their influence, based on
9
the motives that they've shown since the relevant period began,
10
for many years now, to exert that influence and to take those
11
funds offshore.
12
THE COURT:
Okay.
So you can say we don't want your
13
funds to go offshore, but why does what you just told me
14
justify saying you don't get to spend your money at all, it's
15
just frozen?
16
you describe the back and forth with counsel for the
17
defendants -- and we're talking about the U.S. -- and you said
18
the SEC has not obtained sufficient reassurance that Binance.US
19
customer assets, which total over 2.2 billion, are squarely in
20
the control of BAM Trading, rather than under the control or
21
influence of Binance or Zhao.
22
I mean, you've argued, on page 31 of your memo,
You're not alleging that they aren't, you're saying
23
you're not sufficiently reassured that they are.
24
say the SEC is concerned about the safety and security of those
25
assets.
Okay.
I understand that.
And then you
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34
But, I want to know, besides the interlocking
2
relationships then, what have you seen of money going out that
3
supports those concerns?
4
enough to support the kind of significant -- you're saying I
5
want to preserve the status quo.
6
you've got, that 2.2 billion, that stays right here in the
7
U.S., thank you very much.
8
you're saying you can't spend any of it, and we want an
9
accounting.
And are the concerns you talked about
The status quo is anything
But you're saying more than that,
But you're not alleging that it's gone anywhere.
10
You said it hasn't happened yet.
11
earlier in the TRO for asset freeze process than usual?
12
MR. SCARLATO:
Isn't that a little bit
Your Honor, I would say this is the
13
perfect time to freeze those assets.
But my colleague,
14
Ms. Farer, would like to comment on your question as well.
15
THE COURT:
All right.
Okay.
16
MS. FARER:
Good afternoon.
17
THE COURT:
And just to finish up, when you're
18
talking about repatriation, you're not talking about
19
repatriation of funds taken from the U.S. entities, because
20
you're not saying funds from the U.S. entities are gone; is
21
that correct?
22
MS. FARER:
We're saying funds from -- that relate to
23
the U.S. entities and the customers of the U.S. entities are
24
not based in the United States.
25
THE COURT:
Funds that relate to the U.S. customers
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35
and the U.S. entities are not based in the United States.
2
MS. FARER:
Correct.
3
THE COURT:
That is a different statement than the
4
question I asked you.
5
fit into what you're saying?
6
question of whether customer assets that came into the U.S.,
7
whether they left?
8
disagree with that?
9
So what does that mean and how does that
And what's the answer to the
Have they left?
MS. FARER:
He said no.
Do you
Your Honor, there are a number of
10
transfers out of the United States bank accounts that have left
11
the country.
12
$2.2 billion in crypto assets.
13
securities and crypto assets generally are controlled, and
14
their movement is controlled, is through these functions called
15
private keys, and portions thereof are what defendants refer to
16
as key shards.
17
But I think in large part we're focussed on the
And the way that crypto asset
And so the private keys, which control the
18
$2.2 billion in customer assets just for the Binance.US
19
platform, all but one of those are based outside of the
20
United States.
21
private keys.
22
And so our concern is with respect to those
In addition --
THE COURT:
I thought the keys were -- four were in
23
the U.S. and three were out?
24
it was three and four.
25
their position.
There were seven altogether, and
So you always needed one U.S., was
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2
3
MS. FARER:
36
So we can take a step back, Your Honor.
And I think that would be helpful to help us -THE COURT:
But what bothers me is the keys and the
4
shards are not mentioned in the memorandum.
5
says they're transferring money out, out, out, they're
6
dissipating assets, assets are going, they're leaving, and see
7
the Verma declaration.
8
money that left the United States that belonged to U.S.
9
investors, because you're saying we're really concerned that
So I'm saying, okay, tell me about
10
it's going to disappear.
11
disappeared.
12
MS. FARER:
The memorandum
And now you're not saying that it has
So I think we're saying a couple of
13
things, Your Honor.
14
significant transfers out of bank accounts in the
15
United States.
16
THE COURT:
I think in our memo we did identify
Okay.
And I think you said that they
17
consisted of Binance platforms customer assets, including those
18
of Binance.US.
19
from Binance.US?
20
happened yet.
21
coming out of the U.S., is it money in accounts that the
22
international company happened to have in the U.S. that it's
23
now moved out?
24
U.S. that has been moved out?
25
And so I said, okay, where was the money coming
And your colleague just said it hasn't
So has it happened?
What is the -- the money
Or is it money that the U.S. company had in the
MS. FARER:
It's both, Your Honor.
So I think, to
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1
take a step back, contrary to defendant's framing and
2
characterization of our papers, we are concerned about all U.S.
3
investors, both those on the domestic platform, Binance.US, and
4
the international platform, Binance.com.
5
for the violation set forth in our complaint does relate to, as
6
Your Honor identified, the interlocking of the entities and
7
trading platforms, the trading and money flow between the
8
platforms, between the entities.
9
And a large reason
And we have really tried to be reasonable, as set
10
forth in our papers and as represented by my colleague here, in
11
trying to have a narrowly tailored order to preserve assets
12
that are currently identifiable in the United States, and to
13
preserve assets, the crypto assets, the $2.2 billion in crypto
14
assets that we understand are under the control of individuals,
15
including those relating to Binance Holdings that are located
16
outside of the United States.
17
Really, what we're just trying to accomplish here,
18
Your Honor, is to preserve the status quo for all of the U.S.
19
investors on both platforms, and having a narrowly tailored
20
order to freeze this and understand the lay of the land.
21
And what I think is important for Your Honor to
22
understand is in addition to --
23
THE COURT:
24
your memo.
25
memo.
Except it's not their characterization of
I'm talking about your characterization of your
And what you said in your memo was we need this TRO
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1
because we don't have sufficient reassurance that Binance.US
2
customer assets, which total over 2.2 billion, are in the
3
control of BAM Trading.
4
the safety and security of those assets.
5
me, well, no, actually, the TRO is about all the investors on
6
both platforms.
7
me or what you wrote in your pleading?
8
defendants have to say.
And you said you're concerned about
What is it?
And now you just told
Which is it?
What you just told
Put aside what the
9
MS. FARER:
So it's both, Your Honor.
10
THE COURT:
Where is that --
11
MS. FARER:
-- so the asset --
12
THE COURT:
-- in your memorandum, where you asked me
13
14
The freeze --
to do this?
MS. FARER:
So the asset freeze pertains to the
15
$2.2 billion.
16
asked for that relate to the Binance holdings and Binance.com
17
relate to the broader universe investors.
18
very reason that I explained, Your Honor, is that we've
19
identified this $2.2 billion that we want to preserve and we
20
need additional information about the assets that may still be
21
held by Binance Holding on the .com platform that relate to
22
U.S. investors.
23
narrowly tailored as possible.
24
THE COURT:
25
Some of the discovery provisions that we've
And it is for this
As we said, we are trying to have this as
Okay.
Well, why is it saying that the
trading company, U.S. trading company can't make any
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1
withdrawals whatsoever, narrowly tailored, to accomplish this,
2
now that you've said that really a big part of the problem is
3
the investors on the international platform and not on their
4
platform?
5
MS. FARER:
We're saying the crux of the focus for
6
the freeze, Your Honor, relates to the 2.2 billion in U.S.
7
assets.
8
risks that we've identified here relates to the ever changing
9
story and the movement of key shards and crypto assets that
10
And if you'll allow me, Your Honor, I'll explain.
The
have occurred within the past six months.
11
If you'll indulge me, Your Honor, I can explain.
12
There's been a lot of talk in the papers about this wallet
13
custody agreement.
14
established, the domestic entities engaged in a number --
15
entered into a number of service agreements with Binance
16
holdings and Mr. Zhao, one of which was the wallet custody
17
agreement which specifically designated that Binance holdings
18
was the custodian of the wallets, meaning they had the -- they
19
set up the servers, they set up the software, they set up the
20
wallets, had control of all of the keys.
21
that view that that agreement was in effect.
22
referred to the Binance Holdings and Binance.com as the
23
custodian.
24
25
When the BAM Trading platform was
All evidence furthers
All the employees
It has been only recently, since the fall, that
defense counsel has now told us that the wallet custody
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1
agreement was, quote, not operationalized.
This is in the face
2
of audited financial reports reflecting that the wallet
3
agreement was in effect and that auditors have in fact
4
identified that Binance Holdings is implementing those
5
custodial functions.
6
and BAM Management counsel representations to the SEC
7
specifically identifying that this wallet agreement that --
8
that wallet custody agreement was in effect and that Binance
9
served as the custodian.
This is also in the face of BAM Trading
To the point, so much so, that they
10
said we are trying to explain to you how our assets are
11
custodied and controlled, but we have limited information,
12
given that Binance.com is our wallet custodian and performs the
13
functions at issue here.
14
So this -- we started asking a number of questions
15
for the past few months and all of the information has changed.
16
The wallet agreement is not operationalized, the wallet
17
agreement that was not operationalized has now been terminated
18
with no explanation as to why an agreement that was not
19
operationalized needed to be terminated.
20
THE COURT:
Well, does it matter, for purposes of the
21
TRO, to get to the bottom of whether it was operationalized or
22
whether it wasn't, whether it was operationalized and then
23
terminated?
24
who is controlling them?
25
Isn't just the question, where are the assets and
MS. FARER:
We don't care what you call it.
This gives rise to some of the questions,
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1
because then, subsequent to this engagement about the back and
2
forth of this agreement, because we would submit that it gets a
3
little bit too into the weeds, and we've said, we just want to
4
know who is in control and how they're in control and to make
5
sure that they -- the investor assets are safe and secure.
6
then we start hearing about all these movements of tech stocks
7
and servers and key shards.
8
9
So
The protocols that govern and secure the assets at
issue have changed multiple times since January.
It used to be
10
that there were -- it was a nine key shard protocol.
11
Honor, if you would like to take it to a higher level to
12
explain.
13
pieces and there are a certain number of pieces -- from what
14
our understanding is, we've asked a number of questions about
15
how this protocol works -- but what they've represented to us,
16
the particular pieces need to have, like -- need to execute
17
transfers and withdrawal.
18
But really, it's a password that's broken up into
January it was nine key shards, Binance Holdings had
19
three of them.
20
transfer.
21
without BAM Trading key shards.
22
And, Your
It was -- three shards were only required to
So as of that time, Binance.com could transfer
Again, at that time no key shards, except for maybe
23
one, was located in the United States.
Then at some point the
24
key shards changed to seven key shards.
25
required, three of which are by Binance.com.
You know, four
But notably, this
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1
key shard protocol does not even govern all of the assets at
2
issue.
3
governed by this protocol.
4
they were in the control of BAM Trading, but when pressed upon
5
that, it was a Binance employee who had recently been holding
6
the wallet at issue and now it was a BAM employee.
7
There were assets in Singapore and Tokyo that were not
And we were told by counsel that
So there's been a lot of moving parts, including,
8
most recently, we've been engaged with counsel for weeks now
9
about a hardware leger wallet located in Singapore.
And in
10
their papers, as of last night, they've said that there are no
11
Binance.US wallet -- assets on that wallet.
12
significant transfers.
13
And we've seen
So our concern here about the risk, Your Honor, is
14
there are all these moving parts, there's no evidence as to who
15
is in control at what point and there's -- all the evidence
16
shows that there is not a sufficient control within the
17
United States, within the Court's jurisdiction to make sure the
18
significant amount of customer assets are protected.
19
contrary to defense counsel's explanation about the, quote,
20
unquote, fiat, the U.S. dollars in bank accounts, we have no
21
confidence that the company assets and the investor assets are
22
segregated because they are held in these -- what are called
23
omnibus wallets, they all go into these wallets.
24
25
And
So in addition to the significant movement of money,
dollars through these fiat accounts, numbers of accounts have
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closed, even before we began this TRO process, the fiat has
2
changed --
3
THE COURT:
43
Well, that's what I keep asking about, is
4
the significant movement of money.
You've explained to me that
5
we've got the 2.2 billion, whether they're in wallets or
6
they're not, they have eight people governing them, they have
7
nine; they're here, they are there.
8
trading Binance.US platform, some of it are assets that people
9
got on the international platform, but they belong to U.S.
Some of it is from the BAM
10
customers, and it's 2.2 billion and it's somewhere, and you
11
want it frozen.
12
that also a repatriation because you don't think it's here?
13
I understand that.
MS. FARER:
And is that a freeze or is
Your Honor, the way that we -- because we
14
are not -- we were trying to have a very narrowly tailored
15
order.
16
investor assets frozen.
17
redemptions out of those customer funds.
18
just want whoever is controlling those assets to be within the
19
United States under the Court's jurisdiction.
20
21
And as Your Honor identified, we don't want the
THE COURT:
So we are allowing customer
All right.
Our concern is we
Now, that's the 2.2 billion
that you said you wanted to preserve.
22
MS. FARER:
Right.
23
THE COURT:
But the memo talks a lot about transfers,
24
not -- this went to Merit Peak, this went here, this went
25
there, it's going offshore.
And I thought the upshot was that
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1
it was going offshore from -- I'm not taking about the 2.2
2
anymore -- from BAM Trading's customers' assets or BAM
3
trading's own assets.
4
and what your colleague said is our concern is that they're at
5
risk of going offshore.
It hasn't happened yet.
And you just
6
said we're seeing significant movement of money.
So I want to
7
know, talking about Binance.US, U.S. customer assets, money
8
that should be in the control of BAM Trading here in the
9
United States, has it moved yet?
10
MS. FARER:
U.S. assets are going offshore or are --
Is it moving?
The current account information that we
11
have, Your Honor, is that it is moving within banks within the
12
United States.
13
counsel, certain banking partners have not allowed them to --
14
are shutting down their accounts.
15
raised any -- we raised the idea of a TRO.
16
In the time that we have been engaging with
And this is even before we
So contrary to defense counsel's representation,
17
these banking issues have been public that BAM is having.
18
so they are having trouble securing the U.S. dollars in the
19
United States.
20
21
22
23
And
But to Your Honor's question about all of the
allegations -THE COURT:
I want to know, are they going offshore?
That was a big theme of the memo.
24
MS. FARER:
Yes, Your Honor.
25
THE COURT:
And I just want to know, are you saying
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1
it's happening or it's not?
2
that I've now asked this question to each of you five times.
3
MS. FARER:
And it's kind of stunning to me
So currently the assets are not going
4
offshore.
5
relates to a lot of movement of funds from Merit Peak into the
6
United States, into accounts that include U.S. customer funds
7
and back out.
8
current accounts, we're not seeing any flows of money outside
9
of the United States.
10
The references to the Merit Peak and Sigma Chain
But the current funding is that we are -- the
THE COURT:
So other than the 2.2 billion, are you
11
seeking an order to freeze or repatriate money transferred from
12
the international Binance platform at this time?
13
14
MS. FARER:
Binance.com platform, Your Honor.
15
16
There is no freeze focused on the
THE COURT:
Now, is the accounting a necessary
predicate for the repatriation order?
17
MS. FARER:
Before this morning, Your Honor, I would
18
have said no, but now we understand from defense counsel's
19
brief that the staking assets that were located on a ledger
20
wallet in Singapore have since moved.
21
So as we said, the risk is great, Your Honor.
Funds
22
and crypto -- either crypto and fiat, everything is moving,
23
that's why we need everything frozen and we need an accounting
24
to preserve the status quo and ensure that our investors are
25
protected.
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THE COURT:
All right.
46
Now the argument that they
2
keep making -- and again, I'm not sure I hear anybody
3
address -- is that you said freeze this, freeze that.
4
respect to BAM Trading in particular, you basically said freeze
5
it, period.
6
That's what you asked me to impose.
7
backed off of that considerably in the red line that I asked
8
for and received in the middle of the day today.
9
But with
Not, you can use it in the ordinary course.
Now it seems like you've
So what are you saying now with respect to what needs
10
to be ordered with respect to the U.S. company BAM Trading and
11
their ability to do business while this case plays out?
12
MS. FARER:
So our proposal, Your Honor, is to
13
freeze -- have a freeze on the assets; it allows for customer
14
withdrawals.
15
counsel, they have asked for exceptions relating to the
16
ordinary course of business.
17
That was our proposed order.
In engagement with
And some additional context that we think is
18
important, Your Honor, since we've been engaging with them, as
19
we identified, we are very focused on protecting investors, but
20
reasonably understand the continued -- the issues associated
21
with the continued operations of the business.
22
Honor, we have been told multiple times by defense counsel that
23
the business is shutting down.
24
have represented to my colleague that there is a fear of
25
dissipation of assess.
However, Your
And multiple defense counsel
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So, Your Honor, we have no choice.
47
We have a duty to
2
our investors, a duty under our authority to be before the
3
Court when defense counsel themselves are identifying a risk of
4
dissipation of assets, that there's a back and forth about
5
whether they're shutting down or not shutting down.
6
why we're here, Your Honor.
7
point -- to an agreement on this issue.
8
9
This is
But we are trying to get to a
And we have told defense counsel, we are not
categorically opposed to a very narrow exception for ordinary-
10
course expenses, given the context I just identified, that they
11
are telling us they're shutting down, we've had defense counsel
12
tell us that there is a serious risk of dissipation of
13
assets --
14
THE COURT:
Well, they're going to object to that --
15
MS. FARER:
Yes.
16
THE COURT:
-- and I really don't think I can base
17
this TRO on what everybody's representing about what you each
18
said to each other in the context of these settlement
19
discussions.
20
some need for ordinary-course expenses.
21
salaries.
22
they at least probably pay salaries, and they may pay for
23
their -- some utilities or internet or WiFi or something.
What I want to know is:
If they operate, there's
They have to pay
I don't know if these entities even pay rent.
But
24
MS. FARER:
We propose --
25
THE COURT:
So they have expenses to do what they're
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1
doing; they have accountants, they have lawyers, they have a
2
number of expenses that they need to pay.
3
went further than it needs to go to preserve customer assets by
4
saying nothing, no exception.
5
then still there's a way to say whatever is in there, the
6
customers can get their own stuff out, but nothing else, the
7
bank accounts need to be preserved.
8
9
MS. FARER:
And I think the TRO
And if they are shutting down,
So what we've proposed on this issue,
Your Honor, is while we maintain the low threshold to preserve
10
the status quo of a freeze is appropriate here, we have
11
proposed -- we hear you on the ordinary expenses, but we want a
12
better sense of what is involved, particularly given the
13
interrelationship between these entities.
14
You know, Mr. Zhao spins up a new company --
15
there's almost 100 companies that we're aware of for which he's
16
the ultimate beneficial owner.
17
expressly put a carve-out in, but we just want an understanding
18
to make sure that the expenses that they are paying will not
19
unduly dissipate the assets that should be preserved for
20
investors.
21
And we appreciate that they
And so what we've proposed is a limited, ten-day
22
period in which -- provides some expedited discovery so we can
23
evaluate the experiences that they have incurred now and they
24
anticipate going forward, so we can see, evaluate what might be
25
appropriate ordinary-course expenses to allow for the
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exception.
2
3
49
THE COURT:
All right.
So a lot of what you're
talking about now has arisen since you even filed your memo?
4
MS. FARER:
Correct, Your Honor.
5
THE COURT:
So --
6
MS. FARER:
Literally, the ordinary expense
7
discussion occurred over the weekend.
We expressed to counsel
8
our concerns on the issue, they came back with a proposal.
9
don't think it's sufficient because of the -- you know, sort of
We
10
moving targets that we've received on information, what
11
payments are being made, et cetera, so we just said provide
12
some accounting information, provide some additional discovery
13
and hopefully we can work this out, but understanding that we
14
believe a narrowly tailored exception is the appropriate
15
carve-out in this instance, given the nature of the activity at
16
issue.
17
THE COURT:
All right.
I think the answer to the
18
questions that I was asking about the transfers -- and I still,
19
I guess, want to go back through -- I got off the track with my
20
allegations.
So I don't know if you're back up, but --
21
MS. FARER:
Depends on what the question is.
22
THE COURT:
Okay.
Well, I want to talk about which
23
of the three defendant entities you're alleging is performing
24
which role without registration, and just make sure I've got
25
this straight based on the memorandum.
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2
MS. FARER:
50
Yes, I'm happy to turn it over to
Mr. Murphy.
3
THE COURT:
All right.
All right.
In the
4
memorandum, in section II.5, you assert that Binance is an
5
unregistered exchange.
6
II.6 you assert that Binance and BAM Trading as a group are an
7
unregistered exchange.
8
alone is an unregistered exchange?
9
I think that much is clear.
And in
So you're not alleging that BAM Trading
MR. MURPHY:
It is, as part of a group of persons
10
with Binance.
Because that really goes to the point that in
11
the early days Binance was really providing all the
12
functionality for the exchange.
13
THE COURT:
Well, that's my question.
You said it
14
is, as part of a group.
15
get to II.7, you say that Binance and BAM Trading each are
16
unregistered clearing agencies, but XI.6 you say Binance and
17
BAM Trading as a group are an unregistered exchange.
18
there's no allegation by BAM Trading by itself, while it is an
19
unregistered clearing agency, is an unregistered exchange.
20
I correct about that?
21
MR. MURPHY:
22
23
But there's some things, like when you
No, it is.
So
Am
It is on its own an
exchange.
THE COURT:
Okay.
That's not -- it may be in the
24
complaint, but it's not clear at all in the memo.
25
So, that's helpful.
All right.
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51
You've also alleged that Binance and BAM Trading are
2
each unregistered broker-dealers.
3
broker-dealers overlap with the acts that make them exchanges
4
or clearing agencies?
5
conduct?
6
MR. MURPHY:
Do the acts that make them
Or are all these separate types of
There is overlap, Your Honor, and part
7
of that is because -- and the securities laws account for that.
8
There are exceptions, for example, that if you are acting as a
9
broker-dealer, there's an acknowledgment that you are matching
10
buyers and sellers, which is something that exchanges do, but
11
you don't have to register as a national exchange if you are
12
registered as a broker-dealer.
13
THE COURT:
As it turns out here --
So you can be a broker-dealer without
14
being an exchange, but you can't really be an exchange without
15
being a broker-dealer, or no?
16
MR. MURPHY:
Yeah.
I mean, exchanges don't typically
17
take custody of funds, for example, Your Honor, whereas brokers
18
do.
19
in matching buyers and sellers.
20
THE COURT:
Brokers do carry some of the functions that exchanges do
All right.
Well, and finally, in section
21
II.9 you allege that Zhao is a -- has control person liability
22
for all of it; the unregistered exchanges, clearing agencies
23
and broker-dealers, and the misrepresentations, the alleged
24
misrepresentations by BAM Trading and BAM Management.
25
that's your allegation as to him individually.
So
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MR. MURPHY:
Yes, Your Honor.
52
And I think part of
2
this is that the services are so intertwined for the three
3
intermediary charges that it's kind of -- it goes to the core
4
of the business that he founded.
5
THE COURT:
Now, that's everything that's in the
6
memorandum in section II about the failures to register.
7
what was the outstanding failure to register that was being
8
described to me earlier?
9
MR. MURPHY:
So
I think that's a section 5 offering of
10
individual securities, which, frankly, I don't think you need
11
to reach for the purposes of the TRO, Your Honor.
12
THE COURT:
All right.
So that, I think, might have
13
been referenced when you get to the personal jurisdiction
14
section.
15
purposefully availed themselves of a forum by their coordinated
16
operation of three essential securities market functions:
17
Exchange, broker-dealer, and clearing agency on the Binance
18
platforms in the U.S. without registering with the SEC.
19
On page 56 you say:
And then you said:
Binance and Zhao have
In addition, Binance and BAM
20
Trading have engaged in the offers and sales of crypto asset
21
securities, including BNB, in the U.S.
22
function that you're talking about.
23
have, "and failed to register."
24
register that you're talking about?
25
MR. MURPHY:
So that's the other
But that sentence didn't
So that's the other failure to
Yes, Your Honor.
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THE COURT:
2
MR. MURPHY:
3
THE COURT:
53
Okay.
Unregistered offers and sales.
Okay.
On page 57 you mention contracts
4
between Binance and BAM Trading governed by the law of New York
5
as a sign of availing themselves of the forum.
6
New York or any U.S. forum?
7
MR. MURPHY:
That does mean
Well, under the securities laws, I think
8
here we're talking about any forum because of the contacts with
9
the United States for personal jurisdiction.
10
THE COURT:
All right.
So now my question, before I
11
turn to the defendants and give the court reporter a break,
12
is -- maybe I can ask you this after the break -- is whether
13
you're going to continue to discuss this among yourselves or
14
whether you're going to accept my very strong suggestion to get
15
together with Magistrate Faruqui with respect to this consent
16
decree which, notwithstanding everything that's been said this
17
morning, the differences between the parties and their rhetoric
18
is much greater than the differences between the parties and
19
the proposal and the red line.
20
So if you can answer that question, that would be
21
helpful.
22
do that as well.
23
24
25
But if you want to answer it after the break, we can
MR. MURPHY:
I think it would be helpful to answer
after the break.
THE COURT:
All right.
So we're going to break for
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1
54
ten minutes and then we'll be back.
2
(Recess.)
3
THE COURT:
All right.
Before I ask the question, I
4
just want to underscore that I am not urging the parties at
5
this point to get together, unless you choose to do so, to
6
hammer out a permanent consent decree.
7
is to have an order that works for both parties in place so
8
that we can then proceed to deal with the merits at an
9
appropriate pace.
What I'm looking to do
And it seems that there might be some
10
benefit, given some of the distrust going back and forth, to
11
have a neutral in the room.
12
But all I'm looking for is for some variation of what
13
we almost already have, which is something that permits BAM
14
Trading to operate, permits the government to be comfortable
15
that the 2.2 billion is secure, and that U.S. assets, U.S.
16
customer assets, don't leave the country and don't leave the
17
U.S. company's control, and that then we get the additional
18
information and documents that we're seeking.
19
So, you know, again, I think the nitty-gritty of it,
20
because it's very detailed, is better handled by all of you
21
than by me.
22
then the government risks having an order that doesn't go as
23
far as it wants it to go, and the defense risks having an order
24
that it really finds it hard to live under.
25
benefit to this.
And if you don't work it out among yourselves,
So there's some
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1
55
So what's your point of view about whether it makes
2
sense to meet with Judge Faruqui with respect to the
3
refinement, potentially, of a consent decree, instead of a TRO?
4
MS. FARER:
Your Honor, the government is certainly
5
open to that.
6
we're seeking is a freeze of all of the assets.
7
importantly, the operating -- the company operating funds
8
should be preserved under the applicable precedent for --
9
ultimately if we get a judgment, for disgorgement to investors.
10
We did want to clarify that the freeze that
Because,
In addition to --
11
THE COURT:
Freeze of all of the assets of?
12
MS. FARER:
Of the BAM entities.
13
THE COURT:
With the exception that they're allowed
Our position is --
14
to give customers back their money when they ask for it and to
15
pay salaries and operate their business, if they're still
16
operating their business, or not?
17
MS. FARER:
Yes, Your Honor.
What we're proposing
18
here is that all assets are frozen, both the customer assets,
19
but subject to the exception that is already included for
20
withdrawals, and then the remainder of the company assets.
21
It's important to note that we're preserving the status quo for
22
the investors who have paid transaction fees and whatnot that
23
would be included in a disgorgement order, should we prevail at
24
the end.
25
And so what we're asking for is the freeze, and then
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1
we are certainly open to mediation on the scope of the
2
ordinary-course expenses.
3
open to the business continuing to operate, we just want to get
4
additional information as to what the scope of the payments
5
will be.
6
THE COURT:
As discussed, Your Honor, we are
But the extent of your position is fully
7
set out in what you sent me at 1 o'clock today, or a little
8
before?
9
MS. FARER:
Yes, Your Honor.
10
THE COURT:
All right.
11
All right let me hear from the BAM defendants.
12
I want to start with you by saying that obviously
Okay.
Thank you.
13
your memorandum raises a lot of legitimate questions and
14
concerns about the merits and about whether litigation is the
15
best method to get at this highly disputed issue that affects
16
billions of dollars already invested on multiple platforms in
17
the U.S. and elsewhere.
18
shocked that the SEC thinks you're dealing in securities and
19
took this step.
20
pleadings rang a little hollow in light of defendant Zhao's
21
statements over the years, the fact that the SEC banned Binance
22
from doing business in the United States in 2019.
23
appears to be an extension of that, given the overlapping
24
ownerships and relationships.
25
But some of your claims claim to be
And some of the surprise expressed in the
And this
And so the BAM Trading was in direct response for the
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1
fact that Binance couldn't trade here anymore.
2
defendants received a Wells Notice, which you don't get unless
3
the SEC is planning to bring a civil enforcement action.
4
I'm not necessarily interested in getting further into whether
5
it's surprising or shocking or not, as much as how to deal with
6
it and get to the merits of it in a logical and organized
7
fashion.
8
9
Plus, the
So
Similarly, you all repeat in the memo that there's no
evidence, absolutely no evidence of any dissipation of assets
10
whatsoever.
11
haven't seen the evidence of offshore transfers from BAM
12
Trading itself.
13
offshore transfers and we do have the problem of the individual
14
defendants' ownership of the entities that own BAM Management,
15
which is the parent of BAM Trading.
16
going on here and a lot of onion that needs to be peeled to
17
figure out who is doing what.
18
And the government at this point has said they
But we do have considerable evidence of
So there's a lot of layers
So while you can quibble with the strength of the
19
evidence, whether there's anything wrong with any of the
20
transfers, I probably don't need a lot of hyperbole about how
21
shocking this is, and I probably don't need to hear the word
22
"draconian" anymore.
23
So you gave me the terms of exactly what you would be
24
willing to agree to in a consent decree.
But your proposed
25
order to me within your opposition to the memo just said TRO
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1
denied.
So if you all can't come to an agreement, if I enter
2
the terms that you proposed, would that be with your consent?
3
MR. MERTENS:
4
THE COURT:
Yes.
And then, would it then be appropriate to
5
consolidate the PI with the merits and order that it remain in
6
place pending a ruling on a dispositive motion?
7
MR. MERTENS:
I believe it would, Your Honor.
We've
8
said all along that we are not -- we are not interested in
9
making transfers among the defendants.
The sticking point, and
10
the really only sticking point, and it is still a sticking
11
point, even with the SEC's most recent submission, is on page 6
12
of the filing, which is numbered 5 at the bottom of the red
13
line, which is a paragraph 3-A which prohibits any disposal
14
whatsoever of any funds in BAM's possession.
That is a
15
prohibition on ordinary course expenditures.
And that is the
16
sticking point.
17
We are not willing to accept the death penalty eight
18
days into the case, and that is, in effect, what that would be
19
for our business.
20
And because while we don't --
21
22
We are simply asking for ordinary course.
THE COURT:
When you say ordinary course and that is
the sticking point, and I know that's the sticking point --
23
MR. MERTENS:
24
THE COURT:
25
able to do?
Yes, yes.
-- what is it exactly that you need to be
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MR. MERTENS:
59
So for example, last night on the call
2
we said things like rent, salaries, vendor costs, professional
3
fees; you know, normal operating business expenses.
4
the -- and we could make -- we offered last night to make a
5
list of those things.
We think we could sit down and make a
6
list of those things.
But the government's position, the SEC's
7
position has been until this point --
8
9
THE COURT:
All right.
MR. MERTENS:
11
THE COURT:
13
I'm not asking you whether
they're being unreasonable or not --
10
12
Those are
Sure.
Understood.
-- I want to know what you need.
I may
have to craft this myself.
MR. MERTENS:
Right.
We need ordinary-course
14
business expenses, which is how the language we belive normally
15
appears in an order.
16
happy to provide them.
17
are thinking about are like salaries, rent, vendors.
18
obviously have, to the extent that there are servers or
19
licensing of software, professional fees, you know, those are
20
the sorts of things -- office supplies, you know, to the extent
21
that those are relevant, those are the types of things that we
22
are asking for; normal, ordinary course.
23
the primary sticking point.
24
25
THE COURT:
If we need a laundry list of those, we're
But the things, the type of things we
All right.
We
That is, I believe,
So you're willing to agree on
a ban of transfers to any account in which the individual
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1
defendant not only has an ownership interest -- or, whether he
2
has an ownership interest or signatory authority, nothing
3
that's got his name on it?
4
MR. MERTENS:
We are -- it is acceptable to us not to
5
transfer money to -- you know, directly or indirectly in
6
control of the co-defendants.
7
whatever the appropriate language is.
8
9
10
THE COURT:
And you obviously don't need to transfer
money to any offshore account in the ordinary course, much less
one that he owns.
11
12
You know, affiliated with them,
MR. MERTENS:
I assume that we could -- there are
enough U.S. accounts that we could deal with that.
13
THE COURT:
And they also seem to be interested, with
14
respect to the 2.2 billion, about the clearing team and who
15
holds the key shards and all that.
16
they all have to be -- why they can't all be independent from
17
Binance?
18
MR. MERTENS:
Is there any reason why
We are prepared to bring all the key
19
shards to the U.S., if the Court orders that.
20
problem with that.
21
22
23
THE COURT:
We have no
The Court will definitely order it if you
agree to it.
MR. MERTENS:
Well, the only reason I'm hesitating on
24
that is because to the extent that the key shards are in the
25
possession of Binance, I can't speak for Binance.
I can speak
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61
to what we, BAM will do.
2
THE COURT:
I understand that.
3
MR. MERTENS:
And the order would have to direct or
4
not direct what another entity would do.
5
objection to them all being in BAM's possession.
6
THE COURT:
All right.
But we don't have an
And there was a point where
7
you told me earlier today that there is no daylight between any
8
of the defendants at this point.
9
particular language was in the existing order, so I will
10
But I don't know that that
actually ask that to Binance's counsel.
11
And if there is no consent order and I have to issue
12
my own order -- and I meant to ask the government this, and
13
I'll ask you this when you get back up, because I know you're
14
going to want to get back up at the end.
15
about how long a TRO could remain in place?
16
without notice, which is what Rule 65 says only lasts 14 days.
17
The government seems to take the position that it could only
18
last 14 days or it might expire, unless it gets turned into a
19
PI.
What's your position
It's not a TRO
20
I don't see how, given what I've been provided, that
21
I can do the kind of order that would rule on all of the legal
22
and factual issues underlying a preliminary injunction in two
23
weeks.
24
stay in place?
25
So if I have to put something in place, how long can it
MR. MARTENS:
Well, I don't have an answer to that
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1
because our position is that a TRO is not warranted, so I'm not
2
in a position to say so we would agree to one for X number of
3
days.
4
have a discussion, as you do in any case, about how long is
5
necessary for discovery to conduct a PI hearing.
6
today, we don't believe that the sale -- and I think this is an
7
important point, and the Court identified this, they're
8
alleging on crypto asset among more than 100, and arguing --
9
while they say that allows them to win the case, that doesn't
Obviously, if the Court ordered one, we would have to
But as of
10
provide a justification for taking over an entire business.
11
And that, I think, is -- I think we're going a long way to
12
saying, listen, we don't think this is justified at all based
13
on their showing, but we are willing to do -- to take steps to
14
allay concerns because we don't think that there's any valid
15
concerns here.
16
And so we're fine with agreeing to the handling of
17
these funds appropriately because my client believes they are
18
handling the funds appropriately.
19
to do is accept something that goes so far as to shut down our
20
business.
21
THE COURT:
22
MR. MERTENS:
But what we're not willing
I understand that.
I can't really answer the Court's
23
question about how long we would be willing to tolerate a TRO.
24
A, because we don't believe it's appropriate, but, B, because
25
depending on what it does, it could end our business.
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THE COURT:
63
I don't think that a TRO can completely
2
shut down your business; it has to preserve the assets.
3
talked about status quo, status quo, status quo; status quo,
4
this business exists.
5
TRO, it can't really go much further than literally preserving
6
the assets that we're talking about.
7
They
So I think if they're talking about a
MR. MERTENS:
But that's not the status quo, Your
8
Honor.
9
business and pay ordinary business expenses, that's the status
10
The status quo is that we're continuing to operate as a
quo.
11
THE COURT:
I understand that.
I understand your
12
position about that.
13
that is why I was asking you what you need in the ordinary
14
course.
15
if it wasn't received over the phone last night, you can docket
16
that.
I think you've made that very clear and
And if you want to put it in a piece of paper for me,
It would be helpful for you to be specific.
17
MR. MERTENS:
18
THE COURT:
Sure.
But I think that I don't need to be in
19
the room where it happens and that there is a better way to get
20
to what the nature of this is and should be.
21
22
23
MR. MERTENS:
We're happy to provide that list, Your
Honor.
THE COURT:
All right.
Now, you raised important
24
questions to be considered in terms of whether the Binance coin
25
is or is not a security and, therefore, whether the
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1
registration obligations attach.
2
legal question at the heart of the case that I'm going to have
3
to resolve.
4
while you disagree that the assets bought and sold were
5
securities, do you dispute whether BAM Trading was operating as
6
an exchange with Binance with respect to those assets, whatever
7
they are?
8
9
And that's, obviously, the
But I want to make sure I understand, though, that
MR. MERTENS:
So the reason I hesitate is because I
don't know whether you're using an exchange in a technical
10
sense under the securities laws or whether you mean in a
11
colloquial sense.
12
people could buy and sell crypto assets.
13
word "exchange" because that has technical legal meaning in the
14
securities laws that we're not prepared to concede.
15
Certainly it was a platform under which
THE COURT:
All right.
I hesitate to use the
Well, I was going to ask the
16
same questions about acting as a broker-dealer and acting as a
17
clearing agency.
18
took issue with the "it's a security," as opposed to "I'm
19
making them available for sale, I'm providing credit or
20
dealing, clearing the transactions, I'm offering them on a
21
platform where people can pick and choose among, and buy and
22
sell."
23
And I guess my question is:
Your memorandum
The underlying facts that make something an exchange,
24
a broker-dealer or clearing agency, you took issue with
25
whatever -- our offering of these assets is not something
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1
that's subject to the jurisdiction of the agency because the
2
assets aren't securities, that's what you were saying, as
3
opposed to, no, we're not engaged in those operations.
4
MR. MERTENS:
We didn't have to get to the issue of
5
the operations because the operations -- the statutes governing
6
the operations only govern the operations if it's a security.
7
And so if they -- and we do believe they do -- fail on the
8
question of whether it's a security, everything else falls,
9
too.
10
THE COURT:
I understand that.
I was just wondering
11
if there's some even-if argument, that even if it turned out to
12
be a security, you can't call me a broker-dealer because I
13
didn't do X, Y, or Z, or I'm not a clearing agency because I
14
didn't do X, Y, and Z.
15
you're not giving that up as an option, should it come down to
16
that?
17
18
19
It wasn't in the memo and I assume
MR. MERTENS:
Right.
It's just for the TRO purposes
we took a simpler approach.
THE COURT:
All right.
You argue in your memo that
20
the Binance coin, at least by the time it was available to be
21
purchased through BAM Trading on the Binance.US platform was
22
not a security.
So what was it?
23
MR. MERTENS:
24
THE COURT:
25
Was it a commodity?
It was a crypto asset.
What is a crypto asset that is different
from a crypto security?
No one wants to tell me.
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MR. MERTENS:
66
Well, the crypto asset security, as I
2
understand it, is they're adding the world "security" to bring
3
it within the scope of the federal securities laws.
4
whether it's section -- I believe it's section 2 of the
5
Securities Act or section 3 of the Exchange Act, defines a
6
security as, among other things, an investment contract, as the
7
Court has heard, and that is what the government is relying on.
8
An investment contract requires a contract.
9
And
language about a scheme, as I understand, it was dicta.
The
There
10
was not a scheme at issue in Howey, it was a contract.
11
I understand the case law, all of the cases under Howey and all
12
of the cases under the Blue Sky laws prior to Howey under which
13
was the origin of the securities laws, involved a contract.
14
are not aware of any case that's found a security without a
15
contract.
16
And as
And that is -THE COURT:
Even since Howey?
I mean, what about the
17
government's citing cases where actually crypto assets were
18
found to be securities?
19
We
MR. MERTENS:
So my understanding is that those other
20
cases did have a contract in place, and there is not a contract
21
here.
22
contract without a contract.
23
contract without some expectation of profit.
24
there's -- no one has talked, explained at all what the
25
obligation -- what the contractual obligations or the
And that's our dispute.
You can't have an investment
You also can't have an investment
And here
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1
contractual benefits are from supposedly buying one of these
2
assets.
3
And, you know, there's lots of other language used by
4
the SEC when they were speaking about it that, you know, people
5
hoped to earn a return.
6
investment contract.
7
orange grove in Howey and expecting to earn returns when the
8
oranges were picked from the trees and sold.
9
contract here --
10
That's not -- that doesn't equal an
It's a long way from investing in an
THE COURT:
There's no
When you buy stock in a company that's a
11
security, yes, you'd hoped to earn a profit, but is there any
12
promise you're going to earn a profit?
13
MR. MERTENS:
So the difference there is the stock is
14
specifically identified in the definition of a security as
15
being a security.
16
other things.
17
"investment contract."
18
So it begins stock and then it has a list of
Halfway down the definition is the word
So investment contract is its own unique thing, and
19
in order to claim this is an investment contract, they need to
20
start with a contract.
21
THE COURT:
And I know you've said that.
So that
22
even at the ICO stage, you're saying it wasn't even a security
23
then because there was no contract.
24
were also arguing even if it was, it lost that character by the
25
time it was being sold on the U.S. platform with something else
But it seemed like you
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1
at that point.
2
when and how does it transform itself?
3
68
Is that something you're also arguing?
MR. MERTENS:
And
I think what -- so we were focused on
4
the time when it was trading on our platform because that is
5
the time relevant to establishing, thus, whether we were an
6
exchange or a broker-dealer.
7
for purposes of the TRO, was at the time it was trading on our
8
platform there was not a contract and, thus, not an investment
9
contract.
10
THE COURT:
11
MR. MERTENS:
And I think our particular focus,
Okay.
Yet, I think it remains to be seen, if
12
this proceeds into litigation, whether there was ever a
13
contract, even at the time of the ICO.
14
is that there is not a contract even at that point.
15
particular focus was at the time it was trading on our
16
platform.
17
THE COURT:
I suspect the evidence
But our
Well, you've been very clear about the
18
need for the ordinary course exception to any freeze with
19
respect to BAM Trading's assets.
20
of time today talking about the 2.2 billion of U.S. investor
21
assets that it wants to make sure that they're under your
22
control and nobody else's control.
23
with any of that?
24
MR. MERTENS:
25
THE COURT:
The government's spent a lot
Do you have any problems
We do not.
Okay.
And then given the fact that it
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1
seems like really the difference between the two parties is
2
rent and ordinary expenses, what's your position about whether
3
it makes sense for you to be in a room with Magistrate Judge
4
Faruqui and your colleagues on the other side of the courtroom
5
sooner rather than later?
6
MERTENS:
We are happy to have a discussion with or
7
without the magistrate judge.
8
to sort out what ordinary-course expenses are.
9
to reach an agreement on ordinary-course expenses.
We don't think that's required
But we're happy
Again, we
10
don't -- I think that that language is typical.
11
it's really a novel term to be included.
12
there's always a list, but we're not against having a
13
discussion about a list.
14
THE COURT:
All right.
I don't think
I don't know that
Well, they have added a lot
15
of language about the 2.2 billion and who is actually going to
16
be in charge of it, and it seems to be different, what they
17
wrote than what you had.
18
you consternation at this point.
19
MR. MERTENS:
But that's not the area that's giving
That is not the area that's giving us
20
consternation.
The area that's giving us consternation is an
21
asset freeze that will be misconstrued by our banks.
22
have agreed -- what we want to be able to do is make clear we
23
are entitled to continue spending our money in the ordinary
24
course and so that the banks understand that and so that we can
25
continue to operate.
What we
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THE COURT:
All right.
70
Do you want to say anything
2
in response to the statement that you said something about
3
shutting down or not shutting down?
4
MR. MERTENS:
Your Honor, I think -- I know you don't
5
want rhetoric, so I'll be measured.
But I think it is
6
inappropriate for the government to come in and make
7
announcements about whether a business will continue or not
8
continue.
9
don't believe it's appropriate to come into court and make
We have made no such decision as BAM Trading.
10
announcements about what we are or not going to do as a
11
business.
12
THE COURT:
And I
Well, given the public nature of these
13
proceedings, I wanted to give you the opportunity to say
14
something with respect to that, so that was why I asked the
15
question.
16
I have fewer questions for you, not because I think
17
your position is any less important, but because I think I
18
understand your position and I think that the questions for
19
what I'm supposed to do in the short-term for interim relief
20
are different questions than, at the end of the day, the legal
21
rulings that lie at the heart of this case, which I don't think
22
I should be making at this pace.
23
What I'm trying to do is to make sure that we can
24
reach that decision in a thoughtful pace and not have the
25
chickens fly the coop in the meantime.
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71
So I think you and I have discussed what I need to
2
ask you about that, unless there is anything you would like to
3
put on the record right now that I haven't asked you about.
4
MR. MERTENS:
I don't think there is, Your Honor.
5
Again, I agree with you that I don't think we need to sort out
6
the merits now.
7
forward here that allows us to keep operating and allows this
8
litigation to proceed in the normal case and to decide these
9
issues on the facts, with appropriate time to review them.
10
11
Our position is we belive there's a way
THE COURT:
All right.
Let me hear from counsel for
Binance then.
12
MR. NELSON:
13
THE COURT:
Good afternoon, Your Honor.
Good afternoon.
What was I supposed to
14
do with 3,000 pages of exhibits filed four and a half hours
15
after memorandum was due without a motion for leave to file it
16
at that time?
17
MR. NELSON:
Hopefully accept an apology.
And we
18
worked hard to coordinate with counsel for Mr. Zhao.
19
candidly, underestimated the process of getting everything into
20
ECF.
21
brief and a single set of exhibits, we ended up with some
22
logistical issues yesterday afternoon that were wrong, so I
23
apologize.
24
25
And,
But the process of trying to work to coordinate on a
THE COURT:
All right.
Well, you understand,
obviously, that by 9:30 last night I was really focused on the
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1
dueling proposals and the larger issues, rather than the
2
exhibits.
3
dig into them fully.
4
I'm not going to be able to decide this case without looking at
5
all of theirs and looking at all of yours.
6
trying to do is figure out how to manage this case so that that
7
is done.
8
9
I've not yet had the opportunity, the pleasure to
But, understanding that I need to, and
And what we're
What's your position about sitting down with a
magistrate judge to try to finish the process of hammering out
10
something that will govern the conduct of the parties between
11
now and then?
12
MR. NELSON:
Your Honor, Binance Holding, Limited,
13
would be agreeable with that approach, and we think it has
14
wisdom.
If the parties can come to an agreement, that would be
15
better.
Mr. Mertens has addressed the main issue.
16
other details about, you know, difference of wording that may
17
make a difference.
18
instance would be best positioned to address that.
19
There are
But I think the parties in the first
THE COURT:
Well, putting aside wording, and I
20
understand the ordinary course issue is BAM Trading's issue,
21
but the 2.2 million and whether anyone other than BAM Trading
22
is going to hold the wallets or make the decisions on
23
withdrawals, do you have problems with what the government has
24
proposed with respect to the 2.2 billion, which they are
25
alleging are U.S. investor dollars that are at stake in this
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73
litigation?
2
MR. NELSON:
We do not, Your Honor.
And while we
3
disagree that it's necessary to transfer the key shards in
4
order to preserve the security of the assets, as you've seen
5
from our proposed order, we're willing to voluntarily undertake
6
the steps necessary to do that.
7
specifically agreed to do that to address what we understand is
8
the government's concern.
9
THE COURT:
It's in II.4, where we have
All right.
Now one of the points you
10
made -- I'm just going back to the original point.
11
without the apology, I've accepted the filing of the exhibits
12
and I'm not going to strike them or do anything horrible to you
13
because of the four hours; it was just frustrating to have them
14
arrive.
15
Even
I don't understand your addressability point.
You're
16
not saying that the lawsuit itself can't provide relief or
17
redress if the defendants are indeed performing the functions
18
for which they need to be registered.
19
they could have to pay penalties.
20
has to go back to customers.
21
TRO, for interim relief, based on the facts in the complaint,
22
has to separately meet all of the Lujan requirements if there
23
is standing to bring the action?
24
MR. NELSON:
25
colleague Mr. Celio.
They could be enjoined,
There might be money that
Are you saying that a motion for
Your Honor, I'll hand off to my
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THE COURT:
All right.
2
MR. CELIO:
Good afternoon, Your Honor.
3
74
Michael
Celio for BHL.
4
It's not the Lujan holding, it's that for an exercise
5
of this Court's jurisdiction on the TRO, what the law requires
6
is that the relief that is sought be tightly coupled to what it
7
is we've actually done.
8
9
THE COURT:
And --
But my jurisdiction is over the case.
The TRO is a pleading in the case.
10
jurisdiction to hear this case?
11
MR. CELIO:
You're saying I don't have
It's that the relief sought can't be
12
granted by this Court on this record.
13
case against us.
14
other side cited where a registration case has resulted in a
15
TRO like this.
16
I'm not disagreeing with anything my colleague said.
17
offered what we've offered and we stand by that.
18
on the law -- we just want to be clear -- we're going far
19
beyond what we're required to do here.
20
case, where it's just a question of whether we should have
21
registered, an issue that's been out there for what?
22
years?
23
that kind of relief.
24
case, we get that.
25
This is a registration
We're not aware of any of the cases that the
Now we're willing to do it, I want to be clear.
We've
But we think
Because this kind of
Six
That doesn't actually allow the Court, no, to enter
THE COURT:
You absolutely have jurisdiction over the
The question is whether ultimately I'm
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1
going to have -- there would be relief associated, if it was
2
found to be a security.
3
failed to register and you were supposed to register and that
4
resulted in X billions of trades or profits, you're saying
5
you're not going to owe anything at the end of the day?
6
would just be I'm sorry, will you accept my apology, as we said
7
earlier?
And if it was found that you had
8
MR. CELIO:
No, ma'am.
9
THE COURT:
So there could be a penalty owed.
It
That's not what I'm saying.
And
10
they're saying all we're saying is we want to make sure the
11
money is there when we're all left standing at the end of the
12
day.
13
How does standing fit into this?
MR. CELIO:
Because redressability is a separate --
14
and we've said it in our papers, the redressability is a
15
separate element at the TRO stage and they have not met their
16
burden to establish that.
17
18
19
THE COURT:
Tell me what happened in the NLRB, the
one case you cited for that.
MR. CELIO:
So I can't give you chapter and verse on
20
that case, but I think -- it's really just a common sense
21
principle, Your Honor.
22
THE COURT:
It isn't to me, actually.
I've never
23
heard of it before and that's why I want to know what the case
24
held and why you're relying on it.
25
MR. CELIO:
So I'm not prepared to answer that
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1
question, and I apologize Your Honor.
2
though, is really what this goes to is the emergency nature of
3
what's sought against us here.
4
case, we understand that this is an important issue.
5
around us, we get it; it's an issue of first impression and
6
it's important.
7
8
9
But what we're saying,
We understand why we're in the
Look
So we're not --
THE COURT:
Some of those are press, some of those
are your associates, I'm pretty sure.
MR. CELIO:
I only know which ones are associates of
10
Gibson, Dunn, Your Honor.
11
it's obviously an important case.
12
stage, just at this narrow first stage, the Court doesn't have
13
unlimited ability to fashion any relief.
14
relief that's related to what's actually in the complaint and
15
what's actually before you, that's the argument.
16
But there are a lot of people here,
The question is, at this
It's got to fashion
As to my client, who is simply a corporate cousin of
17
BAM, admittedly with some relationship, contractual
18
relationships and other things, but we don't really understand
19
why we're here at the TRO stage.
20
the case, to be clear.
21
position is that at the end, if jurisdiction is established in
22
all the ways, that it will be fought.
23
the claims you suggested.
24
25
We understand why we're in
We understand, at the end -- and our
We're not making any of
But it is the case that the Court's ability to issue
interim relief has to be tied to what's actually in the
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77
complaint and it's just not here.
2
THE COURT:
What are the specific aspects that
3
they're asking for in their order that apply to you in
4
particular?
5
documents in discovery and that sort of thing, but what are the
6
particular aspects of what they're asking for that you say are
7
deficient for this reason?
8
9
I mean, there's things like the not destroying any
MR. CELIO:
Here's the good news, Your Honor:
We
don't have to get into it because we've offered to do it
10
voluntarily.
11
know, I think that our proposal that we filed today, earlier,
12
really makes this an easy question for me.
13
our record that we think, you know, we're doing more than we're
14
required to do.
15
reasonable --
16
So, I mean, we've said -- I think that it's, you
We want to preserve
But we really want to assure the Court how
THE COURT:
The record will so reflect, that it is
17
your position that you are doing more than you're required to
18
do.
19
MR. CELIO:
I appreciate that.
20
THE COURT:
You argue, and your argument has some
21
force, that these kinds of complex legal and financial issues
22
are better resolved through regulation or rule making than
23
through test case litigation, but I don't run the executive
24
branch.
25
say, as you suggested, no, I'm sorry, you've exceeded your
So what would be the authority under which I could
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discretion, you must proceed by rule making here.
2
in my lane as a member of the judiciary?
3
MR. CELIO:
78
How is that
If we made that statement, that's not
4
what I'm arguing today.
I think that it is something -- it may
5
well be in the brief, but I think that that's -- we're not
6
asking you to deny it on that basis.
7
I've got to go to Chicago in a little bit and defend the same
8
case on the issue of whether it's a commodity, and we are put
9
in a difficult position.
I think the issue is --
And I hope that the Court appreciates
10
that the executive has its authority to do what it wishes, they
11
have the right to bring this case, I suppose.
12
difficult thing for my client to be told it's a security, it's
13
a commodity --
It is a
14
THE COURT:
Well, "it," is the "it" the same?
15
MR. CELIO:
I think it is, but I'm sure we're going
16
to argue about that.
17
here.
18
But I think that the issue that we're trying to raise --
19
But the BNB is what I'm talking about
But I think that there's disagreement as on those facts.
THE COURT:
In the CFTC case they say the BUSD was
20
the commodity, and the SEC just told me that that's not the
21
same as the BNB.
22
23
Are you saying it is?
MR. CELIO:
BUSD is not the same as BNB, but BUSD is
very much in the papers that they filed, it's right there.
24
THE COURT:
Yes.
25
MR. CELIO:
So those things -- I mean, the point more
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1
broadly is, and I think it's relevant to the TRO, right, is
2
because the TRO is a terrible way to do this, right?
3
putting unfair pressure on the Court, it's putting unfair
4
pressure on my client.
5
fight.
6
pretty clear that it was coming against someone -- maybe not
7
against us, but someone -- for years.
8
The Court should be given the opportunity to hear from
9
different parties, from -- you know, from amicus briefs, from
It is
We accept that we have to have this
We understand that this is coming.
I think it's been
So let's have the fight.
10
sort of all the relevant parties that this Court usually has
11
access to.
12
You know, we should do this over -- in a normal,
13
orderly discovery process so that the facts aren't coming in
14
the night before the Court -- you know, I had my apologies that
15
it came in late -- that the Court should have a full record.
16
THE COURT:
I agree, completely.
And so the question
17
is:
What do I need to do to make sure that happens and to make
18
sure that the government's, I think, legitimate concerns, given
19
the offshore nature of some of the defendants and the ease of
20
moving money from place to place, given the overlapping
21
ownership, that something needs to be done.
22
everything they originally asked for.
23
everything they originally asked for anymore.
24
lot like what you all have proposed.
25
like better than an orderly process to get at complicated
But, it may not be
They're not asking for
It may look a
There's nothing I would
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80
issues, that's the way we do things.
2
All right.
I don't think I have anything else to ask
4
MR. CELIO:
Okay.
5
THE COURT:
And, finally, counsel for the individual
3
you.
6
defendant, your brief and your proposals were linked, but if
7
there's anything you want to add to the discussion I just had
8
on behalf of the two defendants?
9
MR. QURESHI:
Thank you, Your Honor.
No, I have
10
nothing to add.
I would agree with my colleague representing
11
Binance that there are some stray issues that we look forward
12
to discussing with the Commission and hopefully resolving in
13
the ways that you've outlined.
14
THE COURT:
But right now there's no reason that you
15
see -- is there any reason that BAM Trading needs to be sending
16
money offshore to your client's accounts to operate its
17
business?
18
MR. QURESHI:
No, Your Honor.
And I think in the
19
proposed stipulation that we offered at 1 o'clock today, I
20
think that's at docket 58-1, there is a restriction on anything
21
like that happening.
22
THE COURT:
All right.
And so if all of that is in
23
place with respect to the 2.2 billion of U.S. customer assets,
24
that's something preserving your objections, the jurisdictional
25
objections and your personal jurisdiction, that's something
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you're willing to live with while we figure out all these other
2
objections?
3
MR. QURESHI:
4
THE COURT:
All right.
5
All right.
Is there anything the government wants to
6
7
That is correct, Your Honor.
All right.
Thank you.
add at this point?
MS. FARER:
Just briefly, Your Honor.
On the issue
8
of the case brought by the CFTC, we would just highlight that
9
courts across the country have identified that different crypto
10
assets can be a commodity in certain contexts, can be a
11
security in different contexts.
12
aware, there's a very fulsome court opinion, the CFTC versus
13
McDonnell, an EDNY case that sets forth the framework.
14
number of the regulatory agencies have issued joint statements
15
about how different assets can be treated differently in
16
different context.
17
the CFTC's complaint is different than the one that we are
18
alleging here.
19
As Your Honor may very well be
And a
So the BUSD product that is identified in
With respect to the open questions, as Your Honor
20
identified with respect to just wanting a list, that's really
21
all we're asking for.
22
expenses at issue.
23
unquote, professional fees.
24
that could cover a lot of things.
25
understanding of what may be anticipated.
We just want information about the
You know, a general category of, quote,
When I was in the private sector,
And so we just want an
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THE COURT:
82
Notwithstanding the eye rolling on my
2
right, I'm going to just order that BAM Trading docket a list
3
of what it maintains are the ordinary-course expenses, even if
4
it's obvious and even if it's commonly ordered, just go ahead
5
and do it, put it in writing.
6
up having to issue a TRO, and the government can see it, and
7
maybe that will streamline the conversation that you're going
8
to have with Magistrate Faruqui.
9
10
And then I'll see it, if I end
Yes?
MS. FARER:
We would just ask, Your Honor, in
11
connection with that request, that there be some time
12
parameters imposed.
13
an understanding of, sort of, the time periods at which these
14
expenses are anticipated.
We want to -- it would be helpful to have
15
THE COURT:
All right.
16
MS. FARER:
We would just add a couple other things
17
for the record.
18
THE COURT:
Yes.
19
MS. FARER:
We understand that defendants may be
20
frustrated by our reference to communications that we've had
21
with them, and we certainly, as a regulator in this space,
22
appreciate the sensitivities.
23
defendants made this public themselves by including
24
communications between us that reference the shutdown
25
communications, at docket 41-6.
We would just highlight that the
And we thought it was
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important for Your Honor to understand our position on certain
2
issues that was within that context, that we needed to take
3
certain positions on certain issues.
4
And the final point, Your Honor, is I think an open
5
question that was a sticking point with respect to the consent
6
is -- are the terms of discovery.
7
why Mr. Zhao is -- and Binance are extending the time period by
8
which they would be subject to certain discovery obligations.
9
We think that it's very important, for all the reasons that
It's not clear to us exactly
10
we've discussed, that we have expedited discovery of all the
11
parties for -- as set forth in the proposed order.
12
that's one of the open questions for us, as well.
13
14
THE COURT:
All right.
So I think
Well, if you get to the point
that you can agree to everything except things like that --
15
MS. FARER:
We agree, Your Honor.
16
THE COURT:
-- you can submit to me a consent decree
17
that has, you know, two brackets; what one party thinks and
18
what the other party thinks, and I can figure that out.
19
that all the time with discovery disputes among parties.
20
think if that's -- if that's where this resides, then there's
21
absolutely no need for a TRO, we can figure that out.
22
I do
So, I
And, you know, I don't think I've ever issued a
23
discovery order that sooner or later somebody didn't say, Your
24
Honor, can we have additional time?
25
make at the end of the day if I say ten days?
So what difference does it
Ten days from
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2
3
4
now somebody is going to tell me they need more time.
MS. FARER:
84
Maybe.
Given the expedited issue, we completely
appreciate.
I think the last piece on the list of expenses, Your
5
Honor, we understand that certain processors that may be
6
involved with BAM's ongoing operation are not located in the
7
United States.
8
the issues that we want to make sure that all payments or all
9
vendors that may control the investor assets at issue are
And so it would be helpful -- this is one of
10
within the United States, so it would be helpful if there are
11
going to be payments going offshore.
12
THE COURT:
All right.
But, I mean, everything
13
you've said is really so much to the side of what you stood up
14
and said, oh, you know, we're really worried about the
15
2.2 billion and we're really worried about BAM trading and
16
their investor assets, and this is -- these are all, like, the
17
little details around the fringes.
18
not important and that you all shouldn't be caring deeply about
19
them as advocates for your side, but if they're telling you we
20
don't need to send money offshore, we'll send the keys and the
21
wallets and all that back, they're telling you they're willing
22
to do that by consent, that gets you a lot further and the
23
relief lasts a long longer than even if I issued a TRO that
24
said everything you asked me to say.
25
And I'm not saying they're
So that's really worth thinking about.
And that
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leads me to the question I didn't ask initially, which is, if I
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have to issue a TRO, your pleading assumed it would evaporate
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in two weeks.
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after a hearing?
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Is that true if it was issued with notice and
MS. FARER:
Our position, Your Honor, is that it
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should convert to a preliminary injunction and last for the
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duration of litigation.
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THE COURT:
need an opinion with more findings in it than a TRO would have,
isn't that true?
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If and when it converts, at that point I
MS. FARER:
It's our position that if it's entered by
consent, which we are hopeful --
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THE COURT:
Well, yes, if it's entered by consent, I
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don't have to do anything.
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and it really should, given how close you are -- and I have to
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do something, I think we have to think seriously about how long
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it could last and when we would be having a hearing on a
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preliminary injunction, which would be very similar to this
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hearing except you would actually be talking about the
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exhibits, and I don't see how I have a chance to read them in
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two weeks.
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But if that process doesn't work --
Given the volume of what you've all given me, I don't
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think it would be fair to the Court or fair to you to say this
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thing needs to be decided in two weeks, particularly since
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everything else I have on my schedule and had on my schedule
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before the TRO came along, in the next two weeks.
So what I'm going to do then is refer just the
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question of the language of the consent decree to mediation
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with Magistrate Judge Faruqui starting as soon as he can see
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you, and ask the parties for a status report with respect to
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the -- if you haven't docketed anything within the day after
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the order, then I guess I would ask for a status report on --
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what is today?
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as to whether the discussions are ongoing or whether they've
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Tuesday.
Maybe by close of business Thursday
reached an impasse.
And if it's just an impasse with respect to things
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that you can say we've agreed to all this, but we have this and
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this and this, you can just let me know what's going on by
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close of business Thursday.
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see you between now and then, you need more time, let me know.
And if it turns out that he can't
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If there is a consent decree, that will render the
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request for a TRO, and I think preliminary injunction, moot.
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And at that point, what we will need to do is set a schedule
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for the disposition, dispositive motions, whether they're
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motions to dismiss or they're motions for summary judgment, and
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you'll be able to propose how long you think you need to do
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that and do that right.
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The way I would envision this happening is the
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defense would file -- defendants would file their motions
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first, the government would then have the opportunity to oppose
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and file at that time any cross motion of its own, supported by
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a single memorandum of law, and then the reply or cross
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opposition, and then the cross reply.
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in big finance cases, like the A&E Trust case, that shortly
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after the pleading is due -- you'll get detailed instructions
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about how to do this -- but you're going to file a hyperlinked
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version so that I can read -- with all the technology in this
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courtroom, I know you can do it -- so that I can read the
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pleading and just click on the link and get to the exhibit that
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I think, I've done this
you're citing.
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I have a lot of difficulty toggling back and forth.
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The government's memo, when it got to the legal section, it
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cited the statement of facts, so then I had to go back to the
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statement of facts and see what you cited in the statement of
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facts.
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will be instructions, it's not going to look like this, where
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it's full paragraphs and they're fairly argumentative.
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going to be one fact per numbered paragraph, with the citation
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that supports it in that paragraph, so it's very, very clear to
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me where every fact that either side is relying on is coming
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from.
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With respect to that, the statement of facts, there
It's
But I don't think we need to set the schedule for
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that until -- if we know that we have a consent decree, then
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you can propose a schedule for how to do this and we'll set a
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hearing date and all that.
But, let's -- and if this is not
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going to work out and I have to issue on order, then I'll issue
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on order.
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All right.
Is there anything else I need to take up
right now on behalf of the government?
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MS. FARER:
Nothing for the government, Your Honor.
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THE COURT:
Okay.
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Anything further on behalf of any
of the defenses?
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MR. CELIO:
No, Your Honor.
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MR. NELSON:
(Shakes head.)
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THE COURT:
Okay.
Appreciate the time that everyone
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has put into this this afternoon.
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dog.
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*
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*
Thank you.
Including the
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CERTIFICATE OF OFFICIAL COURT REPORTER
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I, JANICE DICKMAN, do hereby certify that the above and
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foregoing constitutes a true and accurate transcript of my
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stenographic notes and is a full, true and complete transcript
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of the proceedings to the best of my ability.
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Dated this 14th day of June, 2023
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________________________________
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Janice E. Dickman, CRR, CMR, CCR
Official Court Reporter
Room 6523
333 Constitution Avenue, N.W.
Washington, D.C. 20001
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